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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
COMMISSION FILE NO. 1-10540
FOUNDATION HEALTH CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 68-0014772
(State or other jurisdictionof (I.R.S. Employer
incorporation or organization) Identification No.)
3400 DATA DRIVE, RANCHO CORDOVA, CA 95670
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code:
(916) 631-5000
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock $.01 par value New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. X Yes No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in part III of this Form 10-K or any
amendment to this Form 10-K. /X/
----
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based upon the closing sale price of the Common Stock on
August 29, 1996 as reported on the New York Stock Exchange Composite Tape was
approximately $1,770,627,271.
As of August 29, 1996, the Registrant had 58,960,724 shares of Common
Stock outstanding and entitled to vote in the election of directors.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the following document are incorporated by reference to Part III
of this Form 10-K Report: Proxy Statement for Registrant's 1996 Annual Meeting
of Stockholders.
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PART I
ITEM 1. BUSINESS.
Foundation Health Corporation (the "Company") is an integrated managed care
organization which administers the delivery of managed health care services.
Through its subsidiaries, the Company offers group, Medicaid, individual and
Medicare health maintenance organization ("HMO") and preferred provider
organization ("PPO") plans; government sponsored managed care plans; and managed
care products related to workers' compensation insurance, administration and
cost-containment, behavioral health, dental, vision and pharmaceutical products
and services.
The Company has implemented managed care cost-containment programs,
cost-effective medical delivery systems and medical information management to
enable it to meet its business strategies. Over the past several years, the
Company has developed a diversified product line, has established a full range
of medical delivery systems and has achieved geographic expansion throughout the
west, southwest and southeast areas of the United States and in the United
Kingdom.
The Company was incorporated in Delaware in 1984. The Company's executive
offices are located at 3400 Data Drive, Rancho Cordova, California 95670, and
its telephone number is (916) 631-5000. Unless the context otherwise requires,
the term "Company" as used in this Report refers to Foundation Health
Corporation, a Delaware corporation, and its subsidiaries.
BUSINESS STRATEGY
The Company's business strategy is to develop, market and support the
delivery of quality, cost-effective managed care products that address the
health care needs of the Company's commercial, specialty services and government
customers.
The Company's business plan has the following primary objectives:
(i) Increase enrollment of covered medical risk lives (including
Medicare, Medicaid and CHAMPUS lives);
(ii) Achieve significant market share in commercial, government and
specialty services managed care products in the markets the Company serves;
(iii) Differentiate the Company's products by providing a system of
quality, accessible health care services for the Company's members; and
(iv) Create administrative processes that, when measured against standards
of performance, reflect outstanding service and create satisfied and long-term
provider and customer relationships.
EXPANSION AND DIVESTITURE OF OPERATIONS
The Company continually evaluates opportunities to expand its business and
considers whether to divest or cease offering the products of certain of its
businesses. These opportunities may include acquisitions or dispositions of a
specialty services managed care product, insurance and HMO operations or
affiliated provider relationships. The Company also devotes significant
attention to internal development of new products and techniques for the
containment of health care costs, the measurement of the outcomes and
efficiencies of health care delivered and the management of health care delivery
systems.
On August 31, 1995, the Company and Thomas-Davis Medical Centers, P.C.
("TDMC") acquired Tucson Medical Associates, Ltd., an Arizona based physician
group, to enhance the number of physician providers of TDMC to provide greater
access for the Company's HMO members in Arizona.
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On March 6, 1996, the Company acquired Managed Health Network, Inc. and
its subsidiaries (collectively, "MHN"), which provide behavioral health managed
care programs, both on an at-risk and administration only basis, including
employee assistance programs. The Company is integrating the operations of MHN
with those of Foundation Health PsychCare Services, Inc., its behavioral health
subsidiary.
The Company has revised its strategy of creating proprietary networks of
independent practice associations ("IPAs"), which contract with physicians to
provide medical services to the Company's members, and establishing affiliated
medical groups which operated from Company owned and managed health care
centers. This change in strategy was due to the emergence of large, competitive
physician management companies with the necessary size and expertise to manage
provider networks and the required reporting and information systems. In
January 1996, FPA Medical Management, Inc. ("FPA"), a national health care
management services organization, purchased three California IPAs affiliated
with the Company. On June 28, 1996, the Company sold its Florida and Arizona
IPAs to FPA. Also on June 28, 1996, the Company executed a Stock and Note
Purchase Agreement with FPA for the purchase by FPA of the Company's physician
practice management operations and affiliated medical groups in California
("Foundation Health Medical Group, Inc.") and Arizona ("Thomas-Davis Medical
Centers, P.C."). This transaction is subject to customary closing conditions,
including regulatory and FPA stockholder approval. As part of these
transactions, the Company's affiliated health plans have entered into 20-year
provider agreements with the IPAs and medical groups to ensure that the
Company's enrollees have continued and uninterrupted access to the providers of
the medical groups and IPAs. See Note 1 of Notes to Consolidated Financial
Statements.
On June 28, 1996, the Company acquired the minority interest in its
Intergroup of Utah HMO operations and sold to the minority owner the Company's
interest in Premier Medical Networks in Utah.
COMMERCIAL MANAGED CARE
MEDICAL HMO AND PPO. The Company owns medical HMO subsidiaries which
operate in Arizona, California, Colorado, Florida, Louisiana, Oklahoma, Texas
and Utah. The HMOs provide comprehensive health care coverage for a fixed fee
or premium that does not vary with the extent or frequency of medical
services actually received by the member. The Company's insurance
subsidiaries have established PPOs products. PPOs are generally a network of
health care providers which offer their services to health care purchasers,
such as insurers and self-funded employers. PPO enrollees choose their
medical care from among the various contracting providers or choose a
non-contracting provider and are reimbursed on a traditional indemnity plan
basis after reaching an annual deductible. The Company assumes both
underwriting and administrative expense risk in return for the premium
revenue it receives from its medical HMO and PPO products. The HMOs and PPOs
have contractual arrangements with health care providers for the delivery of
health care to the Company's enrollees. Cost-effective delivery of health
care services by such providers is achieved through appropriate use of health
care services, emphasizing preventive health care services and encouraging
the reduction of unnecessary hospitalization and other services. The
Company's California HMO was awarded four Medicaid contracts, and is
subcontractor under two other contracts, in California to deliver managed
care to up to 616,000 Medicaid beneficiaries. Implementation of these
programs commenced in fiscal year 1996 with delivery of health care services
currently anticipated to commence during fiscal year 1997.
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The following chart describes the Company's commercial HMO and insured PPO
membership by state and product:
COMMERCIAL HMO AND INSURED PPO MEDICAL LIVES
JUNE 30, 1996
(IN THOUSANDS)
STATE GROUP AND MEDICARE
INDIVIDUAL RISK MEDICAID TOTAL
Arizona 313 40 7 360
California 577 21 199 797
Colorado 33 0 0 33
Florida 69 26 19 114
Louisiana 23 0 0 23
Oklahoma 2 0 25 27
Texas 24 0 0 24
Utah 87 0 10 97
Other 67 0 0 67
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Total 1,195 87 260 1,542
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PROVIDER ARRANGEMENTS. The Company's medical HMOs arrange for the delivery of
health care services to their enrollees by contracting with physicians, either
directly or through IPAs and medical groups, hospitals and other health care
providers for a defined range of health services, including primary and
specialty care and outpatient diagnostic services. Each enrollee's primary care
physician plays a significant role in cost-control by practicing preventive
medicine and managing the use of specialty physicians, hospitals and ancillary
providers. The Company pays for health care services provided by IPAs and
medical groups on a capitated basis or pursuant to discounted fee-for-service
arrangements. Under capitation arrangements, the Company pays the IPA or medical
group a fixed amount per member per month to cover the payment of all or most
medical services regardless of utilization, which transfers the risk of certain
health care costs to the provider organization. The Company also uses various
risk sharing and incentive arrangements to manage further the cost of providing
health care. The Company contracts for hospital services under a variety of
arrangements including capitation, per diem, discounted fee-for-service and case
rate arrangements.
CONTROL OF HEALTH CARE COSTS. The profitability of the Company depends on its
ability to effectively control health care costs. Advances in medical
technologies, inflation, increasing hospital costs, the occurrence of major
epidemics and numerous other external factors, including the aging of the
population and other demographic characteristics affecting the delivery of
health care, may affect the ability of HMOs, including the Company's HMOs, to
predict and control health care costs.
The Company manages health care costs by entering into payment arrangements
with health care providers and by sharing the risk of certain health care costs
with certain of the Company's contracting providers. The Company continues to
seek capitation arrangements with its physician providers. In addition, several
of the Company's hospital providers are paid pursuant to capitation
arrangements.
Under the Company's utilization review system, certain routine hospital
admissions and lengths of stay require prior authorization and concurrent
review. Post-discharge utilization review procedures are performed to evaluate
the quality and utilization of care. Health professionals also monitor and
become involved in case management of catastrophic cases in an effort to assist
enrollees in obtaining medical care and treatment options that may be more
appropriate and cost-effective than a long-term hospital stay.
RISK MANAGEMENT. In addition to the Company's cost control systems, the use of
medical underwriting criteria is an integral part of its risk management
efforts. In addition, the Company mitigates part of the risk of catastrophic
losses by
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maintaining reinsurance coverage for annual hospital costs incurred in the
treatment of an enrollee's illness. The Company believes that its reinsurance
policies significantly limit, at a reasonable premium cost, the risk of
catastrophic costs incurred by its enrollees. The Company also maintains general
liability, property, fidelity, and managed care professional liability, errors
and omissions and directors and officers insurance coverage in amounts the
Company believes to be adequate. The Company requires contracting physicians,
physician groups, dentists, hospitals and ancillary providers to maintain
malpractice insurance coverage in amounts customary in the industry.
QUALITY MANAGEMENT. The Company's HMOs have programs to evaluate the quality
and appropriateness of care provided to its enrollees. The providers participate
in quality management programs through peer review procedures conducted with the
Company's medical directors. These procedures involve reviews of the tests,
types of treatment and procedures performed for specific diagnoses as well as
reviews of aggregate data. When considering whether to contract with a provider,
the Company's HMOs conduct a credentialling evaluation of the applicant,
including licensure, board certification, residency program completion,
malpractice claims history and ability to accommodate enrollment demands. The
Company's HMOs have customer service departments that work directly with
enrollees to respond to their concerns and have grievance procedures to
investigate and resolve enrollees' complaints. The Company's HMOs also conduct
periodic surveys to assess enrollees' satisfaction with the health care delivery
system, health care received and responsiveness to enrollees' needs.
MANAGED CARE INDEMNITY PRODUCTS. Through the Company's indemnity insurance
subsidiaries, the Company expands the managed care options for enrollees by
making available PPO, point-of-service and other insured managed care products,
including certain specialty services insured products. These companies also
offer group term and dependent life, accidental death and dismemberment and
long-term disability coverage.
SPECIALTY SERVICES MANAGED CARE
The Company is utilizing its experience in managing HMOs to apply managed
care concepts to areas such as dental, vision, prescription drugs, behavioral
health, workers' compensation insurance and administration and ancillary
services. This assists employers and other payers in meeting cost-containment
and integration of benefits goals both on an insured and self-funded basis. The
Company believes that offering a continuum of integrated managed care products
and selling them across broad product lines will result in new sources of
revenue, will increase membership in existing employer groups and will enable
the Company to sell its integrated products to new employer groups. The
Company's specialty services managed care operations consist of the following
groups:
DENTAL. DentiCare of California, Inc. ("DentiCare"), the Company's dental
HMO, offers prepaid commercial and Medicaid dental care services. DentiCare
served approximately 473,000 enrollees as of June 30, 1996.
VISION. Foundation Health Vision Services dba AVP Vision Plans ("AVP"),
the Company's vision HMO, offers prepaid vision services in the major
metropolitan areas of California. AVP served approximately 331,000
enrollees as of June 30, 1996.
BEHAVIORAL HEALTH. Foundation Health PsychCare Services, Inc. and MHN
provide managed care behavioral health, employee assistance and substance
abuse programs on both an insured and self-funded basis to employers,
governmental entities and other payers throughout the United States through
a network of contracted providers. These companies provided services to
approximately 6.6 million eligible beneficiaries as of June 30, 1996.
WORKERS' COMPENSATION SERVICES. The Company applies its managed care
concepts, such as use of specialized preferred provider networks and
utilization review, to the operations of its workers' compensation
subsidiaries, California Compensation Insurance Company ("CalComp"),
Business Insurance Company ("BICO") and Combined Benefits Life Insurance
Company ("CBLIC"), which had estimated aggregate annual premiums in force
at June 30, 1996 of over $585 million. These subsidiaries expand
the Company's workers' compensation products to include insured risk
products, permit the Company to apply its managed care expertise to reduce
the medical costs associated with workers' compensation claims and enable
the Company to develop
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and market "24 hour" risk or "Combined Care" products covering employees
for medical care both on and off the job. The Company provides third party
administration of workers' compensation claims primarily to self-insured
employers, and operates a medical review and cost-containment business for
the workers' compensation industry primarily within California.
PHARMACEUTICAL MANAGED CARE SERVICES. Integrated Pharmaceutical Services
("IPS"), the Company's pharmaceutical subsidiary, provides pharmaceutical
managed care services, including a national pharmacy network and formulary,
pharmacy adjudication and claims processing services, to reduce enrollees
and employer groups health care costs. IPS is also developing disease
state management projects with pharmaceutical manufacturers to enable
outcomes research and information to enhance the quality of care provided
to the Company's enrollees.
SELF-FUNDED PRODUCTS. The Company has developed self-funded products,
including a provider network, for employers who desire the cost containment
aspects of an HMO product but who want to self-insure the health care cost
risk. The Company's third party administration subsidiaries provide
administrative only arrangements, including utilization review, managed
care and claims administration services to employer groups and to medical
groups and IPAs that are paid on a capitated, at-risk basis.
GOVERNMENT CONTRACTS
The Company, through Foundation Health Federal Services, Inc. ("FHFS"), its
government contracts subsidiary, administers large, multi-year managed care
government programs. FHFS subcontracts to affiliated and unrelated third parties
the administration and health care risk of parts of these contracts. These
programs include: (i) a CHAMPUS managed care contract in Washington and Oregon
(the "Washington/Oregon Contract") to provide health care services to
approximately 227,000 CHAMPUS-eligible beneficiaries which commenced health care
services in March, 1995, (ii) a similar contract in Texas, Louisiana, Arkansas
and Oklahoma (the "Region 6 Contract") to provide health care services to
approximately 590,000 CHAMPUS-eligible beneficiaries which commenced delivery of
health care services in November 1995, and (iii) the multi-year TRICARE managed
care contract to provide health care services to approximately 720,000
CHAMPUS-eligible beneficiaries in California and Hawaii (the "California/Hawaii
Contract") which commenced delivery of health care services in April 1996. The
Company intends to compete for other managed care contracts as they are
announced by federal and state agencies. There can be no assurance that the
Company will be successful in managing the implementation and delivery of
services under several large, multi-year government managed care contracts or
whether any such contracts will provide the Company with an adequate level of
profitability.
FHFS also administers contracts in Massachusetts, New Jersey, Georgia and
Maine to enroll Medicaid eligible individuals in managed care programs in those
states. FHFS is not at risk for the provision of any health care services under
any of these contracts.
PATIENT SERVICES
The Company owns and operates a 128-bed hospital located in Los Angeles,
California, the East Los Angeles Doctors Hospital, and a 200-bed hospital
located in Gardena, California, the Memorial Hospital of Gardena. Both of these
hospitals are accredited by the Joint Commission on the Accreditation of
Healthcare Organizations. The Company's strategy in maintaining ownership of
these hospitals depends on the continued cost-efficiency of the hospitals,
integration of the hospitals into the Company's Southern California HMO
networks, particularly with respect to the Medicaid population, and development
of subacute or related units which offer less costly care than acute
hospitalization and which contribute to the hospitals' revenues. Through its
wholly owned subsidiaries, American VitalCare, Inc. and Managed Alternative
Care, Inc., the Company is also engaged in the management of hospital subacute
care units serving chronically ill patients.
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INFORMATION TECHNOLOGY
The Company's information technology systems include several computer
systems, each utilizing customized software and a network of on-line terminals.
The Company's operations use its computer-based information technology systems
for various purposes including claims processing, general accounting and health
services reporting. These systems also include enrollment and billing functions,
including membership verification capabilities, and analysis of transactions
relating to providers and enrollees, such as claims status, hospital admissions
and lengths of stay, outpatient care, utilization and various reporting
capabilities required for accreditation, including HEDIS and NCQA, outcomes data
and cost analyses. The Company is heavily dependent on its information
technology systems and is in the process of integrating the systems of its
recently acquired operations. These systems will need to be further enhanced as
the Company's business expands and it offers new products; there is no assurance
the Company will not experience interruptions in service as a result of the
enhancement and integration of its information technology systems.
SALES AND MARKETING
The Company's sales and marketing strategy for its managed care products is
defined and coordinated by its corporate sales staff. Primary responsibility for
the Company's products resides with a direct sales force at both the corporate
and subsidiary levels. In addition, these products are sold through independent
insurance agents and brokers. The Company is emphasizing cross-marketing of its
products to current and prospective customers through its corporate and
subsidiary sales and marketing staff. Medicaid and Medicare risk products are
primarily marketed by the HMOs' sales employees. Sales and marketing efforts are
also supported by advertising programs that employ television, radio,
newspapers, billboard and direct mail.
COMPETITION
The managed health care industry evolved primarily as a result of health
care buyers' concerns regarding rising health care costs. The industry's goal is
to infuse greater cost effectiveness and accountability into the health care
system through the development of managed care products, including HMOs, PPOs,
and specialized services such as mental health or pharmacy benefit programs,
while increasing the accessibility and quality of health care services. The
managed health care industry is highly competitive, both nationally and in the
Company's various service areas.
As HMO and PPO penetration of the health care market and the effects of
health care reforms increase nationwide, the Company expects that competition
for new contracts with large employer and government groups, small employer
groups and individuals will intensify. In addition, employers may choose to
self-insure the health care risk while seeking benefit administration and
utilization review services from third parties to assist them in controlling and
reporting health care costs. In such an environment, the Company believes that
having a broad line of health care programs and products available will be
important in being selected by employers to manage the health care products or
coverage offered to their employees.
The Company's managed care products compete for group and individual
membership with conventional health insurance plans, Blue Cross/Blue Shield
plans, other HMOs, PPOs, third party administrators and health care companies,
and employers or groups who elect to self-insure. The Company also faces
competition from hospitals, health care facilities and other health care
providers who have combined and formed their own networks to contract directly
with employer groups and other prospective customers for the delivery of health
care services, including in California and other states, the trends for provider
groups to accept full risk for the provision of medical services. The Company's
ability to increase the number of persons covered by its products or services or
to increase its premiums and fees can be affected by the Company's level of
competition in any particular area. The Company believes that the principal
competitive factors affecting the Company's business include price, the level
and quality of service provided or arranged for, provider network capabilities,
the offering of innovative products and marketplace reputation.
Further, the Company believes the current factors that generally help it in
regard to competitors are the breadth of its product line, its geographic scope
and diversity, its significant market position in certain geographic areas, the
strength of its provider network and its expertise in managing large government
managed care contracts. In a number of markets, the Company may be at a
disadvantage with respect to competitors with larger market shares, broader
networks, or more established market place name and reputation.
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GOVERNMENT REGULATION
Substantially all of the Company's businesses are regulated at both the
federal and state level. Government regulation varies from jurisdiction to
jurisdiction and from product to product. Changes in applicable laws and
regulations are continually being considered and the interpretation of existing
laws and rules may also change from time to time. Regulatory agencies generally
have broad discretion in promulgating regulations and in interpreting and
enforcing laws and rules. The Company is unable to predict what regulatory
changes may occur or the impact on the Company of any particular change;
however, the Company's operations and financial results could be negatively
affected by regulatory revisions. See "Cautionary Statements-Health Care
Reform."
Certain minimum tangible net equity, capital and surplus and other
financial viability requirements are imposed on the Company's HMOs and
insurance subsidiaries by regulatory authorities in the states in which these
subsidiaries operate. In addition, certain of the Company's government
contracts require the contracting subsidiaries to maintain specified current
ratio or equity levels or parent guarantees of certain aspects of the
financial performance of the contracts. The Company's HMOs and insurance
subsidiaries are required to file periodic statutory financial statements in
each jurisdiction in which they are licensed and are generally subject to
annual financial, medical or other audits. Additionally, such companies are
periodically examined by the supervisory agencies of the jurisdictions in
which they are licensed to do business.
A number of jurisdictions have enacted small group insurance and rating
reforms which generally limit the ability of insurers and HMOs to use risk
selection as a method of controlling costs for small group business. These laws
may generally limit or eliminate use of pre-existing conditions exclusions,
experience rating and industry class rating and may limit the amount of rate
increases from year to year.
The Company is potentially subject to governmental investigations and
audits and enforcement actions related to its businesses. These include
possible government actions relating to the federal Employee Retirement
Income Security Act ("ERISA"), which regulates insured and self-insured
health coverage plans offered by employers and the Company's services to such
plans and employers, provision of services pursuant to the Federal Employees
Health Benefit Plan ("FEHBP"), federal and state fraud and abuse laws and
laws relating to utilization management and the delivery of health care. The
Company is currently involved in various government audits with respect to
its government contracts, Medicare and Medicaid programs and the operations
of its insurance and HMO subsidiaries.
The Company believes that it is currently in compliance in all material
respects with the various federal and state licensing regulations and contract
requirements applicable to its operations. To maintain such compliance, it may
be necessary for the Company to make changes from time to time in its services,
products, capital structure or marketing methods. Non-compliance with
government regulations or contract requirements could subject the Company to
fines, penalties, cease and desist orders, investigations, audits, reimbursement
of funds previously received, lower reimbursement levels and contract or program
termination. There can be no assurance that the Company will be able to obtain
or maintain any necessary governmental approvals to continue to implement its
business strategy of product growth and geographic expansion. The Company is in
the process of seeking accreditation by the National Committee on Quality
Assurance ("NCQA") of its Florida HMO operations, which accreditation is a
condition of doing business as an HMO in that state. Failure to obtain
accreditation within specific time frames could result in suspension of
enrollment levels or revocation of licensure, which could have a material
adverse effect on the Company's future operating results. The Company's Arizona
HMO received NCQA full accreditation in December 1995 and its California HMO
received provisional NCQA accreditation effective for 15 months in July 1996.
Other states and employer groups are increasingly requiring NCQA or other
similar accreditation as a condition to purchasing health care benefits from
managed care companies.
HMOS. All of the states in which the Company's HMOs offer products have
enacted statutes regulating the activities of those HMOs. As a result, the
HMOs are subject to extensive regulation regarding the scope of benefits
provided to HMO members and the terms of group benefit agreements, the HMOs'
financial condition, including minimum
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tangible net equity, quality assurance and utilization review procedures,
enrollment requirements, manner of structuring member premiums, member grievance
procedures, provider contracts, marketing and advertising.
The Company's HMOs which have Medicare risk contracts are subject to
regulation by the Health Care Financing Administration ("HCFA"), a branch of the
United States Department of Health and Human Services. HCFA has the right to
audit HMOs operating under Medicare risk contracts to determine each HMO's
compliance with HCFA's contracts and regulations and the quality of care being
rendered to the HMO's enrollees. The Company's Medicare contracts are renewed
annually unless the Company or HCFA elects to terminate the contracts. HCFA
also may unilaterally terminate the Company's Medicare contracts if the Company
fails to continue to meet compliance and eligibility standards. While the
federal government may implement changes in the Medicare risk-based program, the
Company believes that HMOs will continue to be an important factor in the
federal government's overall efforts to control medical costs. However, the
loss of Medicare contracts or termination or modification of the HCFA risk-based
Medicare program could have an adverse effect on the revenue, profitability and
business prospects of the Company as the Company's Medicare business grows. The
services reimbursed by Medicare and Medicaid are subject to various requirements
and restrictions imposed by contract, law and regulation.
The Company's HMOs which have Medicaid contracts are subject to both
federal and state regulation regarding services to be provided to Medicaid
enrollees, payment for those services and other aspects of the Medicaid program.
Both Medicare and Medicaid have in force and/or have proposed regulations
relating to fraud and abuse, physician incentive plans and provider referrals
which may affect the Company's operations.
INSURANCE SUBSIDIARIES. The Company's insurance subsidiaries are subject to
regulation by the Department of Insurance (the "DOI") in each state in which the
entity is licensed. Regulatory authorities exercise extensive supervisory power
over insurance companies with regard to the licensing of insurance companies,
including the nature of, and limitation on, an insurance company's investments,
periodic examination of the operations of insurance companies, and the
establishment of capital and surplus requirements for insurance companies. In
addition, the offering of new products may require the approval of these
regulatory agencies.
INSURANCE HOLDING COMPANY REGULATIONS. Certain of the Company's HMOs and each
of the Company's insurance subsidiaries are subject to regulation under state
insurance holding company regulations. Such insurance holding company laws and
regulations generally require registration with the state DOI and the filing of
certain reports describing capital structure, ownership, financial condition,
certain intercompany transactions and general business activities. Various
notice and reporting requirements generally apply to transactions between
companies within an insurance holding company system, depending on the size and
nature of the transactions. Certain state insurance holding company laws and
regulations require prior regulatory approval or, in certain circumstances,
prior notice of, certain transactions between the regulated companies and their
affiliates.
HOSPITAL REGULATION. The operation of the Company's hospitals is also subject
to federal, state and local government regulation. These facilities are subject
to periodic inspection by state licensing agencies to determine that standards
of medical care and the physical plant necessary for continued licensure are
maintained. The hospitals are subject to environmental legislation by virtue of
the real property owned by the hospitals and by their operations, including
regulation of the disposal of medical waste.
Under the federal reimbursement program for inpatients, Medicare pays a
predetermined rate for each covered hospitalization. Each hospitalization is
classified into one of several hundred diagnosis related groups, which
classification determines the rate paid for the hospitalization. Outpatient
services are reimbursed on the basis of reasonable cost and/or per procedure
price.
The East Los Angeles Doctors Hospital and Memorial Hospital of Gardena have
Medicaid contracts which are subject to cancellation by the state or the
hospital on 120 days' prior notice without cause. If either hospital's Medicare
contract was terminated, the hospital would also be required to cease
participation in Medicaid. For the fiscal year ended June 30, 1996, the
hospitals received approximately 79% of their total revenues from the Medicare
and Medicaid contracts. The termination of participation in these programs would
threaten the hospitals' viability.
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EMPLOYEES
As of June 30, 1996, the Company and its subsidiaries employed
approximately 10,500 individuals. None of the Company's employees is presently
covered by a collective bargaining agreement, and the Company believes its
employee relations are good.
ITEM 2. PROPERTIES.
As of June 30, 1996, the Company leased approximately 1.75 million
aggregate square feet of space primarily for administrative offices, data
processing facilities and claims processing in the states in which it is doing
business. These leases expire at various dates through December 2003. The
Company owns approximately 463,000 aggregate square feet of space for health
care centers in California and Arizona and approximately 249,000 square feet of
space for the two hospitals in Southern California. The Company also leases
approximately 313,000 aggregate square feet of space for health care centers in
Arizona, California and Florida, which leases expire at various dates through
June 2001.
ITEM 3. LEGAL PROCEEDINGS.
The Company maintains general liability, managed care professional
liability, directors and officers liability and other insurance coverage it
believes is typical in the industry. In the ordinary course of its business,
the Company is subject to claims and legal actions by enrollees, providers
and others. There can be no assurance that claims in excess of the Company's
insurance coverage will not arise or that all claims would be covered by such
insurance.
Two actions, as previously disclosed, filed in 1993 against the Company,
its dental HMO subsidiary and certain present and former executive officers of
the Company and such subsidiary, have been resolved with no material adverse
effect on the Company's financial results.
The Company is subject to federal and state legislation prohibiting
activities and arrangements that provide economic inducements for the referral
of business or other activities that may be deemed to constitute "fraud or
abuse" under government programs. The Company, like many other government
contractors, is subject to private lawsuits by persons (generally employees or
former employees) who may assert the rights of the government by filing an
action under seal if such person purports to have information that the
contractor submitted a claim to the government that could be false. Upon
filing, the government has the opportunity to intervene and assume control of
the case. The Company has been informed of two such complaints; the government
informed the Company that it has declined to intervene in one such filed
complaint and in the other action, the government and the Company are resolving
the matter, which resolution will not have a material adverse effect on the
Company.
With respect to the Securities and Exchange Commission ("SEC")
investigation commencing in August 1992 regarding trading in the common stock of
Century Medicorp, Inc. ("CMC") and the Company prior to the announcement of the
merger of CMC with the Company, on April 29, 1996, the SEC staff advised the
Company that it has closed, without recommending any action, its investigation
concerning the CMC merger as it pertains to the Company.
In August 1995, the Company was requested to provide information in
connection with a SEC non-public inquiry into trading in the common stock of
Intergroup Healthcare Corporation ("Intergroup") prior to the July 1995
announcement of the proposed merger of Intergroup and the Company. The SEC has
not requested information about any director or officer of the Company and has
advised the Company that its inquiry is not to be considered as an adverse
reflection on any person or as an indication that any violation of law has
occurred.
After consulting with legal counsel, the Company believes that any
liability that may ultimately be incurred as a result of the claims, legal
actions, investigations or audits described above and in "Government Regulation"
will not have a material adverse effect on the consolidated financial position
or results of operations of the Company.
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<PAGE>
CAUTIONARY STATEMENTS
The following discussion contains certain cautionary statements regarding
the Company's business and results of operations which should be considered by
investors and others. These statements discuss matters which may in part be
discussed elsewhere in this Form 10-K and which may have been discussed in other
documents prepared by the Company pursuant to federal or state securities laws.
This discussion is intended to take advantage of the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995. The following factors
should be considered in conjunction with any discussion of operations or results
by the Company or its representatives, including any forward-looking discussion,
as well as comments contained in press releases, presentations to securities
analysts or investors, or other communications by the Company.
In making these statements, the Company is not undertaking to address or
update each factor in future filings or communications regarding the Company's
business or results, and is not undertaking to address how any of these factors
may have caused changes to discussions or information contained in previous
filings or communications. In addition, any of the matters discussed below may
have affected the Company's past results and may affect future results, so that
the Company's actual results for the first fiscal quarter 1997 and beyond may
differ materially from those expressed in prior communications.
HEALTH CARE COSTS. A large portion of the revenue received by the Company
is expended to pay the costs of health care services or supplies delivered to
its enrollees. Much of the Company's premium revenue is set in advance of the
actual delivery of services and the related incurring of the cost, usually on a
prospective annual basis. While the Company attempts to base the premiums it
charges at least in part on its estimate of expected health care costs over the
fixed premium period, competition, regulations and other circumstances may limit
the Company's ability to fully base premiums on estimated costs. In addition,
many factors may and often do cause actual health care costs to exceed that
estimated and reflected in premiums. These factors may include increased
utilization of services, increased cost of individual services, catastrophes,
epidemics, seasonality, general inflation, new mandated benefits or other
regulatory changes and insured population characteristics.
WORKERS' COMPENSATION INSURANCE. The Company, primarily through CalComp in
California and BICO in other states, writes managed care workers' compensation
business. For the fiscal year ended June 30, 1996, approximately 83% of the
Company's direct written workers' compensation premiums were in California.
Since January 1995, policies in California have been issued under "open rating"
rules instead of the "minimum rate" laws which had been in effect. The open
rating environment brings uncertainties to premium revenues and operating
profits due to increased price competition. Although the Company intends to
continue to underwrite each account taking into consideration the insured's risk
profile, prior loss experience, loss prevention plans and other underwriting
considerations, there can be no assurance that the Company will be able to
continue to operate profitably in the California workers' compensation industry
or that future workers' compensation legislation will not be adopted in
California or other states which may adversely affect the Company's results of
operations.
A key part of the Company's workers' compensation business strategy is
continued geographic expansion. Future growth of the Company's operations
depends, in part, on its ability to manage workers' compensation programs for
customers in states outside of California. In order to operate effectively in a
new state, the Company must obtain all necessary regulatory approvals, develop a
broker and provider network, achieve acceptance of the Company in the local
market, adapt its procedures to that state's workers' compensation system and
regulation and establish internal controls that enable it to conduct operations
in several locations. Although the Company believes its managed care approach
to workers' compensation will be effective in states other than California, the
Company has limited experience with its techniques in these other states and
there can be no assurance that the Company can successfully use these techniques
in other states. Future growth will also be dependent on the ability of the
Company to maintain sufficient capital to support such growth.
The Company's insurance subsidiaries are required to maintain reserves to
cover their estimated ultimate liability for loss and loss adjustment expense
with respect to reported and unreported claims incurred. These reserves do not
represent an exact calculation of liabilities but rather are estimates involving
judgment and actuarial projections. The
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<PAGE>
accuracy of these estimates may be affected by external forces such as changes
in the rate of inflation, the regulatory environment, medical costs and other
factors. Because certain workers' compensation claims may not be reported for
several years, estimating reserves for such claims can be more difficult and
uncertain than estimating reserves in other lines of insurance in which the
period between the occurrence of the claim and final determination of the
Company's liability is shorter. Establishment of reserves is an inherently
uncertain process and there can be no certainty that currently established
reserves will prove to be adequate to cover actual ultimate expenses.
Subsequent actual experience could result in loss reserves being too high or too
low. Higher than expected claim costs could require reserves for prior periods
to be increased, which would adversely impact the Company's earnings in future
periods.
HEALTH CARE REFORM. There have been numerous legislative and regulatory
initiatives at both the federal and state levels to address, among other
aspects of the nation's health care system, the continuing increases in
health care costs and the lack of health care coverage for a significant
segment of the population. The Health Insurance Portability and
Accountability Act of 1996 (the "1996 Act"), which was recently adopted by
Congress and signed by President Clinton, contains a number of provisions to
reform the nation's health care system. These provisions include guaranteed
insurance coverage and "portability" of health insurance when changing jobs;
limited use of pre- existing conditions as the basis for exclusion from
coverage; creation of medical savings accounts; mandatory or voluntary
regional health alliances or purchasing cooperatives; increase in the tax
deductibility of premiums for the self employed; and numerous fraud and abuse
provisions containing significant criminal and civil law enhancements (some
of which will apply not only to federal health programs, such as Medicare and
Medicaid, but to private health plans as well). To varying degrees, many of
the provisions of the 1996 Act and other pending bills contemplate the
involvement of state governments in the regulation and implementation of
federal health care reform legislation.
Various states are considering forms of single-payer systems, restructuring
of Medicaid programs, "any willing provider" legislation that could require
managed care companies to contract with any medical provider who agrees to the
terms of the company's standard provider contract and payment schedule and
"patient care initiatives" which address consumer protection issues in the
managed care environment. All or any of these potential forms of legislation
could adversely affect the Company's business.
The Company is unable to predict how existing federal or state laws and
regulations may be changed or interpreted, what additional laws or regulations
affecting its businesses may be enacted or proposed, when and which of the
proposed laws will be adopted or what effect the new laws and regulations will
have on its businesses. However, certain of the proposals, if adopted, could
have a material adverse effect on the Company's business, while others, if
adopted, could potentially benefit the Company's business. Although the effects
of these activities cannot yet be determined, the Company remains committed to
participate in the debate over health care reform and in the restructuring of
the health care system.
MERGERS, ACQUISITIONS AND EXPANSION. Mergers and acquisitions have played
an important role in the implementation of the Company's business strategy and
are expected to continue to be important to the Company's growth and
development. The Company's product offerings and HMO, PPO and specialty
services enrollment have been expanded through these acquisitions. As a result,
the Company is subject to the uncertainties and risks associated with any
business that has grown rapidly and has expanded into new product and geographic
areas. These mergers and acquisitions have placed substantial demands on the
Company's management and financial resources. The integration of the acquired
companies' operations continues to be slower, more complex and more costly than
originally anticipated, especially in systems and functional areas such as
claims processing, data management and finance. There can be no assurance that
the combined companies will realize the full cost savings or revenue
enhancements the Company expects to realize in connection with the recent
acquisitions or that such savings or enhancements will be realized at the points
in time currently anticipated. Furthermore, there can be no assurance that any
cost savings which are realized will not be offset by decreases in revenues or
increases in other expenses. The Company will encounter similar uncertainties
and risks with respect to any future acquisitions it may make.
The Company has start-up HMO and specialty services operations in a number
of states and the United Kingdom thereby exposing the Company to different
methods of operations and management and the effect of varying state
regulations. These operations have required and will continue to incur
significant expenses related to creating the
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<PAGE>
infrastructure for operations, satisfying net equity or capital and surplus
requirements, hiring and training personnel, obtaining necessary regulatory
approvals and operating until sufficient revenues are achieved to offset the
overhead costs. There can be no assurance that the Company will be successful
in managing HMOs at multiple locations or in obtaining sufficient revenues to be
profitable. The Company's United Kingdom operations are experiencing greater
losses during the initial phase of operations and larger capital requirements
than originally anticipated; there can be no assurance that the critical mass
needed for these operations to become profitable within a reasonable time period
will be realized. Failure of the United Kingdom operations would have an
adverse effect on the Company's operating results.
From time to time the Company engages in the evaluation of potential
acquisitions. No assurance can be given as to the Company's ability to compete
successfully at favorable prices for available acquisition candidates or to
complete future acquisitions, or as to the financial effect on the Company of
any acquisitions. Future acquisitions by the Company may involve significant
cash expenditures and may result in increased indebtedness and interest and
amortization expense or decreased operating income, which could have an adverse
impact on the Company's future operating results or a dilutive effect on the
Company's earnings per share.
COMPETITION. In many of its geographic or product markets the Company
competes with a number of other entities, some of which may have certain
characteristics or capabilities which give them an advantage in competing with
the Company. The Company believes there are few barriers to entry in some
markets, so that the addition of new competitors can occur relatively easily.
Certain of the Company's customers may decide to perform for themselves
functions or services formerly provided by the Company, which would result in a
decrease in the Company's revenues. Certain of the Company's providers may
decide to market products and services to Company customers in competition with
the Company. In addition, significant merger and acquisition activity has
occurred in the industry in which the Company operates as well as in industries
which act as suppliers to the Company such as the hospital, physician,
pharmaceutical and medical device industries. This activity may create stronger
competitors and/or result in higher health care costs. To the extent that there
is strong competition or that competition intensifies in any market, the
Company's ability to retain or increase customers, its revenue growth, its
pricing flexibility, its control over medical cost trends and its marketing
expenses may all be adversely affected.
The media are not generally aware of the high degree of regulatory
oversight of the managed care industry or the degree to which the industry's
health care delivery networks have enhanced the ability to measure, monitor and
improve the quality of health care services. As a result, the managed care
industry has recently been the subject of significant amounts of negative
publicity. Such general publicity, or any negative publicity regarding the
Company in particular, could adversely affect the Company's ability to sell its
products or services or could create regulatory problems for the Company.
PROVIDER RELATIONS. One of the significant techniques the Company uses to
manage health care costs and utilization and monitor the quality of care being
delivered is contracting with physicians, hospitals and other providers.
Because of the geographic diversity of the Company's HMOs and the large number
of providers with which most of those HMOs contract, the Company currently
believes it has a limited exposure to potential disruption in relations with
specific providers. In any particular market, however, providers could refuse
to contract with the Company, demand higher payments or take other actions which
could result in higher health care costs, less desirable products for customers
and members or difficulty meeting regulatory or accreditation requirements.
In some markets, certain providers, particularly hospitals,
physician/hospital organizations or multi-specialty physician groups, may have
significant market positions. Many of these providers may compete directly with
the Company. If such providers refuse to contract with the Company or utilize
their market position to negotiate contracts that place the Company at a
competitive disadvantage, the Company's ability to market products or to be
profitable in those areas could be adversely affected.
The Company has recently divested its affiliated IPAs and has pending
transactions to divest its affiliated medical groups in California and Arizona;
although the Company has entered into long-term provider contracts with the
purchaser of these IPAs and medical groups, a significant change in market
conditions, benefits or provider costs or an
13
<PAGE>
adverse change in the financial viability of the purchaser of the IPAs and
medical groups, could adversely affect the cost of health care provided to the
Company's enrollees under these arrangements.
ADMINISTRATION AND MANAGEMENT. The level of administrative expense is a
partial determinant of the Company's profitability. While the Company attempts
to effectively manage such expenses, increases in staff-related and other
administrative expenses may occur from time-to-time due to business or product
start-ups, expansions, growth or changes in business, acquisitions, regulatory
requirements or other reasons. Such cost increases are not clearly predictable
and may adversely affect the Company's financial results.
INFORMATION SYSTEMS. The Company's business is significantly dependent on
effective information systems. The Company has many different information
systems for its various businesses. The Company is in the process of attempting
to reduce the number of systems and also upgrade and expand its information
systems capabilities. Failure to maintain an effective and efficient
information system could result in loss of existing customers and difficulty in
attracting new customers, customer and provider disputes, regulatory problems,
increases in administrative expenses or other adverse consequences. In
addition, the Company may, from time to time, obtain significant portions of its
services or facilities from independent third parties which may make the
Company's operations vulnerable to such third party's failure to perform
adequately. The Company has made several large acquisitions in recent years.
Failure to effectively integrate acquired operations could result in increased
administrative costs and poor customer relations.
GOVERNMENT PROGRAMS AND REGULATION. The Company's business is heavily
regulated. The laws and rules governing the Company's business and
interpretations of those laws and rules are subject to frequent change.
Existing or future laws and rules could force the Company to change how it does
business and may restrict the Company's revenue and/or enrollment growth and/or
increase its health care and administrative costs. Regulatory approvals must be
obtained and maintained to market many of the Company's products and services.
Delays in obtaining or failure to obtain or maintain such approvals could
adversely affect the Company's revenue or the number of its enrollees, or could
increase costs.
A significant portion of the Company's revenues relate to federal, state
and local government health care coverage programs. These types of programs,
such as the federal CHAMPUS and Medicare programs and the federal and state
Medicaid program, are generally subject to frequent change including changes
which may reduce the number of persons enrolled or eligible, reduce the revenue
received by the Company or increase the Company's administrative or health care
costs under such programs. Such changes have in the past and may in the future
adversely affect the Company's financial results and its willingness to continue
participation in such programs.
The Company is also subject to various governmental audits and
investigations. Adverse findings could result in the loss of licensure or the
right to participate in certain programs, or the imposition of fines, penalties
and other sanctions. In addition, disclosure of any adverse investigation or
audit results or sanctions could negatively affect the Company's reputation in
various markets and make it more difficult for the Company to sell its products
and services.
LITIGATION AND INSURANCE. The Company is subject to a variety of legal
actions to which any corporation may be subject, including employment-related
suits, employee benefit claims, breach of contract actions and tort claims. In
addition, because of the nature of its business, the Company incurs and likely
will continue to incur potential liability for claims related to its business,
such as failure to pay for or provide health care, poor outcomes for care
delivered or arranged, provider disputes, including disputes over withheld
compensation and claims related to self-funded business. In some cases,
substantial non-economic or punitive damages may be sought. While the Company
currently has insurance coverage for some of these potential liabilities, others
may not be covered by insurance, the insurers may dispute coverage or the amount
of insurance may not be enough to cover the damages awarded. In addition,
certain types of damages, such as punitive damages, may not be covered by
insurance and insurance coverage for all or certain forms of liability may
become unavailable or prohibitively expensive in the future.
STOCK MARKET. Recently, the market prices of the securities of certain of
the publicly-held companies in the industry in which the Company operates have
shown volatility and sensitivity in response to many factors, including public
communications regarding managed care, legislative or regulatory actions, health
care cost trends, pricing trends,
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competition, earnings or membership reports of particular industry participants,
and acquisition activity. There can be no assurance regarding the level or
stability of the Company's share price at any time or of the impact of these or
any other factors on the share price.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, who are elected by and serve at the
discretion of the Board of Directors, subject to rights under employment
agreements, are as follows:
Daniel D. Crowley, age 48, has been a director and the President and
Chief Executive Officer of the Company since May 1989. In May 1990,
Mr. Crowley was appointed Chairman of the Board of Directors of the
Company.
Steven D. Tough, age 45, has been President and Chief Operating
Officer -- Government Operations since October 1994. He has been employed
by the Company and its subsidiaries in various capacities since 1978.
Mr. Tough has been a director of the Company since 1988.
Jeffrey L. Elder, age 48, was appointed Senior Vice President-Chief
Financial Officer of the Company in July 1992. Mr. Elder joined the Company
as Vice President-Financial Operations in July 1989 and was appointed Vice
President-Chief Financial Officer in March 1990. Mr. Elder has been a
director of the Company since 1991.
Kirk A. Benson, age 46, was appointed President and Chief Operating
Officer -- Commercial Operations in October, 1994 and has served as Senior
Vice President-Corporate Development of the Company since July 1991.
Mr. Benson has been employed by the Company in various capacities since
March 1989.
Allen J. Marabito, age 50, joined the Company as Senior Vice
President-General Counsel and Secretary in July 1991.
There are no family relationships among directors or executive officers of
the Company.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
The Company's common stock is listed on the New York Stock Exchange, Inc.
(the "NYSE") under the symbol "FH." The following table sets forth, for the
periods indicated, the high and low sales prices of the common stock on the NYSE
Composite Tape.
PRICE RANGE OF
--------------
COMMON STOCK
--------------
HIGH LOW
------- -------
Fiscal Year 1995
First Quarter. . . . . . . . . . . . . . . . . . . . . $39 5/8 $31 1/4
Second Quarter . . . . . . . . . . . . . . . . . . . . 37 1/2 29 3/4
Third Quarter. . . . . . . . . . . . . . . . . . . . . 34 7/8 26 3/8
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Fourth Quarter . . . . . . . . . . . . . . . . . . . . 32 3/4 26 7/8
Fiscal Year 1996
First Quarter. . . . . . . . . . . . . . . . . . . . . 39 1/8 26 5/8
Second Quarter . . . . . . . . . . . . . . . . . . . . 46 3/4 36 1/2
Third Quarter. . . . . . . . . . . . . . . . . . . . . 43 7/8 35 5/8
Fourth Quarter . . . . . . . . . . . . . . . . . . . . 41 35
Fiscal Year 1997
First Quarter
(through August 29, 1996). . . . . . . . . . . . . . . . . 35 7/8 24 1/4
On August 29, 1996, the closing sale price of the common stock was $30 1/8
per share. As of August 29, 1996, there were approximately 706 holders of record
of the common stock.
The Company has never paid cash dividends on its common stock, except that
CareFlorida Health Systems, Inc., which became a wholly-owned subsidiary of the
Company in October 1994, paid cash dividends to its shareholders prior to the
merger. The Company presently intends to retain its earnings for the development
of its business and does not anticipate paying cash dividends on its common
stock in the foreseeable future. The Company's loan agreements restrict payment
of cash dividends on the Company's common stock.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
FOUNDATION HEALTH CORPORATION
YEARS ENDED JUNE 30,
-----------------------------------------------------------------------
1992 1993 1994 1995 1996
------------ ------------- -------------- ------------- ------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA (1):
Revenues:
Commercial premiums $ 900,660 $ 1,102,392 $ 1,358,616 $ 1,664,509 $ 2,002,695
Government contracts 670,271 746,827 542,726 187,493 586,011
Specialty services 50,627 89,135 380,726 509,807 699,854
Patient service revenue, net 40,612 43,483 41,358 41,323 50,244
Investment and other income 21,449 24,874 39,511 56,792 77,013
------------ ------------- -------------- ------------- ------------
1,683,619 2,006,711 2,362,937 2,459,924 3,415,817
------------ ------------- -------------- ------------- ------------
Expenses:
Commercial health care services 711,735 862,602 1,067,027 1,290,367 1,607,073
Government contracts health care services 171,983 188,139 152,185 67,508 375,480
Government contracts subcontractor costs 419,817 432,903 252,743 66,551 40,572
Specialty services costs 47,950 79,366 355,208 438,124 616,109
Patient service costs 40,973 38,156 37,599 33,561 36,216
Selling, general and administrative 175,135 230,506 291,130 307,802 423,652
Amortization and depreciation 18,390 21,388 28,463 41,102 61,021
Interest Expense 6,035 4,239 12,709 11,555 15,099
Acquisition and restructuring costs (2) - 12,413 - 124,822 -
------------ ------------- -------------- ------------- ------------
1,592,018 1,869,712 2,197,064 2,381,392 3,175,222
------------ ------------- -------------- ------------- ------------
Income before income taxes and minority interest 91,601 136,999 165,873 78,532 240,595
Provision for income taxes 34,737 57,026 64,834 26,821 74,155
Minority interest 4,042 6,636 7,398 2,262 -
------------ ------------- -------------- ------------- ------------
Net income available to common shareholders $ 52,822 $ 73,337 $ 93,641 $ 49,449 $ 166,440
------------ ------------- -------------- ------------- ------------
------------ ------------- -------------- ------------- ------------
Earnings per share $ 1.32 $ 1.53 $ 1.92 $ 0.90 $ 2.86
------------ ------------- -------------- ------------- ------------
------------ ------------- -------------- ------------- ------------
Weighted average common and common stock
equivalent shares outstanding 40,022,322 47,870,576 48,688,221 54,780,162 58,292,971
------------ ------------- -------------- ------------- ------------
------------ ------------- -------------- ------------- ------------
JUNE 30,
-----------------------------------------------------------------------
1992 1993 1994 1995 1996
------------ ------------- -------------- ------------- ------------
BALANCE SHEET DATA (1)
Cash and investments $ 291,919 $ 485,370 $ 765,572 $ 795,278 $ 939,752
Total assets 632,037 916,247 1,498,508 1,964,207 2,426,399
Notes payable and capital leases 51,688 142,048 170,108 180,054 318,668
Stockholders' equity 263,427 342,398 422,443 756,899 934,589
</TABLE>
- -----------
(1) The Company's consolidated financial statements have been restated to
reflect the results of acquisitions accounted for in accordance with the
pooling of interests method of accounting. See Note 1 of Notes to the
Consolidated Financial Statements.
(2) In connection with certain acquisitions the Company recorded charges
for acquisition and restructuring costs. See Note 1 of Notes to the
Consolidated Financial Statements.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
CONSOLIDATED OPERATING RESULTS
The Company achieved record revenues and earnings for the fiscal year
ended June 30, 1996. The growth in revenues was primarily driven by (i)
commercial enrollment gains from the Company's individual, Medicaid, and
Medicare risk products, (ii) continued growth in net earned workers'
compensation premium due to growth in premiums written and (iii) revenues
related to an entire year of health care delivery under the Washington/Oregon
Contract and commencement of health care delivery under the Region 6 Contract
during the second quarter. Additionally, in September 1995 implementation of
the Califiornia/Hawaii Contract commenced and delivery of health care
services began in the fourth quarter. These results were offset in part by
losses from the Company's Gem Insurance Company ("Gem") PPO operations and
HMO operations in Utah. Fiscal year 1995 revenues were primarily driven by
commercial enrollment gains, especially from the Company's individual and
Medicare risk products, additional Medicaid enrollment as a result of the
acquisition of the Florida Medicaid HMO, growth in net earned workers'
compensation premium due to sales and recapture of ceded premium and
commencement of health care delivery under the Washington/Oregon Contract
during the third quarter. This growth was offset by the January 31, 1994
expiration of the CHAMPUS Reform Initiative Contract for California and
Hawaii (the "CRI Contract"). Fiscal year 1994 revenues included $431.3
million in revenues related to the CRI Contract. Revenues in fiscal year 1994
exceeded revenues in fiscal year 1993 primarily as a result of increased
commercial enrollment and specialty services revenues, including revenues
generated from CalComp which was acquired in August 1993.
Investment and other income, included as a component of the Company's
revenues, increased in fiscal 1996 over fiscal year 1995 primarily due to
investment of excess surplus and reserves generated by operations and to the
sale of IPAs in Florida and Arizona which resulted in gains recognized of
approximately $10.4 million in the fourth quarter of fiscal year 1996. Increases
in each of the other years is due primarily to the investment of excess surplus
and reserves generated by operations, a significant part of investments are held
by CalComp and its subsidiaries in tax-exempt securities.
The Company's selling, general and administrative ("SG&A") expenses in
fiscal year 1996 increased due primarily to the implementation costs of the
Region 6 and California/Hawaii Contracts. The Company's SG&A expenses in fiscal
year 1995 increased over 1994 primarily due to the implementation costs of the
Washington/Oregon and Region 6 Contracts and start-up of the New Jersey Medicaid
administrative services only contract. Fiscal year 1994 SG&A expenses were
driven primarily by expenses incurred related to the establishment and operation
of government claims processing as an internal function and inclusion of SG&A
expenses related to Gem, which was acquired January 1, 1994.
The ratio of SG&A expenses to total revenues (the "SG&A ratio") increased
from 12.3% in fiscal year 1994 to 12.5% in fiscal year 1995 and then decreased
to 12.4% in fiscal year 1996. The increase from 1994 to 1995 was due primarily
to the expiration of the CRI Contract which resulted in the cessation of
contract operating revenues effective January 31, 1994 while various
administrative costs related to claims processing and other activities continued
during the wind-down period. The decrease from 1995 to 1996 was due to
completion of the wind-down period of the CRI Contract during 1995 offset in
part by lower revenue from increased pricing pressure on commercial premiums.
Amortization and depreciation expense increased each year primarily due to
increased depreciation as a result of the Company's ownership and construction
of health care centers and increased amortization of intangibles incurred in
connection with the purchase of the Intergroup minority interest and other
business acquisitions during fiscal years 1994, 1995 and 1996.
Interest expense decreased in fiscal year 1995 from fiscal 1994 as a
result of the prepayment of $11.4 million in bank debt by TDMC in November 1994.
Interest expense increased in 1996 over 1995 due to increased borrowing under
the Company's unsecured revolving line of credit. Fiscal year 1997 interest
expense is expected to increase due to increased borrowings under the Company's
credit agreement. See "Liquidity and Capital Resources".
In connection with the mergers of CareFlorida, TDMC and Intergroup, the
Company recorded a charge for integration, restructuring and pooling costs of
$124.8 million in fiscal year 1995. The acquisition and restructuring charge
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represented the costs of acquiring and consolidating the companies' management
information systems and administrative functions and positioning the Company to
take advantage of best practices in health care delivery systems and managed
care techniques after the mergers.
The components of this charge included (in millions):
<TABLE>
<CAPTION>
<S> <C>
Professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $21.5
Cancellation of certain contractual obligations and other settlement costs. . . 27.1
Write-off of certain redundant hardware, software and other settlement costs. . 17.9
Elimination of duplicate facilities . . . . . . . . . . . . . . . . . . . . . . 13.0
Transition and severance related payments to employees. . . . . . . . . . . . . 36.5
Other integration and restructuring . . . . . . . . . . . . . . . . . . . . . . 8.8
------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $124.8
------
------
</TABLE>
These costs satisfy the definition of "exit costs" as set forth in Emerging
Issues Task Force Issue 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)" that are directly related to the mergers.
During the third quarter of fiscal 1996, the Company re-evaluated the
restructuring liabilities as originally formulated in fiscal 1995. The
re-evaluation resulted in an estimate of $16.7 million less than the original
reserve. This excess reserve was offset by an approximately equivalent amount
of restructuring costs arising from the Company's decision to restructure its
operations in the United Kingdom and acquisition and integration costs
associated with the merger of Managed Health Network, Inc. in March 1996. The
Company has substantially completed its integration and restructuring of the
combined entities as of June 30, 1996.
As a result of the factors described above, fiscal year 1996 income before
income taxes and minority interest increased to $240.6 million. In fiscal year
1995, income before income taxes and the minority interest grew to $203.3
million (before acquisition and restructuring costs). After acquisition and
restructuring costs, income before income taxes and minority interest was $78.5
million in fiscal year 1995. Fiscal year 1994 income before income taxes and
minority interest increased to $165.9 million as compared to $149.4 million
(before acquisition and restructuring costs) for fiscal year 1993. After
acquisition and restructuring costs, income before income taxes and minority
interest was $137.0 million in fiscal year 1993.
The tax provision for fiscal year 1996 decreased to 30.8% as compared to a
rate of 34.2% for fiscal year 1995 as a result of the effect of non-deductible
acquisition costs in fiscal year 1995 (which caused a higher than normal rate)
and the effect of net operating loss carryforwards which became available during
fiscal year 1996 (which caused a lower than normal rate) related to Managed
Health Network, Inc., which was acquired by the Company in March 1996.
Additional net operating loss carryforwards became available in fiscal year 1996
that further decreased the effective tax rate. The tax provision rate for 1995
of 34.2% was lower than the 1994 rate of 39.1% because of the combined effect of
the acquisition and restructuring charge of $124.8 million and the resulting
increased proportion of tax-exempt interest income as a percentage of pre-tax
income. The rate was further reduced by the acquisition of Intergroup, which is
not subject to state franchise or income taxes, and the elimination of a
duplicate tax for undistributed income from Intergroup to its former parent
company. These rate reductions were mitigated by the effects of non-deductible
acquisition expenses. The tax rate is anticipated to increase in fiscal year
1997 as the availability of net operating loss carryforwards is not expected to
recur.
Minority interest in fiscal years 1994 and 1995 represents the allocation
of Intergroup's net income to the holders of the 39.5% portion of Intergroup
common stock not held by TDMC (the "Intergroup Minority Interest"), for the
periods prior to the Company's acquisition of the Intergroup Minority Interest.
Through the combination of the factors described above, net income grew
from $93.6 million or $1.92 per share in fiscal year 1994 to net income of
$128.8 million or $2.35 per share in fiscal year 1995 (before the $124.8
million acquisition and restructuring costs net of related tax-effects). After
such charge net of related tax effects, net income for fiscal year 1995
19
<PAGE>
was $49.4 million or $.90 per share. Net income increased in fiscal year 1996 to
$166.4 million or $2.86 per share over the $128.8 million (before acquisition
and restructuring costs, net of related tax benefits) or $2.35 per share in
fiscal year 1995.
LINE OF BUSINESS REPORTING
The Company operates in a single industry segment, managed health care. The
following table presents financial information reflecting the Company's
operations by the three primary lines of business: (i) commercial operations;
(ii) government contracts; and (iii) specialty services.
20
<PAGE>
LINE OF BUSINESS FINANCIAL INFORMATION
<TABLE>
<CAPTION>
FOUNDATION HEALTH CORPORATION
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
YEARS ENDED JUNE 30,
1994 1995 1996
------------------------------------ ------------------------------------- -------------------------------
PERCENT PERCENT PERCENT PERCENT PERCENT PERCENT
AMOUNT OR OF TOTAL INCREASE AMOUNT OR OF TOTAL INCREASE AMOUNT OR OF TOTAL INCREASE
PERCENT REVENUE (DECREASE) PERCENT REVENUE (DECREASE) PERCENT REVENUE (DECREASE)
------------- --------- --------- ------------ --------- ---------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Commercial premiums $ 1,358,616 57.5% 23.2% $ 1,664,509 67.7% 22.5% $ 2,002,695 58.6% 20.3%
Government contracts 542,726 23.0 (27.3) 187,493 7.6 (65.5) 586,011 17.2 212.6
Specialty services 380,726 16.1 327.1 509,807 20.7 33.9 699,854 20.5 37.3
Patient service
revenue, net 41,358 1.8 (4.9) 41,323 1.7 (0.1) 50,244 1.5 21.6
Investment and other
income 39,511 1.7 58.8 56,792 2.3 43.7 77,013 2.3 35.6
----------- -------- ------------- --------- ------------ -------
2,362,937 100.0 17.8 2,459,924 100.0 4.1 3,415,817 100.0 38.9
----------- -------- ------------- --------- ------------ -------
Expenses:
Commercial health
care services 1,067,027 45.2 23.7 1,290,367 52.5 20.9 1,607,073 47.0 24.5
Government contracts
health care service 152,185 6.4 (19.1) 67,508 2.7 (55.6) 375,480 11.0 456.2
Government contracts
subcontractor costs 252,743 10.7 (41.6) 66,551 2.7 (73.7) 40,572 1.2 (39.0)
Specialty services
costs 355,208 15.0 347.6 438,124 17.8 23.3 616,109 18.0 40.6
Patient service costs 37,599 1.6 (1.5) 33,561 1.4 (10.7) 36,216 1.1 7.9
Selling, general and
administrative (SG&A) 291,130 12.3 26.3 307,802 12.5 5.7 423,652 12.4 37.6
Amortization and
depreciation 28,463 1.2 33.1 41,102 1.7 44.4 61,021 1.8 48.5
Interest Expense 12,709 0.5 199.8 11,555 0.5 (9.1) 15,099 0.4 30.7
Acquisition and
restructuring costs - 0.0 N/A 124,822 5.1 N/A - 0.0 N/A
----------- -------- ------------- --------- ------------ -------
2,197,064 93.0 17.5 2,381,392 96.8 8.4 3,175,222 93.0 33.3
----------- -------- ------------- --------- ------------ -------
Income before income
taxes 165,873 7.0 21.1 78,532 3.2 (52.7) 240,595 7.0 206.4
Provision for income
taxes 64,834 2.7 13.7 26,821 1.1 (58.6) 74,155 2.2 176.5
Minority interest 7,398 0.3 11.5 2,262 0.1 (69.4) - 0.0 N/A
----------- -------- ------------- --------- ------------ -------
Net Income $ 93,641 4.0% 27.7 $ 49,449 2.0% (47.2) $ 166,440 4.9% 236.6
----------- -------- ------------- --------- ------------ -------
----------- -------- ------------- --------- ------------ -------
Earnings per share $ 1.92 25.5 $ 0.90 (53.1) $ 2.86 216.3
----------- ------------- ------------
----------- ------------- ------------
Weighted average common
and common stock
equivalent shares
outstanding 48,688,221 1.8 54,780,162 12.5 58,292,971 6.4
----------- ------------- ------------
----------- ------------- ------------
Operating Ratios
Commercial loss
ratio 78.5% 77.5% 80.2%
Government contracts
ratio 74.6 71.5 71.0
Specialty services
ratio 93.3 85.9 88.0
Patient service
ratio 90.9 81.2 72.1
S G & A to total
revenues 12.3 12.5 12.4
Effective tax rate 39.1 34.2 30.8
Enrollment
Commercial :
Group and individual 828 25.3 992 19.8 1,195 20.5
Medicare risk 46 64.3 72 56.5 87 20.8
Medicaid 111 33.7 112 0.9 260 132.1
------------- --------- ------- ------ ------- -------
985 27.6 1,176 19.4 1,542 31.1
------------- --------- ------- ------ ------- -------
Government
CHAMPUS PPO and
Indemnity 86 (87.9) 251 191.9 1,072 327.1
CHAMPUS HMO 24 (90.7) 86 258.3 457 431.4
------------- --------- ------- ------ ------- -------
110 (88.7) 337 206.4 1,529 353.7
------------- --------- ------- ------ ------- -------
Combined 1,095 (37.2%) 1,513 38.2% 3,071 103.0%
------------- --------- ------- ------ ------- -------
------------- --------- ------- ------ ------- -------
</TABLE>
21
<PAGE>
COMMERCIAL OPERATIONS
Revenues generated by the Company's commercial operations increased in
fiscal year 1996 over fiscal year 1995 due in part to a 31% increase in
enrollment from existing lines of business and geographic expansion offset by
reductions in commercial premium revenue per member due to continued competitive
pricing pressures. Revenues generated by commercial operations in fiscal year
1995 increased over fiscal year 1994 due in part to inclusion of revenues from
the January 1994 purchase of Gem and the November 1994 purchases of the Colorado
HMO and the Florida Medicaid HMO as well as increased enrollment in existing
lines of business. Revenues in fiscal year 1994 increased over fiscal year
1993, reflecting increased enrollment growth and as well as the inclusion of
revenue from Gem for the last six months of fiscal year 1994. The Company
anticipates revenues to increase during fiscal year 1997 primarily as a result
of commercial enrollment growth and revenues related to delivery of health care
services pursuant to the Medicaid Mainstream program in California anticipated
to commence in mid-fiscal year 1997; however, the rate of increase is not
expected to be at the same level as in prior years since, to some extent, prior
year increases have resulted from businesses acquired and the Company
anticipates continued pressure on its ability to increase premium rates.
The Company expects continued pressure from employer groups and government
agencies to reduce premiums. Health care costs on a per member basis increased
slightly for fiscal year 1996 as compared to fiscal year 1995. The commercial
loss ratio increased from 77.5% for fiscal year 1995 to 80.2% for fiscal year
1996. The increase in the ratio was due to the continued competitive premium
pressures, new enrollees in higher loss ratio products and increased health care
costs. The commercial loss ratio decreased slightly to 77.5% in fiscal year
1995 from 78.5% in fiscal year 1994. This decrease was due to the emphasis on
controlling health care costs. The 1994 loss ratio was impacted by competitive
pressures in California offset by greater profitability of the Company's Florida
and Arizona HMOs. The Company believes that commercial premiums will increase
at lower rates than it has experienced historically, or will be lower than
current rates which may adversely affect the commercial loss ratio. The Company
continues to seek to mitigate the effects of premium pressures by continued
health care cost containment efforts. In addition, as the Company's Medicare
risk business increases, the loss ratio may increase, as historically this
product has a higher loss ratio than the Company's other commercial products.
GOVERNMENT CONTRACTS
Government contracts revenue increased in the fiscal year 1996 over fiscal
year 1995 primarily due to revenues generated by the Washington/Oregon, Region 6
and California/Hawaii Contracts. These increases were offset by the expiration
of the Base Realignment and Closure ("BRAC") Contract. Government contracts
revenue for fiscal year 1995 decreased from fiscal year 1994 primarily due to
the expiration of the CRI Contract in January 1994. The CRI Contract contributed
revenues of $431.3 million in fiscal year 1994. The Company commenced health
care delivery under its managed care contract in Louisiana and Texas in May 1993
and under the Washington/Oregon Contract in March 1995. Government contracts
revenue is impacted by semi-annual bid price adjustments, annual price increases
or decreases, risk sharing provisions and various other price adjustments
attributable to change orders for additional services, inflation and other
factors.
The government contracts ratio improved in fiscal years 1994 and 1995. The
improvement in those fiscal years was due primarily to lower health care costs
under the CRI Contract attributable to effective managed care techniques,
shifting of claims processing from an outside vendor to an internal function and
increased change order revenue. The government contracts ratio improved slightly
during fiscal year 1996 compared to fiscal year 1995. This was due primarily to
several of the contracts being in the implementation period. Comparability of
the government contracts ratio between periods is dependent on the mix of the
contracts that are in the implementation phase versus contracts that are in the
health care delivery phase. Administrative expenses relating to both phases are
recorded as part of SG&A costs. Once the delivery of health care services
begins, however, the expenses related to health care services are recorded
either as government contracts health care services or as government contracts
subcontractor costs. The government contracts ratio is expected to increase
during fiscal year 1997 as health care services will be delivered under all
three CHAMPUS contracts during the fiscal year 1997 as compared to staggered
implementation during the fiscal year 1996. Health care services commenced in
March 1995 under the Washington/Oregon Contract, in November 1995 under the
Region 6 Contract and in April 1996 under the California/Hawaii Contract.
22
<PAGE>
SPECIALTY SERVICES
Specialty services revenues increased substantially during each of the
last three fiscal years. A significant part of the increases was due to
revenues generated by CalComp, the Company's workers' compensation bill
review and third party administration subsidiaries and the acquisition of
BICO by CalComp in February 1995.
The improvement in the specialty services ratio in fiscal year 1995 over
that of fiscal year 1994 was primarily due to improvement in the workers'
compensation operating ratios, through the successful implementation of managed
care programs, which has lowered worker's compensation medical costs, and to the
addition of the worker's compensation bill review company, which has a lower
administrative component than most of the other specialty services companies.
The increase in the specialty services ratio in fiscal year 1996 over that of
fiscal year 1995 is primarily due to an increase in the combined ratio in the
worker's compensation business as described below.
Commencing in fiscal year 1994, several significant reforms to the
California workers' compensation laws affected CalComp. The reforms address
various aspects of the workers' compensation system, including limitations on
certain types of claims, restrictions on vocational rehabilitation benefits,
additional penalties for fraud and abuse, and reductions in state-mandated
minimum premium rates which culminated in open rating in California effective
January 1, 1995. Since the acquisition of CalComp, the Company has taken
various actions to mitigate the effects of the reforms and the sharp premium
declines as a result of the more competitive pricing environment under open
rating. These actions include development and implementation of its managed
care approach to workers' compensation, continued use of loss prevention and
return to work programs, shifting of the risk profile of CalComp's business,
increased use of the Company's PPO and blended case management systems (which
have reduced the average severity per claim). In addition, to diversify its
underwriting risk as a result of reduced premium levels on policies written
in California and to take advantage of perceived opportunities because of
favorable national workers' compensation reform, the Company started to write
workers' compensation policies in states outside of California through BICO,
a subsidiary of CalComp, licensed to write insurance in 49 states. Since
being purchased in February 1995, BICO has increased its estimated annual
premiums inforce to over $100 million, and recognized direct premiums earned
of approximately $42 million during fiscal 1996. BICO utilizes the same
managed workers' compensation approach as CalComp to manage its claim costs.
The Company believes these strategies should contribute to the continued
growth of this part of the specialty services operations and partially offset
the impact from the changes in the California workers' compensation
marketplace.
Four ratios are traditionally used to measure underwriting performance of
workers' compensation companies: the loss and loss adjustment expense ratio,
the underwriting expense ratio and the policyholder dividend ratio, which when
added together constitute the combined ratio. A combined ratio of greater than
100% reflects an underwriting loss, while a combined ratio of less than 100%
indicates an underwriting profit.
The following table sets forth CalComp's and its subsidiaries underwriting
experience as measured by its combined ratio and its components (computed on a
generally accepted accounting principles basis) for the fiscal years ended June
30, 1996, 1995 and the eleven months from August 1, 1993 (the date of
acquisition) to June 30, 1994:
1996 1995 1994
---- ---- ----
Loss and loss adjustment expense ratio. . . . 64.2% 62.8% 62.8%
Underwriting expense ratio. . . . . . . . . . 24.5 22.7 24.0
Policyholder dividend ratio . . . . . . . . . 1.1 1.4 7.4
--- --- ---
Combined ratio. . . . . . . . . . . . . . . . 89.8% 86.9% 94.2%
----- ----- -----
----- ----- -----
While average premium rates decreased during fiscal 1996, CalComp's loss
and loss adjustment expense ratio showed a slight increase of 1.4%. CalComp
continues to emphasize writing accounts and classes of business with the
potential for lower than average claim severity and higher claim frequency,
which permits CalComp's loss control staff and managed workers' compensation
programs to reduce the number of reported claims. As a percent of covered
insured payroll,
23
<PAGE>
the claims frequency rate decreased by 8% during fiscal year 1996 compared to
1995. In addition to frequency as a percent of payroll decreasing, the average
cost of new reported claims was 7% lower than new claims reported during fiscal
1995. This reduction in costs is due to the effective use of managed care
techniques, which reduces the medical components of loss costs, lower allocated
loss adjustment expenses by utilizing more cost efficient hearing
representatives, emphasizing returning the injured worker to some form of
modified work, and closing claims more quickly. The reductions in claim
incidence and cost, and reductions in estimates for prior accident year claims
did not fully offset the impact of reductions in premium revenue due to
competitive rating, thereby producing a loss and loss adjustment expense ratio
that increased by 1.4% from fiscal 1995.
The underwriting expense ratio increased by 1.8%, primarily due to the
reduction in premium rates in fiscal year 1996 over fiscal year 1995. The
increase in these costs was greater than the increase in net premiums earned.
This ratio, as a percent of net premiums earned, was significantly impacted by
the reduction to premium rates in California for policies written after January
1, 1995. Premiums earned in fiscal 1995 included premiums for policies issued
prior to the start of competitive rating. Premiums earned in fiscal 1996 were
derived primarily from policies written subsequent to the start of competitive
rating in California. In addition, operating costs were impacted by the
establishment of regional offices for BICO in strategic locations in western and
southern states.
The policyholder dividend ratio for the fiscal year 1996 was 1.1%. In
fiscal year 1996, CalComp issued less than 6% of its California policies on a
participating basis. This resulted in minimal policyholder dividends accrued.
Currently, California policyholders receive the benefit of lower workers'
compensation premiums at the inception of their respective policies, as
compared to policyholder dividends which were paid after policy expiration.
Though CalComp writes participating policies through BICO in states outside
of California, the portion of earned premiums represented by this group is
relatively small in fiscal year 1996.
CalComp was able to maintain a consistent loss and loss adjustment expense
ratio in fiscal year 1995 through the successful implementation of managed care
programs, and the increased use of internal staff to support fair hearing
representatives in the settlement of claims, despite the 16% decrease in the
minimum rates in California effective October 1, 1994, and the abolishment of
minimum rates and the commencement of open rating effective January 1, 1995.
The decrease in the combined ratio from fiscal year 1994 to fiscal year 1995 was
primarily due to the 6.0% decrease in the policyholder dividend ratio and the
1.3% reduction in the underwriting expense ratio. The underwriting expense
ratio decrease is primarily due to the decrease in employee salaries and
benefits to 9.7% of premiums in fiscal year 1995 from 11.0% in fiscal year 1994.
CalComp was able to achieve this decrease during a period when net premiums
earned increased by 20%; however, approximately one-half of such increase was
the result of cancellation of CalComp's quota share reinsurance arrangement
effective July 1, 1994. Workers' compensation reforms and increased price
competition have also resulted in lower policyholder dividends incurred as
policyholders now receive the benefit of lower workers' compensation costs in
the form of reduced premiums at the inception of the policy versus policyholder
dividends paid after the policy expires.
24
<PAGE>
QUARTERLY RESULTS
The following table presents unaudited consolidated operating results for
the last twelve fiscal quarters. The Company believes that all necessary
adjustments, consisting only of normal recurring adjustments, have been included
in the amounts stated below to present fairly the following quarterly results
when read in conjunction with the Company's consolidated financial statements
included elsewhere herein. Results of operations for any particular quarter are
not necessarily indicative of results of operations for a full fiscal year.
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
--- --- --- ---
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
FISCAL 1994
Total revenues . . . . . . . . . . . . . . . . . . . . . . . $621.3 $637.5 $578.9 $525.2
Income before income taxes and minority interest . . . . . . $39.9 $47.7 $40.0 $38.3
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $22.3 $27.3 $22.4 $21.7
Earnings per share . . . . . . . . . . . . . . . . . . . . . $0.47 $0.56 $0.46 $0.44
FISCAL 1995
Total revenues . . . . . . . . . . . . . . . . . . . . . . . $594.4 $598.5 $615.6 $651.4
Income (loss) before income taxes and minority interest. . . $39.3 $(76.8) $57.8 $58.2
Net income (loss). . . . . . . . . . . . . . . . . . . . . . $23.7 $(49.3) $36.3 $38.8
Earnings (loss) per share. . . . . . . . . . . . . . . . . . $0.48 $(0.90) $0.63 $0.68
FISCAL 1996
Total revenues . . . . . . . . . . . . . . . . . . . . . . . $722.4 $768.0 $867.8 $1057.6
Income before income taxes . . . . . . . . . . . . . . . . . $59.7 $61.4 $60.8 $58.7
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $39.4 $41.7 $41.8 $43.5
Earnings per share . . . . . . . . . . . . . . . . . . . . . $0.69 $0.71 $0.72 $0.74
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $156.8 million for the year ended
June 30, 1996 as compared to $201.8 million for the prior year. The change is
principally due to timing of the receipt or payment of amounts under government
contracts as revenues are received monthly in arrears under the current CHAMPUS
contracts, while previously some contracts were prepaid. The Company's cash and
investments increased from $795.3 million at June 30, 1995 to $939.8 million at
June 30, 1996. The Company invests its cash in investment grade securities.
During fiscal year 1997, the Company expects capital expenditures to
approximate $85.8 million, primarily consisting of $78.2 million for the
purchase of computer hardware and software systems; $4.1 million for the
purchase of furniture and equipment; and $3.5 million for other requirements.
Other assets increased over the amount at June 30, 1995, which is primarily
due to increases in pharmacy rebates, trade receivables, notes receivable
related to IPA sales and the cash surrender value of life insurance policies
related to the non-qualified defined benefit pension plans.
In January 1996, the Company sold its affiliated California IPAs to FPA
for a purchase price consisting of cash and a promissory note payable over 10
years, see notes 1 and 11 to the Consolidated Financial Statements. The notes
receivable under the revolving credit agreements with the IPAs in the amount
of $10 million were repaid to the Company and terminated in connection with
the transaction.
In connection with construction of its health care centers and of its
administrative facilities the Company has a $60 million tax-retention operating
lease financing with Nations Bank of Texas, N.A., as Administrative Agent for
the Lenders parties thereto and First Security Bank of Utah, N.A., as Owner
Trustee (the "TROL" financing). As of June 30, 1996, approximately $26 million
of the TROL financing had been used for construction of health care centers.
The Company expects that up to $5 million of the TROL financing will be used
during fiscal year 1997 for the construction of its administrative facilities.
25
<PAGE>
On June 28, 1996, the Company and the sole shareholder of the Foundation
Health Medical Group, Inc. and Thomas-Davis Medical Centers, P.C.
(collectively referred to as the "Medical Groups") entered into a Stock and
Note Purchase Agreement whereby the Company will sell all the outstanding
stock of Foundation Health Medical Services ("FHMS"), its management services
organization, and the shareholder will sell all the outstanding stock of the
holding company for the Medical Groups to FPA. The aggregate consideration
consists of $2 million cash, $75 million of FPA common stock, $22 million
bridge note due five months after closing and bearing a floating interest
rate and a $12 million note to be consolidated with the assumption of the
intercompany indebtedness of FHMS, the holding company and the Medical Groups
to FHC by FPA (estimated to be $80 million as of June 30, 1996, which amount
will be adjusted for liabilities incurred, up to $12 million, between June
30, 1996 and the closing of the transaction, currently anticipated for
October 1, 1996). The consolidated note will bear interest at a floating rate
with amortization of principal on a 15 year schedule with the remaining
principal and accrued interest due 84 months after close. FPA will also
assume other liabilities owed by FHMS, the Holding Company and the Medical
Groups to third parties (estimated to be $41 million as of June 30, 1996).
The promissory notes will be secured by the assets and stock of the FPA, the
purchasing company, FHMS, the holding company and the Medical Groups. The
promissory notes will be guaranteed by FPA. The Company's affiliated health
plans in Arizona, California and Florida will have agreed to pay to FPA an
aggregate of $55 million during the period commencing August 1996 through
December 1998 for continued and uninterrupted access as defined in the
Purchase Agreement to the professional providers of the IPAs and the Medical
Groups for the Company's affiliated health plan enrollees.
In December 1994, the Company established a $300 million unsecured
revolving credit agreement with Citicorp USA, Inc. as Administrative Agent (the
"Credit Agreement") for the lenders parties thereto. As of August 15, 1996, the
Company has drawn $230 million under the Credit Agreement. In June 1993, the
Company issued $125 million of Senior Notes due June 1, 2003, which bear
interest at 7.75% due semiannually (the "Senior Notes"). See Notes 7 and 13 to
the Consolidated Financial Statements for a more detailed description of the
TROL financing, the Credit Agreement and the Senior Notes.
In April 1993, the Company established a stock repurchase program (as
amended) to acquire from time to time up to 5.7 million shares of the Company's
common stock in the open market at prices deemed appropriate by management and
subject to market conditions and other relevant factors. As of June 30, 1996,
the Company had repurchased 1,795,500 shares under the program, 250,000 of which
were repurchased in fiscal year 1996.
The Company's regulated subsidiaries are required to maintain minimum
tangible net equity or capital and surplus. As of June 30, 1996, restricted
net assets of the subsidiaries totaled approximately $71.5 million. Certain
subsidiaries must also maintain current ratios of 1:1. During fiscal year
1996, the Company contributed or advanced approximately $115 million to
various of its subsidiaries to allow them to support and expand premium and
revenue growth and to meet rating and regulatory agency requirements. As the
Company's businesses continue to grow, the Company expects to contribute
additional cash to certain subsidiaries to support premium and revenue growth.
Subsequent to June 30, 1996, the Company drew down $65 million on its Credit
Agreement to support premium and revenue growth in its insurance
subsidiaries. Certain of the Company's regulated subsidiaries are required to
keep securities on deposit in various states where they are licensed. At
June 30, 1996, approximately $405 million in securities were restricted to
satisfy various state regulatory and licensing requirements.
Certain of the Company's subsidiaries are required to maintain reserves to
cover their estimated ultimate liability for claims, losses and loss adjustment
expenses with respect to reported and unreported claims incurred. These
reserves are estimates of future costs based on various assumptions.
Establishment of appropriate reserves is an inherently uncertain process, and
there can be no certainty that currently established reserves will prove
adequate in light of subsequent actual experience, which in the past has
resulted and in the future could result in loss reserves being too high or too
low. The accuracy of these estimates may be affected by external forces such as
changes in the rate of inflation, the regulatory environment, the judicial
administration of claims, medical costs and other factors. Future loss
development or governmental regulators could require reserves for prior periods
to be increased, which would adversely impact earnings in future periods.
The Company currently believes its available cash resources will be
sufficient to meet its current operating requirements and internal development
and integration activities. However, external financing sources may be required
to
26
<PAGE>
sustain growth in certain of the Company's regulated subsidiaries during fiscal
year 1997. There currently are no other material definitive commitments for
future use of the Company's available cash resources; however management
continually evaluates opportunities to expand its operations, which includes
internal development of new products and programs and may include additional
acquisitions.
RECENTLY ISSUED ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, "Accounting for Stock-Based Compensation". The new standard defines a
fair value method of accounting for stock options and other equity instruments,
such as stock purchase plans. Under this method, compensation cost is measured
on the fair value of the stock award when granted and is recognized as expense
over the service period, which is usually the vesting period. This standard
will be effective for the Company beginning in fiscal 1997, and requires
measurement of awards made on or after December 15, 1995. The new standard
permits companies to continue to account for equity transactions with employees
under existing accounting rules, but requires disclosure in a note to the
financial statements of the pro forma net income and earnings per share as if
the Company had applied the new method of accounting. The Company intends to
follow the disclosure requirements for its employee stock plans. The new
standard will also require that all stock-based transactions with non-employees
be measured in accordance with the fair value method and recorded as expense.
The Company has not determined the effect, if any, of implementing this standard
on its results of operations.
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121, "Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets to be Disposed of ("FAS No. 121"). The Statement requires
that long-lived assets and certain identifiable intangibles to be held and
used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The Statement also requires that long-lived assets and certain
identifiable intangibles to be disposed of be reported at the lower of
carrying amounts or fair value less cost to sell. This Statement will be
effective for the Company beginning in fiscal 1997. Adoption of FAS No. 121
is not expected to have a significant effect on the Company's consolidated
financial Statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and related financial information required to be
filed hereunder are set forth at the pages indicated at Item 14(a) of this
Report.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None.
------------
The Company's 1996 Annual Report to Stockholders is not to be deemed filed
as a part of this Report.
PART III
Certain information required by Part III is omitted from this Report in
that the registrant will file a definitive proxy statement pursuant to
Regulation 14A (the "Proxy Statement") not later than 120 days after the end of
the fiscal year covered by this Report, and certain information included therein
is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information concerning the Company's directors required by this Item is
incorporated by reference from the Company's Proxy Statement.
27
<PAGE>
The information concerning the Company's executive officers required by
this Item is incorporated by reference to the section in Part I hereof entitled
"Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference from the
Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is incorporated by reference from the
Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated by reference from the
Company's Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this Report:
1. FINANCIAL STATEMENTS.
The following Consolidated Financial Statements of Foundation Health
Corporation and its subsidiaries and the Independent Auditors' Report therein
are filed as part of this Report:
Independent Auditors' Report
Consolidated Balance Sheets as of June 30, 1995 and 1996
Consolidated Statements of Operations for the years ended
June 30, 1994, 1995 and 1996
Consolidated Statements of Stockholders' Equity for the years
ended June 30, 1994, 1995 and 1996
Consolidated Statements of Cash Flows for the years ended
June 30, 1994, 1995 and 1996
Notes to Consolidated Financial Statements
The independent auditors' reports for predecessor companies
for the year ended December 31, 1993 are included in
Exhibits 13.1, 13.2 and 13.3
2. FINANCIAL STATEMENT SCHEDULE AND OTHER FINANCIAL INFORMATION. The
following financial statement schedule and other financial information of
Foundation Health Corporation and its subsidiaries are filed as part of this
Report and should be read in conjunction with the Consolidated Financial
Statements of Foundation Health Corporation:
SCHEDULE
- --------
Article 5, Schedule I - Condensed Financial Information of Registrant
OTHER FINANCIAL INFORMATION
- ---------------------------
Section 403.04.b - Reconciliation of Beginning and Ending Class
Reserves and Exhibit of Deficiencies (Redundancies)
Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be set forth
therein is included in the Consolidated Financial Statements or Notes thereto.
3. EXHIBITS. The Exhibits listed on the accompanying Index to Exhibits
immediately following the financial statement schedule are filed as part of, or
incorporated by reference into, this Report.
28
<PAGE>
Executive Compensation Plans and Arrangements:
A. 1990 Stock Option Plan of Foundation Health Corporation (as amended
and restated effective August 15, 1996) - Exhibit 10.102;
B. Foundation Health Corporation Profit Sharing and 401(k) Plan (as
amended and restated effective January 1, 1994) - Exhibit 10.103; Form 10-K
filed September 27, 1995;
C. Executive Incentive Plan of Foundation Health Corporation - Exhibit
10.3; Form 10-K filed September 23, 1994;
D. Employment Agreement between Foundation Health Corporation and Daniel
D. Crowley dated April 30, 1994 - Exhibit 10.84; Registration Statement No.
33-80432;
E. Employment Agreement between Foundation Health Corporation and Steven
D. Tough dated April 22, 1994 - Exhibit 10.86; Registration Statement No.
33-80432; Amended May 1, 1996- Exhibit 10.108;
F. Employment Agreement between Foundation Health Corporation and Allen
J. Marabito dated April 22, 1994 - Exhibit 10.88; Registration Statement No.
33-80432; Amended May 1, 1996- Exhibit 10.107;
G. Employment Agreement between Foundation Health Corporation and Jeffrey
L. Elder dated April 22, 1994 - Exhibit 10.85; Registration Statement No.
33-80432; Amended May 1, 1996- Exhibit 10.106;
H. Employment Agreement between Foundation Health Corporation and Kirk A.
Benson dated April 22, 1994 - Exhibit 10.87; Registration Statement No.
33-80432; Amended May 1, 1996- Exhibit 10.105;
I. Employee Stock Purchase Plan - Exhibit 10.53; Registration Statement
No. 33-38867;
J. Amended and Restated Foundation Health Corporation Deferred
Compensation Plan - Exhibit 10.99; Form 10-K filed September 27, 1995;
K. Foundation Health Corporation Supplemental Executive Retirement Plan,
as amended and restated - Exhibit 10.100; Form 10-K filed September 27, 1995;
L. Foundation Health Corporation Executive Retiree Medical Plan, as
amended and restated - Exhibit 10.101; Form 10-K filed September 27, 1995;
(b) Reports on Form 8-K. The following reports on Form 8-K were filed by
the Company during the fiscal quarter ended June 30, 1996:
May 2, 1996 (related to pooling of interests 30 day combined financial
statements for Managed Health Network, Inc. acquisition)
29
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FOUNDATION HEALTH CORPORATION
By /s/ DANIEL D. CROWLEY
---------------------
Daniel D. Crowley
CHAIRMAN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Dated: August 30, 1996
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Daniel D. Crowley, Allen J. Marabito and Patricia
A. Burgess, and each of them, his true and lawful attorneys in fact, each with
the power of substitution, for him in any and all capacities, to sign any
amendments to this Report on Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys in fact, or his substitute or substitutes, may do or cause of be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ DANIEL D. CROWLEY Director, President and Chief August 30, 1996
- --------------------- Executive Officer (Principal
Daniel D. Crowley Executive Officer) and Chairman
of the Board
/s/ DAVID A. BOGGS Director August 30, 1996
- ------------------
David A. Boggs
/s/ JEFFREY L. ELDER Director, Senior Vice August 30, 1996
- -------------------- President-Chief Financial
Jeffrey L. Elder Officer (Principal Financial and
Accounting Officer)
/s/ PATRICK FOLEY Director August 30, 1996
- -----------------
Patrick Foley
/s/ EARL B. FOWLER Director August 30, 1996
- ------------------
Earl B. Fowler
/s/ RICHARD W. HANSELMAN Director August 30, 1996
- ------------------------
Richard W. Hanselman
/s/ ROSS D. HENDERSON, M.D Director August 30, 1996
- --------------------------
Ross D. Henderson, M.D.
/s/ FRANK A. OLSON Director August 30, 1996
- ------------------
Frank A. Olson
/s/ RICHARD J. STEGEMEIER Director August 30, 1996
- -------------------------
Richard J. Stegemeier
/s/ STEVEN D. TOUGH Director August 30, 1996
- -------------------
Steven D. Tough
/s/ RAYMOND S. TROUBH Director August 30, 1996
- ---------------------
Raymond S. Troubh
30
<PAGE>
FOUNDATION HEALTH CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996
31
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Foundation Health Corporation
We have audited the accompanying consolidated balance sheets of
Foundation Health Corporation and its subsidiaries (the "Company") as of June
30, 1995 and 1996, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the
period ended June 30, 1996. Our audits also included the financial statement
schedule of Condensed Financial Information listed in the index at Item
14(a)(2). These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and financial statement schedule
based on our audits. The consolidated financial statements give retroactive
effect to the merger of CareFlorida Health Systems, Inc. and a wholly-owned
subsidiary of Foundation Health Corporation on October 31, 1994, and to the
merger of Foundation Health Corporation and Thomas-Davis Medical Centers,
P.C. on November 1, 1994, both of which have been accounted for as a pooling
of interests as described in Note 1 to the consolidated financial statements.
We did not audit the statements of income, stockholders' equity and cash
flows of Thomas-Davis Medical Centers, P.C., for the year ended December 31,
1993, which statements reflect total revenues of $419,283,000. We also did
not audit the statements of income, stockholders' equity and cash flows of
CareFlorida Health Systems, Inc. for the year ended December 31, 1993, which
statements reflect total revenues of $154,122,000. Those financial statements
were audited by other auditors whose reports have been furnished to us, and
our opinion, insofar as it relates to the amounts included for Thomas-Davis
Medical Centers, P.C. and CareFlorida Health Systems, Inc. for such period,
is based solely on the reports of the other auditors. As described in Note 1
to the consolidated financial statements, subsequent to the issuance of the
reports of the other auditors, the financial statements of Thomas-Davis
Medical Centers, P.C. and CareFlorida Health Systems, Inc. were restated to
conform to the fiscal year of Foundation Health Corporation for the year
ended June 30, 1994.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Foundation Health Corporation and
its subsidiaries as of June 30, 1995 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 1996 in conformity with generally accepted accounting principles. Also,
in our opinion, the financial statement schedule referred to above, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
We also audited the adjustments described in Note 1 that were applied to
restate the 1993 financial statements of Thomas-Davis Medical Centers, P.C. and
CareFlorida Health Systems, Inc. In our opinion, such adjustments are
appropriate and have been properly applied.
DELOITTE & TOUCHE LLP
Sacramento, California
July 25, 1996
32
<PAGE>
FOUNDATION HEALTH CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
JUNE 30,
----------------------------
1995 1996
------------- -------------
Cash and cash equivalents $ 203,937 $ 224,838
Investments :
Available for sale investments 541,596 683,023
Held to maturity investments 49,745 31,891
Amounts receivable under government contracts 81,089 182,062
Reinsurance receivable 98,255 94,662
Premium and patient receivables, net of allowance
for doubtful accounts of $11,915 and $13,675 at
June 30, 1995 and 1996 100,727 139,501
Property and equipment, net 230,278 277,206
Goodwill and other intangible assets, net 409,342 409,514
Deferred income taxes 65,673 42,526
Other assets 183,565 341,176
------------- -------------
$ 1,964,207 $ 2,426,399
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Reserves for claims, losses and loss adjustment
expenses $ 700,281 $ 883,911
Notes payable, capital leases and other
financing arrangements 180,054 318,668
Amounts payable under government contracts 47,584 52,948
Accrued dividends to policyholders 16,405 9,726
Other liabilities 262,984 226,557
------------- -------------
1,207,308 1,491,810
------------- -------------
Stockholders' equity
Common stock and additional paid-in capital,
$.01 par value, 100,000,000 shares
authorized, 57,142,606 and 58,825,753
shares issued and outstanding at
June 30, 1995 and 1996 518,671 533,855
Retained Earnings 244,249 410,689
Unrealized investment gains and losses,
net of taxes (2,974) (6,908)
Common stock held in treasury, at cost (3,047) (3,047)
------------- -------------
756,899 934,589
------------- -------------
$ 1,964,207 $ 2,426,399
------------- -------------
------------- -------------
The accompanying notes are an integral part of these consolidated financial
statements.
33
<PAGE>
FOUNDATION HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
YEAR ENDED JUNE 30,
---------------------------------------
1994 1995 1996
----------- ----------- -----------
REVENUES:
Commercial premiums $ 1,358,616 $ 1,664,509 $ 2,002,695
Government contracts 542,726 187,493 586,011
Specialty services revenue 380,726 509,807 699,854
Patient service revenue, net 41,358 41,323 50,244
Investment and other income 39,511 56,792 77,013
----------- ----------- -----------
2,362,937 2,459,924 3,415,817
----------- ----------- -----------
EXPENSES:
Commercial health care services 1,067,027 1,290,367 1,607,073
Government contracts health care
services 152,185 67,508 375,480
Government contracts subcontractor
costs 252,743 66,551 40,572
Specialty services costs 355,208 438,124 616,109
Patient service costs 37,599 33,561 36,216
Selling, general and administrative 291,130 307,802 423,652
Amortization and depreciation 28,463 41,102 61,021
Interest expense 12,709 11,555 15,099
Acquisition and restructuring costs - 124,822 -
----------- ----------- -----------
2,197,064 2,381,392 3,175,222
----------- ----------- -----------
Income before income taxes and
minority interest 165,873 78,532 240,595
Provision for income taxes 64,834 26,821 74,155
Minority interest 7,398 2,262 -
----------- ----------- -----------
Net income $ 93,641 $ 49,449 $ 166,440
----------- ----------- -----------
----------- ----------- -----------
Earnings per share $ 1.92 $ 0.90 $ 2.86
----------- ----------- -----------
----------- ----------- -----------
Weighted average common and common
stock equivalent shares outstanding 48,688,221 54,780,162 58,292,971
----------- ----------- -----------
----------- ----------- -----------
The accompanying notes are an integral part of these consolidated financial
statements.
34
<PAGE>
FOUNDATION HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK UNREALIZED
COMMON STOCK HELD IN TREASURY INVESTMENT
------------------------- ---------------------- RETAINED GAINS AND LOSSES,
SHARES AMOUNT SHARES AMOUNT EARNINGS NET OF TAXES TOTAL
---------- ---------- --------- --------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1993 47,219,097 $ 248,911 3,381,713 $ (9,667) $ 103,154 $ - $ 342,398
Issuance of common
stock - net 2,087,971 1,627 - - - - 1,627
Purchase of treasury
stock (1,400,281) 1,400,281 (27,666) - - (27,666)
Exercise of stock options 572,347 8,661 - - - - 8,661
Assumption of stock
options - 367 - - - - 367
Tax benefits related to
stock options exercised - 5,410 - - - - 5,410
Dividends paid by
predecessor company - - - - (1,995) - (1,995)
Net income - - - - 93,641 - 93,641
---------- ---------- ---------- ---------- ---------- ---------- ---------
Balance at June 30, 1994 48,479,134 264,976 4,781,994 (37,333) 194,800 - 422,443
Cumulative effect of
adoption of SFAS
No. 115, net of taxes - - - - - (9,019) (9,019)
Issuance of common stock 8,432,676 280,465 - - - - 280,465
Purchase of treasury
stock (100,000) - 100,000 (3,047) - - (3,047)
Retirement of treasury
stock - (37,333) (4,781,994) 37,333 - -
Exercise of stock options 330,796 5,920 - - - - 5,920
Tax benefits related to
stock options exercised - 4,643 - - - - 4,643
Net unrealized holding -
gains - - - - - 6,045 6,045
Net income - - - - 49,449 - 49,449
---------- ---------- ---------- --------- ---------- ---------- ----------
Balance at June 30, 1995 57,142,606 518,671 100,000 (3,047) 244,249 (2,974) 756,899
Issuance of common
stock - net 875,160 (86) 250,000 (8,384) - - (8,470)
Exercise of stock options 807,987 16,932 - - - - 16,932
Retirement of treasury
stock - (8,384) (250,000) 8,384 - - -
Tax benefits related to
stock options exercised - 6,722 - - - - 6,722
Net unrealized holding
loss - - - - - (3,934) (3,934)
Net income - - - - 166,440 - 166,440
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at June 30, 1996 58,825,753 $ 533,855 100,000 $ (3,047) $ 410,689 $ (6,908) $ 934,589
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
35
<PAGE>
FOUNDATION HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------
1994 1995 1996
-------- --------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES :
Net income $ 93,641 $ 49,449 $ 166,440
Adjustments to reconcile net income to
cash provided by operating activities
Amortization and depreciation 28,389 40,981 61,021
Amortization of bond discounts 3,719 5,396 2,769
Noncash restructuring costs - 11,486 -
Gain on sale of IPAs - - (10,427)
Change in assets and liabilities, net of
effects from acquisition of businesses:
Premium and patient receivables, net 11,577 912 (35,539)
Reinsurance receivable 7,117 25,583 3,712
Other assets (28,266) (40,164) (95,561)
Amounts receivable/payable under
government contracts (10,761) 51,730 (95,609)
Reserves for claims, losses and loss
adjustment expenses 18,071 59,645 180,071
Accrued dividends to policyholders 7,115 (13,621) (6,679)
Other liabilities 22,636 27,631 (38,324)
Deferred income taxes, net (9,219) (17,265) 24,932
---------- ---------- ----------
Net cash from operating activities 144,019 201,763 156,806
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES :
Purchases of available for sale investments - (765,510) (599,302)
Sales and maturities of available for
sale investments - 770,673 459,852
Purchases of held to maturity investments - (39,112) (8,970)
Maturities of held to maturity investments - 80,034 17,553
Purchases of short-term investments (367,253) - -
Sales and maturities of short-term
investments 435,201 - -
Purchases of fixed maturity investments (731,324) - -
Sales and maturities of fixed maturity
investments 641,404 - -
Acquisition of property and equipment (46,363) (107,257) (79,419)
Increase in goodwill and other
intangible assets (1,171) (42,126) (11,624)
Increase in other assets (10,543) (35,376) (49,647)
Acquisition of businesses, net of cash
acquired (62,545) (41,874) (1,813)
---------- ---------- ----------
Net cash used for investing activities (142,594) (180,548) (273,370)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES :
Principal payments on notes payable and
capital leases (8,218) (16,451) (17,287)
Proceeds from issuance of notes payable
and capital leases 300 20,000 147,401
Proceeds from issuance of common stock - net 1,627 6,448 1,254
Proceeds from exercise of stock options 8,661 5,920 16,932
Tax benefits related to stock options 5,410 4,643 6,722
Stock repurchase and other adjustments
related to mergers (27,666) (3,047) (17,557)
Dividends paid by predecessor company (1,995) - -
---------- ---------- ----------
Net cash from (used for) financing
activities (21,881) 17,513 137,465
---------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents (20,456) 38,728 20,901
Cash and cash equivalents, beginning of
year 185,665 165,209 203,937
---------- ---------- ----------
Cash and cash equivalents, end of year $ 165,209 $ 203,937 $ 224,838
---------- ---------- ----------
---------- ---------- ----------
SUPPLEMENTAL CASH FLOWS DISCLOSURE :
Interest paid $ 14,004 $ 13,907 $ 15,104
Income taxes paid 64,426 47,792 10,662
Noncash investing and financing activities
Capital lease obligations 2,378 - 824
Deferred compensation 5,383 5,429 2,867
Transfer of investments from held to
maturity to available for sale - - 9,090
Acquisition of businesses :
Assets acquired $ 532,331 $ 392,509 $ 26,090
Liabilities assumed (439,740) (49,506) (13,239)
Issuance of notes payable held in escrow (4,359) (7,909) -
Issuance of common stock - (274,017) (6,631)
---------- ---------- ----------
Cash paid 88,232 61,077 6,220
Less cash acquired (25,687) (19,203) (4,407)
---------- ---------- ----------
Net cash paid $ 62,545 $ 41,874 $ 1,813
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
36
<PAGE>
FOUNDATION HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS
Foundation Health Corporation (the "Company") operates an integrated
multi-state managed care organization. The Company's operations are focused on
its commercial health maintenance organization ("HMO") and preferred provider
organization ("PPO") operations, government-sponsored managed care programs, and
specialty services operations.
The Company's commercial HMO subsidiaries contract to provide medical care
services to a defined, enrolled population for a predetermined, prepaid monthly
fee for group, Medicaid, individual and Medicare HMO plans throughout their
respective service areas. All of the HMOs are state licensed and some are also
federally qualified.
The Company's wholly-owned subsidiary, Foundation Health Federal Services,
Inc. ("Federal Services"), administers large, multi-year managed care government
contracts. Federal Services subcontracts to affiliated and unrelated third
parties the administration and health care risk of parts of these contracts.
These programs include: (i) a CHAMPUS managed care contact in Washington and
Oregon to provide health care services to approximately 227,000 CHAMPUS-eligible
beneficiaries which commenced health care services in March 1995 (the
"Washington/Oregon Contract"), (ii) a similar contract in Texas, Louisiana,
Arkansas and Oklahoma to provide health care services to approximately 590,000
CHAMPUS-eligible beneficiaries which commenced delivery of health care services
in November 1995 (the "Region 6 Contract") and (iii) the multi-year TRICARE
managed care contract to provide health care services to approximately 720,000
CHAMPUS-eligible beneficiaries in California and Hawaii which commenced delivery
of health care services in April 1996 (the "California/Hawaii Contract")
Federal Services also administers contracts in Massachusetts, New Jersey,
Georgia and Maine to enroll Medicaid eligible individuals in managed care
programs in those states. Federal Services is not at risk for the provision of
any health care services under any of these contracts.
The Company's specialty services subsidiaries offer managed care products
related to workers' compensation insurance, administration and cost
containment, behavioral health, dental, vision, and pharmaceutical products
and services. The Company's largest specialty services subsidiary,
California Compensation Insurance Company ("CalComp"), acquired in August
1993, is primarily engaged in writing workers' compensation insurance in
California. CalComp enables the Company to utilize its managed care
capabilities and provider networks to reduce the medical costs associated
with workers' compensation claims and provides the Company with the ability
to market "24 hour" risk products covering employees for medical care both on
and off the job. In February 1995, the Company acquired Business Insurance
Company ("BICO"). BICO was acquired to geographically diversify CalComp's
underwriting risk as a result of reduced premium levels on policies written
in California and to take advantage of perceived opportunities because of
favorable national workers' compensation reform. BICO is licensed to write
workers' compensation policies in 49 states.
The Company operates and manages Company-owned and leased health care
centers in California, Arizona and Florida which provide primary and
multi-specialty care to enrolled members. Physicians employed by professional
corporations which are owned by Company-affiliated physicians provide services
to the Company's members at the health care centers. The Company provides
facilities and support functions to the health care centers and is reimbursed in
the form of a management fee by the affiliated professional corporations.
On June 28, 1996, the Company and the sole shareholder of the holding
Company of Thomas-Davis Medical Centers, P.C. and Foundation Health Medical
Group, Inc. (collectively referred to as the "Medical Groups") entered into a
Stock and Note Purchase Agreement with FPA Medical Management, Inc. ("FPA")
whereby the Company will sell all the outstanding stock of Foundation Health
Medical Services ("FHMS"), its management services organization, and the
shareholder will sell all the outstanding stock of the holding company for
the Medical Groups to FPA and certain of its affiliated entities. The
aggregate consideration consists of $2
37
<PAGE>
million cash, $75 million of FPA common stock, $22 million bridge note due
five months after closing and bearing a floating interest rate and a $12
million note to be consolidated with the assumption of the intercompany
indebtedness of FHMS, the holding company and the Medical Groups to FHC by
FPA (estimated to be $80 million as of June 30, 1996, which amount will be
adjusted, up to $12 million, for liabilities incurred between June 30, 1996
and the closing of the transaction, currently anticipated for October 1,
1996). The consolidated note will bear interest at a floating rate with
amortization of principal on a 15 year schedule with the remaining principal
and accrued interest due 84 months after close. FPA will also assume other
liabilities owed by FHMS, the Holding Company and the Medical Groups to third
parties (estimated to be $41 million as of June 30, 1996). The promissory
notes will be secured by the assets and stock of FPA, the purchasing company,
FHMS, the holding company and the Medical Groups. The promissory notes will
be quaranteed by FPA. The Company's affiliated health plans in Arizona,
California and Florida have agreed to pay to FPA an aggregate of $55 million
during the period commencing August 1996 through December 1998 for continued
and uninterrupted access as defined in the Purchase Agreement to the
professional providers of the IPAs and the Medical Groups for the Company's
affiliated health plan enrollees. This transaction will be recorded in the
financial statements in the quarter it closes.
The Company owns and operates two hospitals, the East Los Angeles Doctors
Hospital, a 128-bed general hospital located in East Los Angeles, California and
the Memorial Hospital of Gardena, a 200-bed general hospital located in Gardena,
California (the "Hospitals"). The health care services provided by the Hospitals
are general medical and surgical services, subacute, pediatrics, intensive and
coronary care, physical therapy, respiratory care and emergency room services.
The Hospitals received approximately 79% of their revenues from Medicare and
Medicaid programs during the year ended June 30, 1996.
CONSUMMATED BUSINESS ACQUISITIONS - POOLING TRANSACTIONS
FISCAL YEAR 1995
On October 31, 1994, 6,862,051 shares of the Company's common stock were
issued in exchange for all of the outstanding common stock of CareFlorida Health
Systems, Inc. ("CareFlorida"). At the time of acquisition, CareFlorida provided
comprehensive health care services to approximately 143,000 members in Florida
through its HMO and PPO subsidiaries.
On November 1, 1994, 13,124,027 shares of the Company's common stock were
issued in exchange for all of the outstanding common stock of TDMC, including
its majority interest of 60.5% of the outstanding common stock of Intergroup
Healthcare Corporation ("Intergroup"). Additionally, 7,577,336 shares were
issued for the purchase of the remaining 39.5% minority interest of Intergroup.
All outstanding Intergroup options were exchanged for options to purchase
500,290 shares of the Company's common stock. TDMC employed approximately 190
physicians at the date of merger who provided health care services to patients
in Arizona through 15 primary care centers, five urgent care centers, two
behavioral health centers and one surgery center. At the time of merger,
Intergroup provided comprehensive health care services to approximately 379,000
HMO and life and accident insurance members and 104,000 PPO members primarily in
Arizona and Utah.
In connection with the mergers of CareFlorida, TDMC and Intergroup in
fiscal 1995, the Company recorded a charge for acquisition, restructuring and
merger costs of $124.8 million.
The acquisition and restructuring charge represented the costs of acquiring
and consolidating the companies' management information systems and
administrative functions and positioning the Company to take advantage of best
practices in health care delivery systems and managed care techniques after the
mergers.
38
<PAGE>
The components of this charge included (in millions):
Professional fees. . . . . . . . . . . . . . . . . . . $21.5
Cancellation of certain contractual obligations and
other settlement costs . . . . . . . . . . . . . . . 27.1
Write-off of certain redundant hardware, software and
other settlement costs . . . . . . . . . . . . . . . 17.9
Elimination of duplicate facilities. . . . . . . . . . 13.0
Transition and severance related payments to
employees. . . . . . . . . . . . . . . . . . . . . . . 36.5
Other integration and restructuring. . . . . . . . . . 8.8
------
Total. . . . . . . . . . . . . . . . . . . . . . . . . $124.8
------
------
These costs satisfy the definition of "exit costs" as set forth in Emerging
Issues Task Force Issue 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)," that are directly related to the mergers.
The Company has substantially completed its integration and restrurcturing of
the combined entities as of June 30, 1996.
In accordance with the pooling of interests method of accounting the
Company's consolidated financial statements and notes thereto have been restated
to include the accounts of TDMC (including its 60.5% interest in Intergroup) and
CareFlorida for all periods presented. Prior to the mergers, CareFlorida and
TDMC each reported on a calendar year basis. Accordingly, the consolidated
financial statements include CareFlorida's and TDMC's financial statements
restated to the Company's fiscal year basis. Separate and combined results of
the Company, CareFlorida and TDMC for the period prior to consummation of the
mergers are as follows (in thousands):
YEAR ENDED JUNE 30
------------------
1994
----
Revenues:
Foundation Health Corporation - as previously
reported . . . . . . . . . . . . . . . . . . . . . . $1,717,821
TDMC- year ended December 31, 1993 . . . . . . . . . . 419,283
CareFlorida- year ended December 31, 1993. . . . . . . 154,122
Adjustments (1). . . . . . . . . . . . . . . . . . . . 71,711
----------
Combined . . . . . . . . . . . . . . . . . . . . . . . . . $2,362,937
----------
----------
Net income:
Foundation Health Corporation - as previously
reported . . . . . . . . . . . . . . . . . . . . . . $82,153
TDMC- year ended December 31, 1993 . . . . . . . . . . 4,841
CareFlorida- year ended December 31, 1993. . . . . . . 6,664
Adjustments (1). . . . . . . . . . . . . . . . . . . . (17)
---------
Combined . . . . . . . . . . . . . . . . . . . . . . . . . $93,641
---------
---------
(1) Primarily reflects adjustments to calendar year results to conform to
the Company's fiscal year reporting and certain reclassifications to conform to
the Company's presentation.
FISCAL YEAR 1996
In March 1996 the Company issued stock for Managed Health Network, Inc. and
its subsidiaries (collectively "MHN"), a privately held company providing
employee assistance and managed behavioral health programs to more than 2.7
million covered lives through its subsidiaries, in a stock-for-stock, pooling of
interest transaction valued at approximately $45 million. The Company has
determined that the impact on prior years' financial statements of restatement
of the Company's financial statements as a result of the MHN merger would not be
significant and therefore, has combined MHN's net assets as of March 6, 1996,
the date of acquisition, with the Company's consolidated financial statements.
39
<PAGE>
CONSUMMATED BUSINESS ACQUISITIONS (PURCHASE TRANSACTIONS) AND DISPOSITIONS
FISCAL YEAR 1994
In July 1993, the Company acquired all of the outstanding common stock of
Managed Alternative Care, a subacute care management company, for $6,000,000,
paid in cash, which resulted in goodwill of $5,500,000.
In August 1993, the Company acquired all of the outstanding common stock of
a holding company primarily engaged in writing workers' compensation
insurance in California through its wholly-owned subsidiary, CalComp, for
$65,268,000, paid in cash. In addition, all outstanding options were exchanged
for options to purchase 29,475 shares of the Company's common stock. The
acquisition resulted in goodwill of $5,001,000.
Effective January 1, 1994, the Company acquired substantially all of the
outstanding shares of common stock of Gem Holding Corporation ("Gem"), a holding
company primarily engaged in writing health, individual life, annuities, group
life, disability and dental insurance. At the date of acquisition, Gem provided
services to approximately 83,000 individuals in six western states. The purchase
price was $17,800,000 which was paid in cash. The acquisition resulted in
goodwill of approximately $4,500,000.
In April 1994, the Company acquired all of the outstanding common stock of
Premier Medical Network ("Premier"). Premier provides third party administrative
services to approximately 98,000 individuals through a PPO network in Utah. The
purchase price was $1,500,000, paid in cash. The acquisition resulted in
goodwill of $1,200,000.
FISCAL YEAR 1995
In July 1994, the Company acquired all of the outstanding common stock of
The Noetics Group and all of the assets of Reviewco for consideration consisting
of the issuance of 378,358 shares of the Company's common stock valued at $16
million, 118,236 shares of common stock valued at $5 million, which was placed
in escrow and cash of $16 million. The release of the escrow shares was subject
to the attainment of certain profitability targets by Reviewco. The escrow was
terminated as of July 31, 1996. The acquisition resulted in goodwill of
$27,773,000. The Noetics Group provides workers' compensation third party
administration services for self-funded employers. Reviewco operates a medical
bill review and cost-containment business for the workers' compensation
industry.
In November 1994, the Company acquired all of the outstanding common stock
of Southern Colorado Health Plan, Inc. ("SCHP"), and its parent corporation for
consideration consisting of 241,672 shares of the Company's common stock valued
at $8,900,000. The acquisition resulted in goodwill of $6,755,000. At the date
of acquisition, SCHP provided health care services to 7,100 members through its
HMO based in Pueblo, Colorado.
In November 1994, the Company acquired all of the outstanding common stock
of Community Medical Plan, Inc. ("CMP") and certain affiliated health care
centers for consideration of $32.9 million, consisting of $25 million in paid
cash and at closing the issuance of promissory notes of $7.9 million due
November 15, 1995. At the date of acquisition, CMP served approximately
25,000 Medicaid beneficiaries in Florida. The acquisition resulted in goodwill
of $32,752,000.
40
<PAGE>
In November 1994, the Company issued 7,577,336 shares of its common stock
for the purchase of 39.5% of the outstanding common stock of Intergroup (the
"Intergroup Minority Interest"). The acquisition of the Intergroup Minority
Interest, which was accounted for as a purchase, was valued at $249,109,000 and
resulted in goodwill of $207,371,000. The unaudited pro forma combined total
revenues, net income and earnings per share of the Company and the Intergroup
Minority Interest, assuming the Company had acquired the Intergroup Minority
Interest on July 1, 1993, are as follows (in thousands, except per share
amounts):
PRO FORMA
YEAR ENDED JUNE 30,
-------------------
1994 1995
---- ----
Total revenues . . . . . . . . . . . . . . . . . . . $2,362.9 $2,459.9
-------- --------
-------- --------
Net income . . . . . . . . . . . . . . . . . . . . . $96.9 $50.6
-------- --------
-------- --------
Earnings per share . . . . . . . . . . . . . . . . . $1.74 $0.89
-------- --------
-------- --------
This unaudited pro forma information reflects the elimination of the
Intergroup Minority Interest and the amortization of the goodwill related to the
purchase of the Intergroup Minority Interest. The unaudited pro forma results of
operations are not necessarily indicative of the combined results that would
have occurred had the acquisition taken place on July 1, 1993, nor are they
necessarily indicative of results that may occur in the future.
In February 1995, CalComp acquired, BICO, a 50-state licensed property and
casualty company, for an aggregate purchase price of $13,201,000, consisting of
the fair market value of investments and intangible assets which was paid in
cash at closing. This company which had no insurance business in force at
closing enables CalComp to geographically expand its managed care workers'
compensation products. No goodwill was recorded as a result of this transaction.
FISCAL YEAR 1996
On June 28, 1996, the Company acquired the remaining minority interest in
the Utah HMO operations for approximately $5.8 million and at the same time sold
its financial interest in Premier Medical Network in Utah for approximately $7.1
million.
In September 1995, the Company acquired a medical practice and related
facilities in Arizona for approximately $6.2 million.
In January 1996, the Company sold its affiliated California IPAs to FPA for
a purchase price consisting of cash and a promissory note payable over 10 years.
The notes receivable under the revolving credit agreements with the IPAs in the
amount of $10 million were repaid to the Company and terminated in connection
with the transaction.
In June 1996, the Company sold its affiliated Florida and Arizona IPAs to
FPA for aggregate consideration of $20 million, consisting of cash in the amount
of $3 million and a promissory note in the amount of $17 million which is due
and payable six months after closing and bears a floating interest rate.
The above acquisitions have been accounted for under the purchase method of
accounting and accordingly, the operations of these companies have been included
in the Company's consolidated financial statements from their respective dates
of acquisition.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany transactions
have been eliminated in consolidation.
41
<PAGE>
USE OF ESTIMATES
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the consolidated financial statements and revenues and expenses during the
reporting period. Actual results could differ significantly from those
estimates.
REVENUE RECOGNITION
Commercial premium revenue includes HMO and PPO premiums from employer
groups and individuals and from Medicare recipients who have purchased
supplemental benefit coverage, which premiums are based on a predetermined
prepaid fee, Medicaid revenues based on multi-year contracts to provide care to
Medicaid recipients, and revenue under Medicare risk contracts to provide care
to enrolled Medicare recipients. Revenue is recognized in the month in which the
related enrollees are entitled to health care services. Premiums collected in
advance are recorded as unearned premium.
Revenue under government contracts is recognized in the month in which the
eligible beneficiaries are entitled to health care services. Certain government
contracts also contain cost and performance incentive provisions which adjust
the contract price based on actual performance, and revenue under certain
contracts is subject to price adjustments attributable to inflation and other
factors. The effects of these adjustments are recognized on a monthly basis.
Amounts receivable under government contracts are comprised primarily of
estimated amounts receivable under these cost and performance incentive
provisions, price adjustments, and change orders for services not originally
specified in the contracts.
Specialty services revenue is recognized in the month in which the
administrative services are performed or the period that coverage for service is
provided. Workers' compensation premium revenue is recognized ratably over the
period to which the premium relates. The insurance policies currently written by
the Company are for a period of one year or less. Billed premium in excess of
premiums earned represents the liability for unearned premium. Premiums earned
include an estimate for earned but unbilled premiums.
Patient service revenue is recorded on the accrual basis in the period in
which services are provided at established rates regardless of whether
collection in full is anticipated. Contractual and charitable allowances, the
results of other arrangements for providing services at less than established
rates and the provision for doubtful accounts are reported as deductions from
patient service revenue. Contractual allowances include differences between
established billing rates and amounts estimated by management as recoverable in
accordance with reimbursement rates in effect. Differences between final
settlements and amounts accrued in previous years are reported as adjustments to
the current year's provision for contractual allowance.
Unearned premiums related to commercial and specialty services lines of
business totaled $64,930,000 and $61,455,000 at June 30, 1995 and 1996 and are
included in other liabilities on the consolidated balance sheet.
RESERVES FOR CLAIMS, LOSSES AND LOSS ADJUSTMENT EXPENSES AND HEALTH CARE
SERVICES EXPENSES
Except as discussed below, reserves for claims, losses and loss adjustment
expenses and health care services expenses are based upon the accumulation of
cost estimates for unpaid claims and losses reported prior to the close of the
accounting period, together with a provision for the current estimate of the
probable cost of claims, losses and loss adjustment expenses that have occurred
but have not yet been reported. Such estimates are based on many variables
including individual cases for reported losses, estimates of unreported losses
using historical and statistical information and other factors. Workers'
compensation claims, losses and loss adjustment expenses, and specialty health
care services expenses are included in specialty services costs in the
statements of operations. The methods for making the estimates and for
establishing the resulting reserves are continually reviewed and updated, and
any adjustments resulting therefrom are reflected in current operations. Such
estimates are subject to the impact of changes in the regulatory environment and
economic conditions. Given the inherent variability of such estimates, the
actual liability could differ significantly from the amounts provided. While the
ultimate amount of claims and losses and the related expenses paid are dependent
on future developments, management is of the opinion that the reserves for
claims, losses and loss adjustment expenses is adequate to
42
<PAGE>
cover such claims, losses and expenses. These liabilities are reduced by
estimated amounts recoverable from third parties for subrogation.
The Company has capitation contracts with individual practice associations,
medical groups and hospitals ("Capitated Providers") to provide medical care
services to enrollees. The Capitated Providers are at risk for the cost of
medical care services provided to the Company's enrollees in the relevant
geographic areas; however, the Company is ultimately responsible for the
provision of services to its enrollees should the Capitated Providers be unable
to provide the contracted services. Certain Capitated Providers also provide
claims processing and other administrative services. The Capitated Providers are
either paid a fixed percentage of premiums collected in the geographic areas
they service or a fixed amount per enrollee for enrollees in their respective
service areas. Medical care expenses relating to these Capitated Providers are
included in commercial health care services expense and amounted to
$398,700,000, $467,735,000 and $660,644,000 for the years ended June 30, 1994,
1995 and 1996.
The HMOs also contract with hospitals, physicians and other providers of
health care, pursuant to discounted fee for service arrangements and hospital
per diems under which providers bill the HMOs for each individual service
provided to enrollees.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include investments with original maturities of
three months or less.
INVESTMENTS
Prior to July 1, 1994, the Company classified its securities as short-term
investments and fixed maturities. Securities with an original maturity of one
year or less at the date of acquisition were classified as short-term
investments. Such investments were carried at cost, which approximated market
value. Declines in market value which were determined by management to be other
than temporary were recorded as charges to the statement of operations.
Investments with fixed maturities primarily included long-term investment grade
bonds and were carried at amortized cost. It is the Company's policy to invest
in notes, bonds and money market securities, limited by certain restrictions.
The cost of investments sold is determined using the specific identification
method.
Effective July 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS No. 115"). The adoption of SFAS No. 115 did not have
a material effect on the Company's consolidated financial position or results of
operations.
In accordance with SFAS No. 115, the Company classifies investments held by
trustees or agencies pursuant to state regulatory requirements as held to
maturity based on the Company's ability and intent to hold these investments to
maturity. Such investments are presented at amortized cost. All other
investments are classified as available for sale and are reported at fair value
based on quoted market prices, with unrealized gains and losses excluded from
earnings and reported as a separate component of stockholders' equity, net of
income tax effects. For purposes of calculating realized gains and losses on the
sale of investments available for sale, the amortized cost of each investment
sold is used. The Company has no trading securities.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation is provided using
the straight-line method for all assets over their estimated useful lives as
follows:
Buildings and improvements . . . . . . . . . . . . . . 5-40 years
Furniture and equipment. . . . . . . . . . . . . . . . 3-10 years
43
<PAGE>
Expenditures for maintenance and repairs are expensed as incurred. Major
improvements which increase the estimated useful life of an asset are
capitalized. Upon the sale or retirement of assets, recorded cost and related
accumulated depreciation are removed from the accounts, and any gain or loss on
disposal is reflected in operations.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consists primarily of goodwill and
other intangibles which arise as a result of various business acquisitions and
the acquisition of the Company through a leveraged buy-out on December 30, 1986,
at which time the assets and liabilities of the Company were recorded at their
appraised values. In addition, the Company's policy is to defer direct and
incremental pre-operating costs related to its HMO subsidiaries' geographic
expansion and the opening of health care centers. These costs are deferred prior
to the commencement of significant operations at which time the Company begins
amortizing such costs over a three-year period. Goodwill and other intangible
assets are amortized using the methods listed below over appropriate periods not
exceeding 40 years. Fully amortized intangible assets and related accumulated
amortization are removed from the accounts. The Company evaluates the carrying
value of it intangible assets at each balance sheet date.
Goodwill and other intangible assets are amortized as follows:
<TABLE>
<CAPTION>
LIFE METHOD
---- ------
<S> <C> <C>
Subscribers. . . . . . . . . . . . . . . . . 22 years Declining balance
Employer group contracts . . . . . . . . . . 22 years Straight line
Goodwill . . . . . . . . . . . . . . . . . . 22-40 years Straight line
Organization and preoperating costs. . . . . 3-8 years Straight line
Noncompetition and employment agreements . . Term of related agreement Straight line
Debt issue costs . . . . . . . . . . . . . . Term of related debt Straight line
</TABLE>
Goodwill and other intangible assets are reported, net of accumulated
amortization of $49,138,000 and $73,752,000 at June 30, 1995 and 1996.
INCOME TAXES
The Company accounts for income taxes using the liability method. Deferred
income tax assets and liabilities result from temporary differences between the
tax basis of assets and liabilities and their reported amounts in the
consolidated financial statements that will result in taxable or deductible
amounts in future years.
The Company adopted SFAS No. 109, "Accounting for Income Taxes" effective
July 1, 1993. The adoption of SFAS No. 109 did not have a significant effect on
the Company's results of operations for the periods presented. No valuation
allowance resulted from the adoption of SFAS No. 109.
DEFERRED POLICY ACQUISITION COSTS
Policy acquisition costs, including commissions, premium taxes and other
acquisition costs related to the production or renewal of workers' compensation
and indemnity business, are deferred. Such costs are amortized as the related
premiums are earned. The amortization of such deferred policy acquisition costs
related to property casualty insurance policies were as follows, $25,788,000,
$24,947,000 and $30,729,000, for the years ended June 30, 1994, 1995 and 1996.
If it is determined that future policy revenues on existing insurance contracts
are not adequate to cover related losses and expenses, deferred policy
acquisition costs are written down. However, to date, no write-downs have been
made. Earnings on invested funds between the time of premium receipts and
related claim payments are considered in determining whether a premium
deficiency exists. Deferred policy acquisition costs totaled $20,824,000 and
$27,804,000 at June 30, 1995 and 1996 and are included in other assets.
44
<PAGE>
DIVIDENDS TO POLICYHOLDERS
Dividends to workers' compensation policyholders are generally declared 18
to 24 months after expiration of the participating policies. A provision is
made for estimated dividends to be paid related to premium revenue recognized.
EARNINGS PER SHARE
Earnings per share is calculated by dividing net income by the weighted
average number of shares of common stock plus common stock equivalent shares
outstanding using the treasury stock method. Earnings per share has been
restated for all periods presented to reflect the mergers of CareFlorida and
TDMC accounted for as poolings of interests as discussed in Note 1.
RECENTLY ISSUED ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, "Accounting for Stock-Based Compensation". The new standard defines a
fair value method of accounting for stock options and other equity instruments,
such as stock purchase plans. Under this method, compensation cost is measured
on the fair value of the stock award when granted and is recognized as expense
over the service period, which is usually the vesting period. This standard
will be effective for the Company beginning in fiscal 1997, and requires
measurement of awards made on or after December 15, 1995. The new standard
permits companies to continue to account for equity transactions with employees
under existing accounting rules, but requires disclosure in a note to the
financial statements of the pro forma net income and earnings per share as if
the Company had applied the new method of accounting. The Company intends to
follow the disclosure requirements for its employee stock plans. The new
standard will also require that all stock-based transactions with non-employees
be measured in accordance with the fair value method and recorded as expense.
The Company has not determined the effect, if any, of implementing this standard
on its results of operations.
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to be Disposed of ("SFAS No. 121"). The Statement requires that
long-lived assets and certain identifiable intangibles to be held and used by an
entity be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
Statement also requires that long-lived assets and certain identifiable
intangibles to be disposed of be reported at the lower of carrying amounts or
fair value less cost to sell. This Statement will be effective for the Company
beginning in fiscal 1997. Adoption of SFAS No. 121 is not expected to have a
significant effect on the Company's consolidated financial statements.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to current
year presentation.
45
<PAGE>
NOTE 3 - INVESTMENTS
As of June 30, 1995, the amortized cost, gross unrealized holding gains and
losses and fair value of the Company's investments were as follows (in
thousands):
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
----------------------------------------------- -----------------------------------------
Gross Gross Gross Gross
Unrealized Unrealized Unrealized Unrealized
Amortized Holding Holding Fair Amortized Holding Holding Fair
Cost Gains Losses Value Cost Gains Losses Value
---- ----- ------ ----- ---- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. government and
agencies $ 108,951 $ 643 $ (1,256) $ 108,338 $ 17,263 $ 224 $ (45) $ 17,442
Obligations of states and
other political subdivisions
385,827 580 (4,231) 382,176 27,703 79 (249) 27,533
Corporate debt securities 8,120 119 (267) 7,972 845 111 - 956
Equity securities 4,089 39 (170) 3,958 - - - -
Other debt securities 39,152 - - 39,152 3,934 - - 3,934
--------- ------- -------- --------- -------- ----- ------- --------
Total $ 546,139 $ 1,381 $ (5,924) $ 541,596 $ 49,745 $ 414 $(294) $ 49,865
--------- ------- -------- --------- -------- ----- ------ --------
--------- ------- -------- --------- -------- ----- ------ --------
</TABLE>
As of June 30, 1996, the amortized cost, gross unrealized holding gains and
losses and fair value of the Company's investments were as follows (in
thousands):
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
------------------------------------------ ---------------------------------------
Gross Gross Gross Gross
Unrealized Unrealized Unrealized Unrealized
Amortized Holding Holding Fair Amortized Holding Holding Fair
Cost Gains Losses Value Cost Gains Losses Value
---- ----- ------ ----- ---- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. government and
agencies $ 89,341 $ 75 $ (2,193) $ 87,223 $12,431 $12 $ (77) $12,366
Obligations of states and
other political
subdivisions 584,371 1,341 (7,872) 577,840 16,675 67 (85) 16,657
Corporate debt securities 6,334 94 (223) 6,205 - - - -
Equity securities 1,372 1 (111) 1,262 - - -
Other debt securities 10,504 - (11) 10,493 2,785 - - 2,785
--------- ------- --------- --------- -------- ----- ------ --------
Total $691,922 $1,511 $(10,410) $683,023 $31,891 $79 $(162) $31,808
--------- ------- --------- --------- -------- ----- ------ --------
--------- ------- --------- --------- -------- ----- ------ --------
</TABLE>
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<PAGE>
At June 30, 1996, the contractual maturities of the Company's investments
were as follows (in thousands):
<TABLE>
<CAPTION>
At Amortized Cost At Fair Market Value
-------------------------------------------- --------------------------------------------
Years to Maturity Years to Maturity
-------------------------------------------- --------------------------------------------
Less than 1 to 5 5 to 10 Over 10 Less than 1 to 5 5 to 10 Over 10
1 Year Years Years Years 1 Year Years Years Years
------ ----- ----- ----- ------ ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE:
U.S. government and
agencies $ 20,052 $ 50,904 $ 18,226 $ 159 $ 19,970 $ 49,878 $ 17,206 $ 169
Obligations of states
and other political
subdivisions 22,090 174,318 204,982 182,981 22,127 173,215 202,501 179,997
Corporate debt securities 561 2,855 2,021 897 559 2,754 1,986 906
Equity securities 21 - - 1,351 22 - - 1,240
Other debt securities 2,110 8,394 - - 2,098 8,395 - -
-------- --------- --------- --------- -------- --------- --------- ---------
Total $ 44,834 $ 236,471 $ 225,229 $ 185,388 $ 44,776 $ 234,242 $ 221,693 $ 182,312
-------- --------- --------- --------- -------- --------- --------- ---------
-------- --------- --------- --------- -------- --------- --------- ---------
HELD TO MATURITY
U.S. government and
agencies $ 4,409 $ 7,555 $ 467 $ - $ 4,416 $ 7,503 $ 447 $ -
Obligations of states and
other political
subdivisions 390 7,644 5,351 3,290 390 7,600 5,392 3,275
Other debt securities 2,685 - 100 - 2,685 - 100 -
------- -------- ------- ------- ------- -------- ------- -------
Total held to maturity $ 7,484 $ 15,199 $ 5,918 $ 3,290 $ 7,491 $ 15,103 $ 5,939 $ 3,275
------- -------- ------- ------- ------- -------- ------- -------
------- -------- ------- ------- ------- -------- ------- -------
</TABLE>
Proceeds from sales and maturities of available for sale securities during
1995 were $770,673,000, resulting in gross realized gains and losses of $13,000
and $122,000, respectively.
Proceeds from the sales and maturities of available for sale securities
during 1996 were $459,852,000 resulting in gross realized gains and losses of
$2,695,000 and $196,000, respectively.
The Company's regulated subsidiaries are required to keep securities on
deposit in various states where they are licensed. At June 30, 1996,
$404,570,000 in securities are restricted to satisfy various state regulatory
and licensing requirements. Additionally, at June 30, 1996, $4,897,000 in
securities were pledged as collateral under reinsurance agreements.
Pursuant to the Financial Accounting Standard Board's implementation
guidance, the Company made a one-time transfer of approximately $9,009,000 of
securities from the hold to maturity classification to the available for sale
classification prior to December 31, 1995.
Investment income, including realized investment gains and losses, were as
follows (in thousands):
YEAR ENDED
----------
JUNE 30,
--------
1994 1995 1996
---- ---- ----
Short-term investments. . . . . . . . . $ 3,035 $ - $ -
Fixed maturities. . . . . . . . . . . . 26,832 - -
Available for sale. . . . . . . . . . . - 31,938 35,396
Held to maturity. . . . . . . . . . . . - 3,283 1,944
Other . . . . . . . . . . . . . . . . . 6,096 7,763 12,169
Less-investment expenses. . . . . . . . (991) (534) (854)
--------- -------- ---------
Net investment income . . . . . . . . . $ 34,972 $ 42,450 $ 48,655
--------- -------- ---------
--------- -------- ---------
Net investment income generated by property casualty operations were as
follows, $14,072,000, 21,437,000, and $26,794,000 for the years ended June 30,
1994, 1995 and 1996.
47
<PAGE>
NOTE 4 - LOSSES AND LOSS ADJUSTMENT EXPENSES
Activity in the reserves for losses and loss adjustment expenses related to
workers' compensation and indemnity insurance policies, for the year ended June
30, 1995 and June 30, 1996 is summarized as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1995 JUNE 30, 1996
------------- -------------
<S> <C> <C>
Beginning balance. . . . . . . . . . . . . . . . . . . . . $ 395,846 $ 414,330
Less-ceded losses and loss adjustment expense reserves . . (103,318) (81,667)
---------- ----------
Net beginning balance. . . . . . . . . . . . . . . . . . . 292,528 332,663
---------- ----------
Incurred related to:
Current fiscal year . . . . . . . . . . . . . . . . . . 232,643 492,090
Prior fiscal years. . . . . . . . . . . . . . . . . . . (7,614) (19,897)
---------- ----------
Total incurred . . . . . . . . . . . . . . . . . . . . . . 225,029 472,193
---------- ----------
Paid related to:
Current fiscal year . . . . . . . . . . . . . . . . . . (41,092) (242,942)
Prior fiscal years. . . . . . . . . . . . . . . . . . . (143,802) (173,348)
---------- ----------
Total paid . . . . . . . . . . . . . . . . . . . . . . . . (184,894) (416,290)
---------- ----------
Net ending balance . . . . . . . . . . . . . . . . . . . . 332,663 388,566
Plus-ceded losses and loss adjustment expense reserves . . 81,667 72,620
---------- ----------
Ending balance . . . . . . . . . . . . . . . . . . . . . . $ 414,330 $461,186
---------- ----------
---------- ----------
</TABLE>
During the fiscal years ended June 30, 1995 and 1996, the Company
experienced favorable loss and loss adjustment expense reserve development of
$7,614,000 and $19,897,000, respectively. This reduction of the estimated
loss and loss adjustment expense is primarily the result of favorable loss
development related to the 1993 and 1994 accident years, offset in part by
adverse loss development for the 1992 and prior accident years.
NOTE 5 - EXCESS LIABILITY INSURANCE AND REINSURANCE
Under reinsurance agreements, the Company reinsures certain workers'
compensation risks with other insurance companies. Reinsurance contracts do not
relieve the Company from its obligations to policyholders. Failure of reinsurers
to honor their obligations could result in losses to the Company. The Company
regularly evaluates the financial condition of its reinsurers. Based on this
evaluation, management believes the reinsurers are creditworthy and that any
potential losses on these agreements will not have a material impact on the
consolidated financial statements.
The Company's workers' compensation subsidiaries maintain specific excess
reinsurance on workers' compensation which provides coverage in excess of
$1,000,000 per occurrence for accident year 1996, in excess of $500,000 per
occurrence for accident years 1994 and 1995, in excess of $350,000 per
occurrence for accident years 1992 and 1993 and in excess of $250,000 per
occurrence for accident years 1989 through 1991. The agreements provide
coverage up to a maximum of $200 million per occurrence, including the
Company's retention. In addition, the Company also maintained a pro rata
reinsurance agreement wherein the reinsurer assumed a proportional amount of
net premiums earned and related losses. The quota share percentage ranged
from 5% to 40% (5% at June 30, 1994) during the year ended June 30, 1994. As
of July 1, 1994 the quota share agreement was terminated. Effective July 1,
1996, the workers' compensation subsidiaries entered into a 30% quota share
treaty to cede a proportional amount of net premiums earned and related loss
and loss adjustment expenses incurred. The 30% ceding rate is applicable
from July 1, 1996 to December 31, 1996. Effective January 1, 1997, the quota
share reinsurance ceding rate is reduced to 7.5%, and subsequently reduced
again to 3.75% from July 1, 1997 to December 31, 1997. Effective January 1,
1998, the Company may terminate the agreement.
48
<PAGE>
The effect of reinsurance on workers' compensation premium written and
earned, and losses incurred for the eleven months from August 1, 1993 (date of
acquisition) to June 30, 1994 and the years ended June 30, 1995 and 1996 is
summarized as follows (in thousands):
PREMIUMS PREMIUMS LOSSES
WRITTEN EARNED INCURRED
-------- -------- --------
Eleven months ended June 30, 1994
Direct . . . . . . . . . . . . . . . . $307,913 $309,379 $199,854
Assumed. . . . . . . . . . . . . . . . 20 16 (1,356)
Ceded. . . . . . . . . . . . . . . . . (32,122) (35,448) (27,016)
-------- -------- --------
Net. . . . . . . . . . . . . . . . . . $275,811 $273,947 $171,482
-------- -------- --------
-------- -------- --------
Year ended June 30, 1995
Direct . . . . . . . . . . . . . . . . $370,408 $373,954 $215,674
Assumed. . . . . . . . . . . . . . . . 4,423 4,393 973
Ceded. . . . . . . . . . . . . . . . . (19,396) (20,296) 8,382
-------- -------- --------
Net. . . . . . . . . . . . . . . . . . $355,435 $358,051 $225,029
-------- -------- --------
-------- -------- --------
Year ended June 30, 1996
Direct . . . . . . . . . . . . . . . . $506,696 $503,408 316,585
Assumed. . . . . . . . . . . . . . . . 16,354 16,354 5,708
Ceded. . . . . . . . . . . . . . . . . (33,383) (35,316) (11,451)
-------- -------- --------
Net. . . . . . . . . . . . . . . . . . $489,667 $484,446 $310,842
-------- -------- --------
-------- -------- --------
At June 30, 1995 and 1996, the Company has an aggregate recoverable for
workers' compensation losses, paid and unpaid, including incurred but not
reported, allocated loss adjustment expenses, and unearned premiums with a
carrying value of $86,272,000, and $64,293,000 respectively, with a single
reinsurer.
The Company's HMO subsidiaries purchase individual excess liability
insurance for hospital costs in excess of deductible amounts. Premiums for this
insurance are included in commercial health care services expense. Amounts
recoverable under such contracts are included as reductions of commercial health
care services expense.
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment comprised the following (in thousands):
JUNE 30,
------------------------------
1995 1996
---- ----
Land $ 29,840 $ 27,354
Construction in progress 22,362 11,370
Buildings and improvements 106,450 132,600
Furniture and equipment 168,075 238,499
------- -------
326,727 409,823
Less - accumulated depreciation (96,449) (132,617)
------- -------
$ 230,278 $ 277,206
------- -------
------- -------
Depreciation expense on property and equipment was $20,450,000, $25,190,000
and $36,400,000 for the years ended June 30, 1994, 1995 and 1996.
49
<PAGE>
NOTE 7 - NOTES PAYABLE, CAPITAL LEASES AND OTHER FINANCING ARRANGEMENTS
Notes payable, capital leases and other financing arrangements comprised
the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
-------------------------------
1995 1996
---- ----
<S> <C> <C>
7.75% Senior Notes due June 1, 2003 $ 124,596 $ 124,647
Capital lease obligations 6,854 2,078
Unsecured notes payable pursuant to business acquisition, bearing interest at 4.167%
due November 15, 1995 (Note 1) 7,909 -
Unsecured revolving line of credit bearing interest at 6.313% and 5.788% at June 30,
1995 and 1996 20,000 165,000
Other 5,167 8,548
------- -------
164,526 300,273
Deferred compensation (Note 10) 15,528 18,395
------- -------
$ 180,054 $ 318,668
------- -------
------- -------
</TABLE>
In June 1993, the Company issued $125,000,000 of senior notes due June 1,
2003 ("Senior Notes"). The Senior Notes bear interest at 7.75% which is due
semi-annually on December 1 and June 1. The Notes are general unsecured
obligations of the Company, will rank PARI PASSU with all future unsecured and
unsubordinated indebtedness of the Company and are effectively subordinated to
creditors of the Company's subsidiaries. The indenture contains certain
covenants that, among other things, (i) restrict the ability of the Company and
its Restricted Subsidiaries (as defined) to (a) pay dividends and make other
distributions and certain investments, (b) grant liens on their assets, (c)
enter into or permit certain sale and lease-back transactions or (d) engage in
certain mergers, consolidations and sales of assets, and (ii) restrict the
ability of the Company's Restricted Subsidiaries to incur additional
indebtedness or issue shares of preferred stock.
The Company has a $300 million unsecured revolving credit agreement with
Citicorp USA, Inc., as Administrative Agent for the lenders thereto (the "Credit
Agreement") which expires December 5, 1999. Principal amounts outstanding under
the Credit Agreement bear interest, at the Company's option, at either
Citibank's base rate or the Eurodollar rate plus a margin depending upon the
Company's public debt rating or level of total debt to total capitalization. Any
interest payments are due quarterly and principal is due at maturity. The
agreement contains customary terms, events of default and covenants (including
financial covenants related to net worth, fixed charge coverage and total debt
to total capitalization) which, among other things, limit the incurring of
additional debt. The Credit Agreement also limits the ability of the Company to
make cash dividends and stock repurchases if the aggregate amount of such
dividends and repurchases exceeds 50% of the cumulative consolidated net income
of the Company beginning with the fiscal year ended June 30, 1994, plus the
after tax effect of up to $125 million of restructuring charges, to the extent
deducted from earnings, plus $25 million after June 30, 1995. As of June 30,
1996, the amount available for cash dividends and stock repurchases under the
Credit Agreement was approximately $241,740,000. Subsequent to June 30, 1996,
the Company drew an additional $65 million under the Credit Agreement.
The Company leases some of its data processing and telecommunications
equipment under capital leases that provide for minimum annual rentals and
purchase options. Equipment under capital leases was $23,995,000 and $16,010,000
at June 30, 1995 and 1996 and the related accumulated depreciation was
$13,475,000 and $11,730,000 at June 30, 1995 and 1996.
50
<PAGE>
Future minimum payments under notes payable, capital leases and other
financing arrangements are as follows (in thousands):
YEAR ENDING JUNE 30,
- --------------------
1997 $ 24,044
1998 21,791
1999 15,623
2000 175,536
2001 10,379
Thereafter 155,133
-------
402,506
Less - Amount representing interest (102,233)
-------
$ 300,273
-------
-------
NOTE 8 - INCOME TAXES
The provision for income taxes comprised the following (in thousands):
YEAR ENDED JUNE 30,
-------------------
1994 1995 1996
---- ---- ----
Current:
Federal $ 55,352 $ 40,469 $ 44,569
State 9,586 7,491 6,439
------- ------ ------
Total current 64,938 47,960 51,008
------ ------ ------
Deferred:
Federal (336) (13,464) 19,573
State 232 (7,675) 3,574
------ ------ ------
Total deferred (104) (21,139) 23,147
------ ------ ------
Total provision for income taxes $ 64,834 $ 26,821 $ 74,155
------ ------ ------
------ ------ ------
A reconciliation of the statutory federal income tax rate and the effective
tax rate as a percentage of pretax income is as follows:
YEAR ENDED JUNE 30,
------------------
1994 1995 1996
---- ---- ----
Statutory rate 35% 35% 35%
State income and franchise taxes, net of federal tax benefit 4 3
Amortization of goodwill 1 5 1
Nondeductible acquisition costs - 4 -
Tax exempt interest income (4) (9) (3)
Recognition of net operating loss carryforwards - - (3)
Taxes on undistributed income from subsidiaries 3 -
Other - (1) (2)
---- ---- ----
Effective tax rate 39% 34% 31%
---- ---- ----
---- ---- ----
51
<PAGE>
The tax effects of the significant temporary differences which comprise the
net deferred tax asset at June 30, 1995 and 1996 were as follows (in thousands):
JUNE 30,
------------------------
1995 1996
---- ----
Deferred state income taxes $ 1,771 $ 1,433
Accrued vacation 3,628 4,245
Deferred compensation 5,973 7,331
Accrued expenses 9,092 4,598
Insurance loss reserves 23,838 22,178
Policyholder dividends 5,536 3,327
Restructuring costs 32,755 -
Investment in subsidiary - 10,156
Net operating losses - 12,104
Policy acquisition costs (6,186) (7,732)
Depreciation and amortization (6,709) (12,784)
Bond premium/discount (1,759) (754)
Valuation allowance - (1,654)
Other (2,266) 78
------- -------
Net deferred tax asset $ 65,673 $ 42,526
------- -------
------- -------
NOTE 9 -CAPITAL STOCK
PREFERRED STOCK
The Company is authorized to issue 1,000,000 shares of $1 par value
preferred stock. No preferred stock was outstanding as of June 30, 1995 or 1996.
STOCKHOLDER RIGHTS PLAN
The Company's Stockholder Rights Plan provides for distribution of Rights
(as defined in the Stockholder Rights Plan) to holders of outstanding shares of
common stock. Except as set forth below, each Right, when exercisable, entitles
the stockholder to purchase from the Company one one-thousandth share of a new
series of the Company's preferred stock at a price of $105 per share, subject to
adjustment.
The Rights are not currently exercisable, but would become exercisable if
certain events occurred related to a person or group ("Acquiring Person")
acquiring or attempting to acquire 15% or more of the outstanding shares of
common stock. In the event that the Rights become exercisable, each Right
(except for Rights beneficially owned by the Acquiring Person, which become null
and void) would entitle the holder to purchase, for the exercise price then in
effect, shares of the Company's common stock having a value of twice the
exercise price.
The Rights may be redeemed by the Board of Directors in whole, but not in
part, at a price of $.01 per Right. The Rights have no voting or dividend
privileges and are attached to, and do not trade separately from, the common
stock. A total of 80,000 shares of preferred stock are reserved for future
issuance under this Rights Agreement, which expire on October 10, 2001.
STOCK REPURCHASE PROGRAM
In April 1993, the Board of Directors of the Company approved the
establishment of a stock repurchase program which, as amended, authorizes
acquisition from time to time, of up to 5.7 million shares of its outstanding
common stock in the open market. As of June 30, 1994, 1995, and 1996 the
repurchase of 1,445,500 and 1,545,500 and 1,795,500 shares had been completed
pursuant to this program.
52
<PAGE>
DIVIDENDS PAID
During the year ended June 30, 1994, CareFlorida paid cash dividends of $2
million on its common stock. As discussed in Note 1, the Company's consolidated
financial statements have been restated to reflect the results of CareFlorida in
accordance with the pooling of interest method of accounting.
Other than the CareFlorida dividend described above, the Company has never
paid cash dividends on its common stock. The Company presently intends to retain
its earnings for the development of its business and does not anticipate paying
cash dividends on its common stock in the foreseeable future. In December 1994,
the Company established a $300 million unsecured revolving Credit Agreement with
Citicorp USA, Inc. as Administrative Agent (the "Credit Agreement") for the
lenders parties thereto. Among other restrictive covenants in the Credit
Agreement, the Company's ability to pay cash dividends is restricted. See Note
7 for a more detailed description of the Credit Agreement.
STOCK OPTIONS
Under the Company's Restated and Amended 1990 Stock Option Plan (the "1990
Plan"), options may be either incentive stock options or nonqualified stock
options which expire no later than 10 years from the date of grant. Under the
1990 Plan, the Company has reserved 5,525,000 shares of common stock for the
granting of options. During the years ended June 30, 1994, 1995, and 1996, the
Company granted nonqualified options to purchase 1,083,750, 786,750 and 598,750
shares of the Company's common stock at exercise prices ranging from as 85 to
100% of the fair market value of the stock at the date of grant. Currently,
options are granted at prices determined by the Compensation and Organizational
Committee of the Board of Directors of the Company (the "Compensation
Committee") but may not be less than 100% of the fair market value of the stock
on the date of grant. As of June 30, 1995 and 1996, the total number of options
outstanding under the 1990 Plan were 3,154,939 and 3,041,023.
The Company has reserved 238,000 shares of the Company's common stock from
the granting of options under the 1992 Nonstatutory Stock Option Plan (the "1992
Plan") established in connection with a business acquisition in May 1992. Under
the 1992 Plan, options are granted to employees of the Company or its
subsidiaries at the discretion of a committee of the subsidiary's Board of
Directors. Options are granted at an exercise price equal to the fair market
value of the stock at the date of grant, subject to a vesting schedule of up to
three years, and expire no later than 10 years from the date of grant. Under the
1992 Plan, nonqualified options to purchase 49,300 shares were granted during
the year ended June 30, 1993. As of June 30, 1995 and 1996, the number of
options outstanding under the 1992 Plan were 38,036 and 20,001.
The Company has reserved 1,600,000 shares of the Company's common stock
under the 1993 Nonstatutory Stock Option Plan (the "1993 Plan") established in
October 1993 (as amended in fiscal year 1996). Under the 1993 Plan, options are
granted at the discretion of the Company's Board of Directors to physician
employees of affiliated professional corporations. Options are granted at an
exercise price equal to the fair market value of the stock at the date of grant.
Under the 1993 Plan, nonqualified options to purchase 381,399 and 384,075 shares
were granted during the years ended June 30, 1995 and 1996. As of June 30, 1995
and 1996, the number of options outstanding under the 1993 Plan were 499,874 and
755,790.
During the year ended June 30, 1992, the Company granted nonqualified stock
options to purchase 172,500 shares of the Company's common stock at exercise
prices determined as 85% of the fair market value of the stock at the date of
grant pursuant to employment agreements entered into in connection with a
business acquisition. Options vested 10% per year beginning July 1, 1992, with
provisions for accelerated vesting in the event certain profitability targets of
the acquired company were exceeded. During the year ended June 30, 1994, the
employment agreements were terminated and all unvested options were canceled.
53
<PAGE>
A summary of the Company's nonqualified and incentive stock options
outstanding is as follows:
<TABLE>
<CAPTION>
SHARES WEIGHTED AVERAGE
------ EXERCISE PRICE
--------------
<S> <C> <C>
Outstanding at June 30, 1993 . . . . . . . . . . . . . . . 2,297,579 22.19
Options exchanged pursuant to acquisition (Note 1) . . . . 29,475 9.41
Granted. . . . . . . . . . . . . . . . . . . . . . . . . . 1,229,250 38.17
Exercised. . . . . . . . . . . . . . . . . . . . . . . . . (572,347) 14.66
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . (202,482) 24.10
---------
Outstanding at June 30, 1994 . . . . . . . . . . . . . . . 2,781,475 30.52
Options exchanged pursuant to acquisition (Note 1) . . . . 500,290 18.09
Granted. . . . . . . . . . . . . . . . . . . . . . . . . . 1,168,149 31.60
Exercised. . . . . . . . . . . . . . . . . . . . . . . . . (330,796) 18.05
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . (229,021) 31.98
---------
Outstanding at June 30, 1995 . . . . . . . . . . . . . . . 3,890,097 30.22
Options exchanged pursuant to MHN acquisition (Note 1) . . 88,962 12.78
Granted. . . . . . . . . . . . . . . . . . . . . . . . . . 982,825 39.16
Exercised. . . . . . . . . . . . . . . . . . . . . . . . . (807,987) 21.04
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . (267,470) 31.48
---------
Outstanding at June 30, 1996 . . . . . . . . . . . . . . . 3,886,427 33.94
---------
---------
</TABLE>
A summary of options exercisable and shares available for future grant
under all option arrangements is as follows:
JUNE 30,
-------
1995 1996
---- ----
Options exercisable. . . . . . . . . . . . . 1,609,941 1,756,794
Shares available for grant . . . . . . . . . 1,665,609 1,931,173
The Company receives a tax deduction for the excess of the market value of
the Company's common stock over the exercise price of the option at the date
nonqualified options are exercised by employees of the Company. The related tax
benefit is credited to common stock. The Company makes no charges against
capital with respect to options granted.
NOTE 10 - EMPLOYEE BENEFIT PLANS
EMPLOYEE STOCK PURCHASE PLAN
The Company has reserved 750,000 shares of common stock under an employee
stock purchase plan which became effective October 1, 1990. Full-time employees
of the Company and substantially all of its subsidiaries are eligible to
participate in this Plan if they have been continuously employed by the Company
for not less than six months. Employees electing to participate authorize
payroll deductions of up to 10% of their base compensation to purchase shares of
common stock at 85% of the then fair market value of the stock on the date of
purchase. During the years ended June 30, 1994, 1995 and 1996, 30,413, 39,389
and 37,536 shares of common stock were purchased under this plan.
54
<PAGE>
DEFINED CONTRIBUTION PLANS
The Company sponsors several defined contribution retirement plans intended
to be qualified under Sections 401(a) and 401(k) of the Internal Revenue Code.
Participation in the plans is available to substantially all employees.
Generally, employees may contribute up to 10% of their annual compensation to
the plans on a pre-tax basis and up to 10% on an after-tax basis. Under the
plans, the Company makes matching contributions of up to 6% of each
participating employee's base salary. The Company's contributions to the plans
totaled $5,961,000, $4,173,000 and $3,847,000 for the years ended June 30, 1994,
1995, and 1996.
DEFERRED COMPENSATION PLAN
Under the Company's deferred compensation plan certain members of
management, highly compensated employees and non-employee Board members may
defer payment of up to 90% of their compensation. The Company makes matching
contributions subject to a vesting schedule, of up to 10% of an employee
participant's compensation if the participant's base salary is at least
$120,000. The deferred compensation, together with Company matching amounts and
accumulated interest which is accrued but unfunded, is distributable in cash by
lump sum or in monthly, quarterly or annual installments (not exceeding
20 years) upon the earlier of the date of distribution elected by the
participant termination of employment. At June 30, 1995 and 1996, the liability
under this deferred compensation plan amounted to $9,139,000 and $12,692,000.
The Company's expense under the plan totaled $1,664,000, $1,955,000 and
$3,089,000 for the years ended June 30, 1994, 1995 and 1996.
During the year ended June 30, 1995, the Company amended the plan by
increasing the interest rate paid to participants to 140% of Moody's corporate
bond rate and by allowing participants to receive 90% of vested funds before
scheduled distributions by irrevocably forfeiting the remaining 10%.
During 1993, TDMC established a deferred compensation plan which called for
payment of deferred compensation to TDMC physicians with five years of service
at termination of employment (the "TDMC Plan"); as part of the merger of TDMC
with the Company the TDMC Plan was frozen in November 1994 and the present value
of each participant's benefits was established. Under the terms of the TDMC
Plan, interest accrues at the Citibank base rate plus 1/4%. The deferred
compensation is distributable in annual installments (not to exceed 10) upon
termination of employment. At June 30, 1995 and 1996, the liability under this
deferred compensation plan amounted to $6,389,000 and $5,703,000. The Company's
expense under the plan totaled $2,885,000, $765,000 and $910,000 for the years
ended June 30, 1994, 1995 and 1996.
DEFINED BENEFIT RETIREMENT PLANS
One of the Company's subsidiaries offers a non-contributory defined benefit
retirement plan ("Retirement Plan") covering substantially all of its employees.
The Retirement Plan is designed to meet the provisions of the Employee
Retirement Income Security Act of 1974. The benefits are primarily based upon
years of service and compensation. The retirement plan was terminated effective
December 31, 1995.
During the fiscal year ended June 30, 1995, the Company adopted two
unfunded non-qualified defined benefit pension plans, a Supplemental Executive
Retirement Plan and a Directors' Retirement Plan (collectively, the "SERP"),
which cover key executives, as selected by the Board of Directors, and
nonemployee directors. Currently there are sixteen participants in the plans.
Benefits are based on years of service and compensation in the last five years
of employment (for key executives) or the highest three years within the last
10 years of service (for non-employee directors).
55
<PAGE>
The discount rate and rate of increase in future compensation levels used
in determining the actuarial present value of the projected benefit obligations
were 7.5% and 6%, respectively, in 1994 and 1995 for the Retirement Plan, and 8%
and 4%, in 1995 and 1996 for the SERP. The funded status and amounts recognized
in the Company's consolidated financial statements for the Retirement Plan is as
follows (in thousands):
RETIREMENT PLAN
--------------------
YEAR ENDED JUNE 30,
--------------------
1994 1995
---- ----
Actuarial present value of:
Vested benefit obligation $ (540) $ (651)
Nonvested benefit obligation (38) (46)
-------- --------
Accumulated benefit obligation $ (578) $ (697)
-------- --------
-------- --------
Projected benefit obligation $(1,184) $(1,447)
Plan assets at fair value 783 1,380
-------- --------
Projected benefit obligation in excess of plan assets (401) (67)
Deferred losses 212 153
Unrecognized net transition obligation 118 109
-------- --------
Pension asset (liability) $ (71) $ 195
-------- --------
-------- --------
Net pension expense was comprised of:
Service cost $ 136 $ 157
Interest cost 83 99
Net amortization and deferral 18 20
Return on plan assets (57) (77)
----- -----
Net pension expense $ 180 $ 199
-------- --------
-------- --------
56
<PAGE>
The funded status and amortization recognized in the Company's
consolidated financial statements for the SERP Plan is as follows (in
thousands):
SERP PLAN
---------
YEAR ENDED JUNE 30,
-------------------
1995 1996
---- ----
Actuarial present value of:
Vested benefit obligation $ (470) $ (3,979)
Nonvested benefit obligation (315) (1,685)
---------- ----------
Accumulated benefit obligation $ (785) $ (5,664)
---------- ----------
---------- ----------
Projected benefit obligation $ (1,130) $ (9,898)
Plan assets at fair value - -
---------- ----------
Projected benefit obligation in excess of
plan assets (1,130) (9,898)
Deferred benefit obligation - 2,717
Unrecognized net transition obligation 296 3,646
Additional liability - (2,129)
---------- ----------
SERP liability $ (834) $ (5,664)
---------- ----------
---------- ----------
Net SERP expense was comprised of:
Service cost $ 788 $ 1,578
Interest cost 25 617
Net amortization and deferral 21 506
---------- ----------
Net SERP expense $ 834 $ 2,701
--------- ---------
--------- ---------
During the year ended June 30, 1995, the Company adopted an unfunded
Executive Retiree Medical Plan, which covers key executives, as selected by the
Board of Directors, and their spouses and dependents. The plan provides medical,
dental, and vision benefits during retirement. At June 30, 1995 and 1996, the
projected benefit obligation was $343,000 and $459,000, the unrecognized net
transition obligation was $194,000 and $172,000, the unrecognized net loss was
$63,000 and $59,000, and the pension liability was $86,000 and $228,000. The
components of post-retirement benefit expense for the years ended June 30, 1995
and 1996 included service cost of $45,000 and $93,000, interest cost of $19,000
and $26,000, and net amortization and deferral of $22,000 and $ 23,000, for
total benefit expense of $86,000 and $ 142,000. The medical cost trend rate
assumed was 14%, trending down to 6.5% over a ten year period. The weighted
average discount rate used in determining the accumulated postretirement benefit
obligation at June 30, 1995 and 1996 was 7.5%.
The impact of increasing the assumed health care cost trend rates by 1
percentage point in each year would not have a significant effect on the
accumulated postretirement benefit obligation or the aggregate of the service
and interest cost componenets of net periodic postretirement benefit cost for
the year ended June 30, 1996.
The Company purchases company-owned life insurance policies to cover the
cost of benefits under the Supplemental Executive Retirement Plan, the
Directors' Retirement Plan, the Executive Retiree Medical Plan, and the deferred
compensation plan. The cash surrender value of these policies at June 30, 1995
and 1996, included in other assets, was $13,090,000 and $33,707,000.
NOTE 11 - RELATED PARTY TRANSACTIONS
In December 1992, April 1993 and August 1994, as part of the consolidation
of health care delivery systems resulting from the acquisition of CMC, a senior
officer of the Company acquired two independent practice associations ("IPAs")
in California which contract with physicians to provide medical services to the
Company's enrollees. During fiscal year 1995, an additional IPA was formed in
Arizona by a senior officer of the Company. During the years ended June 30,
1994, 1995 and 1996, charges for medical services provided by these IPAs to the
Company's enrollees totaled approximately
57
<PAGE>
$20,562,000, $40,070,000 and $22,224,000. In April 1993, the Company entered
into a revolving credit agreement with one of the IPAs, the terms of which
restrict the ability of the IPA and its sole shareholder to pay dividends, to
incur additional indebtedness, to transfer shares, or to otherwise merge, sell
or dispose of assets. The credit agreement bears interest at the rate of prime
plus 2% which is payable quarterly. Principal is due on demand, or if no demand,
no later than April 30, 1997. At June 30, 1994 and 1995, $3,900,000 and
$5,300,000 was outstanding under the credit agreement. During fiscal year 1996,
the Company sold its affiliated California and Arizona IPAs to FPA. See Note 1
to the Consolidated Financial Statements.
During 1994, the Company contracted to provide health care services to the
Company's enrollees at Company-managed health care centers. During the years
ended June 30, 1994, 1995 and 1996, charges for medical services provided by the
affiliated Medical Groups to the Company's enrollees totaled approximately
$1,700,000, $85,000,000 and $123,189,000. The Company provides facilities and
support functions to the health care centers and is reimbursed in the form of a
management fee by the affiliated Medical Groups. The management fee totaled
$4,307,000, $55,271,000 and $104,324,000 for the years ended June 30, 1994, 1995
and 1996. The Company has revolving credit agreements with the affiliated
Medical Groups the terms of which restrict the ability of the affiliated Medical
Groups to pay dividends and bonuses, acquire assets, enter into liens, incur
additional indebtedness or to otherwise merge, sell or dispose of assets. The
credit agreements bear interest at 7.75% and prime plus 1%, respectively.
Principal and interest is due January 22, 1997 subject to automatic one year
extensions of the maturity date unless the Company provides written notice of
intent to terminate the agreements. At June 30, 1995 and 1996, $35,425,000 and
$59,870,000 was outstanding under these agreements. On June 28, 1996, the
Company entered into the stock and note purchase agreement regarding the sale of
the Foundation Health Medical Services and the affiliated Medical Groups in
California and Arizona to FPA. See Note 1 to the Consolidated Financial
Statements.
Management evaluates the collectibility of these loans and, if necessary,
reserves are recorded to reduce carrying amounts to amounts deemed to be
recoverable. No reserves have been deemed necessary as of the dates of these
financial statements.
NOTE 12 - REGULATORY AND CONTRACTUAL CAPITAL REQUIREMENTS
The Company's HMO subsidiaries are required to maintain a minimum level of
tangible net equity or minimum capital and surplus. The required total tangible
net equity and minimum capital and surplus for all HMOs is approximately
$31,594,000 at June 30, 1996. Under certain government contracts, Federal
Services is required to maintain a current ratio of 1:1 and certain HMO
subsidiaries are required to maintain a current ratio of 1:1 under Medicaid
contracts. The Company's life, accident and health insurance subsidiaries are
required by the Departments of Insurance in the states in which they are
licensed to maintain minimum capital and surplus aggregating $34,861,000. The
Company's workers' compensation insurance subsidiaries are required by the
Departments of Insurance in the states in which they are licensed to maintain
minimum capital and surplus of $5,000,000. In certain of the states in which
the workers' compensation subsidiaries are licensed to operate, regulations
allow the Insurance Commissioner, at their discretion, to require additional
surplus amounts based on types of insurance written and amount of premiums
inforce. As a result, actual capital and surplus requirements are
significantly above the minimum requirement as previously stated. The Company
and its subsidiaries are in compliance with the applicable minimum regulatory
and capital requirements described above.
As a result of the above requirements and certain other regulatory
requirements, certain subsidiaries are subject to restrictions on their ability
to make dividend payments, loans or other transfers of cash to the Company. Such
restrictions, unless amended or waived, limit the use of any cash generated by
these subsidiaries to pay obligations of the Company. As of June 30, 1996,
restricted net assets of these subsidiaries totaled approximately $71,455,000.
58
<PAGE>
NOTE 13 - COMMITMENTS AND CONTINGENCIES
During the year ended June 30, 1995, the Company entered into a $60 million
tax retention operating lease with NationsBank of Texas, N.A., as Administrative
Agent for the Lenders who are parties thereto and First Security Bank of Utah,
N.A., as Owner Trustee (the "TROL" agreement) for the construction of health
care centers and corporate facilities.
Under the TROL agreement, rental payments commence upon completion of
construction, with a guarantee of 87% to the lessor of the residual value of
properties leased at the end of the lease term. After the initial five year
noncancelable lease term, the lease may be extended by agreement of the parties
or the Company must purchase or arrange for sale of the leased properties. The
Company has committed to a guaranteed residual value of $22.5 million at
June 30, 1996 under this agreement.
The future minimum rental payments required under operating leases for all
of the Company's office space and equipment and for properties under
construction that have initial or remaining noncancelable lease terms in excess
of one year are as follows (in thousands):
YEAR ENDING JUNE 30,
1997 . . . . . . . . . . . . . . . . . . . . . . . . . $ 31,246
1998 . . . . . . . . . . . . . . . . . . . . . . . . . 24,433
1999 . . . . . . . . . . . . . . . . . . . . . . . . . 18,271
2000 . . . . . . . . . . . . . . . . . . . . . . . . . 12,116
2001 . . . . . . . . . . . . . . . . . . . . . . . . . 5,590
Thereafter . . . . . . . . . . . . . . . . . . . . . . 1,340
---------
$ 92,996
---------
---------
Lease expense for office space and equipment was $21,429,000 $25,425,000
and $35,787,000 for the years ended June 30, 1994, 1995 and 1996.
The Company maintains general liability and managed care professional
liability and directors and officers insurance and other insurance coverage in
amounts the Company believes to be adequate. The Company requires contracting
health care providers to maintain malpractice insurance coverage in amounts
customary in the industry.
In the ordinary course of its business the Company is a party to claims and
legal actions by enrollees, providers and others. The Company also undergoes
governmental audits and investigations with regard to its government contracts
and with respect to operations of its HMO, insurance, and third party
administrator subsidiaries. After consulting with legal counsel, the Company is
of the opinion that any liability that may ultimately be incurred as a result of
these claims, legal actions, audits or investigations will not have a material
adverse effect on the consolidated financial position or results of operations
of the Company.
59
<PAGE>
FOUNDATION HEALTH CORPORATION
SUPPLEMENTAL SCHEDULE
CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
JUNE 30,
------------------------------
1995 1996
-------------- --------------
Cash and cash equivalents $ 1,954 $ 5,210
Advances to subsidiaries 10,336 20,009
Property and equipment, net 8,510 11,600
Investments in subsidiaries 822,142 965,433
Organization and debt issuance costs, net 14,047 4,470
Other assets 167,311 302,954
-------------- --------------
$ 1,024,300 $ 1,309,676
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable and capital leases $ 177,674 $ 353,160
Accounts payable and other liabilities 89,727 21,927
-------------- --------------
267,401 375,087
Stockholders' equity
Common stock 518,671 533,855
Retained Earnings 244,249 410,689
Unrealized holding losses (2,974) (6,908)
Common stock held in treasury, at cost (3,047) (3,047)
-------------- --------------
756,899 934,589
-------------- --------------
$ 1,024,300 $ 1,309,676
-------------- --------------
-------------- --------------
S-1
<PAGE>
FOUNDATION HEALTH CORPORATION
SUPPLEMENTAL SCHEDULE
CONDENSED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
YEAR ENDED JUNE 30,
-----------------------------------
1994 1995 1996
----------- ----------- -----------
REVENUES :
Government contracts $ 978 $ 1,432 $ 1,554
Interest and other income 7,095 8,124 13,432
Administrative revenue 82,516 31,906 36,930
Equity in subsidiary income 64,872 88,552 143,750
----------- ----------- -----------
155,461 130,014 195,666
----------- ----------- -----------
EXPENSES :
Selling, general and administrative 31,852 19,438 21,969
Amortization and depreciation 303 754 1,235
Interest expense 10,265 11,795 16,998
Acquisition and restructuring costs - 84,436 -
----------- ----------- -----------
42,420 116,423 40,202
----------- ----------- -----------
Income before income taxes 113,041 13,591 155,464
Provision for income taxes 19,400 (35,858) (10,976)
----------- ----------- -----------
Net income $ 93,641 $ 49,449 $ 166,440
----------- ----------- -----------
----------- ----------- -----------
S-2
<PAGE>
FOUNDATION HEALTH CORPORATION
SUPPLEMENTAL SCHEDULE
CONDENSED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------
1994 1995 1996
---------- ---------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES :
Net income $ 93,641 $ 49,449 $ 166,440
Adjustments to reconcile net income to cash used for
operating activities:
Amortization and depreciation 305 830 1,235
Equity in subsidiary income (64,986) (88,552) (143,750)
Change in assets and liabilities,
net of effects from
acquisition of businesses:
Other assets (3,560) (44,736) (13,712)
Other liabilitie 6,466 49,604 (55,985)
Deferred income taxes, net (2,457) (11,163) 24,812
Investment in and advances to subsidiaries (50,301) 36,672 (9,673)
---------- ---------- -----------
Net cash used for operating activities (20,892) (7,896) (30,633)
---------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES :
Acquisition of property and equipment (673) (6,399) (3,679)
Decrease in short-term investments 112,966 - -
Purchase of available for sale investments - (256,450) -
Sales and maturities of available for sale investments - 292,344 -
Purchases of held to maturity investments - (12,949) -
Maturities of held to maturity investments - 10,967 -
Notes receivable - - (15,019)
Notes receivable from affiliates (35,708) (43,352) (114,365)
Acquisition of businesses (73,242) (15,727) (1,813)
---------- ---------- -----------
Net cash from (used for) investing activities 3,343 (31,566) (134,876)
---------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES :
Principal payments on notes payable and capital leases (282) (382) (9,057)
Proceeds from issuance of notes payable and capital leases - 30,542 188,351
Proceeds from issuance of common stock - net 812 6,448 1,254
Proceeds from exercise of stock options 8,403 5,920 16,932
Tax benefits related to stock options 5,410 4,645 6,721
Cash dividends received 27,400 54,997 28,050
Stock repurchase and other adjustments related to mergers (27,363) (3,047) (17,557)
Investment in subsidiaries (52,751) (89,564) (45,929)
---------- ---------- -----------
Net cash from (used for) financing activities (38,371) 9,559 168,765
---------- ---------- -----------
Net increase (decrease) in cash and cash equivalents (55,920) (29,903) 3,256
Cash and cash equivalents, beginning of year 87,777 31,857 1,954
---------- ---------- -----------
Cash and cash equivalents, end of year $ 31,857 $ 1,954 $ 5,210
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
S-3
<PAGE>
FOUNDATION HEALTH CORPORATION
SECTION 403.04B
RECONCILIATION OF BEGINNING AND ENDING LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
AND EXHIBIT OF REDUNDANCIES (DEFICIENCIES) - UNAUDITED
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
1986 1987 1988 1989 1990 1991
-------- -------- -------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Liability for unpaid losses and loss
adjustment expenses $ 43,944 $ 53,170 $ 55,089 $ 76,296 $ 158,268 $ 206,993
Paid (cumulative)
as of:
One year later 13,607 14,186 11,649 20,541 59,110 103,361
Two years later 23,110 21,998 20,780 36,151 106,334 167,932
Three years later 28,268 27,849 28,389 44,665 130,826 221,087
Four years later 32,229 33,527 31,492 50,240 146,186 233,168
Five years later 37,007 35,630 34,015 53,896 154,514 236,652
Six years later 38,526 37,448 35,975 56,301 157,082
Seven years later 40,088 39,121 37,374 57,264
Eight years later 41,441 40,346 37,966
Nine years later 42,559 40,892
Ten years later 43,080
Liability re-estimated as of:
One year later 51,633 53,321 51,147 75,988 160,141 218,747
Two years later 50,702 52,382 51,991 65,376 162,040 242,231
Three years later 50,506 54,349 43,651 61,098 172,981 242,533
Four years later 55,059 47,241 41,513 66,135 172,269 245,877
Five years later 48,512 46,116 44,701 66,174 173,581 243,623
Six years later 47,898 47,011 45,364 66,569 172,014
Seven years later 48,650 47,928 45,452 65,369
Eight years later 49,625 47,883 44,523
Nine years later 49,733 47,001
Ten years later 48,817
Redundancy (deficiency) $ (4,873) $ 6,169 $ 10,566 $ 10,927 $ (13,746) $ (36,630)
Net reserve - end of period
Reinsurance recoverable on unpaid
losses and loss adjustment expenses
Gross reserve - end of period
Net re-estimated reserve - end of
period
Re-estimated reinsurance recoverable
Gross re-estimated reserve - end
of period
Gross cumulative redundancy
SIX MONTHS
ENDED
----------------------------------------------------- JUNE 30,
1992 1993 1994 1995 1996
-------- --------- --------- --------- ----------
Liability for unpaid
losses and loss
adjustment expenses $219,464 $ 268,191 $ 322,394 $ 367,061 $ 404,370
Paid (cumulative)
as of:
One year later 106,693 115,189 129,284 100,846
Two years later 191,397 184,304 159,408
Three years later 233,537 192,725
Four years later 231,822
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
Liability re-estimated
as of:
One year later 251,012 262,032 295,856 350,545
Two years later 257,134 256,135 282,306
Three years later 262,582 246,970
Four years later 260,020
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
Redundancy
(deficiency) $ (40,556) $ 21,221 $ 40,088 $ 16,516
Net reserve - end of period $ 322,394 $ 367,061 $ 404,370
Reinsurance recoverable on
unpaid losses and loss adjustment
expenses 90,366 76,309 72,620
---------- --------- ----------
Gross reserve - end of period 412,760 443,370 476,990
Net re-estimated reserve - end of
period 282,306 350,545
Re-estimated reinsurance
recoverable 85,120 69,147
---------- ----------
Gross re-estimated reserve -
end of period 367,426 419,692
---------- ----------
Gross cumulative redundancy $ 45,334 $ 23,678
---------- ----------
---------- ----------
</TABLE>
Note: The last period for each of the calendar years in the above table reflect
changes in the six-month period January 1, 1996 to June 30, 1996.
S-4
<PAGE>
FOUNDATION HEALTH CORPORATION
ANNUAL REPORT ON FORM 10-K
YEAR ENDED JUNE 30, 1996
EXHIBIT
- -------
NUMBER DESCRIPTION
- ------ -----------
3.1(1) Restated Certificate of Incorporation of Foundation
Health Corporation.
3.2(3) Amended and Restated Bylaws of Foundation Health
Corporation.
4.1(6) Specimen of Foundation Health Corporation Common Stock
certificate with Rights Legend.
4.2(6) Form of Rights Certificate (incorporated by reference
to Foundation Health Corporation's Form 8-A dated
September 27, 1991).
4.3(9) Form of Indenture.
4.4(9) Form of Senior Notes.
4.5(18) 1993 Nonstatutory Stock Option Plan of Foundation
Health Corporation, as amended.
10.3(16) Executive Incentive Plan of Foundation Health Corporation.
10.20(2) Lease Agreement between HAS-First Associates and
Foundation Health Corporation dated August 1, 1988 and
form of amendment thereto.
10.38(2) Stock Purchase and Asset Sale Agreement dated
November 1, 1989 between Foundation Health Corporation
and Foundation Health Federal Services, Inc. and
amendment thereto.
10.39(2) Form of Indemnification Agreement.
10.53(1) Employee Stock Purchase Plan.
10.61(3) United States Government DoD Contract No. MDA 903
(91-C-0155 between DoD and Foundation Health Federal
Services, Inc. dated June 7, 1991.)
10.62(4) Asset Purchase Agreement dated July 3, 1991 between
Foundation Health Preferred Administrators and Preferred
Administrators, Inc.
10.63(4) Asset Purchase Agreement dated December 1, 1991 among
Foundation Health Pharmaceutical Services, Inc., Apollo
Billing Service, and as to certain parts thereof,
Anthony Ponzo, Patricia Ponzo and Robert Rhoads.
10.64(3) Agreement and Plan of Reorganization among Foundation
Health Corporation, FH Acquisition Corporation and
National Health Care Systems, Inc.
10.65(4) Stock Purchase Agreement dated February 14, 1991 between
the Company and Western Universal Corporation.
10.67(5) Stock Purchase Agreement between Foundation Health
Corporation, American Travelers Corporation and American
Travelers Life Insurance Company dated March 31, 1992.
10.68(5) Stock and Asset Purchase Agreement among Foundation
Health Corporation, Thomas R. and Linda S. Leonard and
Bayport Leasing Company dated as of May 18, 1992.
10.69(5) Stock Purchase Agreement among Foundation Health
Corporation, Deborah S. Greenfield and James Thompson
dated as of May 15, 1992.
10.70(6) Stock Purchase Agreement among Foundation Health
Corporation and the holders of common stock of Allstate
Optical Services, Inc. dated as of June 8, 1992.
10.71(12) Agreement and Plan of Reorganization among Foundation
Health Corporation, FHC Acquisition Corporation,
Occupational Health Services, Inc. and the OHS
shareholders dated July 31, 1992.
10.72(6) Agreement and Plan of Reorganization dated as of
July 14, 1992, by and among Foundation Health Corporation,
Century Medicorp, Inc. and FH Acquisition Corporation.
10.73(7) Century MediCorp, Inc. 1983 Incentive Stock Option Plan.
10.74(7) Century MediCorp, Inc. 1988 Nonstatutory Stock Option Plan.
64
<PAGE>
10.75(7) Century MediCorp, Inc. 1989 Nonstatutory Stock Option Plan.
10.76(7) Century MediCorp, Inc. 1991 Nonstatutory Stock Option Plan.
10.79(9) Agreement and Plan of Reorganization among Foundation
Health Corporation, FHC Acquisition Corporation and
Business Insurance Corporation dated April 10, 1993.
10.80(10) 1989 Stock Plan of Business Insurance Corporation.
10.81(11) 1992 Nonstatutory Stock Option Plan of Foundation Health
Corporation.
10.82(13) MDA 903(91-C-0155 Modification for Implementation of BRAC
expansion sites in Louisiana and Texas.)
10.83(14) Employment Agreement between Foundation Health
Corporation and Daniel D. Crowley dated April 30, 1994.
10.85(14) Employment Agreement between Foundation Health Corporation
and Jeffrey L. Elder dated April 22, 1994.
10.86(14) Employment Agreement between Foundation Health Corporation
and Steven D. Tough dated April 22, 1994.
10.87(14) Employment Agreement between Foundation Health Corporation
and Kirk A. Benson dated April 22, 1994.
10.88(14) Employment Agreement between Foundation Health Corporation
and Allen J. Marabito dated April 22, 1994.
10.89(14) Agreement and Plan of Reorganization dated as of
May 24, 1994 among Foundation Health Corporation, FHC
Acquisition Subsidiary, Southern Colorado Health
Plan, Inc., the stockholders of Southern Colorado Health
Plan, Inc. and Southern Colorado Health Management, Inc.
10.90(14) Agreement and Plan of Reorganization dated as of
May 2, 1994 among Foundation Health Corporation, The
Noetics Group, Reviewco and the other parties signatory
thereto.
10.91(15) Agreement and Plan of Reorganization dated as of
June 27, 1994 by and among Foundation Health Corporation,
CareFlorida Health Systems, Inc. and the other parties
signatory thereto.
10.92(16) Agreement and Plan of Merger dated as of July 28, 1994
between Foundation Health Corporation and Intergroup
Healthcare Corporation.
10.93(16) Agreement and Plan of Merger dated as of July 28, 1994
between Foundation Health Corporation and Thomas-Davis
Medical Centers, P.C.
10.96(13) Foundation Health Corporation Directors' Retirement Plan.
10.97(17) $300 Million Revolving Credit Agreement dated as of
December 5, 1994 among Foundation Health Corporation, as
Borrower, Citicorp USA, Inc., as Administrative Agent,
Wells Fargo Bank, N.A. and NationsBank of Texas, N.A.,
as Co-Agents and Citicorp Securities, Inc., as Arranger,
and the Other Banks and Financial Institutions Party thereto.
10.98(18) Participation Agreement dated as of May 25, 1995 among
Foundation Health Medical Services, as Construction
Agent and Lessee, Foundation Health Corporation, as
Guarantor, First Security Bank of Utah, N.A., as Owner
Trustee, Sumitomo Bank Leasing and Finance, Inc., The
Bank of Nova Scotia and NationsBank of Texas, N.A., as
Holders and NationsBank of Texas, N.A., as Administrative
Agent for the Lenders; and Guaranty Agreement dated as of
May 25, 1995 by Foundation Health Corporation for the benefit
of First Security Bank of Utah, N.A.
10.99(18) Foundation Health Corporation Deferred Compensation Plan,
as amended and restated.
10.100(18) Foundation Health Corporation Supplemental Executive
Retirement Plan, as amended and restated.
10.101(18) Foundation Health Corporation Executive Retiree Medical Plan,
as amended and restated.
10.102 Foundation Health Corporation 1990 Stock Option Plan, as
amended and restated effective August 15, 1996.
10.103(18) Foundation Health Corporation Profit Sharing and
401(k) Plan (as amended and restated effective
January 1, 1994).
10.104(19) Agreement and Plan of Reorganization dated
January 9, 1996 by and between the Registrant and
Managed Health Network, Inc.
65
<PAGE>
10.105 Amendment Number One to the Employment Agreement
effective May 1, 1996 between the Registrant and
Kirk A. Benson
10.106 Amendment Number One to the Employment Agreement
effective May 1, 1996 between the Registrant and
Jeffrey L. Elder
10.107 Amendment Number One to the Employment Agreement
effective May 1, 1996 between the Registrant and
Allen J. Marabito
10.108 Amendment Number One to the Employment Agreement
effective May 1, 1996 between the Registrant and
Steven D. Tough
10.109 Stock and Note Purchase Agreement by and between
the Registrant, Jonathan H. Scheff, M.D., and FPA
Medical Management, Inc. FPA Medical Management of
California, Inc. and FPA Independent Practice
Association dated as of June 28, 1996.
11.0 Computation of Earnings per Share.
12.0 Computation of Ratios.
13.1 Report of Ernst & Young LLP.
13.2 Report of Stevenson, Jones & Holmaas, P.C.
13.3 Report of Coopers & Lybrand LLP
21.0 Subsidiaries of Foundation Health Corporation.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Ernst & Young LLP.
23.3 Consent of Stevenson, Jones & Holmaas, P.C.
23.4 Consent of Coopers & Lybrand LLP
24.1 Power of Attorney (included on page i).
- ------------------
(1) Incorporated by reference to the Exhibits to Registrant's Registration
Statement on Form S-1 (File No. 33-38867).
(2) Incorporated by reference to the Exhibits to Registrant's Registration
Statement on Form S-1 (File No. 33-34963).
(3) Incorporated by reference to the Exhibits to Registrant's Registration
Statement on Form S-4 (File No. 33-42690).
(4) Incorporated by reference to the Exhibits to Registrant's Registration
Statement on Form S-1 (File No. 33-45513).
(5) Incorporated by reference to the Exhibits to Registrant's Form 10-Q for the
quarter ended March 31, 1992 filed with the Commission on May 14, 1992.
(6) Incorporated by reference to the Exhibits to Registrant's Registration
Statement on Form S-4 (File No. 33-51648).
(7) Incorporated by reference to the Exhibits to Registrant's Registration
Statement on Form S-8 (File No. 33-53468).
(8) Incorporated by reference to the Exhibits to Registrant's Form 8-K filed on
October 30, 1992.
(9) Incorporated by reference to the Exhibits to Registrant's Registration
Statement on Form S-3 (File No. 33-61684).
(10) Incorporated by reference to the Exhibits to Registrant's Registration
Statement on Form S-8 (File No. 33-67062).
(11) Incorporated by reference to the Exhibits to Registrant's Registration
Statement on Form S-8 (File No. 33-48561).
(12) Incorporated by reference to the Exhibits to Registrant's Registration
Statement on Form S-4 (File No. 33-51992).
(13) Incorporated by reference to the Exhibits to Registrant's Form 10-K for the
year ended June 30, 1994 filed with the Commission on September 24, 1994.
(14) Incorporated by reference to the Exhibits to Registrant's Registration
Statement on
66
<PAGE>
Form S-4 (File No. 33-80432).
(15) Incorporated by reference to the Exhibits to Registrant's current report on
Form 8-K filed with the Commission on June 28, 1994.
(16) Incorporated by reference to the Exhibits to Registrant's current report on
Form 8-K filed with the Commission on August 9, 1994.
(17) Incorporated by reference to the Exhibits to Registrant's quarterly report
on Form 10-Q for the quarter ended December 31, 1994 filed with the
Commission on February 14, 1995.
(18) Incorporated by reference to the Exhibits to Registrants Form 10-K for the
year ended June 30, 1995 filed with the Commission on September 27, 1995
(19) Incorporated by reference to Annex 1 of the Proxy Statement/Prospectus
contained in Registrant's Registration Statement on Form S-4
(File No. 333-00517)
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EXHIBIT 10.102
1990 STOCK OPTION PLAN OF
-------------------------
FOUNDATION HEALTH CORPORATION
-----------------------------
(AS AMENDED AND RESTATED EFFECTIVE AUGUST 15, 1996)
---------------------------------------------------
SECTION I. ESTABLISHMENT AND PURPOSE.
The Plan was established in 1990, and it was most recently amended and
restated effective August 15, 1996. The Plan offers selected employees,
consultants and advisors and the non-employee directors of the Company an
opportunity to acquire a proprietary interest in the success of the Company, or
to increase such interest, by exercising Options to purchase Shares of the
Company's Common Stock. Options granted under the Plan may include Nonstatutory
Options as well as ISOs intended to qualify under section 422 of the Code. The
Plan also offers the non-employee directors of the Company an opportunity to
receive their directors' fees in the form of Shares of the Company's Common
Stock.
SECTION II. DEFINITIONS
A. "BOARD OF DIRECTORS" shall mean the Board of Directors of the Company,
as constituted from time to time.
B. "CHANGE IN CONTROL" means the occurrence of either of the following
events:
1. A change in the composition of the Board of Directors, as a
result of which fewer than one half of the incumbent directors are directors who
either:
a. Had been directors of the Company 24 months prior to such
change; or
b. Were elected, or nominated for election, to the Board of
Directors with the affirmative votes of at least a majority of the
directors who had been directors of the Company 24 months prior to such
change and who were still in office at the time of the election or
nomination; or
2. Any "person" (as such term is used in sections 13(d) and 14(d)
of the Securities Exchange Act of 1934, as amended) by the acquisition or
aggregation of securities is or becomes the beneficial owner, directly or
indirectly, of securities of the Company representing 20% or more of the
combined voting power of the Company's then outstanding securities ordinarily
(and apart from rights accruing under special circumstances) having the right
to vote at elections of directors (the "Base Capital Stock"); except that any
change in the relative beneficial ownership of the Company's securities by
any person resulting solely from a reduction in the aggregate number of
outstanding shares of Base Capital Stock, and any decrease thereafter in such
person's ownership of securities, shall be disregarded until such person
increases in any manner, directly or indirectly, such person's beneficial
ownership of any securities of the Company. For purposes of this Subsection
(B)(2), the term "person" shall not include an employee benefit plan
maintained by the Company.
C. "CODE" shall mean the Internal Revenue Code of 1986, as amended.
D. "COMMITTEE" shall be the committee of the Board of Directors of the
Company, as described in Section III(A).
E. "COMPANY" shall mean Foundation Health Corporation, a Delaware
corporation.
F. "DIRECTOR" shall mean any individual who is not a common-law employee
of the Company or of a Subsidiary and who is duly elected and serving the
Company as a member of the Board of Directors.
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G. "EMPLOYEE" shall mean
1. An individual who is a common-law employee of the Company or of a
Subsidiary; and
2. An independent contractor who performs services for the Company
or a Subsidiary as an advisor or consultant and who is not a Director. Service
as an independent contractor shall be considered employment for all purposes of
the Plan, except as provided in Section IV(A).
H. "EXERCISE PRICE" shall mean the amount for which one Share may be
purchased upon exercise of an Option, as specified in the applicable Stock
Option Agreement.
I. "FAIR MARKET VALUE" shall mean the market price of Stock, determined
by the Committee as follows:
1. If the Stock was traded over-the-counter on the date in question
but was not classified as a national market issue, then the Fair Market Value
shall be equal to the mean between the last reported representative bid and
asked prices quoted by the NASDAQ system for such date;
2. If the Stock was traded over-the-counter on the date in question
and was classified as a national market issue, then the Fair Market Value shall
be equal to the last transaction price quoted by the NASDAQ system for such
date;
3. If the Stock was traded on a stock exchange on the date in
question, then the Fair Market Value shall be equal to the closing price
reported by the applicable composite-transactions report for such date; and
4. If none of the foregoing provisions is applicable, then the Fair
Market Value shall be determined by the Committee in good faith on such basis as
it deems appropriate.
In all cases, the determination of Fair Market Value by the
Committee shall be conclusive and binding on all persons.
J. "ISO" shall mean an employee incentive stock option described in
section 422 of the Code.
K. "NONSTATUTORY OPTION" shall mean a stock option not described in
section 422 or 423(b) of the Code.
L. "OPTION" shall mean an ISO or Nonstatutory Option granted under the
Plan and entitling the holder to purchase Shares.
M. "OPTIONEE" shall mean an individual who holds an Option.
N. "PLAN" shall mean this 1990 Stock Option Plan of Foundation Health
Corporation, as amended from time to time.
O. "SERVICE" shall mean service as an Employee or Director including a
Director of any Subsidiary of the Company.
P. "SHARE" shall mean one share of Stock, as adjusted in accordance with
Section IX (if applicable).
Q. "STOCK" shall mean the Common Stock of the Company.
R. "STOCK OPTION AGREEMENT" shall mean the agreement between the Company
and an Optionee which contains the terms, conditions and restrictions pertaining
to his or her Option.
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S. "SUBSIDIARY" shall mean any corporation, if the Company and/or one or
more other Subsidiaries own not less than 50 percent of the total combined
voting power of all classes of outstanding stock of such corporation. A
corporation that attains the status of a Subsidiary on a date after the adoption
of the Plan shall be considered a Subsidiary commencing as of such date.
T. "TOTAL AND PERMANENT DISABILITY" shall mean that the Optionee is
unable to engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which can be expected to result in
death or which has lasted, or can be expected to last, for a continuous period
of not less than 12 months.
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SECTION III. ADMINISTRATION.
A. COMMITTEE MEMBERSHIP. The Plan shall be administered by a committee
that will satisfy Rule 16b-3 of the Securities Exchange Act of 1934, as amended,
with respect to grants to officers and directors (the "Committee"). The members
of the Committee shall be appointed by the Board of Directors. If no Committee
has been appointed, the entire Board of Directors shall constitute the
Committee.
B. COMMITTEE PROCEDURES. The Board of Directors shall designate one of
the members of the Committee as chairperson. The Committee may hold meetings at
such times and places as it shall determine. The acts of a majority of the
Committee members present at meetings at which a quorum exists, or acts reduced
to or approved in writing by all Committee members, shall be valid acts of the
Committee.
C. COMMITTEE RESPONSIBILITIES. Subject to the provisions of the Plan,
the Committee shall have full authority and discretion to take the following
actions:
1. To interpret the Plan and to apply its provisions;
2. To adopt, amend or rescind rules, procedures and forms relating
to the Plan;
3. To authorize any person to execute, on behalf of the Company, any
instrument required to carry out the purposes of the Plan;
4. Except with respect to Optionees who are Directors, to determine
when Options are to be granted under the Plan;
5. Except with respect to Optionees who are Directors, to select the
Optionees;
6. Except with respect to Optionees who are Directors, to determine
the number of Shares to be made subject to each Option;
7. Except with respect to Optionees who are Directors, to prescribe
the terms and conditions of each Option, to determine whether such Option is to
be classified as an ISO or as a Nonstatutory Option, and to specify the
provisions of the Stock Option Agreement relating to such Option;
8. To amend any outstanding Stock Option Agreement, subject to
applicable legal restrictions and to the consent of the Optionee who entered
into such agreement;
9. To prescribe the consideration for the grant of each Option under
the Plan and to determine the sufficiency of such consideration; and
10. To take any other actions deemed necessary or advisable for the
administration of the Plan.
All decisions, interpretations and other actions of the Committee shall be final
and binding on all Optionees and all persons deriving their rights from an
Optionee. No member of the Committee shall be liable for any action that he or
she has taken or has failed to take in good faith with respect to the Plan or
any Option.
SECTION IV. ELIGIBILITY.
A. EMPLOYEES. Only Employees (including, without limitation, independent
contractors who are not Directors) shall be eligible for designation as
Optionees by the Committee. In addition, only Employees who are common-law
employees of the Company or of a Subsidiary shall be eligible for the grant of
ISOs.
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1. TEN-PERCENT STOCKHOLDERS. An Employee who owns more than 10
percent of the total combined voting power of all classes of outstanding stock
of the Company or any of its Subsidiaries shall not be eligible for designation
as an Optionee for an ISO unless (i) the Exercise Price is at least 110 percent
of the Fair Market Value of a Share on the date of grant and (ii) the ISO by its
terms is not exercisable after the expiration of five years from the date of
grant.
2. ATTRIBUTION RULES. For purposes of Subsection (A)(1) above, in
determining stock ownership, an Employee shall be deemed to own the stock owned,
directly or indirectly, by or for his or her brothers, sisters, spouse,
ancestors and lineal descendants. Stock owned, directly or indirectly, by or
for a corporation, partnership, estate or trust shall be deemed to be owned
proportionately by or for its stockholders, partners or beneficiaries. Stock
with respect to which such Employee holds an option shall not be counted.
3. OUTSTANDING STOCK. For purposes of Subsection (A)(1) above,
"outstanding stock" shall include all stock actually issued and outstanding
immediately after the grant. "Outstanding stock" shall not include treasury
shares or shares authorized for issuance under outstanding options held by the
Employee or by any other person.
B. DIRECTORS. Directors of the Company shall be eligible for
participation in the Plan as set forth in Sections VI(B) and VIII.
SECTION V. STOCK SUBJECT TO PLAN.
A. BASIC LIMITATION. Shares offered under the Plan shall be authorized
but unissued Shares or treasury Shares. The aggregate number of Shares which
may be issued under the Plan upon exercise of Options shall not exceed
5,525,000 Shares, subject to adjustment pursuant to Section IX. Commencing with
July 1, 1994, the Committee shall not grant options to any one individual
covering a number of shares in excess of 1,000,000 (the "Allocation limit"),
subject to adjustment pursuant to Section IX. The number of Shares which are
subject to Options outstanding at any time under the Plan shall not exceed the
number of Shares which then remain available for issuance under the Plan. The
Company, during the term of the Plan, shall at all times reserve and keep
available sufficient Shares to satisfy the requirements of the Plan.
B. ADDITIONAL SHARES. In the event that any outstanding Option for any
reason expires or is canceled or otherwise terminated, the Shares allocable to
the unexercised portion of such Option shall again be available for the purposes
of the Plan.
C. ADJUSTMENT OF ALLOCATION LIMIT. If, as a result of subsequent
regulations or other interpretive guidance, the Committee determines that (i)
the inclusion of the Allocation Limit is not required in order for option grants
to qualify as performance-based compensation under the provisions of Section
162(m) of the Code, or (ii) option grants can qualify as performance-based
compensation even if the Allocation Limit was made less restrictive, the
Committee will be entitled to amend the Plan accordingly (including amendments
to adjust or eliminate altogether the Allocation Limit).
SECTION VI. TERMS AND CONDITIONS OF OPTIONS.
A. EMPLOYEES.
1. STOCK OPTION AGREEMENT. Each grant of an Option under the Plan
shall be evidenced by a Stock Option Agreement between the Optionee and the
Company, which Stock Option Agreement shall have been approved in advance by the
Committee. Such Option shall be subject to all applicable terms and conditions
of the Plan and may be subject to any other terms and conditions which are not
inconsistent with the Plan and which the Committee deems appropriate for
inclusion in a Stock Option Agreement. The provisions of the various Stock
Option Agreements entered into under the Plan need not be identical.
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<PAGE>
2. NUMBER OF SHARES. Each Stock Option Agreement shall specify the
number of shares that are subject to the Option and shall provide for the
adjustment of such number in accordance with Section IX. The Stock Option
Agreement shall also specify whether the Option is an ISO or a Nonstatutory
Option.
3. EXERCISE PRICE. Each Stock Option Agreement shall specify the
Exercise Price. The Exercise Price shall not be less than 100 percent of the
Fair Market Value of a Share on the date of grant, except as otherwise provided
in Section IV (A)(1). Subject to the preceding sentence, the Exercise Price
under any Option shall be determined by the Committee at its sole discretion.
The Exercise Price shall be payable in a form described in Section VII.
4. EXERCISABILITY AND TERM. Each Stock Option Agreement shall
specify the date when all or any installment of the Option is to become
exercisable. The vesting of any Option shall be determined by the Committee at
its sole discretion. A Stock Option Agreement may provide for accelerated
exercisability in the event of the Optionee's death, Total and Permanent
Disability or retirement or other events. The Stock Option Agreement shall also
specify the term of the Option. The term shall not exceed 10 years from the date
of grant, except as otherwise provided in Section IV(A)(1). Subject to the
preceding sentence, the Committee at its sole discretion shall determine when an
Option is to expire.
5. EFFECT OF CHANGE IN CONTROL. The Committee may determine, at the
time of granting an Option or thereafter, that such Option shall become fully
exercisable as to all Shares subject to such Option in the event that a Change
in Control occurs with respect to the Company. If the Committee finds that
there is a reasonable possibility that, within the succeeding six months, a
Change in Control will occur with respect to the Company, then the Committee may
determine that any or all outstanding Options shall become fully exercisable as
to all Shares subject to such Options.
B. DIRECTORS.
1. STOCK OPTION AGREEMENTS. A Nonstatutory Option to purchase
Shares shall be granted to each Director then in office on April 22, 1993. In
the case of a Director who is not a Director on April 22, 1993, the grant of an
option to such Director under this Subsection (B)(1) shall occur on the date
such Director takes office. Each grant of an Option under the Plan shall be
evidenced by a Stock Option Agreement between the Optionee and the Company.
Such Option shall be subject to all applicable terms and conditions of the Plan
and to stockholder approval of this provision. The provisions of the various
Stock Option Agreements entered into under the Plan need not be identical.
2. NUMBER OF SHARES. Each Stock Option Agreement shall specify the
number of Shares that are subject to the Option and shall provide for the
adjustment of such number in accordance with Section IX. The number of Shares
that are subject to each Option under Subsection (B)(1) shall be 25,000.
3. EXERCISE PRICE. Each Stock Option Agreement shall specify the
Exercise Price. The Exercise Price shall be 100 percent of the Fair Market
Value of a Share on the date of grant. The Exercise Price shall be payable in
cash or Common Stock.
4. EXERCISABILITY AND TERM. Each Stock Option Agreement shall
specify that the Option is to become exercisable in accordance with the
following schedule:
Anniversary of Percentage of
DATE OF GRANT SHARES EXERCISABLE
-----------------------------------------------------
First 20%
Second 40%
Third 60%
Fourth 80%
Fifth 100%
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The Stock Option Agreement shall specify the term of the Option which shall be
10 years from the date of grant, unless earlier terminated as set forth herein.
C. WITHHOLDING TAXES. As a condition to the exercise of an Option, the
Optionee shall make such arrangements as the Committee may require for the
satisfaction of any federal, state, local or foreign withholding tax obligations
that may arise in connection with such exercise. The Optionee shall also make
such arrangements as the Committee may require for the satisfaction of any
federal, state, local or foreign withholding tax obligations that may arise in
connection with the disposition of Shares acquired by exercising an Option. The
Committee may permit the Optionee to satisfy all or part of his or her
withholding or income tax obligations by having the Company withhold a portion
of any Shares that otherwise would be issued to him or her or by surrendering a
portion of any Shares that previously were issued to him or her. Such Shares
shall be valued at their Fair Market Value on the date when taxes otherwise
would be withheld in cash. Any payment of taxes by assigning Shares to the
Company may be subject to restrictions, including any restrictions required by
rules of the Securities and Exchange Commission.
D. NONTRANSFERABILITY. No Option shall be transferable by the Optionee
other than by will, by a beneficiary designation executed by the Optionee and
delivered to the Company or by the laws of descent and distribution. An Option
may be exercised during the lifetime of the Optionee only by him or her or by
his or her guardian or legal representative. No Option or interest therein may
be transferred, assigned, pledged or hypothecated by the Optionee during his or
her lifetime, whether by operation of law or otherwise, or be made subject to
execution, attachment or similar process.
E. TERMINATION OF SERVICE (EXCEPT BY DEATH). If an Optionee's Service
terminates for any reason other than his or her death, then his or her Option(s)
shall expire on the earliest of the following occasions:
1. The expiration date determined pursuant to Subsection (A)(4) or
(B)(4) above;
2. The date 90 days after the termination of his or her Service for
any reason other than Total and Permanent Disability; or
3. The date 12 months after the termination of his or her Service by
reason of Total and Permanent Disability.
The Optionee may exercise all or part of his or her Option(s) at any time before
the expiration of such Option(s) under the preceding sentence, but only to the
extent that such Option(s) had become exercisable before his or her Service
terminated or became exercisable as a result of the termination. The balance of
such Option(s) shall lapse when the Optionee's Service terminates unless
otherwise specified in the applicable Stock Option Agreement. In the event that
the Optionee dies after the termination of his or her Service but before the
expiration of his or her Option(s), all or part of such Option(s) may be
exercised (prior to expiration) by the executors or administrators of the
Optionee's estate or by any person who has acquired such Option(s) directly from
him or her by bequest, beneficiary designation or inheritance, but only to the
extent that such Option(s) had become exercisable before his or her Service
terminated or became exercisable as a result of the termination.
F. LEAVES OF ABSENCE. For purposes of Subsection E above, Service shall
be deemed to continue while the Optionee is on military leave, sick leave or
other bona fide leave of absence (as determined by the Committee). The
foregoing notwithstanding, in the case of an ISO granted to an Employee under
the Plan, Service shall not be deemed to continue beyond the first 90 days of
such leave, unless the Optionee's reemployment rights are guaranteed by statute
or by contract.
G. DEATH OF OPTIONEE. If an Optionee dies while he or she is in Service,
then his or her Option(s) shall expire on the earlier of the following dates:
1. The expiration date determined pursuant to Subsection (A)(4) or
(B)(4) above; or
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2. The date 12 months after his or her death.
All or part of the Optionee's Option(s) may be exercised at any
time before the expiration of such Option(s) under the preceding sentence by the
executors or administrators of his or her estate or by any person who has
acquired such Option(s) directly from him or her by bequest, beneficiary
designation or inheritance, but only to the extent that such Option(s) had
become exercisable before his or her death or became exercisable as a result of
his or her death. The balance of such Option(s) shall lapse when the Optionee
dies.
H. NO RIGHTS AS A STOCKHOLDER. An Optionee, or a transferee of an
Optionee, shall have no rights as a stockholder with respect to any Shares
covered by his or her Option until the date of the issuance of a stock
certificate for such Shares. No adjustments shall be made, except as provided
in Section IX.
I. MODIFICATION, EXTENSION AND ASSUMPTION OF OPTIONS. Within the
limitations of the Plan, the Committee may modify, extend or assume outstanding
Options or may accept the cancellation of outstanding Options (whether granted
by the Company or another issuer) in return for the grant of new Options for the
same or a different number of Shares and at the same or a different price. The
foregoing notwithstanding, no modification of an Option shall, without the
consent of the Optionee, impair his or her rights or increase his or her
obligations under such Option.
J. RESTRICTIONS ON TRANSFER OF SHARES. Any Shares issued upon exercise
of an Option shall be subject to such special forfeiture conditions, rights of
repurchase, rights of first refusal and other transfer restrictions as the
Committee may determine. Such restrictions shall be set forth in the applicable
Stock Option Agreement and shall apply in addition to any general restrictions
that may apply to all holders of Shares.
SECTION VII. PAYMENT FOR SHARES.
A. GENERAL RULE. The entire Exercise Price of Shares issued under the
Plan shall be payable in lawful money of the United States of America at the
time when such Shares are purchased, except as follows:
1. In the case of an option granted under the Plan to an Employee,
the Committee (at its sole discretion) may specify in the Stock Option Agreement
that payment of the exercise price may be made in one or more of the forms
described in Subsections (B), (C), (D) and (E) below.
2. In the case of a Nonstatutory Option granted under the Plan to a
Director, payment may be made in one or both of the forms described in
Subsections (B) and (D) below.
B. SURRENDER OF STOCK. To the extent that this Subsection (B) is
applicable and to the extent that applicable law permits, payment may be made
all or in part with Shares which have already been owned by the Optionee or his
or her representative for more than six months and which are surrendered to the
Company in good form for transfer. Such Shares shall be valued at their Fair
Market Value on the date when the new Shares are purchased under the Plan.
C. PROMISSORY NOTE. To the extent that this Subsection (C) is
applicable, a portion of the Exercise Price of Shares issued under the Plan may
be payable by a full-recourse promissory note; provided that (i) the par value
of such Shares must be paid in lawful money of the United States of America at
the time when such Shares are purchased, (ii) the Shares are security for
payment of the principal amount of the promissory note and interest thereon and
(iii) the interest rate payable under the terms of the promissory note shall not
be less than the minimum rate (if any) required to avoid the imputation of
additional interest under the Code. Subject to the foregoing, the Committee (at
its sole discretion) shall specify the term, interest rate, amortization
requirements (if any) and other provisions of such note.
D. EXERCISE/SALE. To the extent that this Subsection (D) is applicable,
payment may be made by the delivery (on a form prescribed by the Company) of an
irrevocable direction to a securities broker approved by the Company to sell
Shares and to deliver all or part of the sales proceeds to the Company in
payment of all or part of the Exercise Price and any withholding taxes.
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E. EXERCISE/PLEDGE. To the extent that this Subsection (E) is
applicable, payment may be made by the delivery (on a form prescribed by the
Company) of an irrevocable direction to pledge Shares to a securities broker or
lender approved by the Company, as security for a loan, and to deliver all or
part of the loan proceeds to the Company in payment of all or part of the
Exercise Price and any withholding taxes.
SECTION VIII. PAYMENT OF DIRECTOR'S FEES IN STOCK.
A. ELECTION. A Director may elect to receive his or her director's fees
from the Company in the form of Shares to be issued under the Plan. Such an
election may be made with respect to:
1. All director's fees, including (without limitation) annual
retainer fees, meeting fees and fees paid to committee chairpersons, but not
including expense reimbursements and consulting fees; or
2. Annual retainer payments only.
An election under this Section VIII shall be filed with the Company on the
prescribed form. The election shall apply only to fees payable at least six
months after such form has been received by the Company. The election may be
amended or canceled by filing a new form with the Company, but the new form
shall apply only to fees payable at least six months after it has been received
by the Company. The number of Shares to be issued shall be determined by
dividing the amount of the fee by the Fair Market Value of one Share on the date
when such fee otherwise would be paid in cash.
B. WITHHOLDING TAXES. The Director shall satisfy all of his or her
federal, state or local withholding tax obligations (if any) by having the
Company withhold a portion of the Shares that otherwise would be issued to him
or her. Such Shares shall be valued at their Fair Market Value on the date when
taxes otherwise would be withheld in cash. The payment of taxes by assigning
Shares to the Company shall be subject to any restrictions required by rules of
the Securities and Exchange Commission.
SECTION IX. ADJUSTMENT OF SHARES.
A. GENERAL. In the event of a subdivision of the outstanding Stock, a
declaration of a dividend payable in Shares, a declaration of a dividend payable
in a form other than Shares in an amount that has a material effect on the value
of Shares, a combination or consolidation of the outstanding Stock (by
reclassification or otherwise) into a lesser number of Shares, a
recapitalization or a similar occurrence, the Committee shall make appropriate
adjustments in one or more of (i) the number of Shares available for future
grants under Section V, (ii) the number of Shares covered by each outstanding
Option or (iii) the Exercise Price under each outstanding Option.
B. MERGER; CONSOLIDATION. In the event that the Company is a party to a
merger or consolidation, outstanding Options shall be subject to the agreement
of merger or consolidation. Such agreement shall provide (i) for the assumption
of outstanding Options by the surviving corporation or its parent, (ii) for
their continuation by the Company, if the Company is a surviving corporation,
(iii) for payment of a cash settlement equal to the difference between the
amount to be paid for one Share under such agreement and the Exercise Price or
(iv) for the acceleration of their exercisability followed by the cancellation
of Options not exercised, in all cases other than clause (iii) without the
Optionees' consent. (The Optionees' consent shall be required for a cash
settlement.) Any cancellation shall not occur earlier than 30 days after such
acceleration is effective and Optionees have been notified of such acceleration.
In the case of Options that have been outstanding for less than 12 months, a
cancellation need not be preceded by an acceleration.
C. RESERVATION OF RIGHTS. Except as provided in this Section IX, an
Optionee shall have no rights by reason of (i) any subdivision or consolidation
of shares of stock of any class, (ii) the payment of any dividend or (iii) any
other increase or decrease in the number of shares of stock of any class. Any
issue by the Company of shares of stock of any class, or securities convertible
into shares of stock of any class, shall not affect, and no adjustment by reason
thereof shall be made with respect to, the number or Exercise Price of Shares
subject to an Option. The grant of an Option pursuant to
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the Plan shall not affect in any way the right or power of the Company to make
adjustments, reclassifications, reorganizations or changes of its capital or
business structure, to merge or consolidate or to dissolve, liquidate, sell or
transfer all or any part of its business or assets.
SECTION X. SECURITIES LAWS.
Shares shall not be issued under the Plan unless the issuance and delivery
of such Shares complies with (or is exempt from) all applicable requirements of
law, including (without limitation) the Securities Act of 1933, as amended, the
rules and regulations promulgated thereunder, state securities laws and
regulations, and the regulations of any stock exchange on which the Company's
securities may then be listed.
SECTION XI. NO RIGHTS TO SERVICE.
No provision of the Plan, nor any Option granted under the Plan, shall be
construed to give any person any right to become, to be treated as, or to remain
an Employee or Director of the Company, as the case may be. The Company and its
Subsidiaries reserve the right to terminate any person's Service at any time and
for any reason.
SECTION XII. DURATION AND AMENDMENTS.
A. TERM OF THE PLAN. The Plan, as amended and restated, is effective as
of August 15, 1996. The Plan shall terminate automatically on March 31, 2000
and may be terminated on any earlier date pursuant to Subsection (B) below.
B. RIGHT TO AMEND OR TERMINATE THE PLAN. The Committee may amend,
suspend or terminate the Plan at any time and for any reason; provided, however,
that any amendment of the Plan which increases the number of Shares available
for issuance under the Plan (except as provided in Section IX), or which
materially changes the class of persons who are eligible for the grant of ISOs,
shall be subject to the approval of the Company's stockholders. Stockholder
approval shall not be required for any other amendment of the Plan, except to
the extent required by applicable law, rule or regulation.
C. EFFECT OF AMENDMENT OR TERMINATION. No Shares shall be issued under
the Plan after the termination thereof, except upon exercise of an Option
granted prior to such termination. The termination of the Plan, or any
amendment thereof, shall not affect any Share previously issued or any Option
previously granted under the Plan.
SECTION XIII. EXECUTION.
To record the amendment and restatement of the Plan by the Committee to be
effective as of August 15, 1996, the Company has caused its authorized officer
to execute the same.
FOUNDATION HEALTH CORPORATION
By: /s/ Daniel D. Crowley
--------------------------------------
President and Chief Executive Officer
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EXHIBIT 10.105
AMENDMENT NUMBER ONE TO EMPLOYMENT AGREEMENT
This Amendment Number One to the Employment Agreement entered into as of
April 22, 1994, by and between Kirk A. Benson (the "Employee") and Foundation
Health Corporation, a Delaware corporation (the "Company") (the "Employment
Agreement") is effective as of May 1, 1996.
WHEREAS, the Company desires to amend certain provisions of the Employment
Agreement to extend the term and restate the compensation provisions thereof;
and
WHEREAS, the Employee is amenable to such amendments;
NOW THEREFORE, for good and valuable consideration the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
1. Subsection 1(a) of the Employment Agreement shall be amended by
deleting such subsection in its entirety and replacing it with the following
Subsection 1(a):
"(a) BASIC RULE. The Company agrees to continue the Employee's employment,
and the Employee agrees to remain in employment with the Company for a five
year period commencing as of the date hereof and ending May 1, 2001, and
thereafter automatically renewable from year to year unless sooner
terminated pursuant to Subsection (b), (c), (d) or (e) below."
2. Subsection 3(a) shall be amended by stating the annual rate of
compensation as not less than $350,000 per year.
3. REMAINING TERMS. The remaining terms of the Employment Agreement
shall remain in full force and effect.
IN WITNESS WHEREOF, each of the parties has executed this Amendment Number
One, in the case of the Company, by its duly authorized officer, as of the day
and year first above written.
/s/ Kirk A. Benson
---------------------------------------
Employee
FOUNDATION HEALTH CORPORATION
By: /s/ Daniel D. Crowley
--------------------------------
Its: President and CEO
-----------------------------------
<PAGE>
EXHIBIT 10.106
AMENDMENT NUMBER ONE TO EMPLOYMENT AGREEMENT
This Amendment Number One to the Employment Agreement entered into as of
April 22, 1994, by and between Jeffrey L. Elder (the "Employee") and Foundation
Health Corporation, a Delaware corporation (the "Company") (the "Employment
Agreement") is effective as of May 1, 1996.
WHEREAS, the Company desires to amend certain provisions of the Employment
Agreement to extend the term and restate the compensation provisions thereof;
and
WHEREAS, the Employee is amenable to such amendments;
NOW THEREFORE, for good and valuable consideration the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
1. Subsection 1(a) of the Employment Agreement shall be amended by
deleting such subsection in its entirety and replacing it with the following
Subsection 1(a):
"(a) BASIC RULE. The Company agrees to continue the Employee's employment,
and the Employee agrees to remain in employment with the Company for a five
year period commencing as of the date hereof and ending May 1, 2001, and
thereafter automatically renewable from year to year unless sooner
terminated pursuant to Subsection (b), (c), (d) or (e) below."
2. Subsection 3(a) shall be amended by stating the annual rate of
compensation as not less than $300,000 per year.
3. REMAINING TERMS. The remaining terms of the Employment Agreement
shall remain in full force and effect.
IN WITNESS WHEREOF, each of the parties has executed this Amendment Number
One, in the case of the Company, by its duly authorized officer, as of the day
and year first above written.
/s/ Jeffrey L. Elder
---------------------------------------
Employee
FOUNDATION HEALTH CORPORATION
By: /s/ Daniel D. Crowley
--------------------------------
Its: President and CEO
-----------------------------------
<PAGE>
EXHIBIT 10.107
AMENDMENT NUMBER ONE TO EMPLOYMENT AGREEMENT
This Amendment Number One to the Employment Agreement entered into as of
April 22, 1994, by and between Allen J. Marabito (the "Employee") and Foundation
Health Corporation, a Delaware corporation (the "Company") (the "Employment
Agreement") is effective as of May 1, 1996.
WHEREAS, the Company desires to amend certain provisions of the Employment
Agreement to extend the term and restate the compensation provisions thereof;
and
WHEREAS, the Employee is amenable to such amendments;
NOW THEREFORE, for good and valuable consideration the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
1. Subsection 1(a) of the Employment Agreement shall be amended by
deleting such subsection in its entirety and replacing it with the following
Subsection 1(a):
"(a) BASIC RULE. The Company agrees to continue the Employee's employment,
and the Employee agrees to remain in employment with the Company for a five
year period commencing as of the date hereof and ending May 1, 2001, and
thereafter automatically renewable from year to year unless sooner
terminated pursuant to Subsection (b), (c), (d) or (e) below."
2. Subsection 3(a) shall be amended by stating the annual rate of
compensation as not less than $250,000 per year.
3. REMAINING TERMS. The remaining terms of the Employment Agreement
shall remain in full force and effect.
IN WITNESS WHEREOF, each of the parties has executed this Amendment Number
One, in the case of the Company, by its duly authorized officer, as of the day
and year first above written.
/s/ Allen J. Marabito
---------------------------------------
Employee
FOUNDATION HEALTH CORPORATION
By: /s/ Daniel D. Crowley
--------------------------------
Its: President and CEO
-----------------------------------
<PAGE>
EXHIBIT 10.108
AMENDMENT NUMBER ONE TO EMPLOYMENT AGREEMENT
This Amendment Number One to the Employment Agreement entered into as of
April 22, 1994, by and between Steven D. Tough (the "Employee") and Foundation
Health Corporation, a Delaware corporation (the "Company") (the "Employment
Agreement") is effective as of May 1, 1996.
WHEREAS, the Company desires to amend certain provisions of the Employment
Agreement to extend the term and restate the compensation provisions thereof;
and
WHEREAS, the Employee is amenable to such amendments;
NOW THEREFORE, for good and valuable consideration the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
1. Subsection 1(a) of the Employment Agreement shall be amended by
deleting such subsection in its entirety and replacing it with the following
Subsection 1(a):
"(a) BASIC RULE. The Company agrees to continue the Employee's employment,
and the Employee agrees to remain in employment with the Company for a five
year period commencing as of the date hereof and ending May 1, 2001, and
thereafter automatically renewable from year to year unless sooner
terminated pursuant to Subsection (b), (c), (d) or (e) below."
2. Subsection 3(a) shall be amended by stating the annual rate of
compensation as not less than $300,000 per year.
3. REMAINING TERMS. The remaining terms of the Employment Agreement
shall remain in full force and effect.
IN WITNESS WHEREOF, each of the parties has executed this Amendment Number
One, in the case of the Company, by its duly authorized officer, as of the day
and year first above written.
/s/ Steven D. Tough
---------------------------------------
Employee
FOUNDATION HEALTH CORPORATION
By: /s/ Daniel D. Crowley
--------------------------------
Its: President and CEO
-----------------------------------
<PAGE>
EXHIBIT 10.109
STOCK AND NOTE PURCHASE AGREEMENT
by and between
FOUNDATION HEALTH CORPORATION, a Delaware corporation
as "Seller"
JONATHAN H. SCHEFF, M.D.
as "Selling Shareholder"
on the one hand,
and
FPA MEDICAL MANAGEMENT, INC., a Delaware corporation
as "FPA"
FPA MEDICAL MANAGEMENT OF CALIFORNIA, INC.,
a Delaware corporation
as "Purchasing Subsidiary"
and
FPA INDEPENDENT PRACTICE ASSOCIATION,
An Osteopathic Corporation
as "Purchasing Shareholder"
on the other hand
Dated as of June 28, 1996
<PAGE>
TABLE OF CONTENTS
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ARTICLE 1 DEFINITIONS 2
1.1 Defined Terms 2
1.2 Other Defined Terms 4
ARTICLE 2 PURCHASE AND SALE OF FHMS SHARES AND NOTES 5
2.1 Description of FHMS Shares and Notes 5
2.2 Sale of FHMS Shares by Seller 6
2.3 FHMS Share Purchase Price 6
2.4 Sale of FHMS Indebtedness by Seller 6
2.5 FHMS Indebtedness Purchase Price 6
2.6 Transfer Taxes and Fees 7
ARTICLE 3 APPOINTMENT OF DESIGNEE - SALE AND PURCHASE OF HOLDING COMPANY
SHARES AND NOTES 7
3.1 Appointment of Purchasing Shareholder as Designee 7
3.2 Description of Shares and Notes 7
3.3 Exercise of Option 7
3.4 Sale of Holding Company Indebtedness by Seller 7
3.5 Holding Company Indebtedness Purchase Price 7
ARTICLE 4 CLOSING 8
4.1 Closing 8
4.2 Conveyances at Closing 8
ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF SELLER 9
5.1 Organization 9
5.2 Authorization 9
5.3 No Material Adverse Change 9
5.4 Leased Real Property 9
5.5 Contracts and Commitments 9
5.6 Permits and Governmental Filings 10
5.7 No Conflict or Violation 10
5.8 Financial Statements 11
5.9 Litigation 11
5.10 Compensation 11
5.11 Compliance with Laws 11
5.12 Employee Benefits Matters 11
5.13 Insurance 13
5.14 No Undisclosed Liabilities. 13
5.15 Capital Structure 13
5.16 Real Property 14
5.17 Taxes 14
5.18 Proprietary Rights 14
5.19 Subsidiaries 14
5.20 Accounts Receivable 14
5.21 Brokers 14
5.22 Certain Real Estate and Legal Matters 14
</TABLE>
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ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF FPA AND PURCHASING
SUBSIDIARY 17
6.1 Organization of FPA and Purchasing Subsidiary 18
6.2 Authorization 18
6.3 No Conflict or Violation 18
6.4 Permits and Governmental Filings 18
6.5 Financial Statements 18
6.6 SEC Documents 19
6.7 No Material Adverse Change 19
6.8 Compliance with Laws 19
6.9 Litigation 19
6.10 No Undisclosed Liabilities 19
6.11 Capital Structure 19
ARTICLE 7 COVENANTS OF PARTIES HERETO 20
7.1 Further Assurances 20
7.2 No Solicitation 20
7.3 Inspections 20
7.4 Conduct of Business 20
7.5 Employee Matters 21
7.6 FPA's Covenant Not to Compete 22
7.7 Purchase of Indebtedness;Post-Closing Adjustment 24
7.8 Preparation of the Proxy Statement 24
7.9 Stockholders Meeting 24
7.10 Agreement to Vote Shares 24
7.11 Surgery Center Referrals 25
7.12 Disease State Management 25
7.13 Real Estate Matters 25
7.14 Software Licenses 26
7.15 Guaranty Payments 26
ARTICLE 8 CONDITIONS TO SELLER'S AND SELLING SHAREHOLDER'S OBLIGATIONS 26
8.1 Representations, Warranties and Covenants 26
8.2 No Proceedings, Litigation or Laws 26
8.3 Opinion of Counsel 26
8.4 Certificates and Corporate Documents 26
8.5 Registration Rights Agreement 26
8.6 Guaranties 26
8.7 Intentionally Deleted 27
8.8 Intentionally Deleted 27
8.9 Master Lease Assignment 27
8.10 Professional Group Provider Agreements 27
8.11 Purchase Price. 27
8.12 HSR Act 27
8.13 Governmental Approvals 27
8.14 Related Agreements 27
8.15 Consents 27
8.16 No Material Adverse Changes 27
8.17 Transition Agreement. 27
8.18 Releases. 27
8.19 Pledge Agreements. 28
8.20 Security Agreement. 28
8.21 Board Approval. 28
8.22 Tax Opinion. 28
</TABLE>
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ARTICLE 9 CONDITIONS TO FPA'S OBLIGATIONS 28
9.1 Representations, Warranties and Covenants 28
9.2 No Proceedings, Litigation or Laws 28
9.3 Opinion of Counsel 28
9.4 Certificates and Corporate Documents 29
9.5 Other Documents 29
9.6 HSR Act 29
9.7 Governmental Approvals 29
9.8 Intentionally deleted 29
9.9 Master Lease Assignment 29
9.10 Professional Group Provider Agreements 29
9.11 Related Agreements 29
9.12 Consents 29
9.13 Material Adverse Changes 29
9.14 Pre-Closing Transactions 29
9.15 Transition Agreement 30
9.16 Registration Rights Agreement 30
9.17 Notice of Designee 30
9.18 Board Approval. 30
9.19 Stockholder Approval 30
9.20 Voting Agreement 31
9.21 Physicians 31
9.22 Real Estate Matters 31
ARTICLE 10 ACTIONS BY SELLER AND FPA AFTER THE CLOSING 31
10.1 Books and Records 31
10.2 Taxes 31
10.3 338(h)(10) Election 31
10.4 Future Contractual Alliances 32
10.5 Certain Obligations Regarding Employees 32
10.6 Foundation Name 32
10.7 Reimbursement For Certain Tax Matters 33
10.8 Covenant 34
10.9 Solicitation of Employees 34
ARTICLE 11 SURVIVAL AND INDEMNIFICATION 35
11.1 Survival 35
11.2 No Other Representations 35
11.3 Indemnification by Seller 35
11.4 Limitations on Indemnity 35
11.5 Indemnification by FPA 36
11.6 Notice and Defense of Third-Party Claims 36
11.7 Limitation 36
11.8 Exclusivity 36
11.9 Right of Set-off 36
ARTICLE 12 MISCELLANEOUS 37
12.1 Termination 37
12.2 Assignment and No Third Party Beneficiaries 38
12.3 Notices 38
12.4 Choice of Law 39
12.5 Entire Agreement; Amendments and Waivers 39
</TABLE>
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12.6 Counterparts 39
12.7 Expenses 39
12.8 Invalidity 39
12.9 Publicity 39
12.10 Schedules 40
</TABLE>
<PAGE>
This Stock and Note Purchase Agreement, dated as of June 28, 1996 (the
"AGREEMENT") is made by and between FPA MEDICAL MANAGEMENT, INC., a Delaware
corporation ("FPA"), FPA MEDICAL MANAGEMENT OF CALIFORNIA, INC., a Delaware
corporation and a wholly-owned subsidiary of FPA ("PURCHASING SUBSIDIARY"), FPA
INDEPENDENT PRACTICE ASSOCIATION, An Osteopathic Corporation ("PURCHASING
SHAREHOLDER"), JONATHAN H. SCHEFF, M.D., an individual ("SELLING SHAREHOLDER")
and FOUNDATION HEALTH CORPORATION, a Delaware corporation ("SELLER").
W I T N E S S E T H:
WHEREAS, Seller owns all of the issued and outstanding shares of capital
stock of Foundation Health Medical Services, a California corporation, doing
business in Arizona as TDMC Medical Services Corporation ("FHMS");
WHEREAS, FHMS is engaged in the business of providing facilities
management, non-physician healthcare professionals and other administrative and
management services to Holding Company (as defined below) and its subsidiaries
("FHMS'S BUSINESS");
WHEREAS, FPA desires to buy from Seller and Seller desires to sell to FPA,
all of the outstanding capital stock of FHMS, on the terms and conditions set
forth in this Agreement;
WHEREAS, Selling Shareholder owns all of the issued and outstanding shares
of capital stock of FHMG/TDMC Medical Group, a California Professional
Corporation ("HOLDING COMPANY");
WHEREAS, Holding Company is engaged in the business of holding the stock of
Foundation Health Medical Group, Inc., a California Professional Corporation
("FHMG") and Thomas Davis Medical Centers, P.C., an Arizona Professional
Corporation ("TDMC"), its professional corporation subsidiaries and providing
medical services through such subsidiaries' respective Practitioners (as defined
below) ("HOLDING COMPANY'S BUSINESS");
WHEREAS, Seller has the right, pursuant to that certain Share Ownership
Agreement (the "SHARE OWNERSHIP AGREEMENT"), dated as of June 27, 1996, to name
a designee (the "DESIGNEE") who will have the option (the "OPTION") to purchase
all of the outstanding shares of capital stock of Holding Company;
WHEREAS, Purchasing Shareholder desires to be named the Designee by Seller
and Seller desires to name Purchasing Shareholder the Designee;
WHEREAS, Purchasing Shareholder desires to buy from Selling Shareholder
pursuant to the Option and Selling Shareholder desires to sell to Purchasing
Shareholder pursuant to the Option, all of the outstanding capital stock of
Holding Company, on the terms and conditions set forth in this Agreement and the
Share Ownership Agreement;
WHEREAS, Seller owns the FHMS Indebtedness and the Holding Company
Indebtedness (both as defined below);
WHEREAS, Purchasing Subsidiary desires to purchase the FHMS Indebtedness
and the Holding Company Indebtedness; and
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein and for other good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the parties hereto agree as follows:
<PAGE>
ARTICLE 1
DEFINITIONS
1.1 DEFINED TERMS. As used herein, the terms below shall have the
following meanings.
"AFFILIATE" shall have the meaning set forth in the Securities Exchange Act
of 1934, as amended, and the rules and regulations thereunder. When used in
relation to FPA or Purchasing Subsidiary, "Affiliate" shall include Purchasing
Shareholder.
"BUSINESSES" shall mean FHMS's Business and Holding Company's Business,
collectively.
"FPA FINANCIAL STATEMENTS" shall mean (i) the audited consolidated balance
sheet of FPA dated as of December 31, 1995 and the related consolidated
statement of operations, stockholders' equity and cash flow for the fiscal year
then ended and (ii) the unaudited consolidated balance sheet of FPA dated as of
March 31, 1996, and the related consolidated statement of operations,
stockholders' equity and cash flow for the three-month period then ended.
"CARE CENTERS" shall mean the health care centers and other facilities
operated by Seller prior to the Closing which are listed on SCHEDULE 1.1(a).
"CODE" shall mean the Internal Revenue Code of 1986, as amended, and the
rules and regulations thereunder.
"CONFIDENTIALITY AGREEMENT" shall mean the letter agreement regarding
confidentiality dated June 4, 1996 between Seller and FPA.
"CONTRACT" shall mean any agreement, contract, lease, note, purchase order,
mortgage, indenture, security agreement, license, instrument or other contract
or commitment, whether oral or written.
"DISCLOSURE SCHEDULE" shall mean, collectively, the schedules attached
hereto which set forth the exceptions to the representations and warranties
contained in Articles 5 and 6 hereof and certain other information called for by
this Agreement. The Disclosure Schedule shall be prepared so as to make clear
the party hereto or the Affiliate of a party hereto to which the matters or
items listed thereon relate.
"ENCUMBRANCE" shall mean any claim, lien, pledge, option, charge, easement,
security interest, deed of trust, mortgage, right-of-way, encroachment, building
or use restriction, encumbrance or other right of third parties, whether
voluntarily incurred or arising by operation of law, and includes any existing
agreement to give any of the foregoing in the future, and any contingent sale or
other title retention agreement or lease in the nature thereof.
"EXPIRING CONTRACT" shall mean any Contract which will expire, by its
terms, on or before the Closing Date.
"FAMILY AND SENIOR CARE, INC." shall mean FPA's affiliate which has filed
an application for licensure as a limited licensed health care service plan
under the Knox-Keene Health Care Services Plan Act of 1975, as amended.
"FHCA" shall mean those Affiliates of Seller which offer benefit programs
to commercial groups, Governmental Authorities, individual members or other
sponsors of health care benefit plans and which are a party to a Professional
Group Provider Agreement.
"FHMS FINANCIAL STATEMENTS" shall mean the unaudited balance sheet of FHMS
dated as of March 31, 1996, attached as SCHEDULE 1.1(b) hereto.
"FINANCIAL STATEMENTS" shall mean the Holding Company Financial Statements
and the FHMS Financial Statements, collectively.
2
<PAGE>
"FINANCIAL STATEMENT DATE" shall mean March 31, 1996.
"GAAP" shall mean U.S. generally accepted accounting principles set forth
in the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity or other practices and procedures as may be
approved by a significant segment of the accounting profession, which are
applicable to the circumstances as of the date of determination.
"GOVERNMENTAL AUTHORITY" shall mean any court, governmental agency,
administrative authority or body, arbitrator or arbitration panel of the United
States or any state, county, city or other political subdivision thereof.
"HOLDING COMPANY FINANCIAL STATEMENTS" shall mean the respective unaudited
balance sheets of FHMG and TDMC dated as of March 31, 1996, attached as
SCHEDULE 1.1(b) hereto.
"HSR ACT" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, and the rules and regulations promulgated thereunder.
"INCLUDING" or to "INCLUDE" any item shall mean containing or to contain
such item as part of a whole, without any implied exclusion of other items.
"INTERGROUP OF ARIZONA" shall mean Intergroup Prepaid Health Services of
Arizona, Inc., doing business as Intergroup of Arizona, an Arizona corporation.
"KNOWLEDGE" of a Person shall mean the actual knowledge of the Person if
such Person is an individual, or if such Person is a corporation, shall mean the
actual knowledge of the member or members of senior management of such Person
(in the case of Seller, Daniel D. Crowley, Kirk A. Benson, Michael P. White, and
Jerry Newman and with respect to SECTION 5.22 only, Joe Erway and, in the case
of FPA, Seth M. Flam, Steven Lash, James A. Lebovitz, and Sol Lizerbram) with
primary responsibility for the matters referred to, in both cases after
reasonable inquiry.
"LAWS" shall mean all laws, statutes, ordinances, regulations, rules,
codes, orders, consent decrees, settlement agreements, and governmental
requirements (including any ruling or requirement having the effect of law) of
any federal, state or local government and any other governmental department or
agency, and any judgment, decision, decree, writ, injunction, award, ruling or
order of any Governmental Authority with jurisdiction.
"LEASED REAL PROPERTY" shall mean all real property leased or subleased by
Seller, Holding Company or any of Holding Company's subsidiaries and used in the
Businesses.
"LIABILITY" means any liability, including any indebtedness, any guaranty
of indebtedness or obligations of any other Person, and any liability for Taxes.
"MANAGEMENT AGREEMENT" shall mean, collectively (i) that certain Sublease
and Management Agreement between FHMS and FHMG, dated as of May 12, 1993, as
amended and (ii) that certain Sublease and Management Agreement between FHMS and
TDMC, dated as of November 1, 1994, as amended.
"MATERIAL ADVERSE EFFECT" or "MATERIAL ADVERSE CHANGE" shall mean, with
respect to either FHMS's Business, Holding Company's Business, FPA or Purchasing
Subsidiary, respectively, any material adverse effect on or change in their
respective condition (financial or other), business or results of operations, or
on the ability of FPA, Purchasing Subsidiary, Purchasing Shareholder, Seller or
Selling Shareholder to consummate the transactions contemplated hereby and by
the Related Agreements.
"ORDINARY COURSE" shall mean the ordinary course of business consistent
with prior practice.
3
<PAGE>
"PERMITS" shall mean all licenses, permits, franchises, approvals,
authorizations, accreditations, provider numbers, consents or orders of, or
filings with, any Governmental Authority, necessary for the conduct of, or
relating to the operation of, either of the Businesses.
"PERSON" shall mean an individual, a partnership, a corporation, a trust, a
limited liability company or partnership, an unincorporated organization, a
Governmental Authority or any other entity.
"PROFESSIONAL GROUP PROVIDER AGREEMENTS" shall mean, collectively, the
Professional Group Provider Agreement, in substantially the form of Exhibit B
hereto, to be entered into by and between FHCA and FHMG at the Closing and the
Professional Group Provider Agreement, in substantially the form of Exhibit C
hereto, to be entered into by and between FHCA and TDMC at the Closing.
"PRACTITIONER" shall mean any licensed physician and surgeon, dentist,
clinical psychologist, podiatrist, optometrist or paraprofessional employed by
Holding Company or any of its subsidiaries, who provides professional or
paraprofessional services in connection with Holding Company's Business.
"RELATED AGREEMENTS" shall mean all agreements set forth on SCHEDULE 8.14.
"REPRESENTATIVE" shall mean any officer, director, principal, attorney,
agent, employee or other representative.
"TAX" shall mean any federal, state, local, foreign or other tax, levy,
impost, fee, assessment or other government charge, including income, estimated
income, business occupation, property, payroll, personal property, sales,
transfer, use, employment, commercial rent, occupancy, franchise or withholding
taxes, and any premium, including interest, penalties and additions in
connection therewith.
1.2 OTHER DEFINED TERMS. The following terms shall have the meanings
given in the Sections set forth below:
Term Section
- ----------------------------------------------------------
Accounts 7.5(c)(ii)
Actions 5.9
Agent 3.1
Bridge Note 2.3(a)(iii)
Cash Payment 2.3(a)(i)
Closing 4.1
Closing Date 4.1
Closing Price 2.3(a)(ii)
Designee Recitals
Designee Consideration 3.1
Employee 5.10
Employee Benefit Plans 5.12(b)
Environmental Laws 5.22
ERISA 5.12(a)(i)
Exclusivity Period 7.2
FHMG Recitals
FHMG Agreement 5.6(c)
FHMS Recitals
FHMS Indebtedness 2.1
FHMS Indebtedness Purchase Price 2.5
FHMS Share Purchase Price 2.3(a)
FHMS Shares 2.1
4
<PAGE>
FHMS's Business Recitals
FPA Common 2.3(a)(ii)
FPA SEC Documents 6.6
FPA's Savings Plans 7.5(c)(ii)
Foundation Name 10.6
Frozen 401(k) Plan 7.5(d)
Hazardous Materials 5.22
Holding Company Recitals
Holding Company Indebtedness 3.2
Holding Company Indebtedness Purchase Price 3.5
Holding Company Shares 3.2
Holding Company's Business Recitals
Indemnitee 11.4
Indemnified Person 11.6
Indemnifying Person 11.6
Insurance Policies 5.13
Leases 5.22
Losses 11.3
Master Lease Assignment 8.9
Material Contracts 5.5
Nasdaq NMS 2.3(a)(ii)
Non-Compete Period 7.6(a)
Note Consideration 2.3(a)(iv)
Option Recitals
Owner 5.22
Pledge Agreement 8.19
Proxy Statement 7.8
Registration Rights Agreement 8.5
Rent Roll 5.22
Retained Employees 7.5(a)
SEC 6.6
Secured Obligations 8.19
Seller's 401(k) Plan 7.5(c)(i)
Share Consideration 2.3(a)(ii)
Share Ownership Agreement Recitals
Stockholder's Meeting 7.9
Transition Agreement 8.17
Transition Period 10.6
TDMC Recitals
ARTICLE 2
PURCHASE AND SALE OF FHMS SHARES AND NOTES
2.1 DESCRIPTION OF FHMS SHARES AND NOTES. The shares of FHMS to be sold
pursuant hereto (the "FHMS SHARES") shall consist of all of the issued and
outstanding capital stock of FHMS and are described in SCHEDULE 2.1. The
promissory notes and other indebtedness of FHMS to be sold pursuant hereto shall
consist of the line items "Inter-Company Payable," "Notes Payable, FHC" and
"Claims Payable" (the "FHMS INDEBTEDNESS") in the amounts shown on FHMS's
balance sheet as of the Closing Date. For reference purposes only, the
aggregate amount of such items, when combined with the aggregate amount of the
Holding Company Indebtedness is estimated to be Seventy Nine Million Five
Hundred Thousand Dollars ($79,500,000) as of June 30, 1996.
5
<PAGE>
2.2 SALE OF FHMS SHARES BY SELLER. On the basis of the representations
and warranties of the parties and subject to the terms and conditions
hereinafter set forth, at the Closing, Seller shall sell, assign, transfer and
deliver the FHMS Shares to Purchasing Subsidiary and Purchasing Subsidiary shall
purchase, make payment for and accept the FHMS Shares from Seller at the price
and in the manner set forth in this Article 2.
2.3 FHMS SHARE PURCHASE PRICE.
(a) COMPONENTS OF FHMS SHARE PURCHASE PRICE. Upon the terms and
subject to the conditions set forth herein, FPA shall deliver to Seller at
the Closing in exchange for the sale, transfer, assignment, conveyance and
delivery of the FHMS Shares to Purchasing Subsidiary, the following
(collectively, the "FHMS SHARE PURCHASE PRICE"):
(i) by wire transfer of immediately available funds to an
account designated by Seller, cash in the amount of Two Million U.S.
Dollars ($2,000,000) (the "CASH PAYMENT");
(ii) a number of shares (the "SHARE CONSIDERATION") of FPA's
Common Stock ("FPA COMMON") equal to (A) (x) Seventy Five Million U.S.
Dollars ($75,000,000) minus (y) the amount of any cash paid in lieu of
FPA Common by FPA to Seller and in the same manner as the Cash Payment
divided by (B) the Closing Price. The Closing Price shall be the
average of the per share closing prices of FPA Common during the ten
(10) trading days ending on the second trading day prior to Closing as
reported on the National Market System on Nasdaq (the "NASDAQ NMS").
In the event that the Closing Price is less than $13.60 (the "Walk-
Away Price"), then FPA may in its sole discretion terminate this
Agreement by giving notice of termination to Seller no later than one
day prior to Closing, PROVIDED, HOWEVER, that notwithstanding any such
notice, Seller may cause the Closing to occur if it gives notice to
FPA no later than the day prior to Closing that it will accept a
number of shares of FPA Common equal to (A) $75,000,000 divided by (B)
the Walk-Away Price, as the Share Consideration.
(iii) a Promissory Note (the "BRIDGE NOTE"), issued by FPA, in
the principal amount of Twenty Two Million Dollars, ($22,000,000)
containing the terms set forth in Exhibit D hereto and otherwise in
form and substance reasonably satisfactory to the parties hereto;
(iv) a Promissory Note (the "NOTE CONSIDERATION"), issued by
Purchasing Subsidiary, in the principal amount of Twelve Million U.S.
Dollars ($12,000,000) , which note will be consolidated, at the
Closing, into the Consolidated Note.
(b) No fractional shares of FPA Common shall be issued, but in lieu
thereof Seller shall receive from Purchasing Subsidiary an amount of cash
(rounded up to the nearest whole cent) equal to the product of (i) the
fraction of a share of FPA Common to which Seller would otherwise have been
entitled times (ii) Closing Price.
2.4 SALE OF FHMS INDEBTEDNESS BY SELLER. On the basis of the
representations and warranties of the parties and subject to the terms and
conditions hereinafter set forth, at the Closing, Seller shall sell, assign,
transfer and deliver the FHMS Indebtedness to Purchasing Subsidiary, without
recourse, and Purchasing Subsidiary shall purchase, make payment for and accept
the FHMS Indebtedness from Seller at the price and in the manner set forth in
this Article 2. Neither FPA nor Purchasing Subsidiary shall have any recourse
against Seller as a result of any default by FHMS under the FHMS Indebtedness,
including any default resulting from FHMS's failure to make any payment of
principal or interest or any other payment under the FHMS Indebtedness when due.
2.5 FHMS INDEBTEDNESS PURCHASE PRICE. Upon the terms and subject to the
conditions set forth herein, Purchasing Subsidiary shall deliver to Seller at
the Closing in exchange for the sale, transfer, assignment, conveyance and
delivery of the FHMS Indebtedness, without recourse, a promissory note (the
"FHMS INDEBTEDNESS PURCHASE PRICE") in a principal amount equal to the amount
of FHMS Indebtedness shown on FHMS's pro forma balance sheet as
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of the Closing Date (subject to adjustment following the Closing Audit), which
promissory note will be consolidated, at the Closing, into the Consolidated
Note.
2.6 TRANSFER TAXES AND FEES. Seller shall be responsible for any
applicable documentary, use, filing, sales, transfer and other taxes or fees due
or payable as a result of the conveyance, assignment, transfer or delivery of
the FHMS Shares by Seller.
ARTICLE 3
APPOINTMENT OF DESIGNEE - SALE AND PURCHASE OF HOLDING COMPANY SHARES AND NOTES
3.1 APPOINTMENT OF PURCHASING SHAREHOLDER AS DESIGNEE. On the basis of
the representations and warranties of the parties and subject to the terms and
conditions hereinafter set forth and in consideration for the sum of $15,000
(the "DESIGNEE CONSIDERATION") payable to Seller by or on behalf of Purchasing
Shareholder by wire transfer at the Closing, at the Closing, Seller shall
appoint Purchasing Shareholder Designee under the Share Ownership Agreement and
shall so notify Selling Shareholder and the agent (the "AGENT") under the Share
Ownership Agreement.
3.2 DESCRIPTION OF SHARES AND NOTES. The shares of Holding Company to be
sold pursuant to the Option (the "HOLDING COMPANY SHARES") shall consist of all
of the issued and outstanding capital stock of Holding Company and are
described in SCHEDULE 3.2. The promissory notes and other indebtedness of
Holding Company and its subsidiaries to be sold pursuant hereto shall consist
of the line items "Inter-Company Payable," "Notes Payable, FHC" and "Claims
Payable" (the "HOLDING COMPANY INDEBTEDNESS") in the amounts shown on Holding
Company's consolidated balance sheet as of the Closing Date. For reference
purposes only, the aggregate amount of such items, when combined with the
aggregate amount of the FHMS Indebtedness is estimated to be Seventy Nine
Million Five Hundred Thousand Dollars ($79,500,000) as of June 30, 1996.
3.3 EXERCISE OF OPTION. On the basis of the representations and
warranties of the parties and subject to the terms and conditions hereinafter
set forth, at the Closing, Purchasing Shareholder shall exercise the Option and
Selling Shareholder shall sell, assign, transfer and deliver the Holding Company
Shares to Purchasing Shareholder and Purchasing Shareholder shall purchase, make
payment for and accept the Holding Company Shares from Selling Shareholder at
the price and in the manner set forth in the Share Ownership Agreement.
3.4 SALE OF HOLDING COMPANY INDEBTEDNESS BY SELLER. On the basis of the
representations and warranties of the parties and subject to the terms and
conditions hereinafter set forth, at the Closing, Seller shall sell, assign,
transfer and deliver the Holding Company Indebtedness to Purchasing Subsidiary,
without recourse, and Purchasing Subsidiary shall purchase, make payment for and
accept the Holding Company Indebtedness from Seller at the price and in the
manner set forth in this Article 3. Neither FPA nor Purchasing Subsidiary shall
have any recourse against Seller as a result of any default by Holding Company
or any of its subsidiaries under the Holding Company Indebtedness, including any
default resulting from a failure to make any payment of principal or interest
under the Holding Company Indebtedness when due.
3.5 HOLDING COMPANY INDEBTEDNESS PURCHASE PRICE. Upon the terms and
subject to the conditions set forth herein, Purchasing Subsidiary shall deliver
to Seller at the Closing in exchange for the sale, transfer, assignment,
conveyance and delivery of the Holding Company Indebtedness, without recourse, a
promissory note (the "HOLDING COMPANY INDEBTEDNESS PURCHASE PRICE") in a
principal amount equal to the amount of the Holding Company Indebtedness shown
on Holding Company's pro forma consolidated balance sheet as of the Closing Date
(subject to adjustment following the Closing Audit), which promissory note will
be consolidated, at the Closing, into the Consolidated Note.
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ARTICLE 4
CLOSING
4.1 CLOSING. The Closing of the transactions contemplated herein (the
"CLOSING") shall be held at 9:00 a.m. local time at the San Francisco office of
Pillsbury Madison & Sutro on the third business day after the conditions to
closing set forth in Articles 8 and 9 hereof are satisfied or waived (the
"CLOSING DATE"), unless the parties hereto otherwise agree.
4.2 CONVEYANCES AT CLOSING.
(a) CASH PAYMENT. At the Closing, FPA shall deliver the Cash Payment
to Seller in accordance with SECTION 2.3(a)(i).
(b) SHARE CONSIDERATION. At the Closing, FPA shall issue to Seller a
stock certificate representing the Share Consideration, in accordance with
SECTION 2.3(a)(ii) together with any cash payable in lieu of fractional
shares pursuant to SECTION 2.3(b).
(c) BRIDGE NOTE. At the Closing, FPA shall execute and deliver to
Seller the Bridge Note.
(d) CONSOLIDATED NOTE. At the Closing, Purchasing Subsidiary shall
execute and deliver to Seller a promissory note (the "Consolidated Note")
in aggregate principal amount equal to the sum of the FHMS Indebtedness
Purchase Price, the Holding Company Indebtedness Purchase Price (both of
which amounts are subject to adjustment following the Closing Audit) and
the Note Consideration, containing the terms set forth in the term sheet
attached as Exhibit E hereto and otherwise in form and substance reasonably
satisfactory to the parties hereto.
(e) OPTION EXERCISE. At the Closing, Purchasing Shareholder shall
exercise the Option and deliver or cause to be delivered to the Agent under
the Share Ownership Agreement, the price of such Option as set forth
therein.
(f) HOLDING COMPANY SHARE CERTIFICATE. At the Closing and upon the
exercise of the Option, the Agent under the Share Ownership Agreement
shall deliver to Purchasing Shareholder a stock certificate representing
the Holding Company Shares, accompanied by an appropriate stock assignment,
which stock certificate shall be immediately delivered to Seller, together
with an appropriate stock assignment, by Purchasing Shareholder pursuant to
the Pledge Agreement. The Holding Company Shares shall be delivered free
and clear of all Encumbrances, other than (i) Encumbrances created by the
registration requirements of the Securities Act of 1933, as amended and
(ii) Encumbrances contemplated hereby or by the Related Agreements.
(g) FHMS SHARE CERTIFICATE. At the Closing, Seller shall deliver to
Purchasing Subsidiary, a stock certificate representing the FHMS Shares,
accompanied by an appropriate stock assignment, which stock certificate
shall be immediately redelivered to Seller, together with an appropriate
stock assignment, by Purchasing Subsidiary pursuant to the Pledge
Agreement. The FHMS Shares shall be delivered free and clear of all
Encumbrances, other than (i) Encumbrances created by the registration
requirements of the Securities Act of 1933, as amended and (ii)
Encumbrances contemplated hereby or by the Related Agreements.
(h) CERTIFICATES; OPINIONS; CLOSING CONDITIONS. FPA, Purchasing
Shareholder, Seller and Selling Shareholder shall deliver the agreements,
certificates, opinions of counsel and other items described in ARTICLES 8
and 9.
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ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller hereby represents and warrants to FPA as follows:
5.1 ORGANIZATION. FHMS is a corporation and each of Holding Company and
each of its subsidiaries is a professional corporation, duly organized, validly
existing and in good standing under the laws of its respective state of
incorporation and is duly qualified and in good standing as a foreign
corporation in any state other than its state of incorporation where its
business requires that it be so qualified, with all requisite power and
authority to own, lease and operate its respective properties and to carry on
its respective Business as now being conducted.
5.2 AUTHORIZATION. Each of Seller and Selling Shareholder has full power
and authority to enter into and perform this Agreement, the Related Agreements
and the other agreements and documents contemplated by this Agreement to which
it is a party and to carry out the transactions contemplated by this Agreement
and such other agreements. Each of this Agreement and the Share Ownership
Agreement has been duly and validly executed and delivered by each of Seller and
Selling Shareholder, and constitutes and upon the execution and delivery by each
of Seller and Selling Shareholder of the Related Agreements to which it is a
party such Related Agreements will constitute, the legally valid and binding
obligation of each of them, enforceable in accordance with its terms, except as
such enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium and other similar laws and equitable principles relating to or
limiting creditors' rights generally and general principles of equity.
5.3 NO MATERIAL ADVERSE CHANGE. Except as listed on SCHEDULE 5.3, since
the Financial Statement Date, there has not been any Material Adverse Change in
either of the Businesses.
5.4 LEASED REAL PROPERTY. SCHEDULE 5.4 contains a complete and accurate
list of all Leased Real Property. With respect to such Leased Real Property,
each of FHMS, Holding Company and Holding Company's subsidiaries has in all
material respects performed all the respective obligations required to be
performed by it with respect to the Leased Real Property as lessee under the
leases of such property. Notwithstanding the foregoing, this representation
shall not be deemed to be untrue in any material respect as of the Closing Date
solely because any Expiring Contract has expired in accordance with its terms or
has been renegotiated by FHMS, Holding Company or any of Holding Company's
subsidiaries in consultation with FPA or in accordance with SECTION 9.14 (PRE-
CLOSING TRANSACTIONS).
5.5 CONTRACTS AND COMMITMENTS. (a) SCHEDULE 5.5 contains a true and
complete list of each of the following Contracts (the "MATERIAL CONTRACTS") to
which FHMS, Holding Company, or any of Holding Company's subsidiaries is a
party:
(i) all Contracts (excluding Employee Benefit Plans and
Contracts which can be terminated at will without subjecting FHMS,
Holding Company or any of Holding Company's Subsidiaries to cost or
penalty) providing for a commitment for employment or consultation
services for a specified or unspecified term to, or otherwise relating
to employment or the termination of employment of, any Employee;
(ii) all Contracts with any Person containing any provision or
covenant prohibiting or materially limiting the ability of FHMS,
Holding Company or any of Holding Company's subsidiaries to engage in
any business activity or compete with any Person in connection with
their respective Businesses or prohibiting or materially limiting the
ability of any Person to compete with FHMS, Holding Company or any of
Holding Company's subsidiaries in connection with either of the
Businesses;
(iii) all material partnership, joint venture, shareholders' or
other similar Contracts with any Person in connection with either of
the Businesses;
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(iv) all Contracts relating to the future disposition or
acquisition of any assets material to either of the Businesses, other
than dispositions or acquisitions in the Ordinary Course of business;
(v) all other Contracts (other than Employee Benefit Plans, the
Real Property Leases and Insurance Policies) with respect to either of
the Businesses that (A) involve the payment or potential payment,
pursuant to the terms of any such Contract, by or to FHMS, Holding
Company or any of Holding Company's subsidiaries of more than $100,000
annually and (B) cannot be terminated within sixty (60) days after
giving notice of termination without resulting in any material cost or
penalty to FHMS, Holding Company or any of Holding Company's
subsidiaries.
(b) There is no default or event that with notice or lapse of time,
or both, would constitute a default by FHMS, Holding Company or any of
Holding Company's subsidiaries under any of the Material Contracts to which
it is a party. To Seller's knowledge, neither FHMS, Holding Company nor
any of Holding Company's subsidiaries has received written notice of a
default under any Material Contract by any other party thereto. Each of
the Material Contracts is enforceable against FHMS, Holding Company or one
of Holding Company's subsidiaries, as the case may be, in accordance with
its terms, except as such enforceability may be limited by general
principles of equity or by bankruptcy, insolvency or other similar laws
relating to rights of creditors. Neither FHMS, Holding Company nor any of
Holding Company's subsidiaries has received notice that any party to any of
the Material Contracts intends to cancel or terminate any of the Material
Contracts or to exercise or not exercise any options under any of the
Material Contracts. Notwithstanding the foregoing, this representation
shall not be deemed to be untrue in any material respect as of the Closing
Date solely because any Expiring Contract has expired in accordance with
its terms or has been renegotiated by FHMS, Holding Company or any of
Holding Company's subsidiaries in consultation with FPA or in accordance
with SECTION 9.14 (PRE-CLOSING TRANSACTIONS).
5.6 PERMITS AND GOVERNMENTAL FILINGS.
(a) PERMITS. To Seller's knowledge, SCHEDULE 5.6(a) sets forth a
complete and accurate list of all material Permits which constitute all
material Permits required to conduct the Businesses as now being conducted.
No notice or warning from any authority with respect to the suspension,
revocation, or termination of any material Permit has been received by
Seller, FHMS, Holding Company or Selling Shareholder. Seller has caused
FHMS to deliver or Selling Shareholder has caused Holding Company to
deliver to FPA true, correct and complete copies of all Permits requested
by FPA.
(b) FILINGS. Except as disclosed on SCHEDULE 5.6(b) hereto, no
notice to, declaration, filing or registration with, or Permit from, any
Governmental Authority is required to be made or obtained by FHMS, Holding
Company or any of Holding Company's subsidiaries in connection with the
execution, delivery or performance of this Agreement and the consummation
of the transactions contemplated by this Agreement and the Related
Agreements, except for any such notices, declarations, filings,
registrations or Permits the failure of which to be obtained would not
reasonably be expected to have a Material Adverse Effect on either of the
Businesses.
(c) CERTAIN APPROVALS. FHCA has been consulted regarding the current
medical director of FHMG in accordance with Section 2.1(h) of the
Professional Provider Agreement (the "FHMG AGREEMENT") currently in effect
between FHCA and FHMG. FHCA acknowledges receipt of copies of the written
agreements pursuant to which Provider Risk Services (as defined in the FHMG
Agreement) are rendered in accordance with Section 2.8 of the FHMG
Agreement.
5.7 NO CONFLICT OR VIOLATION. None of the execution, delivery and
performance of this Agreement, the consummation of the transactions contemplated
hereby, and the compliance by Seller and Selling Shareholder with any of the
provisions hereof, will (i) violate or conflict with any provision of the
Articles or Certificate of Incorporation or Bylaws of FHMS or Holding Company or
any of Holding Company's subsidiaries, (ii) violate, conflict with, or result in
a
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breach of any provision of, or constitute a default (or an event which, with
notice or lapse of time or both, would constitute a default) under, or result in
the termination of, or accelerate the performance required by, or result in a
right of termination or acceleration under, or result in the creation of any
Encumbrance upon any material asset of FHMS, Holding Company or any of Holding
Company's subsidiaries under, any of the terms, conditions or provisions of any
Contract to which FHMS, Holding Company or any of Holding Company's subsidiaries
is a party except for violations, conflicts, breaches, defaults, terminations,
accelerations, rights of termination or acceleration, or Encumbrances that would
not reasonably be expected to have a Material Adverse Effect on either of the
Businesses or (iii) to Seller's knowledge, violate any Laws the violation of
which would reasonably be expected to have a Material Adverse Effect on either
of the Businesses.
5.8 FINANCIAL STATEMENTS. The Financial Statements (i) are in accordance
with the books and records of FHMS, Holding Company and Holding Company's
subsidiaries, as appropriate, and (ii) fairly and accurately present the assets
and liabilities of the Businesses indicated therein as of the dates thereof.
5.9 LITIGATION. Except as disclosed on SCHEDULE 5.9, as of the date
hereof there are no suits, labor disputes or other litigation or proceedings
("ACTIONS") pending or, to Seller's knowledge, threatened in writing against
FHMS or Holding Company or any of Holding Company's subsidiaries, with respect
to their respective Businesses, other than Actions that would not reasonably be
expected to have a Material Adverse Effect on either of the Businesses.
5.10 COMPENSATION. SCHEDULE 5.10 contains a true and complete list of all
employees of FHMS, Holding Company or any of Holding Company's subsidiaries
(each, an "EMPLOYEE") specifying their names, job designations, dates of hire
and rates of compensation.
5.11 COMPLIANCE WITH LAWS. FHMS's Business is in compliance with all Laws
relating to FHMS's Business, except where the failure to comply would not
reasonably be expected to have a Material Adverse Effect on FHMS's Business and
Holding Company's Business is in compliance with all Laws relating to Holding
Company's Business, except where the failure to comply would not reasonably be
expected to have a Material Adverse Effect on Holding Company's Business.
5.12 EMPLOYEE BENEFITS MATTERS.
(a) Except as set forth on SCHEDULE 5.12, neither FHMS, Holding
Company nor any of Holding Company's subsidiaries is a party to and none
participates in or has any liability or contingent liability with respect
to:
(i) any "employment benefit plan" (as that term is defined in
Section 3(3) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"));
(ii) any retirement or deferred compensation plan, incentive
compensation plan, stock plan, unemployment compensation plan,
vacation pay, severance pay, bonus or benefit arrangement, insurance
or hospitalization program or any other fringe benefit arrangement for
any employee, director, consultant or agent, whether pursuant to
contract, arrangement, custom, informal understanding or otherwise,
which does not constitute an employee benefit plan; or
(iii) any employment agreement not terminable upon thirty (30)
days' or less written notice without further liability;
PROVIDED, HOWEVER, that nothing in this paragraph (a) shall require that
SCHEDULE 5.12 include any plans, arrangements or agreements unless either
(i) the plan, arrangement or agreement has been extended to persons because they
have performed or will perform services for FHMS, Holding Company or any of
Holding Company's subsidiaries or (ii) FPA may have any liability or contingent
liability with respect to such plan, arrangement or agreement as a result of the
execution of this Agreement or the transactions contemplated by this Agreement.
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(b) A true and correct copy of each of the plans, arrangements or
agreements listed on SCHEDULE 5.12 (the "EMPLOYEE BENEFIT PLANS") and all
contracts relating thereto or the funding thereof, each as in effect on the
date hereof, have been or will be made available to FPA by FHMS or Holding
Company, as appropriate on or before July 15, 1996.
(c) Except as set forth on SCHEDULE 5.12, none of the Employee
Benefit Plans is a multiemployer plan (as defined in Section 3(37) of
ERISA).
(d) Except as set forth on SCHEDULE 5.12, each Employee Benefit Plan
complies, in form and in operation in all material respects, with all
applicable requirements of any Laws, including, to the extent applicable,
Sections 401(a) and 501(a) of the Code, and, to Seller's knowledge, no
event has occurred which will or could cause any such Employee Benefit Plan
to fail to comply in all material respects with such requirements.
(e) Except as set forth on SCHEDULE 5.12, neither FHMS, Holding
Company nor any of Holding Company's subsidiaries has any liability or
contingent liability with respect to its respective Business to provide
medical, dental, life, accidental death and dismemberment, or long-term
disability benefits from its general assets (other than to pay insurance
premiums) and, with respect to each Employee Benefit Plan, all required
contributions including premium payments, have been paid.
(f) Except as set forth on SCHEDULE 5.12, neither FHMS, Holding
Company nor any of Holding Company's subsidiaries has any liability or
contingent liability, under any Employee Benefit Plan or otherwise, for any
post-retirement medical or life insurance benefits, other than statutory
liability for providing group health plan continuation coverage under
Part 6 of Title 1 of ERISA and Section 4980B of the Code.
(g) Except as set forth on SCHEDULE 5.12, with respect to any
Employee Benefit Plan with respect to which FPA is assuming liabilities
pursuant to SECTION 7.5 or from which assets and liabilities will be
transferred to an employee benefit plan of FPA (or its Affiliates):
(i) in the case of any such Employee Benefit Plan which is an
"employee pension benefit plan" (within the meaning of Section 3(2) of
ERISA), there have been no amendments thereto which are not the
subject of a favorable determination letter issued with respect
thereto by the IRS and no event has occurred which will or could give
rise to disqualification of any such plan under such Sections or to a
Tax under Section 511 of the Code;
(ii) there have been no "prohibited transactions" (as described
in Section 406 of ERISA or Section 4975 of the Code) with respect to
any such Employee Benefit Plan;
(iii) there have been no acts or omissions by FHMS, Holding
Company or their respective Affiliates with respect to such Employee
Benefit Plan which have given rise to or may give rise to fines,
penalties, Taxes or related charges under Section 502 of ERISA or
Chapters 43, 47 or 68 of the Code;
(iv) none of the payments contemplated under such Employee
Benefit Plan would, in the aggregate, constitute excess parachute
payments (as defined in Section 280G of the Code (without regard to
subsection (b)(4) thereof));
(v) there are no Actions (other than routine claims for
benefits) pending or to Seller's knowledge threatened in writing
involving any such Employee Benefit Plan or the assets thereof and no
facts exist which could give rise to any such Actions (other than
routine claims for benefits); and
(vi) with respect to any such Employee Benefit Plan which is
subject to Title IV of ERISA:
i. there has been no reportable event (as described in
Section 4043 of ERISA);
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ii. no steps have been taken to terminate any such plan;
iii. there has been no withdrawal (within the meaning of
Section 4063 of ERISA) of a "substantial employer" (as defined
in Section 4001(a)(2) of ERISA);
iv. no event or condition has occurred which might
constitute grounds under Section 4042 of ERISA for the
termination of or the appointment of a trustee to administer
any such plan; and
v. if each such plan were terminated immediately after the
Closing, there would be no unfunded liabilities with respect to
any such plan, its participants or beneficiaries or the Pension
Benefit Guaranty Corporation.
5.13 INSURANCE. SCHEDULE 5.13 lists all policies of fire, liability, life
and employee health, environmental, medical malpractice, workers' compensation
and other forms of insurance currently held and maintained by FHMS, Holding
Company, or any of Holding Company's subsidiaries (the "INSURANCE POLICIES").
Seller believes that such Insurance Policies are commercially reasonable in
amount and coverage. All of the Insurance Policies are in full force and
effect, all billed premiums with respect thereto covering all periods up to and
including the Closing Date have been paid or will have been paid on or prior to
the Closing Date and no written notice of cancellation or termination has been
received with respect to any such Policy, except for failures to pay or
cancelations or terminations which would not reasonably be expected to have a
Material Adverse Effect on FHMS's or Holdings Company's Business.
5.14 NO UNDISCLOSED LIABILITIES. Except as disclosed on SCHEDULE 5.14, or
elsewhere in the Disclosure Schedule, since the Financial Statement Date
(i) FHMS has not incurred any Liability material to FHMS's Business (ii) neither
Holding Company nor any subsidiary of Holding Company has incurred any Liability
material to Holding Company's Business, in each case other than in the Ordinary
Course.
5.15 CAPITAL STRUCTURE.
(a) The issued and outstanding FHMS Shares are held directly by Seller
in the amount set forth on SCHEDULE 2.1 hereto and represent all of the
outstanding capital stock of FHMS. The issued and outstanding Holding
Company Shares are held directly by Selling Shareholder in the amount set
forth on SCHEDULE 3.2 hereto and represent all of the outstanding capital
stock of Holding Company.
(b) All of the outstanding Holding Company Shares and FHMS Shares
(i) were issued in compliance with applicable federal and state securities
laws, (ii) are duly authorized, validly issued, fully paid and
nonassessable and not subject to preemptive rights created by statute, the
Articles of Incorporation or Bylaws of the respective issuer of such shares
or any agreement to which Seller, FHMS, Selling Shareholder or Holding
Company is bound and (iii) are not subject to any options, warrants or
other rights to purchase, agreements or other obligations to issue or other
rights to convert any obligations into shares of capital stock or ownership
interests in Holding Company or FHMS, respectively, except that all of the
Holding Company Shares are subject to the Option and except as set forth on
SCHEDULE 5.15. The Holding Company Shares are wholly owned by Selling
Shareholder free and clear of all Encumbrances except for the Option and as
set forth on SCHEDULE 5.15 and the FHMS Shares are wholly owned by Seller
free and clear of all Encumbrances except as set forth on SCHEDULE 5.15.
(c) Except as set forth on SCHEDULE 5.15, there are no voting trusts,
registration rights, proxies, shareholder agreements or other agreements or
understandings with respect to the Holding Company Shares or the FHMS
Shares.
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5.16 REAL PROPERTY. Neither Holding Company nor any of Holding Company's
subsidiaries owns any real property in fee. As of the Closing Date, FHMS will
not own any real property in fee.
5.17 TAXES. Each of FHMS and Holding Company has duly filed or caused to
be filed with the appropriate Governmental Authority all tax returns and reports
required to be filed (subject to permitted extensions or amendments applicable
to such filings) with respect to their respective Businesses at or prior to the
Closing Date for all periods up to and including the Closing Date and will
timely file subsequent to the Closing Date such tax returns as shall be due
thereafter for periods up to and including the Closing Date and Seller shall be
entitled to all the benefits, including any net operating losses, and be
responsible for all the obligations of, such tax returns (which returns are or
will be accurate and complete), and shall have paid all Taxes shown to have
become due pursuant to such tax returns and will continue to pay such Taxes for
periods ending on or before the Closing Date. FPA and Purchasing Shareholder
shall join and cause Holding Company and FHMS to join, Seller and Selling
Shareholder, as the case may be, in filing or amending any such tax returns, if
required, at no out-of-pocket expense to FPA and Purchasing Shareholder.
Neither FHMS, Holding Company nor any of Holding Company's subsidiaries is a
party to any pending action or proceeding, nor, to the knowledge of Seller, is
any such action or proceeding threatened in writing by any Governmental
Authority against FHMS, Holding Company or any of Holding Company's subsidiaries
for the assessment or collection of Taxes. Since the Financial Statement Date,
no liability for Taxes has been incurred by FHMS, Holding Company or any of
Holding Company's subsidiaries other than in the Ordinary Course of business.
There are no liens for Taxes except for liens for property taxes not yet
delinquent.
5.18 PROPRIETARY RIGHTS. Each of Holding Company and Holding Company's
Subsidiaries owns or licenses all trademarks, trade or fictitious names,
copyrights and proprietary know-how necessary or material to their respective
Businesses as currently conducted.
5.19 SUBSIDIARIES. Neither of FHMS nor Holding Company owns, directly or
indirectly, any interest or investment (whether equity or debt) in any
corporation, partnership, business, trust, or other entity except as set forth
on SCHEDULE 5.19 hereto.
5.20 ACCOUNTS RECEIVABLE. All accounts receivable of FHMS, FHMG and TDMC
shown on the Financial Statements and all accounts receivable arising after the
Financial Statement Date, arose from transactions in the Ordinary Course and
have been collected or to Seller's knowledge, are collectible in at least their
aggregate recorded amounts, net of any applicable reserve.
5.21 BROKERS. Other than Bear, Stearns & Co., Inc. which has acted on
behalf of Seller and its Affiliates in connection with the transactions
contemplated hereby, and whose commissions, fees and expenses are the sole
responsibility of Seller, no Person has acted on behalf of Seller in connection
with the transactions contemplated hereby in such a way as to give rise to a
valid claim against FPA or its Affiliates for brokerage commissions, or
finders' or similar fees.
5.22 CERTAIN REAL ESTATE AND LEGAL MATTERS. All references to the "Care
Centers" in this SECTION 5.22 shall mean the real estate constituting the Care
Centers only and shall not refer to any business operations or services
conducted on or from the Care Centers. SCHEDULE 1.1(a) attached hereto contains
a complete list of all Care Centers and indicates which Care Centers are owned,
are leased from a third party or are leased under the May 25, 1995 Tax Retention
Operating Lease (the "TROL") between FHMS and First Security Bank of Utah, N.A.,
as trustee under the FH Trust 1995-1 (the "TROL Lessor").
(a) Seller has no knowledge, and Seller has received no notice to the
contrary, of any plan, study or effort of governmental authorities which
could reasonably and materially and adversely affect the use of any of the
Care Centers or could reasonably result in any charge being levied
against, or any lien assessed upon, any of the Care Centers (other than
usual and customary real property taxes and assessments for amounts not yet
delinquent). Seller has no knowledge of any existing, proposed or
contemplated plan to widen, modify or realign any street or highway
contiguous to any of the Care Centers.
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(b) No notices of violation of laws or governmental regulations
relating to any of the Care Centers have been received by Seller. To the
best of Seller's knowledge, the improvements to the Care Centers were
constructed in all material respects in accordance with all plans,
specifications, drawings and permits applicable thereto and are permitted,
conforming structures under applicable laws and ordinances in effect at the
time of construction.
(c) There is no pending proceeding in eminent domain or any action
to quiet title, which reasonably could materially and adversely affect any
of the Care Centers, nor does Seller know of the existence of any
threatened proceedings or of the existence of any facts which might give
rise to such action or proceeding.
(d) Seller has received all occupancy permits or similar permits
necessary to occupy the Care Centers as they are currently being used and
operated by Seller.
(e) Except for those pending sales and assignments of Care Centers
and interests therein as set forth on attached SCHEDULE 5.22(e)
(collectively, the "Pending Transfers"), Seller has not entered into any
other contracts for the sale of the Care Centers nor do there exist any
rights of first offer or first refusal or options to purchase any of the
Care Centers. The execution of final documentation and/or closing of any
or all of the Pending Transfers shall not affect the terms or conditions of
this Agreement).
(f) Seller has no knowledge, and Seller has received no written
notice to the contrary, of any special assessments which will result from
work, activities or improvements done to the Care Centers by Seller or by
any tenants or other parties, except as disclosed in title documents
delivered by Seller to Purchasing Subsidiary or otherwise examined by or
available to Purchasing Subsidiary.
(g) As of the above date, to the best of Seller's knowledge, the Care
Centers are not in violation of any federal, state or local law, ordinance
or regulation promulgated thereunder relating to industrial hygiene or to
the environmental conditions on, under or about the Care Centers including,
but not limited to, all improvements, facilities, structures and equipment
thereon, and the soil and groundwater thereunder. During the time in which
Seller's Affiliates owned the Care Centers (each, an "OWNER"), neither the
Owner nor, to the best of Seller's knowledge, any third party has used,
released, generated, manufactured, or produced on, under or about the Care
Centers, or transported to or from the Care Centers, any flammable
explosives, radioactive materials, hazardous wastes or substances,
polychlorinated biphenyls or similar materials that are dangerous to the
public health (collectively, "Hazardous Materials") in violation of
statutes, ordinances or regulations that govern the use and/or disposal of
Hazardous Materials (collectively, "Environmental Laws").
(h) Each of the Care Centers is connected to and served by water,
sewage disposal, drainage, telephone, gas, electricity and other utility
equipment facilities and services required by law, or, to the best of
Seller's knowledge, are reasonably adequate for the present use and
operation of the Care Centers and which are installed and connected
pursuant to valid permits required at the time of construction of the Care
Center or installation of the utility.
(i) To the best of Seller's knowledge, there are no physical or
mechanical defects or deficiencies in the condition of the Care Centers
that would result in the revocation of any required building or occupancy
permit.
(j) The Owners have not received any notices from any insurance
company of any defects or inadequacies in the Care Centers.
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(k) To the best of Seller's knowledge, there are no storage or other
tanks or containers, or wells or other improvements below the surface of
the Care Centers in violation of any Environmental Laws or in violation of
statutes, ordinances and/or regulation governing the installation, use,
sealing or removal of such storage tanks. The Owners did not install any
underground storage tanks under any of the Care Centers.
(l) Except for the leases and subleases of the Care Centers currently
in effect and disclosed or made available for inspection by Seller (the
"Leases"), there are no oral or written leases, subleases, occupancies, or
tenancies in effect pertaining to the Care Centers.
(m) Copies of the Leases, title documents, environmental reports and
similar real estate related documents which have been given to Purchasing
Subsidiary by Seller are true and correct copies thereof in all material
respects.
(n) The Owners have received no written notice from any of the
tenants of any of the Care Centers informing the Owners of any material
defects in the structure or mechanical systems of any of the Care Centers
that would adversely affect use and occupancy of the Care Centers.
(o) With respect of each of the Leases, except as may be otherwise
set forth in the Leases, in the rent roll for the respective Care Centers
provided by Seller to Purchasing Subsidiary, in documentation or
information provided to or available to Purchasing Subsidiary during the
normal course of Purchasing Subsidiary's due diligence, the following
information is true and correct: (a) each of the Leases is in full force
and effect according to the terms set forth therein and has not been
further modified, amended, extended or assigned by Seller, in writing or
otherwise; (b) all obligations of each Owner, as landlord under the Leases,
which have accrued prior to Closing will be performed in all material
respects and, to Seller's best knowledge, no tenant has asserted or has any
defense to, or any offsets, abatements, concessions, claims against, any
rent payable by it after the date hereof, or any calculation of rent, or
the performance of any other obligations under such tenant's respective
Lease; (c) to the best of Seller's knowledge, no tenant is in default under
or in arrears in the payment of any sum payable or in the performance of
any obligation required of it under its Lease, including but not limited to
all rent, taxes, assessments, repairs and maintenance charges, insurance
premiums, utilities or other charges or expenses, and, to the best of
Seller's knowledge, no tenant has prepaid any rent or other charges; (d) to
Seller's best knowledge, no tenant is unable to perform any or all of its
obligations under its Lease, whether for financial or legal reasons or
otherwise; (e) to Seller's best knowledge, no guarantor or any assignor
under any of the Leases has been released or discharged from any obligation
under or in connection with any of the Leases; (f) Seller has not applied
any security deposit from a tenant to rent or any other obligation due from
any tenant without Purchasing Subsidiary's prior written consent; (g) all
work required to be done by any Owner, as landlord under each such Lease,
has been or by the Closing will be done or furnished unless otherwise
agreed by the parties and no tenant is entitled to any additional work
during the term of its Lease; (h) neither the Leases nor the rents nor any
other amounts payable thereunder have been assigned, pledged or encumbered
by Seller, except in connection with existing indebtedness disclosed by
Seller to Purchasing Subsidiary; and (i) Seller has not received from any
tenant written notice of any presently pending dispute regarding the
calculation of payment of rent, the terms of any Lease or any alleged
default by Seller, as lessor, under such Lease, or of any bankruptcy,
receivership, custodianship, reorganization, insolvency, assignment for
benefit of creditors or other proceeding of a similar nature respecting any
tenant, any Lease or the Care Centers.
(p) Seller is not now nor at Closing will be a "foreign person" as
defined in Internal Revenue Code section 1445.
(q) To the best of Seller's knowledge, the Leases, environmental
reports, title documents, rent rolls and other documents delivered by
Seller to Purchasing Subsidiary or otherwise made available to Purchasing
Subsidiary by Seller do not contain any false information that could, if
relied upon, materially affect Purchasing Subsidiary's decision to purchase
the Care Centers.
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(r) Except for the Pending Transfers and as otherwise disclosed to
Purchasing Subsidiary, neither the respective Owner's interest in the
Leases, nor any of the rentals due or to become due under the Leases, has
been or will be assigned prior to the Closing.
(s) No leasing or brokerage fees or commissions of any nature
whatsoever is now due or shall become due or owing by any Owner to any
third party after the Closing under the existing provisions of any of the
Leases.
(t) Subject to the Pending Transfers and clause (u), below, Seller
agrees to cause the Owners to continue to cause the Care Centers to be
managed and maintained, reasonable wear and tear excepted, in the ordinary
and usual course of business prior to the Closing; provided, however,
Seller and the Owners shall not, without the prior written consent of
Purchasing Subsidiary, convey any interest in the Care Centers or subject
the Care Centers to any additional liens, encumbrances, covenants,
conditions, easements, or rights of way adversely affecting the Care
Centers or enter into any contracts, other than contracts terminable upon
no less than thirty days prior notice.
(u) The Owners will not hereafter modify, cancel, extend or otherwise
change any of the terms, covenants, or conditions of the Leases, enter
into, renew or extend any Leases (other than (i) documentation regarding
any of the Pending Transfers, and (ii) Leases or cancellation or
modifications of Leases with any Affiliates of Seller or with any
Affiliates of or providers to the Owners, which may be modified, amended or
canceled in the sole and absolute discretion of the respective Owners at
any time before the Closing) without the prior written consent of
Purchasing Subsidiary, which shall not be unreasonably withheld. If
Purchasing Subsidiary does not disapprove any written request of Seller
under this subparagraph within ten (10) days of such request, Purchasing
Subsidiary shall be deemed to have approved such request.
(v) To the extent insured as to the date of this Agreement, the
respective Owners shall, at their sole cost and expense, will keep in full
force all existing insurance policies affecting the Care Centers or any
portion thereof through the Closing.
Purchasing Subsidiary acknowledges that the assignment or subletting, as
applicable of the Leases (collectively, the "Assignments") may require the
written consent of the landlords or sublandlords (collectively, the
"Landlords"). Seller shall solicit the Landlords' consent to the Assignments as
soon as possible after the Closing. Notwithstanding the foregoing, Purchasing
Subsidiary acknowledges that the Closing may occur notwithstanding the inability
or failure to obtain the required consent of each of the Landlords, and
Purchasing Subsidiary shall (i) waive any claims, actions, demands, causes of
action, liabilities, judgments, costs and expenses (collectively, "Claims")
Purchasing Subsidiary may incur as a result of the inability to obtain consent
to the Assignments, and (ii) indemnify, defend and hold Seller harmless from and
against any and all Claims that Purchasing Subsidiary may incur as a result of
proceeding with the Assignments without the consent of each of the Landlords.
Seller shall have no liability for any breach of any of the foregoing
representations or warranties if Purchasing Subsidiary or Purchasing
Subsidiary's agents, attorneys, or other representatives was either aware or
through the exercise of reasonable diligence would have been aware of the facts
to the contrary.
ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF FPA AND PURCHASING SUBSIDIARY
Each of FPA and Purchasing Subsidiary hereby jointly and severally
represents and warrants to Seller and Selling Shareholder as follows:
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6.1 ORGANIZATION OF FPA AND PURCHASING SUBSIDIARY. Each of FPA and
Purchasing Subsidiary is a corporation and Purchasing Shareholder is a
professional corporation duly incorporated, validly existing and in good
standing under the laws of the State of Delaware and is duly qualified and in
good standing as a foreign corporation in any state other than its state of
incorporation where its business requires that it be so qualified, with all
requisite power and authority to own, lease and operate its properties and to
carry on its business as now being conducted, and is qualified to do business as
a foreign corporation in the States of California and Arizona.
6.2 AUTHORIZATION. Each of FPA, Purchasing Subsidiary and Purchasing
Shareholder has full power, authority and capacity to enter into and perform
this Agreement, the Related Agreements and the other agreements and documents
contemplated by this Agreement to which it is a party and to carry out the
transactions contemplated by this Agreement and such other agreements. This
Agreement has been duly and validly executed and delivered by each of FPA,
Purchasing Subsidiary and Purchasing Shareholder and constitutes and upon the
execution and delivery by each of FPA, Purchasing Subsidiary and Purchasing
Shareholder of the Related Agreements to which it is a party such Related
Agreements will constitute, the legally valid and binding obligation of each of
them, enforceable in accordance with its terms, except as such enforceability
may be limited by bankruptcy, insolvency, reorganization, moratorium and other
similar laws and equitable principles relating to or limiting creditors' rights
generally and general principles of equity.
6.3 NO CONFLICT OR VIOLATION. None of the execution, delivery and
performance of this Agreement, the consummation of the transactions contemplated
hereby, and the compliance by FPA, Purchasing Subsidiary and Purchasing
Shareholder with any of the provisions hereof, will (i) violate or conflict with
any provision of the respective Certificates of Incorporation or Bylaws of FPA
or Purchasing Subsidiary, (ii) except as set forth on SCHEDULE 6.3, violate,
conflict with, or result in a breach of any provision of, or constitute a
default (or any event which, with notice or lapse of time or both, would
constitute a default) under, or result in a right of termination or acceleration
under, any of the terms, conditions or provisions of any contract, indebtedness,
note, bond, indenture, security or pledge agreement, commitment, license, lease,
franchise, permit, agreement, or other instrument or obligation to which FPA,
Purchasing Subsidiary or Purchasing Shareholder is a party except for
violations, conflicts, breaches, defaults, terminations, accelerations, rights
of termination or acceleration, or Encumbrances that would not reasonably be
expected to have a Material Adverse Effect on FPA or Purchasing Subsidiary or
(iii) to FPA's knowledge violate any Laws the violation of which could
reasonably be expected to have a Material Adverse Effect on FPA or Purchasing
Subsidiary.
6.4 PERMITS AND GOVERNMENTAL FILINGS.
(a) PERMITS. To FPA's knowledge, SCHEDULE 6.4(a) sets forth a
complete and accurate list of all material Permits which constitute all
material Permits required to conduct the respective businesses of FPA and
Purchasing Subsidiary as now being conducted. No notice or warning from
any authority with respect to the suspension, revocation, or termination of
any material Permit has been received by FPA. FPA has delivered to Seller
true, correct and complete copies of all Permits requested by Seller.
(b) FILINGS. Except as disclosed on SCHEDULE 6.4(b) hereto, no notice
to, declaration, filing or registration with, or Permit from, any
governmental or regulatory body or authority is required to be made or
obtained by FPA, Purchasing Subsidiary or Purchasing Shareholder in
connection with the execution, delivery or performance of this Agreement
and the consummation of the transactions contemplated by this Agreement and
the Related Agreements, except for any such notices, declarations, filings,
registrations or Permits, the failure of which to be obtained would not
reasonably be expected to have a Material Adverse Effect on FPA or
Purchasing Subsidiary.
6.5 FINANCIAL STATEMENTS. The FPA Financial Statements, together with the
notes thereto (i) are in accordance with the books and records of FPA,
(ii) fairly and accurately present the assets, liabilities and financial
position of FPA as of the dates thereof and the results of operations for the
periods then ended and (iii) have been prepared in accordance with GAAP
consistently applied throughout the periods presented.
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6.6 SEC DOCUMENTS. FPA (i) has provided to Seller and Selling
Shareholder, a true and complete copy of FPA's Annual Report on Form 10-K
(without exhibits) for the years ended December 31, 1994 and December 31, 1995,
and Quarterly Report on Form 10-Q for the three (3) months ended March 31, 1996,
and its definitive 1996 proxy statement filed by FPA with the SEC and (ii) will
provide to Seller and Selling Shareholder all documents filed by FPA with the
SEC at or prior to the Closing Date (collectively, with the documents listed in
clause (i), the "FPA SEC DOCUMENTS"). As of their respective filing dates, FPA
has made all necessary filings with the Securities and Exchange Commission
("SEC") required to be filed by it since October 20, 1994, the FPA SEC Documents
comply or will comply in all material respects with the requirements of the
Exchange Act or the Securities Act, and none of the FPA SEC Documents contains
or will contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements made therein, in light of the circumstances under which they were
made, not misleading, except to the extent material statements in any of the
foregoing are modified or superseded in accordance with applicable rules and
regulations of the SEC by a subsequently filed FPA SEC Document delivered to the
Shareholders prior to the date of this Agreement.
6.7 NO MATERIAL ADVERSE CHANGE. Except as listed on SCHEDULE 6.7, or in a
FPA SEC Document since March 31, 1996, there has not been any Material Adverse
Change in FPA.
6.8 COMPLIANCE WITH LAWS. To FPA's knowledge, each of FPA, Purchasing
Subsidiary and Purchasing Shareholder is in compliance with all Laws, except
where the failure to comply would not reasonably be expected to have a Material
Adverse Effect on FPA or Purchasing Subsidiary.
6.9 LITIGATION. Except as disclosed on SCHEDULE 6.9, as of the date
hereof there are no Actions pending or threatened in writing against FPA,
Purchasing Subsidiary or Purchasing Shareholder other than Actions that would
not reasonably be expected to have a Material Adverse Effect on FPA or
Purchasing Subsidiary.
6.10 NO UNDISCLOSED LIABILITIES. Except as disclosed on SCHEDULE 6.10,
since March 31, 1996, FPA has not incurred any liability material to FPA other
than in the Ordinary Course. Purchasing Subsidiary has no Liabilities other
than pursuant to this Agreement and the Related Agreements and is not a party to
any Contract other than this Agreement and the Related Agreements to which it is
a party.
6.11 CAPITAL STRUCTURE.
(a) The authorized capital stock of FPA consists of 98,000,000 shares
of Common Stock $.001 par value, 2,000,000 shares of Preferred Stock $.002
par value, the number and classes of outstanding equity securities of FPA
(including securities convertible or exercisable into or exchangeable for
equity securities of FPA) are as listed on SCHEDULE 6.11. The authorized
capital stock of Purchasing Subsidiary consists of 100 shares of common
stock, $.01 par value.
(b) All of the outstanding shares of capital stock of FPA and
Purchasing Subsidiary (i) were issued in compliance with applicable federal
and state securities laws and (ii) are duly authorized, validly issued,
fully paid and nonassessable and not subject to preemptive rights created
by statute, the Certificate of Incorporation or Bylaws of the respective
issuer of such shares or any agreement to which FPA or Purchasing
Subsidiary is a party or by which it is bound.
(c) The shares of FPA Common will, when issued and delivered to the
Seller in accordance with this Agreement, be duly authorized, validly
issued, fully paid and nonassessable and not subject to preemptive rights
created by statute, FPA's Certificate of Incorporation, Bylaws or any
agreement to which FPA is a party or by which it is bound.
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ARTICLE 7
COVENANTS OF PARTIES HERETO
Seller, Selling Shareholder, FPA, Purchasing Subsidiary and Purchasing
Shareholder each covenant with the other as follows:
7.1 FURTHER ASSURANCES. Upon the terms and subject to the conditions
contained herein, each of Seller, Selling Shareholder, FPA, Purchasing
Subsidiary and Purchasing Shareholder agrees, both before and after the Closing,
(i) to use all reasonable efforts to take, or cause to be taken, all actions and
to do, or cause to be done, all things necessary, proper or advisable to
consummate and make effective the transactions contemplated by this Agreement
and the Related Agreements, (ii) to execute any documents, instruments or
conveyances of any kind which may be reasonably necessary or advisable to carry
out any of the transactions contemplated hereunder or thereunder, and (iii) to
cooperate with each other in connection with the foregoing, including using all
reasonable efforts (A) to obtain all permits or licenses required to be obtained
under any applicable Laws, (B) to effect all necessary registrations and
filings, including submissions of information requested by governmental
authorities, (C) to fulfill all conditions to this Agreement and (D) to consult
with each other regarding renegotiation of any Expiring Contract. Seller,
Selling Shareholder, FPA, Purchasing Subsidiary and Purchasing Shareholder will
commence all action required under clause (A) above (including making all
filings required under the HSR Act) as soon as reasonably practicable.
7.2 NO SOLICITATION. From the date of this Agreement to the Closing Date
or earlier termination of this Agreement (the "EXCLUSIVITY PERIOD"), neither
Seller nor Selling Shareholder will directly or indirectly make, entertain,
solicit or encourage inquiries or proposals, enter into or conduct discussions,
or negotiate or enter into an agreement with any party other than FPA,
Purchasing Subsidiary and Purchasing Shareholder for the divestiture of FHMS or
Holding Company, respectively, whether by way of an asset or stock sale,
partnership, joint venture, merger, consolidation or other transaction (provided
that the foregoing shall not limit or restrict restructuring or other changes by
FHMS or Holding Company or any of Holding Company's subsidiaries).
7.3 INSPECTIONS. FPA, on the one hand, and Seller and Selling
Shareholder, on the other, agree that, prior to the Closing, (i) FPA and its
Representatives will have full access to such business, books, records,
management and operations of FHMS, Holding Company and Holding Company's
subsidiaries as may be reasonably required by FPA to evaluate the transactions
contemplated by this Agreement and the Related Agreements PROVIDED, HOWEVER,
that nothing contained herein shall give FPA or Purchasing Shareholder a right
of access to the consolidated tax returns of Seller; and (ii) Seller and its
Representatives will have full access to such business, books, records,
management and operations of FPA and its Affiliates as may be reasonably
required by Seller to evaluate the quality of healthcare services provided or to
be provided by FPA or its affiliated medical groups. FPA will exercise
reasonable efforts to minimize interference with the Businesses and Seller will
exercise reasonable efforts to minimize interference with FPA's business. Each
of FPA and Seller further agrees to provide the other with reasonable notice
before visiting the other's or its Affiliates' facilities or contacting the
other's or its Affiliates' employees, practitioners or allied health
professionals for the purpose of inspecting and conducting the due diligence
contemplated by this SECTION 7.3.
7.4 CONDUCT OF BUSINESS. Except as set forth in SCHEDULE 7.4 or as
specifically contemplated by this Agreement and the Related Agreements or
requested by FPA in writing, from the date hereof until the Closing, Seller will
cause FHMS to and Selling Shareholder will cause Holding Company to operate its
respective Business in the Ordinary Course. In addition, from the date hereof
through the Closing, (i) Seller will not permit FHMS and Selling Shareholder
will not permit Holding Company or any of its Subsidiaries, except in the
Ordinary Course, to sell, transfer or assign or acquire any asset material to
its respective Business (materiality for this purpose being defined as $100,000)
and (ii) Seller will not permit FHMS to and Selling Shareholder will not permit
Holding Company or Holding Company's subsidiaries to, enter into any Contract
other than in the Ordinary Course. In addition, Seller will not permit FHMS to
and Selling Shareholder will not permit Holding Company or any of its
subsidiaries to (i) issue, deliver or sell or authorize or propose the issuance,
delivery or sale of, or purchase or propose the purchase of, any shares of its
capital stock of any class or securities convertible into, or rights, warrants
or options to acquire, any such shares or other
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convertible securities or (ii) amend their respective Articles or Certificates
of Incorporation or Bylaws, except as may be necessary or advisable in
connection with the transactions contemplated hereby and by the Related
Agreements.
7.5 EMPLOYEE MATTERS.
(a) EMPLOYEE BENEFITS GENERALLY. The employees of FHMS, Holding
Company and Holding Company's subsidiaries who are retained by FPA or a
subsidiary or Affiliate of FPA (including Purchasing Subsidiary) shall be
referred to herein as the "Retained Employees." FPA shall provide each
Retained Employee (and, to the extent applicable, the Retained Employee's
respective eligible dependents) benefits which are substantially similar to
those provided under the employee benefit plans applicable to similarly
situated employees of FPA or its Affiliates. Without limiting the
foregoing, FPA shall provide health coverage to each Retained Employee (and
dependents) under a group health plan of FPA, shall waive any pre-existing
condition exclusion that otherwise would apply, shall provide each Retained
Employee (and dependent) with credit under the group health plan for any
deductibles and co-payments paid during the coverage year with respect to
the Retained Employee's (and dependent's) coverage prior to the Closing
Date and shall provide such group health plan coverage as of the Closing
Date. For purposes of determining eligibility to participate, vesting and
benefit eligibility in any employee benefit plan of FPA, its subsidiaries
or Affiliates, FPA shall give each Retained Employee full credit for the
service credited to the Retained Employees under the Employee Benefit
Plans. The preceding sentence does not require FPA to give any Retained
Employee credit under its employee pension benefit plans for prior pension
benefit accrual service under any Employee Benefit Plan.
(b) ASSUMPTION OF LIABILITIES. Except as specifically provided in
this SECTION 7.5 or in SECTION 10.5(a), effective as of the Closing Date,
FPA agrees that FHMS shall have all liability and responsibility of Seller
with respect to employees or former employees of FHMS or with respect to
employees or former employees of the Holding Company or the Holding
Company's subsidiaries, provided, that such liabilities are shown in the
pro forma consolidated balance sheet attached hereto as SCHEDULE 1.1(b) (as
may be further described on SCHEDULE 7.5(b)). Seller and its subsidiaries
and Affiliates shall not retain any, and shall not be deemed to have
retained any, of such liabilities or responsibilities.
(c) SELLER'S 401(K) PLAN.
(i) Effective as of the Closing Date and as soon as practicable
thereafter, FPA shall cause FHMS to make all required contributions to
be made to the Foundation Health Corporation Profit Sharing and 401(k)
Plan (as amended and restated effective January 1, 1994) ("SELLER'S
401(k) PLAN") for each participating FHMS Employee.
(ii) Each FHMS Employee shall cease to participate in Seller's
401(k) Plan for periods after the Closing Date. As soon as
practicable after the Closing Date, as more fully described below,
Seller and FPA shall arrange for the transfer of Seller's 401(k) Plan
accounts (the "ACCOUNTS") of the FHMS Employees who are participants
in Seller's 401(k) Plan and who elect to make such transfer during the
election period established by Seller. Such Accounts shall be valued
as of the last business day before the transfer is effected from
Seller's 401(k) Plan and shall be transferred to one or more defined
contribution plans (within the meaning of Section 3(34) of ERISA)
which is or are maintained by FPA, its subsidiaries or Affiliates for
the benefit of eligible employees and which is or are qualified under
Section 401(a) of the Code (collectively, "FPA's SAVINGS PLANS").
FPA, its subsidiaries and Affiliates agree to cooperate with Seller,
its subsidiaries and Affiliates in directing the trustee of any trust
in which the assets of Seller's 401(k) Plan are invested to transfer
to a new trustee or trustees or other funding agent or agents
appointed by FPA or its Affiliates for FPA's Savings Plan, the amount
of assets in the Accounts of the affected FHMS Employees participating
in Seller's 401(k) Plan. Such transfer of assets of Seller's 401(k)
Plan described above shall be made in cash or marketable securities.
Such transfer of assets shall occur as soon as practicable after the
last to occur of the receipt by Seller of FPA's (its subsidiary's or
Affiliate's) certification that (i) FPA, its subsidiaries or
Affiliates has established FPA's
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Savings Plans; (ii) FPA, its subsidiaries or Affiliates has received
or requested a favorable determination letter for FPA's Savings Plans
from the Internal Revenue Service, and (iii) FPA's Savings Plans
provide that each participating FHMS Employee shall, immediately after
the date of the transfer of assets in the Accounts as described above,
have an accrued benefit under FPA's Savings Plans at least equal to
the benefit accrued under Seller's 401(k) Plan immediately prior to
such date. As of the transfer date, FPA shall become the plan sponsor
with respect to the transferred Accounts of FHMS Employees and shall
assume all obligations and Liabilities under all applicable Laws with
respect to such Accounts.
(d) FROZEN 401(k) PLAN. Effective as of the Closing Date or as soon
as practicable thereafter, Seller shall transfer in whole to FPA all of
the assets and liabilities under the Thomas-Davis Medical Centers, P.C.
Profit Sharing and 401(k) Plan and its related trust (the "FROZEN 401(k)
PLAN"). As of the transfer date, FPA shall become the plan sponsor of the
Frozen 401(k) Plan and shall assume all obligations and liability under all
applicable Laws with respect to the Frozen 401(k) Plan.
(e) SMART CHOICES PLAN. Effective as of the Closing Date and for the
duration of the current coverage period, FPA shall establish a dependent
care reimbursement account and a health care flexible spending account for
FHMS Employees that continues benefits on the same terms as apply to the
FHMS Employees under the Seller-sponsored SMART Choices Plan. In
connection therewith, effective as of the Closing Date or as soon as
practicable thereafter, Seller shall transfer to FPA account balances of
FHMS Employees under the dependent care reimbursement account and the
health care reimbursement account features of the Seller-sponsored SMART
Choices Plan. Effective as of the Closing Date, with respect to such
transferred accounts, FPA shall assume all obligations and Liabilities
under all Applicable Laws.
(f) MATCHING CONTRIBUTIONS. Effective as of the Closing Date, FPA
shall assume all obligations and Liabilities of Seller with respect to the
October 31, 1994 letter agreement attached hereto as Exhibit A, regarding
the provision of a 401(k) matching contribution of up to six percent (6%)
of their compensation, with respect to certain employees of TDMC.
(g) COOPERATION OF FPA AND SELLER. FPA and Seller shall take all
actions which they deem necessary or desirable to implement the provisions
of this SECTION 7.5.
(h) THIRD PARTY BENEFICIARIES. It is understood and agreed between
FPA and Seller that all provisions contained in this Agreement with respect
to employee benefit plans or employee compensation or employment are
included for the sole benefit of the parties hereto and do not and shall
not create any right in any other person, including, but not limited to,
any Employee, any participant in any benefit or compensation plan or any
beneficiary thereof.
(i) ACTION BY FPA'S AFFILIATES. Any action required by FPA pursuant
to this SECTION 7.5 shall be deemed satisfied to the extent such action is
taken by an Affiliate of FPA.
7.6 FPA'S COVENANT NOT TO COMPETE.
(a) FPA'S PROHIBITED CONDUCT. Each of FPA and Purchasing Subsidiary
acknowledges and agrees that pursuant to the transactions contemplated
hereby and due to the ongoing relationship among Seller, FHCA, Family and
Senior Care, Inc., FHMG, TDMC, Purchasing Subsidiary and FPA contemplated
hereby, by the Professional Group Provider Agreements and the other Related
Agreements, FPA and its Affiliates will be receiving confidential and
proprietary information concerning Seller, FHCA and their Affiliates and
that the use of such information by FPA or its subsidiaries or Affiliates
(including Purchasing Subsidiary) could result in serious economic
detriment to Seller, FHCA and/or their Affiliates. Therefore, subject to
the provisions of this SECTION 7.6, neither FPA nor any of its Affiliates
(including Purchasing Subsidiary) shall seek to modify its respective Knox-
Keene Act limited license so as to operate as a comprehensive health care
service plan, or hold, acquire, or make any commitment to hold or acquire a
controlling interest in, a comprehensive health plan, which
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offers insured, self-insured or prepaid health insurance products to
individuals, to CHAMPUS, FEHBP, Medicare, Medicaid or other state or
federal healthcare programs, to commercial groups or other sponsors of
health care benefit plans in the Provider Service Area (as defined in
addenda B, C and D to each Professional Group Provider Agreement) until the
earlier of (i) the expiration of the Professional Group Provider Agreements
by their own terms or (ii) the first anniversary of the date the
Professional Group Provider Agreements terminate as a result of a breach of
such agreements by FHCA (the "NON-COMPETE PERIOD"). Without limiting the
foregoing, the parties hereto understand and agree that FPA or an Affiliate
of FPA is seeking a restricted health care service plan license from the
California Department of Corporations in order to continue its operations
as in effect on the date hereof and as of the Closing Date. Upon
attainment of such license, FPA shall only utilize such license for the
conduct of its business as currently conducted and shall not, either
directly or indirectly, compete with Seller, FHCA or any of their
respective Affiliates in the Provider Service Area during the Non-Compete
Period by marketing or soliciting potential HMO enrollees as a direct
contractor to employer groups, individuals or governmental entities. A
termination of the Professional Group Provider Agreements due to a material
breach thereof by FPA or an Affiliate of FPA shall not relieve FPA or its
Affiliates from their obligations under this SECTION 7.6.
(b) SELLER'S PROHIBITED CONDUCT. Subject to the provisions of this
SECTION 7.6, until the earlier of (i) the date which is three (3) years
from the date hereof or (ii) the termination of a Professional Group
Provider Agreement, Seller shall not (i) purchase any medical group if the
FHCA linked lives to FHMG or TDMC which are provided services by the
medical groups acquired during such period in a given Provider Service Area
exceed five percent (5%) of the number of FHCA linked lives to FHMG or TDMC
within such Provider Service Area or (ii) purchase any independent
physicians association or medical group within a five mile radius of any
Care Center purchased pursuant hereto.
(c) REMEDIES. The parties hereto acknowledge and agree that the
breach of the provisions of this SECTION 7.6 by FPA or any of its
Affiliates (including Purchasing Subsidiary) would cause irreparable harm
to Seller and FHCA and that the party injured by such breach would not
have an adequate remedy at law or in damages. Therefore, FPA consents to
the issuance of an injunction or the other enforcement of equitable
remedies against it or its Affiliates (including Purchasing Subsidiary) at
the suit of Seller, without bond or other security, to compel performance
of all the terms of this SECTION 7.6, and waives the defense of the
availability of relief in damages.
(d) SEVERABILITY. To the extent any provision of this SECTION 7.6
shall be invalid or unenforceable, it shall be considered deleted herefrom
and the remainder of such provision and of this SECTION 7.6 shall be
unaffected and shall continue in full force and effect. In furtherance and
not in limitation of the foregoing, should the duration or geographical
extent of, or business activities covered by any provision of this
SECTION 7.6 be in excess of that which is valid and enforceable under
applicable Law, then such provision shall be construed to cover only that
duration, extent or activities which may validly and enforceably be
covered. The parties hereto acknowledge the uncertainty of the Law in this
respect and expressly stipulate that this SECTION 7.6 shall be given
construction that renders its provisions valid and enforceable to the
maximum extent (not exceeding its express terms) possible under applicable
law.
(e) TERMINATION OF COVENANT. Notwithstanding anything else contained
herein, if the covenant of Buyer under SECTION 7.6(a), or the covenant of
Seller under SECTION 7.6(b) is found to be unenforceable or if either Buyer
or Seller or any of their respective Affiliates breach any such covenant
and such breach is not cured within thirty (30) days of receipt of notice
thereof, then the non-breaching party and its Affiliates shall be released
from their obligations under SECTION 7.6(a) OR (b), as the case may be, and
such provision shall be deemed terminated and of no further force and
effect.
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7.7 PURCHASE OF INDEBTEDNESS; POST-CLOSING ADJUSTMENT . The parties
hereto acknowledge and agree that (i) Purchasing Subsidiary shall purchase the
FHMS Indebtedness and the Holding Company Indebtedness as set forth in ARTICLES
2 AND 3 and (ii) that the Holding Company Indebtedness Purchase Price, the FHMS
Indebtedness Purchase Price and the Note Consideration shall be represented by
the Consolidated Note and, together with certain obligations under the
Professional Group Provider Agreements and certain third party indebtedness
shall be guaranteed by FPA in accordance with SECTION 8.6. The parties hereto
understand and agree that (i) the Holding Company Indebtedness Purchase Price
and the FHMS Indebtedness Purchase Price will be based, initially, on the amount
of Holding Company Indebtedness and FHMS Indebtedness shown on the Pro Forma
Consolidated Balance Sheet of FHMS, Holding Company and its subsidiaries as of
the Closing Date, (PROVIDED, that for the period between June 30, 1996 and
Closing there will be no reduction in the Note for any utilization by the Seller
of tax benefits from FHMS, TDMC and FHMG, it being acknowledged and agreed that
the Tax Sharing Agreements between FHC and each of FHMS, TDMC and FHMG
obligating FHC to compensate each of FHMS, TDMC and FHMG for such utilization
shall be terminated as of July 1, 1996) and that the principal amount of the
Consolidated Note shall reflect such amounts, (ii) Seller shall cause an audit
(the "Closing Audit") of the consolidated balance sheet of FHMS, Holding Company
and its subsidiaries as of the Closing Date to be conducted promptly after the
Closing Date and shall furnish Purchasing Subsidiary with the audited
consolidated balance sheet of FHMS, Holding Company and Holding Company's
subsidiaries within sixty (60) days following the Closing Date and (iii)
following such audit, the principal amount of the Consolidated Note shall be
adjusted such that it equals the actual audited amounts of FHMS Indebtedness and
Holding Company Indebtedness (subject to the proviso in clause (i)) plus the
Note Consideration, adjusted for any difference between (x) the interest paid on
the Consolidated Note between the Closing Date and the date of such adjustment
and (y) that which would have been paid had the Consolidated Note been based on
the audited consolidated balance sheet at the Closing Date. In furtherance of
the foregoing, Purchasing Subsidiary agrees to issue a new Consolidated Note in
the adjusted amount and upon receipt of such new Consolidated Note, Seller
agrees to cancel the existing Consolidated Note.
7.8 PREPARATION OF THE PROXY STATEMENT. FPA shall determine whether to
seek stockholder approval of this Agreement and the Related Agreements and the
transactions contemplated hereby and thereby. If such stockholder approval is
sought, to the extent required by applicable Law, FPA shall promptly prepare and
file with the SEC a Proxy Statement relating to the transactions contemplated
hereby (the "PROXY STATEMENT") and Seller shall promptly furnish all information
regarding itself, FHMS, Holding Company and Holding Company's subsidiaries as is
reasonably requested by FPA and necessary for the preparation of the Proxy
Statement. FPA shall also take any action (other than qualifying to do business
in any jurisdiction in which it is now not so qualified) required to be taken
under any applicable state and federal securities laws in connection with the
issuance of FPA Common pursuant hereto. In addition, if FPA is required to
prepare a Proxy Statement pursuant hereto, FPA shall obtain the services of a
proxy solicitor reasonably satisfactory to Seller.
7.9 STOCKHOLDERS MEETING. If FPA is required to prepare a Proxy Statement
pursuant hereto, FPA shall call a meeting of its stockholders (the "STOCKHOLDERS
MEETING") to be held as promptly as practicable for the purpose of voting upon
the approval of this Agreement, the Related Agreements and the transactions
contemplated hereby and thereby. FPA's Boards of Directors shall recommend to
its stockholders approval of such matters. If the Board of Directors of FPA is
required by applicable law to review or restate their recommendation, this
SECTION 7.9 shall not prohibit accurate disclosure that is required in any FPA
SEC Document (including the Proxy Statement) or otherwise under applicable law
of the opinion of the Board of Directors of FPA as of the date of such SEC
Document or such other required disclosure as to the transactions contemplated
hereby.
7.10 AGREEMENT TO VOTE SHARES. In consideration for the execution of this
Agreement by Seller and Selling Shareholder, each officer of FPA who is a
holder of FPA Common shall, in an agreement reasonably satisfactory to Seller,
agree to vote all shares of FPA Common held by such person entitled to vote at
the FPA Stockholders Meeting (and at any adjournment thereof) in favor of the
transactions contemplated hereby and by the Related Agreements. In addition,
FPA shall use it best efforts to have each non-officer director and beneficial
owner of (5%) or more of the outstanding FPA Common to sign an agreement
agreeing so to do.
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7.11 SURGERY CENTER REFERRALS. Seller and FPA agree to and agree to cause
their appropriate Affiliates to use their reasonable best efforts to enter into
an agreement, prior to the Closing Date, providing for referrals from FHMG, TDMC
and Intergroup IPA, P.C. ("IG IPA") to the surgery centers listed in such
agreement such that the referral pattern from FHMG, TDMC and IG IPA to such
surgery centers following the Closing shall be substantially similar to that
prior to the Closing.
7.12 DISEASE STATE MANAGEMENT. Seller agrees to cause Integrated Pharmacy
Services ("IPS") to and FPA agrees to cause its appropriate Affiliates to use
their reasonable best efforts to enter into an agreement, prior to the Closing
Date, pursuant to which FPA and such Affiliates would promote IPS's Disease
State Management ("DSM") programs to physicians and employees in the care
centers of such Affiliates and pursuant to which FPA would and would cause such
Affiliates to, make all FHCA pharmacy claims data available to IPS in a format
such as to allow IPS to fully develop and implement the DSM programs.
7.13 REAL ESTATE MATTERS. As promptly as reasonably possible but in no
event later than forty-five (45) days following the date hereof, Seller shall,
at its sole cost and expense, deliver to FPA the following documents and
materials (which shall be delivered as they become available to Seller):
(a) One or more title insurance commitments with respect to the Owned Care
Centers dated no earlier than the date of this Agreement, issued by such title
insurance company as may be reasonably acceptable to FPA and accompanied by
copies of all documents, instruments and other matters referred to therein as
exceptions.
(b) Copies of surveys of the Owned Care Centers prepared by or on behalf
of Seller or its affiliates;
(c) Copies of the most recent real property tax bills with respect to the
Owned Care Centers for the preceding tax year;
(d) Copies of all real property service, maintenance, management, and
other similar real property management contracts with respect to the Owned Care
Centers to which Seller or one of its Affiliates is a party and which is in
Seller's possession or control;
(e) Copies of all certificates of occupancy in Seller's possession or
control for the Owned Care Centers;
(f) Copies of all warranties and guaranties currently in effect and in
Seller's possession or control for the Owned Care Centers or any portion
thereof;
(g) Copies of all soil, seismological, geological, and drainage reports in
Seller's possession or control with respect to the Owned Care Centers;
(h) Copies of any "as built" plans and specifications in Seller's
possession or control for the Owned Care Centers;
(i) Copies of all Leases for the Owned Care Centers, and a current rent
roll showing the names of all tenants under the Leases with respect to the Owned
Care Centers;
(j) Copies of the most recent utility bills and insurance claims in
Seller's possession or control with respect to the Owned Care Centers for the
preceding six (6) month period;
(k) Copies of any environmental audits or studies for the Owned Care
Centers to the extent in Seller's possession or control;
For purposes of this SECTION 7.13, "Owned Care Centers" shall include those
Care Centers owned by FHMS or any Affiliate of FHMS and those Care Centers
leased by FHMS under the TROL.
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7.14 SOFTWARE LICENSES. At Closing, FPA agrees to or to cause one of its
Affiliates to assume those certain license and maintenance agreements between
Foundation Health, a California Health Plan and the licensors of certain
software which is used in connection with the Businesses, which agreements are
set forth on SCHEDULE 7.14 hereto.
7.15 GUARANTY PAYMENTS. In the event Seller advances any funds pursuant
to its guaranty of certain bank indebtedness of FPA, then FPA agrees to
immediately pay Seller the amount of any funds so advanced.
ARTICLE 8
CONDITIONS TO SELLER'S AND SELLING SHAREHOLDER'S OBLIGATIONS
The respective obligations of Seller and Selling Shareholder to consummate
the transactions provided for by this Agreement and the Related Agreements are
subject, in the discretion of Seller and Selling Shareholder, respectively, to
the satisfaction, on or prior to the Closing Date, of each of the following
conditions, any of which may be waived on its or his own behalf by Seller or
Selling Shareholder:
8.1 REPRESENTATIONS, WARRANTIES AND COVENANTS. All representations and
warranties of each of FPA, Purchasing Subsidiary and Purchasing Shareholder
contained in this Agreement shall be true and correct in all material respects
(without duplication of any materiality standard contained therein) at and as of
the date of this Agreement and at and as of the Closing Date, and each of FPA,
Purchasing Subsidiary and Purchasing Shareholder shall have performed in all
material respects all covenants required by this Agreement to be performed by it
prior to the Closing.
8.2 NO PROCEEDINGS, LITIGATION OR LAWS. No Action by any Governmental
Authority or other Person shall have been instituted or threatened which
questions the validity or legality of the transactions contemplated by this
Agreement and the Related Agreements or which asserts the right of a
Governmental Authority to approve any aspect of such transactions and which
would reasonably be expected to damage Seller or Selling Shareholder materially
if the transactions contemplated hereunder or thereunder are consummated. There
shall not be any Laws that make the purchase of the Businesses as contemplated
by this Agreement and the Related Agreements illegal or otherwise prohibited.
8.3 OPINION OF COUNSEL. FPA shall have delivered to Seller and Selling
Shareholder an opinion of Latham & Watkins, special counsel to FPA, Purchasing
Subsidiary and Purchasing Shareholder, dated as of the Closing Date, in form and
substance reasonably satisfactory to Seller and its counsel.
8.4 CERTIFICATES AND CORPORATE DOCUMENTS. Each of FPA and Purchasing
Subsidiary shall have furnished Seller and Selling Shareholder with such
certificates of its officers and others (including Purchasing Shareholder) to
evidence compliance with the conditions set forth in this ARTICLE 8 as may be
reasonably requested by Seller and Selling Shareholder. Seller and Selling
Shareholder shall have received from each of FPA and Purchasing Subsidiary,
resolutions adopted by their respective boards of directors and any required
shareholder resolutions, approving this Agreement and the Related Agreements to
which it is a party and the transactions contemplated by this Agreement and such
Related Agreements, certified by FPA's and Purchasing Subsidiary's respective
corporate secretaries.
8.5 REGISTRATION RIGHTS AGREEMENT. FPA and Seller shall have entered into
a Registration Rights Agreement (the "REGISTRATION RIGHTS AGREEMENT"),
containing the terms set forth in the term sheet attached as Exhibit F hereto
and otherwise in form and substance reasonably satisfactory to the parties
hereto.
8.6 GUARANTIES. FPA shall have (i) executed and delivered to Seller a
Guaranty, containing the terms set forth in the term sheet attached as Exhibit G
hereto and otherwise in form and substance reasonably satisfactory to the
parties hereto, guaranteeing the Consolidated Note and the performance by any
Affiliate of FPA that is a party thereto, of its obligations under the
Professional Group Provider Agreements and (ii) executed and delivered to each
of the third party payees under such indebtedness, a guaranty of the
indebtedness to non-Affiliates shown on the pro forma consolidated balance sheet
of FHMS, Holding Company and Holding Company's subsidiaries attached as SCHEDULE
1.1(b) hereto in the amounts outstanding on the Closing Date.
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8.7 INTENTIONALLY DELETED.
8.8 INTENTIONALLY DELETED.
8.9 MASTER LEASE ASSIGNMENT. FPA, Purchasing Subsidiary and the
designated "Assignors" thereunder shall have entered into a Master Lease
Assignment (the "MASTER LEASE ASSIGNMENT"), in substantially the form of Exhibit
I hereto.
8.10 PROFESSIONAL GROUP PROVIDER AGREEMENTS. FHCA shall have entered into
a Professional Group Provider Agreement with FHMG in substantially the form of
Exhibit B hereto and with TDMC in substantially in the form of Exhibit C hereto.
8.11 PURCHASE PRICE. FPA and Purchasing Subsidiary shall have delivered
the FHMS Share Purchase Price to Seller and Purchasing Subsidiary shall have
delivered the FHMS Indebtedness Purchase Price and the Holding Company
Indebtedness Purchase Price and the Designee Price to Seller.
8.12 HSR ACT. The applicable waiting period, including any extension
thereof, under the HSR Act shall have expired or been terminated.
8.13 GOVERNMENTAL APPROVALS. Such Governmental Authorities as may be
required, shall have received notice of, or applications or other filings with
respect to, the transactions contemplated by this Agreement and the Related
Agreements and, where required, shall have approved same.
8.14 RELATED AGREEMENTS. The various parties named therein shall have
entered into the agreements set forth on SCHEDULE 8.14 hereto in accordance
herewith, all of which shall be in full force and effect and none of which shall
have been amended or breached. In addition, each such party other than FPA
shall have delivered to Seller and Selling Shareholder, in the form of a
certificate, the equivalent of the representation made by Seller and FPA with
respect to such Agreements in SECTION 5.2 (AUTHORIZATION) and SECTION 6.2
(AUTHORIZATION), respectively.
8.15 CONSENTS. All Permits, waivers and consents required to consummate
the transactions contemplated hereby, including the consents listed on SCHEDULES
5.6(b) AND 6.4(b) shall have been obtained.
8.16 NO MATERIAL ADVERSE CHANGES. No violations or alleged violations of
Law by any of FPA or its Affiliates (including Purchasing Subsidiary), including
those arising from patterns or practices engaged in by such Persons, other than
matters which have been previously publicly disclosed, shall have (i) resulted
in any Material Adverse Change since the Financial Statement Date in FPA's or
Purchasing Subsidiary's business or (ii) materially and adversely affected the
ability of FPA, Purchasing Subsidiary or Purchasing Shareholder to consummate
the transactions contemplated hereby and by the Related Agreements.
8.17 TRANSITION AGREEMENT. FPA, Purchasing Subsidiary and Seller shall
have entered into a Transition Agreement (the "TRANSITION AGREEMENT"), in form
and substance reasonably satisfactory to the parties hereto.
8.18 RELEASES. Each of Seller, Selling Shareholder, Intergroup of Arizona
and such other Affiliates of Seller as are named therein shall have received a
General Release, containing the terms set forth in the term sheet attached as
Exhibit J hereto and otherwise in form and substance reasonably satisfactory to
the parties hereto, from FHMS, Holding Company and each of Holding Company's
subsidiaries releasing Seller, Selling Shareholder, Intergroup of Arizona and
such other Affiliates of Seller from all claims which FHMS, Holding Company or
any of Holding Company's subsidiaries may have against them arising from events
or occurrences prior to Closing, including any claims which TDMC may have under
the terms of that certain hospital risk sharing arrangement with Intergroup of
Arizona.
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8.19 PLEDGE AGREEMENTS. (i) Each of FPA, Purchasing Subsidiary, and
Purchasing Shareholder shall have executed and delivered to Seller a Pledge
Agreement (a "PLEDGE AGREEMENT") containing the terms set forth in the term
sheet attached as Exhibit K hereto and otherwise in form and substance
reasonably satisfactory to the parties hereto, pledging the shares of Purchasing
Subsidiary, FHMS and of Holding Company, respectively, (ii) Holding Company
shall have executed and delivered a Pledge Agreement, pledging the shares of
FHMG and TDMC and (iii) FPA and any Affiliate of FPA possessing such an option
shall have executed a Pledge Agreement, pledging any options it has to purchase
any of the shares pledged pursuant to clauses (i) and (ii) hereof, in each case
to secure Consolidated Note, the Bridge Note and the performance by Buyer and
its Affiliates of their respective obligations under the Professional Group
Provider Agreements (collectively, the "SECURED OBLIGATIONS").
8.20 SECURITY AGREEMENT. Each of Purchasing Subsidiary, FHMS, Holding
Company, FHMG and TDMC shall have executed and delivered to Seller a Security
Agreement, containing the terms set forth in Exhibit L hereto and otherwise in
form and substance reasonably satisfactory to the parties hereto, pledging its
respective assets to secure the Secured Obligations.
8.21 BOARD APPROVAL. The Board of Directors of Seller shall have approved
this Agreement and the Related Agreements and the transactions contemplated
hereby and thereby.
8.22 TAX OPINION. Seller shall have received an opinion from Pillsbury
Madison & Sutro LLP regarding certain tax matters relating to the transactions
contemplated hereby, in form and substance reasonably satisfactory to Seller.
ARTICLE 9
CONDITIONS TO FPA'S OBLIGATIONS
The respective obligations of FPA, Purchasing Subsidiary and Purchasing
Shareholder to consummate the transactions provided for by this Agreement and
the Related Agreements are subject, in the discretion of FPA, Purchasing
Subsidiary and Purchasing Shareholder, respectively, to the satisfaction, on or
prior to the Closing Date, of each of the following conditions, any of which may
be waived on its own behalf by FPA, Purchasing Subsidiary or Purchasing
Shareholder:
9.1 REPRESENTATIONS, WARRANTIES AND COVENANTS. All representations and
warranties of Seller and Selling Shareholder contained in this Agreement shall
be true and correct in all material respects (without duplication of any
materially standard contained therein) at and as of the date of this Agreement
and at and as of the Closing Date, and each of Seller and Selling Shareholder
shall have performed in all material respects all covenants required by this
Agreement to be performed by it prior to the Closing.
9.2 NO PROCEEDINGS, LITIGATION OR LAWS. No Action by any Governmental
Authority or other Person shall have been instituted or threatened which
questions the validity or legality of the transactions contemplated by this
Agreement and the Related Agreements or which asserts the right of a
Governmental Authority to approve any aspect of such transactions and which
would reasonably be expected to have a Material Adverse Effect on FPA if the
transactions contemplated by this Agreement and the Related Agreements are
consummated. There shall not be any Laws that make the purchase of the
Businesses as contemplated by this Agreement and the Related Agreements illegal
or otherwise prohibited.
9.3 OPINION OF COUNSEL. Seller shall have delivered to FPA an opinion of
Pillsbury Madison & Sutro LLP, special counsel to Seller, in form and substance
reasonably satisfactory to FPA and its counsel.
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9.4 CERTIFICATES AND CORPORATE DOCUMENTS. Seller shall furnish FPA and
Purchasing Shareholder with such certificates of its officers and others and
Selling Shareholder shall furnish FPA and Purchasing Shareholder with such
certificates, to evidence compliance with the conditions set forth in this
ARTICLE 9 as may be reasonably requested by FPA and Purchasing Shareholder. FPA
and Purchasing Shareholder shall have received from Seller resolutions adopted
by the board of directors of Seller and any required shareholder resolutions
approving this Agreement, the Related Agreements to which it is a party and the
transactions contemplated by this Agreement and such Related Agreements,
certified by Seller's corporate secretary.
9.5 OTHER DOCUMENTS. Seller shall have executed and delivered an
assignment of the FHMS Shares, the FHMS Indebtedness and the Holding Company
Indebtedness to Purchasing Subsidiary as provided in this Agreement and Selling
Shareholder shall have executed and delivered an assignment of the Holding
Company Shares to Purchasing Shareholder pursuant to the Option as provided in
this Agreement and the Share Ownership Agreement, which documents shall be in a
form reasonably satisfactory to FPA's counsel.
9.6 HSR ACT. The applicable waiting period, including any extension
thereof, under the HSR Act shall have expired or been terminated.
9.7 GOVERNMENTAL APPROVALS. Such Governmental Authorities as may be
required, shall have received notice of, or applications or other filings with
respect to, the transactions contemplated by this Agreement and the Related
Agreements and, where required, shall have approved same.
9.8 INTENTIONALLY DELETED.
9.9 MASTER LEASE ASSIGNMENT. FPA, Purchasing Subsidiary and the
designated "Assignors" thereunder shall have entered into the Master Lease
Assignment.
9.10 PROFESSIONAL GROUP PROVIDER AGREEMENTS. FHCA shall have entered into
a Professional Group Provider Agreement with FHMG in substantially the form of
Exhibit B hereto and with TDMC in substantially the form of Exhibit C hereto.
9.11 RELATED AGREEMENTS. The various parties named therein shall have
entered into the Agreements listed on SCHEDULE 8.14 (RELATED AGREEMENTS), all of
which shall be in full force and effect and none of which shall have been
amended or breached. In addition, each such party other than Seller, Selling
Shareholder, FHMS, Holding Company or any of Holding Company's subsidiaries
shall have delivered to FPA, in the form of a certificate, the equivalent of the
representation made by Seller and FPA with respect to the Related Agreements in
SECTION 5.2 (AUTHORIZATION) and SECTION 6.2 (AUTHORIZATION).
9.12 CONSENTS. All Permits, waivers and consents required to consummate
the transactions contemplated hereby, including the consents listed on SCHEDULES
5.6(b) AND 6.4(b) shall have been obtained.
9.13 MATERIAL ADVERSE CHANGES. No violations or alleged violations of Law
by FHMS, Holding Company or any of their respective Affiliates, including those
arising from patterns or practices engaged in by such Person, other than matters
which have been previously publicly disclosed, shall have (i) resulted in any
Material Adverse Change since the Financial Statement Date in FHMS's Business or
Holding Company's Business or (ii) materially and adversely affected the ability
of Seller or Selling Shareholder to consummate the transactions contemplated
hereby and by the Related Agreements.
9.14 PRE-CLOSING TRANSACTIONS.
(a) TRANSFER OF REAL PROPERTY. Seller shall have caused FHMS to
transfer all real property owned by it in fee (together with all
indebtedness encumbering such real property) to an Affiliate of Seller.
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(b) TRANSFER OF CPR STOCK. Seller shall have caused the stock of
Catalina Professional Recruiters, Inc. to have been transferred from FHMS
to Seller or an Affiliate of Seller.
(c) TRANSFER OF OTHER ASSETS AND LIABILITIES. Seller shall have
caused those other assets and liabilities which are shown to have been
transferred by FHMS, Holding Company or Holding Company's subsidiaries in
the adjustments resulting in the pro forma consolidated balance sheet
attached hereto as SCHEDULE 1.1(b) to have been transferred by FHMS,
Holding Company or one of Holding Company's subsidiaries, as the case may
be.
9.15 TRANSITION AGREEMENT. FPA and Seller shall have entered into the
Transition Agreement.
9.16 REGISTRATION RIGHTS AGREEMENT. FPA and Seller shall have entered into
the Registration Rights Agreement.
9.17 NOTICE OF DESIGNEE. Seller shall have notified the Agent and Selling
Shareholder of Purchasing Shareholder's appointment as Designee in accordance
with the Share Ownership Agreement.
9.18 BOARD APPROVAL. The Board of Directors of FPA shall have approved
this Agreement and the Related Agreements and the transactions contemplated
hereby and thereby.
9.19 STOCKHOLDER APPROVAL. FPA shall have obtained any approval of its
stockholders required by applicable Law to be obtained in connection with the
execution and delivery of this Agreement and the Related Agreements to which FPA
is a party or to consummate the transactions contemplated hereby or thereby.
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9.20 VOTING AGREEMENT. Seller shall have executed and delivered to FPA a
Voting Agreement, containing the terms set forth in the term sheet attached as
Exhibit M hereto and otherwise in form and substance reasonably satisfactory to
the parties hereto.
9.21 PHYSICIANS. The number of physicians employed by Holding Company and
its subsidiaries as of the Closing Date shall not be less than seventy five
percent (75%) of the number of physicians employed by Holding Company and its
subsidiaries as of the date hereof.
9.22 REAL ESTATE MATTERS. Purchasing Subsidiary shall, in its good faith
business judgment, have approved (i) the condition of title to each owned Care
Center, as described in the title commitments and the surveys delivered to or
obtained by Purchasing Subsidiary (provided Purchasing Subsidiary shall not
disapprove any title exception that does not have a material adverse effect on
the use or operation of such Care Center), (ii) environmental audits or studies
of the such Care Centers, (iii) all of the characteristics and aspects of each
Care Centers which may reasonably affect its ownership, operation, use,
development, marketability and/or economic viability, and (iv) the Leases and
service contracts with respect to the Care Centers.
ARTICLE 10
ACTIONS BY SELLER AND FPA AFTER THE CLOSING
10.1 BOOKS AND RECORDS. FPA and Purchasing Subsidiary, on the one hand,
and Seller, on the other, each agree to cooperate with and make available to the
other, during normal business hours, all books and records of such party,
information and employees (without substantial disruption of employment)
retained and remaining in existence after the Closing which are necessary or
useful in connection with any tax inquiry, audit, investigation or dispute, any
litigation or investigation or any other matter requiring any such books and
records, information or employees for any reasonable business purpose, PROVIDED,
HOWEVER, that nothing contained herein shall give FPA or Purchasing Shareholder
a right of access to the consolidated tax returns of Seller. The party
requesting any such books and records, information or employees shall bear all
of the out-of-pocket costs and expenses (including attorneys' fees, but
excluding reimbursement for salaries and employee benefits) reasonably incurred
in connection with providing such books and records, information or employees.
Each of FPA, Purchasing Subsidiary and Seller will retain such books and records
in accordance with its corporate records retention policy or as required by law,
whichever requires retention for a longer period. All information received
pursuant to this SECTION 10.1 shall be subject to the terms of the
Confidentiality Agreement.
10.2 TAXES. Seller shall pay, or cause to be paid, when due all Taxes for
which FHMS, Selling Shareholder, Holding Company or any of Holding Company's
subsidiaries is or may be liable or that are or may become payable with respect
to all periods ending on or prior to the Closing. FPA shall pay, or cause to be
paid, when due all Taxes for which FPA, Purchasing Subsidiary, Purchasing
Shareholder, FHMS, Holding Company or any of Holding Company's subsidiaries is
or may be liable or that are or may become payable with respect to all periods
ending subsequent to the Closing.
10.3 338(h)(10) ELECTION. As soon as practicable after the Closing, and in
no event later than 30 days after the delivery by Seller of the closing date
balance sheet, Seller, FPA, Purchasing Subsidiary and Purchasing Shareholder
will jointly make an election under Section 338(h)(10) of the Code (and a
comparable election under state law) with respect to the purchase of stock of
Holding Company and FHMS. In connection therewith, Seller, Selling Shareholder,
FPA, Purchasing Subsidiary and Purchasing Shareholder agree to cooperate with
each other and use their reasonable best efforts to effect such 338(h)(10)
election. Without limiting the generality of the foregoing, the parties hereto
agree that (i) Seller, Selling Shareholder, FPA, Purchasing Subsidiary and
Purchasing Shareholder shall prepare and file all documents and materials
necessary or appropriate in connection with making the Section 338(h)(10)
Election, (ii) Seller, FPA and Purchasing Subsidiary shall use their reasonable
best efforts to determine the allocation of the "modified
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aggregate deemed sale price" and "adjusted grossed up basis" among the assets of
FHMS (in accordance with the Section 338 Treasury Regulations) and (iii) Seller,
FPA and Purchasing Subsidiary shall use their reasonable best efforts to
determine the allocation of the "modified aggregate deemed sale price" and
"adjusted grossed-up basis" among the assets of Holding Company and its
subsidiaries (in accordance with the Section 338 Treasury Regulations).
10.4 FUTURE CONTRACTUAL ALLIANCES. Seller and FPA intend to expand their
contractual relationships and agree to negotiate in good faith the terms of a
provider contract for the benefit of Seller and its Affiliates and FPA and FPA's
professional provider groups relating to all service areas of FPA and any Seller
Affiliate engaged in the business of offering a benefit program, which overlap,
as those service areas may change from time to time.
10.5 CERTAIN OBLIGATIONS REGARDING EMPLOYEES.
(a) RETAINED OBLIGATIONS. Seller agrees to continue to perform its
obligations relating to the grant of options to TDMC and FHMG employees as
set forth on SCHEDULE 10.5, subject in each case to any conditions or terms
set forth in such arrangements.
(b) EMPLOYEE INFORMATION. In order to facilitate the performance of
such obligations by Seller, FPA, Purchasing Subsidiary and Purchasing
Shareholder agree to and to cause Holding Company and its subsidiaries to
provide to Seller (i) on a monthly basis, a list of employees of Holding
Company, TDMC or FHMG who have been terminated during the prior month and
the date of termination and (ii) at least ten (10) business days prior to
November 1, 1996 and November 1, 1997, a list of TDMC Practitioners who are
eligible to receive options to purchase the common stock of Seller as set
forth on SCHEDULE 10.5 and such other information as is required to
effectuate the grant of such options.
(c) TAIL INSURANCE. Seller shall manage all claims alleging medical
malpractice by any Practitioner that fall within the "tail coverage"
purchased by Holding Company and its subsidiaries immediately prior to
Closing. To facilitate the management of such claims, FPA, Purchasing
Subsidiary and Purchasing Shareholder agree to and agree to cause Holding
Company and its subsidiaries to notify Seller of any potential claims which
may fall within such tail coverage within ten (10) days of the date on
which FPA, Purchasing Subsidiary, Purchasing Shareholder or any of their
Affiliates first becomes aware of the existence of such potential claim.
If notice of a claim or potential claim is not given in accordance with the
preceding sentence, then neither Seller nor any of its Affiliates,
including the Affiliate providing the tail coverage, shall have any
liability with respect to such claim or potential claim, but only if Seller
or one of its Affiliates is actually prejudiced by such failure to give
appropriate notice.
10.6 FOUNDATION NAME. Notwithstanding anything else contained in this
Agreement, it is the express intent of the parties hereto and such parties
hereby agree that neither FPA nor its Affiliates (including Purchasing
Subsidiary) shall gain any right, title or interest in the names "Foundation,"
"Foundation Health," "Foundation Health Medical Group," "Foundation Health
Medical Services," or any similar name or derivation thereof (the "FOUNDATION
NAME") pursuant to this Agreement, the Related Agreements and the transactions
contemplated hereby and thereby, it being expressly understood that Seller and
its Affiliates, as the case may be, shall retain all right, title and interest
in and to the Foundation Name and that each of FHMS, Holding Company and Holding
Company's subsidiaries shall forfeit any interest it might be deemed to have in
the Foundation Name upon the transfer of the FHMS Shares and the Holding Company
Shares, respectively, as contemplated hereby. Notwithstanding the foregoing,
for a period of six (6) months (the "TRANSITION PERIOD") following the date
hereof, and for the sole purpose of facilitating the transition of FHMS, Holding
Company and Holding Company's subsidiaries from subsidiaries of Seller and
Selling Shareholder to subsidiaries of Purchasing Subsidiary and Purchasing
Shareholder, Seller grants FPA a non-exclusive, non-transferable license to use
the names Foundation Health Medical Group and Foundation Health Medical Services
in California only. Upon the expiration of the Transition Period, FPA and
Purchasing Subsidiary shall have caused FHMS to and Purchasing Shareholder shall
have caused Holding Company to (i) appropriately dispose of all letterhead,
signage and other items containing or using the Foundation Name and (ii) to have
ceased using the Foundation Name in any manner whatsoever.
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10.7 REIMBURSEMENT FOR CERTAIN TAX MATTERS.
(a) REIMBURSEMENT. If each of FPA, Purchasing Subsidiary and
Purchasing Shareholder complies with its obligations under SECTION 10.3
hereof, but a basis in the assets of Holding Company and its subsidiaries
equal to the "adjusted grossed-up basis" of the assets of such companies as
of the date of Closing, calculated in the manner provided for pursuant to
the Treasury Regulations under Section 338 of the Code, is not obtained
thereby (for reasons other than any action or inaction by FPA or any of its
Affiliates), then Seller shall pay to FPA the amount of the foregone tax
benefit, as defined below, resulting from the failure to obtain such an
adjusted grossed-up basis for those calendar quarters with respect to which
the applicable period of limitations shall not have expired (such
expiration to be measured as of the date it is determined that the
"adjusted grossed up basis" has not been obtained) (the "Tax Indemnity").
For purposes of this indemnity, the foregone tax benefit for any calendar
quarter shall conclusively be presumed to equal the present value,
determined as of the Closing Date, of the estimated future tax benefit
for such calendar quarter determined by assuming a deduction attributable
to depreciation or amortization for such period in excess of the amount
which would otherwise be available in such period in the amount provided
for on SCHEDULE 10.7 attached hereto, at a discount rate and a combined
federal and state income tax rate such that the present value of the
foregone tax benefit from all deductions set forth on SCHEDULE 10.7 is
equal to Thirty Seven Million Dollars ($37,000,000) as of the Closing Date.
The amount determined pursuant to the foregoing provisions of this SECTION
10.7(a) shall be increased by the amount of any applicable penalties that
result from a failure to successfully make the 338(h)(10) election that
triggers Seller's indemnification obligation under this SECTION 10.7(a) and
by the amount that would have been payable as interest (had such amount
constituted a debt incurred at the date of this Agreement) from the date of
this Agreement to the date payment of such amount is made, for this purpose
conclusively presuming that the applicable interest rate is LIBOR plus 45
basis points per annum. The indemnity provided for hereunder is the sole
and exclusive remedy of FPA and its Affiliates in the event that a basis in
the assets of Holding Company and its subsidiaries equal the "adjusted
grossed-up basis" of the assets of such companies is not obtained.
(b) PRE-ACQUISITION LOSSES. In the event, but only in the event,
that Seller is or has been obligated to pay the Tax Indemnity, and
notwithstanding anything else contained herein, if, as and when FPA,
Purchasing Subsidiary, FHMS or Holding Company or any of Holding Company's
subsidiaries realizes any tax benefits attributable to pre-acquisition
losses of FHMS, Holding Company or its subsidiaries, FPA will pay to Seller
fifty percent (50%) of the amount of such tax benefit. The amount of FPA's
tax benefit shall equal the difference between the income taxes payable by
FPA (or any Affiliate of FPA) without the utilization of such
pre-acquisition losses, and the amount of such taxes actually paid by FPA
(or any Affiliate of FPA). In the event the use of such pre-acquisition
losses results in a refund of previously paid tax, the amount of the tax
benefits shall include any interest payments made in connection with such
refund. Within 30 days of the filing of FPA's (or its Affiliate's) tax
return (or 30 days after receipt of any payment attributable to a claim for
refund) claiming the benefit of any pre-acquisition losses, FPA will cause
its auditors to deliver a certificate to Seller setting forth the
calculation of FPA's (or its Affiliate's) tax benefit, and certifying that
such calculation is correct in all material respects. The cost of such
certification shall be borne by Seller. At Seller's option, any amounts
payable from FPA or any Affiliate of FPA to Seller under this Section may
be offset against any amounts payable from Seller to FPA under this
Section.
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(c) CONTEST AND CONTROL.
(i) FHC and FPA shall promptly (but in any event within 30 days
of receipt of notice) give written notice (the "NOTICE") to each
other of any inquiry, discussions with a tax authority, proposed
adjustment, assertion of a claim, or the commencement of any suit,
action or proceeding against such party (the "CONTESTED PARTY," and
the party receiving the Notice, the "NOTICED PARTY") that challenges
or questions the availability of a Section 338(h)(10) election based
upon facts and circumstances uniquely within the control of the
Noticed Party or based upon actions taken by, or failed to be taken
by, the Noticed Party (each, a "PROPOSED ADJUSTMENT"). The failure of
a Contested Party to provide the Noticed Party with Notice within the
above time frame shall relieve the Noticed Party from its obligation
to indemnify if such failure results in the loss or material
impairment of the Noticed Party's rights under this Section 10.7(c).
(ii) The Contested Party shall give the Noticed Party all
information, including records in its possession and witnesses within
its control, with respect to any Proposed Adjustment, and in each case
the underlying facts relating thereto. In all matters related to the
defense of a Proposed Adjustment, the Contested Party shall act in a
reasonable manner. The Noticed Party and its counsel shall have the
right to participate with the Contested Party and its counsel in
(i) all conferences, meetings or proceedings with any tax authority,
the subject matter of which is or includes any Proposed Adjustment,
and (ii) all appearances before any court or administrative agency,
the subject matter of which includes any Proposed Adjustment. The
Noticed Party shall have the right to monitor and review the Contested
Party's defense of any Proposed Adjustment, including specifically the
right to review and comment on any briefs or other filings made in
courts or to taxing authorities which take substantive positions with
respect to Proposed Adjustments, a reasonable period of time before
such filings are made. The Noticed Party's right to participate
referred to herein shall include, without limitation, the right to
participate in the submission and determination of the contents of
documentation, protests, memoranda of fact and law and briefs, the
conduct of oral arguments or presentations, the selection of
witnesses, and the negotiation of stipulations of fact, all as may be
deemed appropriate by the Noticed Party in its sole discretion but
solely with respect to any Proposed Adjustment. A settlement of a
Proposed Adjustment shall be binding upon the Noticed Party (with the
result that the indemnity obligation under Section 10.7 hereof shall
be effective) only if the Noticed Party consents to such settlement or
unreasonably withholds consent to such settlement.
10.8 COVENANT. For a period commencing on the Closing Date and thereafter
for a period of three (3) years, each of Seller and FHCA shall use their best
efforts to encourage commercial members of FHCA and its affiliated health plans
who, as of the Closing Date, have primary care physicians who are employees of
FHMG or TDMC, to continue to select primary care physicians who are employees of
FHMG or TDMC; in the event certain of such commercial members become unassigned
due to the fact that their primary care physician is no longer employed by FHMG
or TDMC and such members do not select another FHCA contracting physician,
Seller and FHCA will assign such non-assigned members to a physician who is
employed by FHMG or TDMC, subject in all cases to adequate availability and
accessibility and other regulatory requirements of the parties.
10.9 SOLICITATION OF EMPLOYEES. During the period from the date hereof
until that date which is six (6) months after the Closing Date, neither Seller
or its Affiliates on the one hand, nor FPA or its Affiliates, on the other shall
initiate or maintain contact with any officer, director or employee of the other
regarding the employment of such individual, except for public solicitation of
employment by general advertisement, contacts regarding employment initiated by
the individual involved and contacts with Employees regarding their continued
employment after the Closing.
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ARTICLE 11
SURVIVAL AND INDEMNIFICATION
11.1 SURVIVAL. Each of the representations, warranties and covenants of
each of FPA, Purchasing Subsidiary and Seller contained in this Agreement shall
be deemed renewed by such party at the Closing as if made at such time and shall
survive the Closing and shall continue in full force and effect for one (1) year
thereafter, other than the representations and warranties of Seller made in
SECTION 5.17 (TAXES), which shall survive for the applicable statute of
limitations. A material misrepresentation or breach of warranty that is either
(A) disclosed in a written notice, delivered by the breaching party to the non-
breaching party after the date of this Agreement and at or prior to the Closing
or (B) otherwise actually known to the non-breaching party prior to the Closing,
allows the non-breaching party to refuse to proceed with the Closing, but does
not give rise to a cause of action for damages or other relief. By nevertheless
proceeding with the Closing, the non-breaching party waives any remedies for any
misrepresentation or breach of warranty of which it was aware prior to the
Closing.
11.2 NO OTHER REPRESENTATIONS. Notwithstanding anything to the contrary
contained in this Agreement, it is the explicit intent of each party hereto that
Seller is making no representations or warranties whatsoever, express or
implied, except those representations and warranties contained in ARTICLE 5 and
neither FPA nor Purchasing Subsidiary is making any representations or
warranties whatsoever, express or implied, except those representations and
warranties contained in ARTICLE 6. In particular, but without limiting the
foregoing, Seller makes no representation or warranty to FPA with respect to any
financial projection or forecast relating to the Businesses and neither FPA nor
Purchasing Subsidiary makes any representation or warranty to Seller with
respect to any financial projection or forecast relating to FPA's business.
With respect to any projection or forecast delivered by or on behalf of any
party hereto to any other party hereto, the party receiving such information
acknowledges that (i) there are uncertainties inherent in attempting to make
such projections and forecasts, (ii) such party is familiar with such
uncertainties, (iii) such party is taking full responsibility for making its own
evaluation of the adequacy and accuracy of all such projections and forecasts
furnished to it and (iv) such party shall have no claim against the party
furnishing such information with respect thereto.
11.3 INDEMNIFICATION BY SELLER. Except as otherwise expressly provided in
this ARTICLE 11, Seller shall defend, indemnify and hold harmless FPA and shall
reimburse FPA for, from and against, each and every demand, claim, loss,
liability, judgment, damage, cost and expense (including without limitation,
reasonable attorneys' fees), ("LOSSES") imposed on or incurred by FPA, relating
to, resulting from or arising out of (i) any inaccuracy in any representation or
warranty made by Seller under this Agreement and such inaccuracy is not
disclosed in the Disclosure Schedule or in the Financial Statements; (ii) any
breach of a covenant of this Agreement required to be performed by Seller or
Selling Shareholder; and (iii) any taxes of FHMS, Holding Company or any of
Holding Company's subsidiaries, relating to any pre-Closing period.
11.4 LIMITATIONS ON INDEMNITY. Notwithstanding anything to the contrary
contained in this Agreement, no amounts of indemnity shall be payable by Seller
to FPA as a result of any claim in respect of a Loss arising under SECTION 11.3
or by FPA to Seller as a result of a Loss arising under SECTION 11.5:
(a) unless, until and then only to the extent that the party
requesting indemnification (the "INDEMNITEE") has suffered, incurred,
sustained or become subject to Losses referred to in SECTION 11.3 (other
than Losses arising from a breach of SECTION 5.17) or SECTION 11.5 (other
than Losses arising from Taxes for post-Closing periods), as the case may
be, which exceed $200,000 in the aggregate;
(b) with respect to any claim for indemnification thereunder, unless
the Indemnified Person has given the Indemnifying Person proper notice in
accordance with SECTION 11.6, as applicable, with respect to such claim,
setting forth in reasonable detail the specific facts and circumstances
pertaining thereto, (A) as soon as practical following the time at which
the Indemnified Person discovered or reasonably should have discovered such
claim (except to the extent the Indemnifying Person is not prejudiced by
any delay in the delivery of such notice) and (B) in any event prior to the
expiration of one (1) year following the Closing Date;
(c) with respect to any Loss, to the extent that the Indemnitee had a
reasonable opportunity, but failed in good faith to mitigate the Loss,
including but not limited to the failure to use commercially reasonable
efforts to recover under a policy of insurance or under a contractual right
of set-off or indemnity;
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(d) with respect to any Loss suffered, incurred or sustained by the
Indemnitee or to which it becomes subject, to the extent it arises from or
was caused by actions taken or failed to be taken by the Indemnitee or any
of its Affiliates after the Closing.
Notwithstanding anything else contained herein, the maximum amount for
which Seller or FPA may be liable under this ARTICLE 11, in the aggregate for
all claims made and Losses suffered by the other, shall be equal to Twenty
Million U.S. Dollars ($20,000,000), PROVIDED, HOWEVER, that Seller shall
indemnify FPA for all Losses arising from a breach of SECTION 5.17 and,
PROVIDED, FURTHER, that FPA shall indemnify Seller from all Losses arising from
Taxes for any post-Closing period.
11.5 INDEMNIFICATION BY FPA. Except as otherwise expressly provided in
this ARTICLE 11, FPA shall defend, indemnify and hold harmless Seller and shall
reimburse Seller for, from and against all Losses imposed on or incurred by
Seller, relating to, resulting from or arising out of (i) any inaccuracy in any
representation or warranty made by FPA under this Agreement, which inaccuracy is
not disclosed in the Disclosure Schedule or in the FPA Financial Statements
(ii) any breach of a covenant of this Agreement required to be performed by FPA
or Purchasing Shareholder; and (iii) any taxes of FHMS, Holding Company or any
of Holding Company's subsidiaries, relating to any post-Closing period.
11.6 NOTICE AND DEFENSE OF THIRD-PARTY CLAIMS. If any action, claim or
proceeding shall be brought or asserted under this SECTION 11.6 against an
indemnified party or any successor thereto (the "INDEMNIFIED PERSON") in respect
of which indemnity may be sought under this ARTICLE 11 from an indemnifying
person or any successor thereto (the "INDEMNIFYING PERSON"), the Indemnified
Person shall give prompt written notice of such action or claim to the
Indemnifying Person who shall assume the defense thereof, including the
employment of counsel reasonably satisfactory to the Indemnified Person and the
payment of all expenses; the Indemnified Person shall have the right to employ
separate counsel in any of the foregoing actions, claims or proceedings and to
participate in the defense thereof, but the fees and expenses of such counsel
shall be at the expense of the Indemnified Person unless both the Indemnified
Person and the Indemnifying Person are named as parties and the Indemnified
Person and the Indemnifying Person shall in good faith determine that the
representation by the same counsel is inappropriate. In the event that the
Indemnifying Person, within ten days after notice of any such action or claim,
fails to assume the defense thereof, the Indemnified Person shall have the right
to undertake the defense, compromise or settlement of such action, claim or
proceeding for the account of the Indemnifying Person, subject to the right of
the Indemnifying Person to assume, at its expense, the defense of such action,
claim or proceeding with counsel reasonably satisfactory to the Indemnified
Person at any time prior to the settlement, compromise or final determination
thereof. Anything in this ARTICLE 11 to the contrary notwithstanding, the
Indemnifying Person shall not, without the Indemnified Person's prior written
consent, settle or compromise any action or claim or consent to the entry of any
judgment with respect to any action, claim or proceeding for anything other than
money damages paid by the Indemnifying Person. The Indemnifying Person may,
without the Indemnified Person's prior written consent, settle or compromise any
such action, claim or proceeding or consent to entry of any judgment with
respect to any such action or claim that requires solely the payment of money
damages by the Indemnifying Person and that includes as an unconditional term
thereof the release by the claimant or the plaintiff of the Indemnified Person
from all liability with respect to such action, claim or proceeding.
11.7 LIMITATION. An Indemnifying Person shall have no liability under this
ARTICLE 11 unless notice of a claim for indemnity, or notice of facts as to
which an indemnifiable Loss is expected to be incurred, shall have been given
prior to ninety days after the expiration of the appropriate statute of
limitations with respect thereto, as the same may be extended from time to time
by the Indemnifying Person.
11.8 EXCLUSIVITY. Except as otherwise specifically provided herein, the
provisions of this ARTICLE 11 shall be the exclusive basis for the assertion of
claims by or imposition of liability on the parties hereto arising under or as a
result of this Agreement. Section 11.4 shall not apply to any fraudulent
misrepresentation.
11.9 RIGHT OF SET-OFF. The parties hereto agree that Seller may satisfy
any obligation to pay any amount to FPA arising under this Article 11 or SECTION
10.7 by, at Seller's option, either (i) paying cash, (ii) foregoing interest
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payments due under the Bridge Note and/or the Consolidated Note equal to the
amount so payable by Seller or (iii) reducing the principal amount of the Bridge
Note and/or the Consolidate Note by the amount so payable. In addition, if FPA
is finally determined under this Agreement to be obligated to pay Seller any
amount under this Article 11 or SECTION 10.7, Seller may withhold any amounts
due from Seller or any of Seller's Affiliates to FPA or any of FPA's Affiliates
under any provider agreement, (including the Professional Group Provider
Agreements) which amount will be set-off against the amount so payable,
PROVIDED, HOWEVER, that the amount withheld under any provider agreement in any
month may not exceed five percent of the total amount due under such provider
agreement for such month.
ARTICLE 12
MISCELLANEOUS
12.1 TERMINATION.
(a) TERMINATION. This Agreement may be terminated at any time prior
to Closing:
(i) By mutual written consent of FPA and Seller or Selling
Shareholder;
(ii) By FPA if there is a material breach of any representation
or warranty set forth in Article 5 hereof or any covenant or
agreement to be complied with or performed by Seller or Selling
Shareholder pursuant to the terms of this Agreement which would render
impossible the satisfaction of a condition set forth in Article 9 (and
such condition is not waived in writing by FPA);
(iii) By Seller or Selling Shareholder if there is a material
breach of any representation or warranty set forth in Article 6 hereof
or of any covenant or agreement to be complied with or performed by
FPA, Purchasing Subsidiary or Purchasing Shareholder pursuant to the
terms of this Agreement which would render impossible the satisfaction
of a condition set forth in Article 8 (and such condition is not
waived in writing by Seller); or
(iv) By any party hereto if the Closing has not occurred by
October 31, 1996.
(b) IN THE EVENT OF TERMINATION. In the event of termination of this
Agreement:
(i) Each party hereto will redeliver all documents, work papers
and other material of each other party hereto relating to the
transactions contemplated by this Agreement and the Related
Agreements, whether so obtained before or after the execution hereof,
to the party furnishing the same;
(ii) The provisions of the Confidentiality Agreement shall
continue in full force and effect; and
(iii) No party hereto shall have any liability or further
obligation to any other party to this Agreement or the Related
Agreements, except (x) as stated in subsections (i) , (ii), (iv), (v)
and (vi) of this SECTION 12.1(b), and (y) for any willful breach of
this Agreement occurring prior to the proper termination of this
Agreement.
(iv) If this Agreement is not consummated because either Seller
or FPA breaches a material representation or warranty or fails to
perform a material covenant contained herein, and the other party has
not breached any material representation or warranty or failed to
perform a material covenant, and the non-breaching party chooses to
terminate this Agreement as a direct result of such breach or failure,
the breaching party shall promptly pay the non-breaching party (x) up
to $500,000 to reimburse the non-breaching party for its documented
expenses (including the fees and expenses of counsel, accountants,
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consultant and advisors) incurred in connection with the transactions
contemplated by this Agreement (the "Expenses") and (y) a fee of
$1,000,000 as liquidated damages.
(v) If this Agreement is not consummated because Seller or FPA
does not obtain necessary board or stockholder approval, then such
party failing to obtain such approval shall pay the other party
promptly up to $500,000 in Expenses.
(vi) If this Agreement is not consummated for any reason, in
addition to any payments described in this Section, the Seller shall
pay FPA promptly $3,000,000, which may be paid in a reduction in
principal of any existing indebtedness owed by FHC and its affiliates
to FPA and its affiliates, including any affiliated medical groups.
12.2 ASSIGNMENT AND NO THIRD PARTY BENEFICIARIES. Neither this Agreement
nor any of the rights or obligations hereunder may be assigned by any party
without the prior written consent of the other parties. Subject to the
foregoing, this Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns, and no
other person shall have any right, benefit or obligation under this Agreement as
a third party beneficiary or otherwise.
12.3 NOTICES. All notices, requests, demands and other communications
which are required or may be given under this Agreement shall be in writing and
shall be deemed to have been duly given when received if personally delivered;
when transmitted if transmitted by facsimile; the day after being sent, if sent
for next day delivery by recognized overnight delivery service (E.G., FEDERAL
EXPRESS); and upon receipt, if sent by certified or registered mail, return
receipt requested. In each case notice shall be given as follows:
If to Seller or Selling Shareholder, addressed to:
Foundation Health Corporation
3400 Data Drive
Rancho Cordova, California 95670
Facsimile Number: (916) 631-5335
Attention: Kirk A. Benson, President and Chief Operating Officer
- - Commercial Operations
With a copy to:
Pillsbury Madison & Sutro LLP
235 Montgomery Street
San Francisco, California 94104
Facsimile Number: (415) 983-1200
Attention: Linda C. Williams, Esq.
If to FPA, Purchasing Subsidiary or Purchasing
Shareholder, addressed to:
FPA Medical Management,Inc.
2878 Camino Del Rio South, Suite 301
San Diego, California 92108-3846
Facsimile Number: (619) 299-0708
Attention: Dr. Seth M. Flam,
Chief Executive Officer
With copies to:
38
<PAGE>
FPA Medical Management,Inc.
2878 Camino Del Rio South, Suite 301
San Diego, California 92108-3846
Facsimile Number: (619) 299-0708
Attention: James A. Lebovitz, Esq.
Senior Vice President, General Counsel and Secretary
and
Latham & Watkins
701 B Street, Suite 2100
San Diego, California 92101-8197
Facsimile Number: (619) 696-7419
Attention: Andrew Singer, Esq.
or to such other place and with such other copies as a party may designate as to
itself by written notice to the others.
12.4 CHOICE OF LAW. This Agreement shall be governed by, construed and
enforced in accordance with the laws of the State of Delaware as applied to
contracts entered into solely between residents of, and to be performed entirely
in, such state.
12.5 ENTIRE AGREEMENT; AMENDMENTS AND WAIVERS. This Agreement and the
Related Agreements to which the parties hereto are parties, together with all
exhibits and schedules to be attached hereto and thereto (including the
Disclosure Schedule), constitute or will constitute the entire agreement among
the parties pertaining to the subject matter hereof and supersede or will
supersede all prior agreements, understandings, negotiations and discussions,
whether oral or written, of the parties, other than the Confidentiality
Agreement. This Agreement may not be amended except by an instrument in writing
signed on behalf of each of the parties hereto. No amendment, supplement,
modification or waiver of this Agreement shall be binding unless executed in
writing by the party to be bound thereby. No waiver of any of the provisions of
this Agreement shall be deemed to or shall constitute a waiver of any other
provision hereof (whether or not similar), nor shall such waiver constitute a
continuing waiver unless otherwise expressly provided.
12.6 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. This Agreement may be
executed by original or facsimile signature if the party executing this
Agreement by facsimile signature delivers an original signature to the other
parties hereto promptly thereafter.
12.7 EXPENSES. Except as otherwise specified in this Agreement, each party
hereto shall pay its own legal, accounting, out-of-pocket and other expenses
incident to this Agreement and to any action taken by such party in preparation
for carrying this Agreement into effect.
12.8 INVALIDITY. In the event that any one or more of the provisions
contained in this Agreement or in any Related Agreement, shall, for any reason,
be held to be invalid, illegal or unenforceable in any respect, then to the
maximum extent permitted by law, such invalidity, illegality or unenforceability
shall not affect any other provision of this Agreement or any other such
instrument.
12.9 PUBLICITY. Except as may be required by law, FPA shall not and shall
not permit any of its Affiliates to and Seller and Selling Shareholder shall not
and shall not permit any of their respective Affiliates to, issue any press
release or make any public statement regarding the transactions contemplated
hereby or by the Related Agreements, without prior written approval of the
other. FPA and Seller will issue joint press releases or public announcements
after the execution and delivery of this Agreement and after the Closing.
Seller, Selling Shareholder, FPA and Purchasing Shareholder each agree to
portray the others in a positive light to enrollees and patients of the parties,
other providers and the investment and financial community.
39
<PAGE>
12.10 SCHEDULES. The inclusion of any item in one schedule hereto
comprising part of the Disclosure Schedule shall be deemed for purposes of this
Agreement to be an inclusion of such item in all schedules comprising part of
the Disclosure Schedule.
40
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
SELLER FPA
By: /s/ Daniel D. Crowley By: /s/ Seth Flam
------------------------- -------------------------
Name: Daniel D. Crowley Name: Seth Flam
------------------ ------------------
Title: President and CEO Title: President and CEO
------------------ ------------------
PURCHASING SHAREHOLDER PURCHASING SUBSIDIARY
By: /s/ Seth Flam By: /s/ Seth Flam
------------------------- -------------------------
Name: Seth Flam Name: Seth Flam
------------------ -------------------------
Title: President and CEO Title: President and CEO
------------------ ------------------
SELLING SHAREHOLDER
By: /s/ Jonathan H. Scheff, M.D.
-------------------------------
Name: Jonathan H. Scheff, M.D.
------------------------
Title: President
------------------------
41
<PAGE>
DISCLOSURE SCHEDULE
1.1(a) Care Centers
1.1(b) Holding Company and FHMS Financial Statements/Pro Forma
Consolidated Balance Sheet
2.1 FHMS Share Ownership
3.2 Holding Company Share Ownership
5.3 Material Adverse Changes
5.4 Leased Real Property
5.5 Material Contracts
5.6(a) Seller/Holding Company Permits
5.6(b) Seller/Holding Company Filings
5.9 Litigation
5.10 Compensation
5.12 Employee Benefit Matters
5.13 Insurance Policies
5.14 Liabilities
5.15 Certain Rights Relating to Shares
5.19 Subsidiaries
5.22(e) Pending Transfers
6.3 No Conflicts
6.4(a) FPA Permits
6.4(b) FPA Filings
6.7 Material Adverse Changes
6.9 Litigation
6.10 Liabilities
6.11 Capital Structure
7.4 Conduct of Business
7.5(b) Employee Liabilities
7.14 License and Maintenance Agreements
8.14 Related Agreements
10.5 Retained Employee Obligations
10.7 Depreciation Deduction
-i-
<PAGE>
EXHIBITS
Exhibit A Letter Agreement Regarding Matching Contributions
Exhibit B Form of Professional Group Provider Agreement (CA)
Exhibit C Form of Professional Group Provider Agreement (AZ)
Exhibit D Term Sheet Regarding Bridge Note
Exhibit E Term Sheet Regarding Consolidated Note
Exhibit F Term Sheet Regarding Registration Rights
Exhibit G Term Sheet Regarding Guaranty
Exhibit H Reserved
Exhibit I Form of Master Lease Assignment
Exhibit J Term Sheet Regarding General Release
Exhibit K Term Sheet Regarding Pledge Agreements
Exhibit L Term Sheet Regarding Security Agreements
Exhibit M Term Sheet Regarding Voting Agreement
-ii-
<PAGE>
EXHIBIT 11.0
EARNINGS PER SHARE CALCULATION
UTILIZING THE TREASURY STOCK METHOD
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30, YEAR ENDED JUNE 30,
------------------------------ ---------------------------
1996 1995 1996 1995
------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Proceeds upon exercise of options outstanding $ 82,612 $ 46,780
------------- --------------
------------- --------------
Average market price of common stock $ 38.53 $ 29.45
------------- --------------
------------- --------------
Weighted average common shares outstanding 58,776,537 57,115,655
Issued shares - exercise of options 2,593,214 1,863,165
Shares assumed to be repurchased with proceeds from exercise (2,144,027) (1,588,539)
------------- -------------- -------------- --------------
Weighted average shares outstanding (A) 59,225,724 57,390,281 58,292,971 54,780,162
------------- -------------- -------------- --------------
------------- -------------- -------------- --------------
Net income (B) $ 43,539 $ 38,774 $ 166,440 $ 49,449
------------- -------------- -------------- --------------
------------- -------------- -------------- --------------
Earnings per share ((B) divided by (A)) $ 0.74 $ 0.68 $ 2.86 $ 0.90
------------- -------------- -------------- --------------
------------- -------------- -------------- --------------
</TABLE>
<PAGE>
EXHIBIT 12.0
FOUNDATION HEALTH CORPORATION
RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------------------------------------
1992 1993 1994 1995 1996
------------ ------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
1. EARNINGS :
(a) Income before income taxes $ 91,601 $ 136,999 $ 165,873 $ 78,532 $ 240,595
(b) Interest expense, net 6,035 4,239 12,709 11,555 15,099
(c) 1/3 operating rental expense 3,960 4,825 7,081 8,475 11,929
------------ ------------- ------------- ------------ -------------
Total $ 101,596 $ 146,063 $ 185,663 $ 98,562 $ 267,623
------------ ------------- ------------- ------------ -------------
------------ ------------- ------------- ------------ -------------
2. FIXED CHARGES :
(a) Interest expense $ 6,035 $ 4,239 $ 13,446 $ 13,095 $ 15,814
(b) 1/3 operating rental expense 3,960 4,825 7,081 8,475 11,929
------------ ------------- ------------- ------------ -------------
Total $ 9,995 $ 9,064 $ 20,527 $ 21,570 $ 27,743
------------ ------------- ------------- ------------ -------------
------------ ------------- ------------- ------------ -------------
Ratio ( 1 divided by 2 ) 10.2 16.1 9.0 4.6 9.6
------------ ------------- ------------- ------------ -------------
------------ ------------- ------------- ------------ -------------
</TABLE>
<PAGE>
EXHIBIT 13.1
Report of Ernst & Young, Independent Auditors
Stockholders and Board of Directors
Intergroup Healthcare Corporation
We have audited the consolidated statements of income, changes in stockholders'
equity, and cash flows of Intergroup Healthcare Corporation for the year ended
December 31, 1993. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows of Intergroup Healthcare Corporation for the year ended December 31,
1993 in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Tucson, Arizona
February 16, 1994, except
Note 17 as to which the date is
March 18, 1994
-70-
<PAGE>
EXHIBIT 13.2
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
of Thomas-Davis Medical Centers, P.C.
Tucson, Arizona
We have audited the consolidated statements of operations, cash flows, and
changes in shareholders' equity of Thomas-Davis Medical Centers, P.C. and
Subsidiaries for the year ended December 31, 1993. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit. We did not
audit the financial statements of Intergroup Healthcare Corporation, a 62.6%
owned subsidiary, which statements reflect total revenues of $392,036,000 for
the year ended December 31, 1993. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for Intergroup Healthcare Corporation, is based
solely on the report of the other auditors.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the results of the operations and cash flow of Thomas-Davis
Medical Centers, P.C. and Subsidiaries for the year ended December 31, 1993, in
conformity with generally accepted accounting principles.
STEVENSON, JONES & HOLMASS, P.C.
Tuscon, Arizona
April 27, 1994
-71-
<PAGE>
<PAGE>
EXHIBIT 13.3
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of CareFlorida Health Systems, Inc.
We have audited the consolidated statements of income, changes in stockholders'
equity, and cash flows of CareFlorida Health Systems, Inc. And Subsidiaries for
the year ended December 31, 1993. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash flows of
CareFlorida Health Systems, Inc. And Subsidiaries for the year ended December
31, 1993 in conformity with generally accepted accounting principles.
COOPERS & LYBRAND LLP
Miami, Florida
February 28, 1994
-72-
<PAGE>
EXHIBIT 21.0
<TABLE>
<CAPTION>
SIGNIFICANT SUBSIDIARIES
CORPORATION STATE OF INCORPORATION
----------------------------------------------------------------------------------------------------------
<S> <C>
AMERICAN VITALCARE, INC. California
ASSOCIATED CLAIMS MANAGEMENT OF NEVADA, INC. Nevada
BUSINESS INSURANCE COMPANY Delaware
CALIFORNIA COMPENSATION INSURANCE California
CAREFLORIDA HEALTH PLAN, INC. Florida
CATALINA PROFESSIONAL RECRUITERS, INC. Arizona
CENTURY MEDICAL CORP., DBA CENTURY MEDICAL MANAGEMENT California
CLAIMS TECHNICAL SERVICES, INC. Delaware
CMP-HEALTH ADMINISTRATORS, INC. Florida
COMBINED BENEFITS LIFE INSURANCE COMPANY California
DENTICARE OF CALIFORNIA, INC. California
EAST LOS ANGELES DOCTORS HOSPITAL, INC. California
FH-ARIZONA SURGERY CENTER, INC. California
FH ASSURANCE COMPANY Cayman Islands
FH SURGERY CENTERS, INC. California
FH SURGERY LIMITED, INC. California
FHC INTERNATIONAL, INC. Delaware
FOUNDATION HEALTH (UNLIMITED) United Kingdom
FOUNDATION HEALTH FACILITIES, INC. California
FOUNDATION HEALTH FEDERAL SERVICES, INC. Delaware
FOUNDATION HEALTH INTERNATIONAL MANAGEMENT SERVICES California
FOUNDATION HEALTH MEDICAL GROUP, FLORIDA, INC. Florida
FOUNDATION HEALTH MEDICAL RESOURCE MANAGEMENT, DBA REVIEWCO California
FOUNDATION HEALTH MEDICAL SERVICES California
FOUNDATION HEALTH NATIONAL LIFE INSURANCE COMPANY Texas
FOUNDATION HEALTH PHARMACEUTICAL SERVICES, NC. DBA APOLLO ENTERPRISES California
FOUNDATION HEALTH PREFERRED ADMINISTRATORS California
FOUNDATION HEALTH PSYCHCARE LIMITED United Kingdom
FOUNDATION HEALTH PSYCHCARE SERVICES, INC. California
FOUNDATION HEALTH TRAVEL LTD. United Kingdom
-73-
<PAGE>
FOUNDATION HEALTH VISION SERVICES, DBA AVP VISION PLAN California
FOUNDATION HEALTH WAREHOUSE COMPANY California
FOUNDATION HEALTH, A CALIFORNIA HEALTH PLAN California
FOUNDATION HEALTH, A COLORADO HEALTH PLAN, INC. Colorado
FOUNDATION HEALTH, A LOUISIANA HEALTH PLAN, INC. Louisiana
FOUNDATION HEALTH, A SOUTH FLORIDA HEALTH PLAN, INC. Florida
FOUNDATION HEALTH, A TEXAS HEALTH PLAN, INC. Texas
FOUNDATION HEALTH, AN ALABAMA HEALTH PLAN, INC. Alabama
FOUNDATION HEALTH, AN OKLAHOMA HEALTH PLAN, INC. Oklahoma
FOUNDATION INTEGRATED RISK MANAGEMENT SOLUTIONS, INCORPORATED California
GEM HOLDING CORPORATION Utah
GEM INSURANCE COMPANY Utah
HEALTH MANAGEMENT CENTER WEST, INC. Massachusetts
HEALTH MANAGEMENT CENTER WISCONSIN, INC. Wisconsin
HEALTH MANAGEMENT CENTER, INC. Massachusetts
HMC PPO, INC. Massachusetts
INTEGRATED PHARMACEUTICAL SERVICES California
INTERCARE, INC. Arizona
INTERGROUP HEALTH PLAN, INC., DBA AHCCCS SELECT Arizona
INTERGROUP HEALTHCARE CORPORATION OF UTAH Utah
INTERGROUP OF UTAH, INC. Utah
INTERGROUP PREPAID HEALTH SERVICES OF ARIZONA, INC. Arizona
INTERLEASE OF ARIZONA, INC. Arizona
JANNA CORPORATION Delaware
MANAGED ALTERNATIVE CARE, INC. California
MANAGED HEALTH NETWORK California
MANAGED HEALTH NETWORK, INC. Delaware
MEDNET EUROPE United Kingdom
MEDNET SERVICES LIMITED United Kingdom
MEMORIAL HOSPITAL OF GARDENA, INC. California
MHN REINSURANCE COMPANY OF ARIZONA Arizona
MHN SERVICES California
PREFERRED HEALTH PROVIDERS, INC. Florida
</TABLE>
-74-
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in: (1) Registration
Statement on Form S-8 (No. 33-36847) relating to the Foundation Health
Corporation Profit Sharing and 401(k) Plan, (2) Registration Statement on
Form S-8 (No. 33-36850) relating to the Foundation Health Corporation 1990
Stock Option Plan, (3) Registration Statement on Form S-8 (No. 33-36849)
relating to the Foundation Health Corporation Employee Stock Purchase Plan,
(4) Registration Statement on Form S-8 (No. 33-44783) relating to the
Non-Qualified Stock Option Plan of Foundation Health Corporation, (5)
Registration Statement on Form S-8 (No. 33-48561) relating to the 1992
Nonstatutory Stock Option Plan of Foundation Health Corporation and the
Foundation Health Corporation Incentive Common Stock Option Agreement, (6)
Registration Statement on Form S-8 (No. 33-53468) relating to the Century
MediCorp 1983 Incentive Stock Option Plan and Century MediCorp 1985, 1988,
1989 and 1991 nonstatutory stock option plans, (7) Registration Statement on
Form S-8 (No. 33-67062) relating to the 1989 Stock Plan of Business Insurance
Corporation, (8) Registration Statement on Form S-3 (No. 33-80512) relating
to the 1993 Nonstatutory Stock Option Plan of Foundation Health Corporation,
(9) Registration Statement on Form S-8 (No. 33-86568) relating to the
Intergroup Healthcare Corporation Stock Option and Incentive Plan and Stock
Option Agreement, and (10) Registration Statement on Form S-8 (No. 33-86566)
relating to the Foundation Health Corporation 1990 Stock Option Plan (as
amended and restated), of our report dated July 25, 1996, appearing in this
Annual Report on Form 10-K of Foundation Health Corporation for the year
ended June 30, 1996.
DELOITTE & TOUCHE LLP
Sacramento, California
August 27, 1996
-75-
<PAGE>
EXHIBIT 23.2
Consent of Ernst & Young LLP, Independent Auditors
We consent to the incorporation by reference in the: (1) Registration Statement
on Form S-8 (No. 33-36847) relating to the Foundation Health Corporation Profit
Sharing and 401(k) Plan, (2) Registration Statement on Form S-8 (No. 33-36850)
relating to the Foundation Health Corporation 1990 Stock Option Plan, (3)
Registration Statement on Form S-8 (No. 33-36849) relating to the Foundation
Health Corporation Employee Stock Purchase Plan, (4) Registration Statement on
Form S-8 (No. 33-44783) relating to the Non-Qualified Stock Option Plan of
Foundation Health Corporation, (5) Registration Statement on Form S-8 (No. 33
- -48561) relating to the 1992 Nonstatutory Stock Option Plan of Foundation Health
Corporation and the Foundation Health Corporation Incentive Common Stock Option
Agreement, (6) Registration Statement on Form S-8 (No. 33-53468) relating the
Century MediCorp 1983 Incentive Stock Option Plan and Century MediCorp 1985,
1988, 1989 and 1991 nonstatutory stock option plans, (7) Registration Statement
on Form S-8 (No. 33-67062) relating to the 1989 Stock Plan of Business Insurance
Corporation, (8) Registration Statement on Form S-3 (No. 33-80512) relating to
the 1993 Nonstatutory Stock Option Plan of Foundation Health Corporation, (9)
Registration Statement on Form S-8 (No. 33-86568) relating to the Intergroup
Healthcare Corporation Stock Option and Incentive Plan and Stock Option
Agreement, and (10) Registration Statement on Form S-8 (No. 33-86566) relating
to the Foundation Health Corporation 1990 Stock Option Plan (as amended and
restated), of our report dated February 16, 1994, except Note 17 as to which the
date is March 18, 1994, with respect to the consolidated financial statements of
Intergroup Healthcare Corporation for the year ended December 31, 1993,
appearing in this Annual Report on Form 10-K of Foundation Health Corporation
for the year ended June 30, 1996.
ERNST & YOUNG LLP
Tucson, Arizona
August 27, 1996
-76-
<PAGE>
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the: (1) Registration Statement
on Form S-8 (No. 33-36847) relating to the Foundation Health Corporation Profit
Sharing and 401(k) Plan; (2) Registration Statement on Form S-8 (No. 33-36850)
relating to the Foundation Health Corporation 1990 Stock Option Plan; (3)
Registration Statement on Form S-8 (No. 33-36849) relating to the Foundation
Health Corporation Employee Stock Purchase Plan; (4) Registration Statement on
Form S-8 (No. 33-44783) relating to the Non-Qualified Stock Option Plan of
Foundation Health Corporation; (5) Registration Statement on Form S-8 (No. 33-
48561) relating to the 1992 Nonstatutory Stock Option Plan of Foundation Health
Corporation and the Foundation Health Corporation Incentive Common Stock Option
Agreements; (6) Registration Statement on Form S-8 (No. 33-53468) relating to
the Century Medicorp 1983 Incentive Stock Option Plan and Century Medicorp 1985,
1988, 1989 and 1991 nonstatutory stock option plans; (7) Registration Statement
on Form S-8 (No. 33-67062) relating to the 1989 Stock Plan of Business Insurance
Corporation; and (8) Registration Statement on Form S-3 (No. 33-80512) relating
to the 1993 Nonstatutory Stock Option Plan of Foundation Health Corporation; (9)
Registration Statement on Form S-8 (No. 33-86568) relating to the Intergroup
Healthcare Corporation Stock Option and Incentive Plan and Stock Option
Agreement; (10) Registration Statement on Form S-8 (No. 33-86566) relating to
the Foundation Health Corporation 1990 Stock Option Plan (as amended and
restated), of our report dated April 27, 1994, appearing in this Annual Report
on Form 10-K of Foundation Health Corporation for the year ended June 30, 1996.
STEVENSON, JONES & HOLMASS, P.C.
Tucson, Arizona
August 27, 1996
-77-
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTS
We consent to incorporation by reference in the (1) Registration Statement on
Form S-8 (No. 33-36847) relating to the Foundation Health Corporation Profit
Sharing and 401(k) Plan, (2) Registration Statement on Form S-8 (No. 33-36850)
relating to the Foundation Health Corporation 1990 Stock Option Plan, (3)
Registration Statement on Form S-8 (No. 33-36849) relating to the Foundation
Health Corporation Employee Stock Purchase Plan, (4) Registration Statement on
Form S-8 (No. 33-44783) relating to the Non-Qualified Stock Option Plan of
Foundation Health Corporation, (5) Registration Statement on Form S-8 (No. 33
- -48561) relating to the 1992 Nonstatutory Stock Option Plan of Foundation Health
Corporation and the Foundation Health Corporation Incentive Common Stock Option
Agreement, (6) Registration Statement on Form S-8 (No.33-534468) relating to the
Century MediCorp. 1983 Incentive Stock Option Plan and Century MediCorp 1985,
1988, 1989 and 1991 nonstatutory stock option plans, (7) Registration Statement
on Form S-8 (No. 33-67062) relating to the 1989 Stock Plan of Business Insurance
Corporation, (8) Registration Statement on Form S-3 (No. 33-80512) relating to
the 1993 Nonstatutory Stock Option Plan of Foundation Health Corporation, (9)
Registration Statement on Form S-8 (No. 33-86568) relating to the Intergroup
Healthcare Corporation Stock Option and Incentive Plan and Stock Option
Agreement, and (10) Registration Statement on Form S-8 (No.33-86566) relating
to the Foundation Health Corporation 1990 Stock Option Plan (as amended and
restated), of our report dated February 28, 1994, on our audit of the
consolidated statements of income, changes in stockholders' equity, and cash
flows of CareFlorida Health Systems, Inc. and Subsidiaries for the year ended
December 31, 1993 which report is included in the Annual Report on Form 10-K
of Foundation Health Corporation.
COOPERS & LYBRAND LLP
Miami, Florida
August 27, 1996
-78-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FORM 10-K FILED BY FOUNDATION HEALTH CORPORATION FOR THE FISCAL YEAR ENDED
JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 224,838
<SECURITIES> 714,914
<RECEIVABLES> 416,225
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 277,206 <F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,426,399
<CURRENT-LIABILITIES> 0
<BONDS> 318,668
0
0
<COMMON> 533,855
<OTHER-SE> 400,734
<TOTAL-LIABILITY-AND-EQUITY> 2,426,399
<SALES> 3,338,804
<TOTAL-REVENUES> 3,415,817
<CGS> 0
<TOTAL-COSTS> 3,160,123
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,099
<INCOME-PRETAX> 240,595
<INCOME-TAX> 74,155
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 166,440
<EPS-PRIMARY> 2.86
<EPS-DILUTED> 0
<FN>
<F1> NET PPE
</FN>
</TABLE>
