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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
FORM 10-Q
_______________________
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: MARCH 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to ____________.
Commission file number: 1-12718
FOUNDATION HEALTH SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-4288333
- ------------------------------------- --------------------------------
(State or other jurisdiction of (I.R.S. Employer identification No.)
incorporation or organization)
21600 OXNARD STREET, WOODLAND HILLS, CA 91367
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (818) 719-6978
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. Yes [x] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date:
As of May 9, 1997, 106,133,786 shares of Class A Common Stock, $.001 par
value per share, were outstanding (exclusive of 3,324,374 shares held as
treasury stock) and 19,297,642 shares of Class B Common Stock, $.001 par
value per share, were outstanding.
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Foundation Health Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share data)
March 31, December 31,
1997 1996
---------- ----------
ASSETS
Current assets
Cash and equivalents $ 204,865 $ 187,486
Marketable securities held for sale 377,819 402,128
Premiums receivable, net 98,823 86,598
Prepaid expenses and other 62,612 52,895
Deferred income taxes 25,536 24,370
---------- ----------
Total current assets 769,655 753,477
Property and equipment, net 72,217 71,786
Goodwill and other intangible assets, net 323,994 328,719
Deferred income taxes 4,976 4,976
Other assets 65,261 52,922
---------- ----------
TOTAL ASSETS $1,236,103 $1,211,880
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Estimated claims payable $ 227,304 $ 243,144
Shared risk and other settlements 32,070 27,235
Unearned subscriber premiums 34,643 88,605
Accounts payable and accrued expenses 116,286 108,057
Federal and state income taxes payable 24,820 9,689
Notes payable, current portion 1,488 1,608
---------- ----------
Total current liabilities 436,611 478,338
Notes payable 409,800 362,465
Other 1,485 6,101
---------- ----------
847,896 846,904
Commitments and contingencies
Stockholders' equity
Preferred stock, $.001 par value
Authorized shares - 10,000,000
Issued and outstanding shares - none
Class A common stock, $.001 par value
Authorized shares - 135,000,000
Issued and outstanding shares -
32,338,705 in 1997 and 32,329,684
in 1996 32 32
Class B nonvoting convertible common stock,
$.001 par value
Authorized shares - 30,000,000
Issued and outstanding shares -
19,297,642 in 1997 and 1996 19 19
Additional paid-in capital 187,252 187,086
Retained earnings 306,803 282,091
Treasury Stock, 3,194,374 shares of
Class A common stock (95,831) (95,831)
Unrealized loss on marketable
securities held for sale, net (10,068) (8,421)
---------- ----------
Total stockholders' equity 388,207 364,976
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,236,103 $1,211,880
---------- ----------
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See accompanying notes to consolidated financial statements
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Foundation Health Systems, Inc. and Subsidiaries
Condensed Consolidated Statements of Income (Unaudited)
(In thousands, except per share data)
Three-Months Ended March 31,
----------------------------
1997 1996
-------- --------
Revenues:
Premium revenue $831,264 $783,123
ASO and other 9,701 18,226
-------- --------
Total revenues 840,965 801,349
-------- --------
Operating Expenses:
Health care expenses:
Physician 317,154 297,704
Hospital 292,574 278,233
Pharmacy and other 94,343 72,985
-------- --------
Total health care expenses 704,071 648,922
Marketing, general and administrative 82,553 80,120
Depreciation and amortization 11,176 13,466
ASO and other 5,125 16,333
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Total operating expenses 802,925 758,841
-------- --------
Operating income 38,040 42,508
Investment income 9,439 8,823
Interest expense (6,316) (5,932)
-------- --------
Income before income taxes and minority
interest 41,163 45,399
Income taxes 16,589 19,390
Minority interest in (gain)/loss of
subsidiary (2) 31
-------- --------
Net income $ 24,572 $ 26,040
-------- --------
-------- --------
Earnings per share:
Primary and fully diluted $ 0.51 $ 0.54
-------- --------
-------- --------
Weighted average common shares outstanding:
Primary 48,500 48,135
-------- --------
-------- --------
Fully diluted 48,506 48,177
-------- --------
-------- --------
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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Foundation Health Systems, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In Thousands)
Three-Months Ended March 31,
----------------------------
1997 1996
-------- --------
OPERATING ACTIVITIES
Net income $ 24,572 $ 26,040
Adjustments to reconcile net income to net
cash used by operating activities:
Depreciation and amortization 11,176 13,466
Deferred income taxes 1,331
Changes in operating assets and
liabilities net of acquisition:
Premiums receivable and unearned
subscriber premiums (66,187) (58,762)
Prepaid expenses and other (7,337) (4,249)
Estimated claims payable, shared risk
and other settlements (11,005) (23,285)
Accounts payable and accrued expenses
and other liabilities 3,610 (16,063)
Federal and state income taxes payable 15,131 15,648
-------- --------
Net cash used by operating activities (30,040) (45,874)
INVESTING ACTIVITIES
Sale or redemption of marketable securities
held for sale 103,657 75,201
Purchases of marketable securities held for
sale (82,161) (80,929)
Purchases of property and equipment (8,892) (5,922)
Investment in subsidiaries (12,566) (4,114)
-------- --------
Net cash provided (used) by investing
activities 38 (15,764)
FINANCING ACTIVITIES
Proceeds from exercise of stock
options and employee stock plan
purchases 166 14,481
Borrowings 47,500 9,000
Purchase of treasury stock (9,586)
Repayment of debt and other non current
liabilities (285) (142)
-------- --------
Net cash provided by financing activities 47,381 13,753
-------- --------
Increase (decrease) in cash and equivalents 17,379 (47,885)
Cash and equivalents, beginning of period 187,486 225,932
-------- --------
Cash and equivalents, end of period $204,865 $178,047
-------- --------
-------- --------
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
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FOUNDATION HEALTH SYSTEMS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial
statements of Foundation Health Systems, Inc. and its wholly and majority
owned subsidiaries (collectively, the "Company") have been prepared in
accordance with generally accepted accounting principles for interim
financial information, and with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three-month
period ended March 31, 1997 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1997. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Annual Report on Form 10-K for the year ended
December 31, 1996 of the Company (formerly known as Health Systems
International, Inc. ("HSI")).
The accompanying unaudited interim condensed consolidated financial
statements of the Company do not include the financial position or results of
operations of Foundation Health Corporation ("FHC") as the companies were not
merged as of March 31, 1997 (see Note 2 below).
2. FOUNDATION HEALTH SYSTEMS MERGER
Effective April 1, 1996, pursuant to the Agreement and Plan of Merger
(the "Merger Agreement") among the Company, FHC and FH Acquisition Corp. (a
wholly-owned subsidiary of the Company), Merger Sub merged (the "Merger")
with and into FHC and FHC became a wholly owned subsidiary of the Company.
Pursuant to the Merger prior FHC stockholders received 1.3 shares of the
Company's Class A Common Stock for every share of FHC common stock held. The
shares of the Company's Class A Common Stock issued to FHC's stockholders in
the Merger constitute approximately 61% of the outstanding stock of the
Company, and the Company's stockholders immediately prior to the Merger hold
approximately 39% of the outstanding stock of the Company.
Pursuant to the Merger Agreement, the Company also amended its
Certificate of Incorporation to change its name to Foundation Health Systems,
Inc. and to increase the number of authorized shares of the Company's Common
Stock to 380,000,000 shares consisting of 350,000,000 shares of Class A
Common Stock and 30,000,000 shares of Class B Common Stock.
The Merger was tax-free and accounted for as a pooling of interests.
5
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Summarized below are the unaudited pro forma consolidated results of
operations of the Company for the three month periods ended March 31, 1996
and March 31, 1997 as if the Merger had taken place as of January 1, 1996 (in
millions except earnings per share):
Three Months Ended March 31,
1997 1996
-------- --------
Premium and ASO revenue $1,860.6 $1,652.4
-------- --------
Net income $ 58.5 $ 62.3
-------- --------
Primary and fully diluted earnings
per share $ 0.47 $ 0.50
-------- --------
Also attached as Exhibits 99.1, 99.2, and 99.3 to this report are the following
unaudited pro forma consolidated supplemental schedules for the quarter ended
March 31, 1997: Pro Forma Unaudited Consolidated Balance Sheet, Pro Forma
Unaudited Consolidated Statement of Operations and Pro Forma Medical Covered
Lives.
3. NOTES PAYABLE
On April 26, 1996, the five-year unsecured $400 million revolving credit
facility was replaced with a $700 million revolving credit facility (the
"Credit Facility") from a lending syndicate led by Bank of America. The
Company may elect from various short-term interest rates based upon a spread
above the LIBOR rate, or the greater of the bank's reference rate or the
federal funds rate plus 1/2%. In addition, the Company may elect a
"competitive bid auction" in which participating banks are offered an
opportunity to bid alternative rates. The Credit Facility is for a term of
five years from the date of execution, with two one year extension options.
As of March 31, 1997, $366.5 million had been borrowed against the new $700
million Credit Facility.
4. CONTINGENCIES
LITIGATION
The Company is involved in various other legal proceedings, most of which
are routine to its business. In the opinion of management, based in part on
advice from litigation counsel to the Company, the resolution of these
matters will not have a material adverse effect on the financial condition or
results of operations of the Company.
5. EARNINGS PER SHARE
Earnings per share is calculated based on the weighted average shares of
common stock and common stock equivalents outstanding during the periods
presented. Common stock equivalents arising from dilutive stock options are
computed using the treasury stock method.
In February 1997, the Financial Accounting Standards Board issued SFAS
128, "EARNINGS PER SHARE" effective for periods ending after December 15,
1997, including interim periods; earlier adoption is not permitted. This
statement requires restatement of all prior period earnings per share ("EPS")
data presented. The statement establishes standards for computing and
presenting EPS. The following sets forth the weighted shares and EPS as
calculated under SFAS 128:
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Three Months Ended March 31,
1997 1996
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Basic Shares Outstanding 48,437 47,878
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Basic EPS $.51 $.54
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Diluted Share Outstanding 48,506 48,177
------ ------
Diluted EPS $.51 $.54
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6. ACQUISITIONS
PHYSICIANS HEALTH SERVICES
On May 8, 1997 the Company entered into a definitive agreement to acquire
Physicians Health Services, Inc. ("PHS") for $29.25 per share, or a total
consideration to PHS shareholders of approximately $300 million. PHS is a
440,000 member health plan with operations in the New York metropolitan area,
including northern New Jersey, and throughout the state of Connecticut.
Consummation of the transaction is subject to customary conditions, including
approval by PHS's stockholders and the receipt of all necessary governmental
authorizations. In connection with entering into the definitive acquisition
agreement, the Greater Bridgeport Individual Practice Association, Inc.,
holding a majority of the outstanding voting power of PHS stock, agreed to
vote in favor of the transactions. The Company will fund the acquisition with
cash on hand and existing bank credit lines. The Company presently expects
that the transaction will close in the third or fourth quarter of 1997.
PACC
On April 9, 1997, the Company announced that it had reached a definitive
agreement to acquire PACC, a 116,000 member health plan based in Oregon. The
transaction is subject to receipt of all applicable regulatory approvals.
The Company expects the transaction to close in the third quarter of 1997.
ADVANTAGE HEALTH
On April 1, 1997, the Company completed the acquisition of Advantage
Health, a group of managed health care companies based in Pittsburgh, PA.,
for $12.5 million in cash. Advantage Health has approximately 40,000
full-risk members. In 1996, Advantage Health recorded revenues of
approximately $56 million, with about 90 percent from HMO operations. The
Company purchased Advantage Health from St. Francis Health System, which has
a short-term option to re-acquire a 20 percent interest in Advantage Health
for $2.5 million. Advantage Health remains a party to long-term provider
agreements with the St. Francis Health System and a management agreement with
the Company.
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FIRST OPTION HEALTH PLAN
On April 30, 1997, the Company completed a $51.7 million investment in
FOHP, Inc. ("FOHP") of Red Bank, New Jersey. FOHP is owned by physicians,
hospitals and other health care providers and is the sole shareholder of
First Option Health Plan of New Jersey, Inc. ("FOHP-NJ"), a managed care
company. The Company's investment is in the form of FOHP debentures
convertible into up to 71 percent of FOHP's outstanding equity at the
Company's discretion. In addition to the investment, the Company will provide
a variety of management services to FOHP in return for a percentage of FOHP's
premium revenue. The Company, at its option, may also provide information
systems and claims processing services to FOHP. First Option currently has
more than 250,000 members in New Jersey enrolled in its commercial, Medicare,
Medicaid and PPO programs.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company is one of the largest HMOs in the United States, providing as
of March 31, 1997 health care and administrative services to more than 1.9
million full-risk HMO members in California, Colorado, Connecticut, Idaho,
New Jersey, New Mexico, Oregon, Pennsylvania and Washington. Through its
operating subsidiaries, the Company provides a wide range of managed health
care services and also provides various tailored managed health care
products, operates a preferred provider organization network and owns certain
health and life insurance companies.
The following discussion should be read in conjunction with the
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1996, and the notes included elsewhere herein. In
particular, it should be noted that the following information does not
include the financial position or results of operations of FHC which became a
subsidiary of the Company effective April 1, 1997.
RESULTS OF OPERATIONS
The following table sets forth the selected operating statistics and
membership data for the three months ended March 31, 1997.
SUMMARY OF OPERATING STATISTICS AND MEMBERSHIP DATA
OPERATING STATISTICS
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------
1997 1996
-------- --------
<S> <C> <C>
Medical loss ratio (health care expense as a
percentage of premium revenue) 84.7% 82.9%
Marketing, general and administrative expense
including depreciation and amortization
as a percentage of premium revenue 11.3% 12.0%
Net income as a percentage of total revenue 2.9% 3.2%
Primary and fully diluted earnings per share $0.51 $0.54
----- -----
----- -----
</TABLE>
MEMBERSHIP DATA
March 31,
1997 1996
--------- ---------
Members by Product Type
Commercial 1,702,465 1,606,260
Medicare 151,663 139,787
Medicaid 50,969 59,550
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Total 1,905,097 1,805,597
--------- ---------
--------- ---------
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March 31,
1997 1996
--------- ---------
Members by State
California 1,391,157 1,340,052
Colorado 76,314 53,649
New Mexico 30,468 27,751
Washington/Idaho 126,538 113,546
Oregon 61,506 48,331
Connecticut 165,898 135,759
Pennsylvania 53,216 86,509
--------- ---------
Total 1,905,097 1,805,597
--------- ---------
--------- ---------
For the period ended March 31, 1997 full risk membership increased by
approximately 99,500 (5.5%) compared to the same period last year. The
increase is comprised of 96,200 commercial members and 11,800 medicare
members, offset by a decrease in Medicaid membership of 8,500.
For the quarter ended March 31, 1997 full risk membership increased by
approximately 84,000 (4.6%) compared to December 31, 1996. A successful open
enrollment period resulted in a significant membership increase during the
first quarter. The increase is comprised of 86,500 commercial members and
6,000 medicare members, offset by a decrease in Medicaid membership of 8,500.
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31,
1996
Net income decreased 5.6% to $24.6 million for the first three months of
1997, compared with $26.0 million for the comparable period in 1996. Premium
revenues, excluding ASO revenues, were $831.3 million for the three month
period, a 6.1% increase from the $ 783.1 million reported in 1996.
TOTAL REVENUE
Premium revenue, excluding ASO revenue, increased $48.2 million or 6.1%
in the first quarter of 1997 compared to the first quarter of 1996. The
increase in premium revenue was reflective of overall increased membership
and premium rate increases in the Company's Medicare line of business.
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CHANGE IN NET PREMIUM REVENUE
(IN MILLIONS)
FIRST QUARTER 1997 COMPARED TO FIRST QUARTER 1996
Change in revenue due to
premium change:
Commercial $ (8.9)
Medicare 11.3
-------
2.4
Change in revenue due to
membership change:
Commercial 30.0
Medicare 15.8
-------
45.8
Total change in revenue:
Commercial 21.1
Medicare 27.1
-------
$ 48.2
-------
-------
Total member months (cumulative number of member service months during
the period) increased by 5.3% to 5,725,000 during the first quarter of 1997
compared to the same period in 1996, and the combined per member per month
("PMPM") premium revenue increased by .8% to $145.21.
COMMERCIAL
Commercial member months increased by 5.1% to 5,272,000 during the first
quarter of 1997 compared to the same period in the prior year. For the
quarter ended March 31, 1997, commercial premium revenue PMPM decreased by
1.5% to $118.13, compared to the same period last year. The decrease was due
mainly to pricing pressures in the Northwest, Northeast and California.
MEDICARE
Medicare member months increased by 8.2% to 453,000 during the first
quarter of 1997 compared to the same period in the prior year. For the
quarter ended March 31, 1997, Medicare premium revenue PMPM increased by 6.2%
to $460.61, compared to the same period last year. Increases in Medicare
PMPM are principally a result of rate increases by the Federal Health Care
Financing Administration.
HEALTH CARE EXPENSES
Health care expenses increased by 8.5% from $648.9 million in the first
quarter of 1996 to $704.1 million in the first quarter of 1997. On a PMPM
basis, health care expenses for the quarter ended March 31, 1997 rose by 3.0%
to $122.99 PMPM, versus $119.37 PMPM during the equivalent period in the
prior year. During the same period, the Company's overall medical loss ratio
(i.e., health care expenses as a percentage of premium revenue, or "MLR"),
increased to 84.7% as compared to 82.9% during the prior year's three-month
period.
COMMERCIAL
Commercial health care expenses on a PMPM basis in the quarter ended
March 31, 1997 increased by .5% to $96.87 compared to $96.40 during the same
period last year. Commercial MLR increased to 82.0% from 80.4% for the
comparable period in 1996. The commercial MLR increase is primarily a result
of lower commercial PMPM revenue, coupled with flat commercial PMPM health
care expenses for the three months ended
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March 31, 1997 as compared to March 31, 1996.
MEDICARE
Medicare health care expenses on a PMPM basis in the quarter ended March
31, 1997 increased by 8.2% to $427.26, compared to $394.78 during the same
period last year. Medicare MLR increased to 92.8% from 91.1% for the first
quarter of 1996. The increase in Medicare health care expenses and MLR is
mainly due to higher pharmacy costs and increased utilization of services in
all of the Company's markets.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES
Marketing, general and administrative expenses, excluding the effects of
the Company's ASO business, decreased to 9.9% of premium revenue in the first
quarter of 1997 as compared to 10.2% during the first quarter of the prior
year. The decrease in marketing, general and administrative expenses reflects
the Company's ongoing efforts to aggressively control its administrative
costs.
DEPRECIATION AND AMORTIZATION EXPENSES
Depreciation and amortization expenses decreased as a percentage of
premium revenue in the first quarter of 1997 as compared to the first quarter
of 1996. These expenses were $11.2 million (1.3% of premium revenue) in the
first quarter of 1997 and $13.5 million (1.7% of premium revenue) in the
first quarter of 1996. The decrease in depreciation expense is a direct
result of a portion of assets which became fully depreciated in the first
quarter of 1997, coupled with asset write-offs in late 1996.
FOUNDATION HEALTH SYSTEMS MERGER
On October 1, 1996 the Company entered into a merger agreement with FHC,
an integrated managed health care organization. Pursuant to such merger
agreement, effective April 1, 1997, FH Acquisition Corp., a wholly-owned
subsidiary of the Company, merged with and into FHC with FHC surviving the
merger as a wholly-owned subsidiary of the Company. The merger was accounted
for as a pooling-of-interest transaction and, accordingly, after the merger,
the financial statements of the Company and FHC will be presented on a
combined basis for financial reporting purposes.
As previously announced, negotiation and consummation of the FHC Merger
as well as additional charges associated with and related to integrating the
operations of the Company and FHC will result in material non-recurring costs
and expenses to the new combined company. Such costs cannot be determined
until the transition plan related to the integration of operations is
completed, but they are estimated at this time by the Company to be in the
range of $175 million to $225 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of cash is premium revenue. Its primary
uses of cash are claims and capitation payments. Estimates of future cash
flows include a component to account for the delay between providing health
care services and reporting their cost. The estimate is based on actuarial
projections of claims and other costs, claims paid history, membership
growth, inflation, seasonality, claims inventory and reserves.
The Company's capital resources are managed according to certain
guidelines intended to ensure liquidity and maximize total return by assuming
prudent investment risks. The Company's liquidity requirements consist of
the need to service medical claims in a timely manner and to satisfy shared
risk and other obligations. Such requirements are the principal factors in
determining the appropriate investment portfolio mix. The Company presently
invests primarily in a
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variety of fixed-income obligations according to established investment
guidelines.
During the first quarter of 1997, cash used by operating activities was
$30.0 million, compared with cash used of $45.9 million in the comparable
prior year period. This decrease compared to 1996 is due, in part, to normal
fluctuations in operating assets and liabilities from year to year caused by
timing differences in the payment of liabilities and collection of
receivables of each respective quarter end. The remaining difference in cash
used by operating activities compared to the prior year was due to a
significant reduction in claims inventory in the first quarter of 1996 which
had accumulated in late 1995.
Cash used for investing activities decreased from $15.8 million in the
quarter ended March 31, 1996 to cash provided by investing activities of
$38,000 in the quarter ended March 31, 1997. Cash provided from financing
activities increased from $13.8 million to $47.4 million during such periods.
Decreases in cash used by investing activities resulted from increased sale
of marketable securities during the first quarter of 1997, as compared to the
comparable prior year quarter. The increase in cash provided from financing
activities was due to additional borrowings against the credit line for
merger related expenses and an acquisition in April of 1997.
The Company's current ratios at March 31, 1997 and December 31, 1996 were
1.76 to 1 and 1.57 to 1, respectively. The increase in the Company's current
ratio is primarily attributable to decreased current liabilities resulting
from increased payments of claims, as well as reductions in unearned premiums
during the first quarter of 1997.
Outstanding notes payable amounted to $411.3 million at March 31, 1997,
an increase of $47.5 million from December 31, 1996, resulting from
additional borrowings relating to the FHC merger described above and the
Company's investment in Advantage Health Plan during the first quarter of
1997 (see note 6 of the Notes to Condensed Consolidated Financial
Statements). The Company believes that cash from operations and existing
working capital are adequate to fund existing obligations, introduce new
products and services and continue to develop health care-related businesses.
The Company regularly evaluates cash requirements for current operations and
commitments, and for capital acquisitions and other strategic transactions.
The Company may elect to raise additional funds for these purposes, either
through additional debt or equity, the sale of investment securities or
otherwise, as appropriate.
Under the terms of its $700 million five-year Credit Facility, the
Company pays interest at a variable rate (See note 3 of the Notes to
Condensed Consolidated Financial Statements and information contained in Part
II of this report). FHC also currently has in place two credit facilities
providing an aggregate line of credit of up to $500 million (please refer to
the information contained in Part II of this report for additional detail).
The Company's subsidiaries must comply with certain minimum capital
requirements under applicable state laws and regulations. As of March 31,
1997, each of the Company's subsidiaries was in compliance with its minimum
capital requirements.
IMPACT OF INFLATION AND OTHER ELEMENTS
The managed health care industry is labor intensive and its profit margin
is low. Hence, it is especially sensitive to inflation. Increases in
medical expenses without corresponding increases in premiums could have a
material adverse effect on the Company.
Various federal and state legislative initiatives regarding the health
care industry have been proposed during recent legislative sessions, and
health care reform and similar issues continue to be in the forefront of
social and political discussion. If health care reform or similar
legislation is enacted, such legislation could impact the Company.
Management cannot at this time predict whether any such initiative will be
enacted and, if enacted, the impact on the financial condition or operations
of the Company.
Reference is also made to the disclosures contained under the heading
"Cautionary Factors" included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1996, which could cause the
13
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Company's actual results to differ from those projected in forward looking
statements of the Company made by or on behalf of the Company. In addition,
certain of these factors may have affected the Company's past results and may
affect future results.
14
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
MEDAPHIS CORPORATION
On November 7, 1996 the Company filed a lawsuit against Medaphis
Corporation ("Medaphis") and its former Chairman and Chief Executive Officer
Randolph G. Brown entitled HEALTH SYSTEMS INTERNATIONAL, INC. V. MEDAPHIS
CORPORATION, RANDOLPH G. BROWN AND DOES 1-50, case number BC 160414, Superior
Court of California, County of Los Angeles. The lawsuit arises out of the
acquisition of Health Data Sciences Corporation ("HDS") by Medaphis. In June
1996, the Company, the owner of 1,234,544 shares (or 77%) of Series F
Preferred Stock of HDS, representing over sixteen percent of the total
outstanding equity of HDS, voted its shares in favor of the acquisition of
HDS by Medaphis. The Company received as the result of the acquisition
976,771 shares of Medaphis Common Stock in exchange for its Series F
Preferred Stock.
In its complaint, the Company alleges that Medaphis was actually a poorly
run company with sagging earnings in its core businesses, and had
artificially maintained its stock prices through a series of acquisitions and
accounting maneuvers which provided the illusion of growth while hiding the
reality of its weakening financial and business condition. The Company
alleges that Medaphis, Brown, and other insiders deceived the Company by
failing to reveal that Medaphis would shortly reveal a "write off" of up to
$40,000,000 in reorganization costs and would lower its earnings estimate for
the following year, thereby more than halving the value of the Medaphis
shares received by the Company. The Company alleges that these false and
misleading statements were contained in oral communications with the Company,
as well as in the prospectus provided by Medaphis to all HDS shareholders in
connection with the HDS acquisition. Further, despite knowing of the
Company's discussions to form a strategic alliance of its own with HDS,
Medaphis and the individual defendants wrongfully interfered with that
prospective business relationship by proposing to acquire HDS using Medaphis
stock whose market price was artificially inflated by false and misleading
statements. These allegations of the Company constitute violations of both
federal and state securities laws, as well as constituting fraud and other
torts under state law. The Company is seeking either rescission of the
transaction or damages in excess of $38,000,000. The defendants have denied
the allegations in the complaint, and the Company is vigorously pursuing its
claims against Medaphis.
MISCELLANEOUS PROCEEDINGS
The Company and certain of its subsidiaries are also parties to various
legal proceedings, many of which involve claims for coverage encountered in
the ordinary course of its business. Based upon information presently
available, management of the Company is of the opinion, based in part on
advice from litigation counsel to the Company, that the final outcome of all
such proceedings should not have a material adverse effect upon the Company's
results of operations or financial condition.
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ITEM 2. CHANGES IN SECURITIES
REVOLVING CREDIT FACILITY
On April 26, 1996, the Company entered into an Amended and Restated
Credit Agreement among the Company, Bank of America National Trust and
Savings Association ("Bank of America"), as agent, and certain financial
institutions which are parties thereto (the "Credit Agreement") pursuant to
which the Company obtained an unsecured five-year $700 million revolving
credit facility. The Credit Agreement replaced the Company's prior credit
agreement providing for an unsecured $400 million revolving credit facility,
which prior agreement was also entered into by the Company with Bank of
America, as agent.
Specifically, Section 7.11 of the Credit Agreement provides that the
Company and its subsidiaries may, so long as no event of default exists (i)
declare and distribute stock as a dividend; (ii) purchase, redeem or acquire
its stock, options and warrants with the proceeds of concurrent public
offerings and (iii) declare and pay dividends or purchase, redeem or
otherwise acquire its capital stock, warrants, options or similar rights with
cash so long as the sum of such acquisitions does not exceed $150 million
plus 25% of the net income of the Company and its subsidiaries in fiscal 1995
plus 50% of the net income of the Company and its subsidiaries in fiscal 1996
and subsequent years (calculated on a cumulative consolidated basis).
Under the Credit Agreement, the Company is (i) obligated to maintain at
all times a Total Leverage Ratio not to exceed 3 to 1, a Fixed Charge
Coverage of not less than 2.75 to 1 and to preserve its combined net worth
and Permitted Class Subordinated Indebtedness (as defined in the Credit
Agreement) at not less than $100 million plus 50% of net income after
December 31, 1994 on a cumulative consolidated basis, (ii) obligated to limit
liens on its assets to those incurred in the normal course and for taxes and
other similar obligations, and (iii) subject to customary covenants to
dispose of assets only in the ordinary course and generally at fair value, to
restrict mergers and consolidations to those permitted under the Credit
Agreement, and to limit loans, leases, joint ventures and contingent
obligations and certain transactions with affiliates. Upon the occurrence of
a default or an event of default, the Company and its subsidiaries would be
subject to further restrictions, including with respect to the operating HMO
subsidiaries, an obligation to advance to the parent company reserves in
excess of those held to comply with state and similar administrative
requirements.
In connection with the Merger (as defined in Item 4 below), the Company
entered into Amendment No. 3 to the Credit Agreement which, among other
things, deemed the Merger to be a Permitted Acquisition and waived certain
compliance requirements through June 30, 1997 in order to enable the Company
to negotiate and enter into a new credit agreement combining the Credit
Agreement and FHC's existing credit agreements.
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FHC also has two unsecured revolving credit agreements (one with a $300
million credit line and the other with a $200 million credit line) with
Citicorp USA, Inc. as Administrative Agent for the lenders thereto (together,
the "FHC Credit Agreements"). The FHC Credit Agreements contains customary
terms, events of default and affirmative and negative covenants (including
financial covenants related to net worth, fixed charge coverage ratio and
total debt to total capitalization ratio). Principal amounts outstanding
under the FHC Credit Agreements bear interest, at FHC's option, at either
Citibank's base rate or the Eurodollar rate plus a margin depending upon
FHC's level of total debt to total capitalization and other factors. Any
interest payments are due quarterly and principal is due at maturity.
In connection with the Merger, FHC entered into amendments to the Credit
Agreements which, among other things, deemed the Merger to be a permitted
acquisition under the FHC Credit Agreements and waived certain compliance
requirements through June 30, 1997 in order to enable the Company to
negotiate and enter into a new credit agreement combining the FHC Credit
Agreements and the Company's existing Credit Agreement.
SHAREHOLDER RIGHTS PLAN
On May 20, 1996, the Board of Directors of the Company declared a
dividend distribution of one right (a "Right") for each outstanding share of
the Company's Class A Common Stock and Class B Common Stock (collectively,
the "Common Stock"), to stockholders of record at the close of business on
July 31, 1996 (the "Record Date"). The Board of Directors of the Company
also authorized the issuance of one Right for each share of Common Stock
issued after the Record Date and prior to the earliest of the Distribution
Date (as defined below), the redemption of the Rights and the expiration of
the Rights and in certain other circumstances. Rights will attach to all
Common Stock certificates representing shares then outstanding and no
separate Rights Certificates will be distributed. Subject to certain
exceptions contained in the Rights Agreement dated as of June 1, 1996 by and
between the Company and Harris Trust and Savings Bank, as Rights Agent (the
"Rights Agreement"), the Rights will separate from the Common Stock in the
event any person acquires 15% or more of the outstanding Class A Common
Stock, the Board of Directors of the Company declares a holder of 10% or more
of the outstanding Class A Common Stock to be an "Adverse Person," or any
person commences a tender offer for 15% of the Class A Common Stock (each
event causing a "Distribution Date").
Except as set forth below and subject to adjustment as provided in the
Rights Agreement, each Right entitles its registered holder, upon the
occurrence of a Distribution Date, to purchase from the Company one
one-thousandth of a share of Series A Junior Participating Preferred Stock,
at a price of $170.00 per one-thousandth share. However, in the event any
person acquires 15% or more of the outstanding Class A Common Stock, or the
Board of Directors of the Company declares a holder of 10% or more of the
outstanding Class A Common Stock to be an "Adverse Person," the Rights
(subject to certain exceptions contained in the Rights
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Agreement) will instead become exercisable for Class A Common Stock having a
market value at such time equal to $340.00. The Rights are redeemable under
certain circumstances at $.01 per Right and will expire, unless earlier
redeemed, on July 31, 2006.
In connection with the Merger, the Company entered into Amendment No. 1
(the "Amendment") to the Rights Agreement to exempt the Merger and related
transactions from triggering the Rights. In addition, the Amendment modifies
certain terms of the Rights Agreement applicable to the determination of
certain "Adverse Persons," which modifications became effective upon
consummation of the Merger.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On February 12, 1997, the Company held a Special Meeting of Stockholders
(the "Special Meeting") at which meeting the Company's stockholders voted
upon the following two proposals:
1. To consider and vote upon a proposal to approve the Agreement and
Plan of Merger, dated as of October 1, 1996 (the "Merger Agreement"), among
the Company, FHC and FH Acquisition Corp., a wholly owned subsidiary of the
Company ("Merger Subsidiary"), the merger of Merger Subsidiary with and into
FHC (the "Merger") and the transactions contemplated thereby, including the
issuance of shares of the Company's Class A Common Stock, par value $.001 per
share ("Proposal 1"); and
2. To consider and vote upon a proposal to amend and restate the
Company's Certificate of Incorporation to (i) increase the number of
authorized shares of common stock of the Company to 380 million shares with
350 million shares designated as Class A Common Stock and 30 million shares
designated as Class B Common Stock and (ii) change the name of the Company to
"Foundation Health Systems, Inc." ("Proposal 2").
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The following provides voting information for such proposals voted upon
at the Special Meeting:
Proposal Votes For Votes Against Votes Withheld
-------- ---------- -------------- --------------
Proposal 1 22,611,768 26,564 354,187
Proposal 2 22,505,011 127,169 360,339
In total, 29,136,310 shares of Class A Common Stock were eligible to vote
at the Special Meeting, 22,992,519 shares were voted at the Special Meeting
and 6,143,791 shares were unvoted at the Special Meeting.
ITEM 5. OTHER INFORMATION
REVOLVING CREDIT FACILITY
As indicated in Item 2 above, on April 26, 1996 the Company executed the
Credit Agreement which provides an unsecured five-year $700 million revolving
credit facility. The facility is available to the Company and its
subsidiaries for general corporate purposes including Permitted Acquisitions
and Joint Ventures and, if the Company should elect, to repurchase or redeem
the Company's capital stock to the extent allowed by the Federal Reserve
Board Regulations and other requirements of law and as set forth in the
Credit Agreement. As of March 31, 1997, the Company had drawn approximately
$367 million under the facility.
Bank of America is the lead bank and agent for the other participating
banks named in the Credit Agreement. At the election of the Company, and
subject to customary covenants, loans can be initiated on a bid or committed
basis and will carry interest at offshore or domestic rates, but subject to
the applicable LIBOR Rate or the Base Rate, of .50% above the Federal Funds
Rate or the Bank of America "reference rate." Actual rates on borrowings
under the facility will vary based on competitive bidding, sources of funds
and the Company's senior leverage ratio at the time of the borrowing. The
facility is available for five years, until April 2001, but may be extended,
under certain circumstances, for two additional years until April 2003.
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Loans under the facility are unsecured but the Company and its
subsidiaries are subject to affirmative and negative covenants. As described
in Item 2 above, these include limitations on the payment of cash dividends
on the Company's capital stock and, in certain cases, the redemption or
repurchase of capital stock or securities. In addition to obligations
incurred under the facility, the Company and its subsidiaries are entitled to
incur Permitted Subordinated Indebtedness for seller financing of Permitted
Acquisitions and certain other items in an aggregate amount of up to $150
million and to incur unsecured indebtedness to repurchase the Company's Class
A Common Stock.
Under the Credit Agreement, the Company is (i) obligated to maintain at
all times a Total Leverage Ratio not to exceed 3 to 1, a Fixed Charge
Coverage of not less than 2.75 to 1 and to preserve its combined net worth
and Permitted Class A Subordinated Indebtedness (as defined in the Credit
Agreement) at not less than $100 million plus 50% of net income after
December 31, 1994 on a cumulative consolidated basis, (ii) obligated to limit
liens on its assets to those incurred in the normal course and for taxes and
other similar obligations, and (iii) subject to customary covenants to
dispose of assets only in the ordinary course and generally at fair value, to
restrict mergers and consolidations to those permitted under the Credit
Agreement, and to limit loans, leases, joint ventures and contingent
obligations and certain transactions with affiliates. Upon the occurrence of
a default or an event of default, the Company and its subsidiaries would be
subject to further restrictions, including with respect to the operating HMO
subsidiaries, an obligation to advance to the parent company reserves in
excess of those held to comply with state and similar administrative
requirements.
In connection with the Merger, the Company entered into Amendment No. 3
to the Credit Agreement which, among other things, deemed the Merger to be a
Permitted Acquisition and waived certain compliance requirements through June
30, 1997 in order to enable the Company to negotiate and enter into a new
credit agreement combining the Credit Agreement and the FHC's existing credit
agreements.
As indicated in Item 2 above, FHC also has two unsecured revolving credit
agreements with Citicorp USA, Inc. as Administrative Agent for the lenders
thereto (the "FHC Credit Agreements") in the aggregate amount of $500
million. As of March 31, 1997, FHC had borrowed approximately $405 million
under the FHC Credit Agreements. The FHC Credit Agreements contain customary
terms, events of default and affirmative and negative covenants (including
financial covenants related to net worth, fixed charge coverage ratio and
total debt to total capitalization ratio). Principal amounts outstanding
under the FHC Credit Agreements bear interest, at FHC's option, at either
Citibank's base rate or the Eurodollar rate plus a margin depending upon
FHC's level of total debt to total capitalization and other factors. Any
interest payments are due quarterly and principal is due at maturity.
In connection with the Merger, FHC entered into amendments to the Credit
Agreements which, among other things, deemed the Merger to be a permitted
acquisition under the FHC Credit Agreements, and waived certain compliance
requirements through June 30, 1997 in order to
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enable the Company to negotiate and enter into a new credit agreement
combining the FHC Credit Agreements and the Company's existing Credit
Agreement.
CAUTIONARY STATEMENTS
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company has previously filed with its
Annual Report on Form 10-K for the year ended December 31, 1996 certain
cautionary statements identifying important risk factors that could cause the
Company's actual results to differ materially from those projected in
forward-looking statements of the Company made by or on behalf of the Company.
The Company wishes to caution readers that these factors, among others,
could cause the Company's actual financial or enrollment results to differ
materially from those expressed in any projected, estimated or
forward-looking statements relating to the Company. The 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 was not and 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, certain of
these matters may have affected the Company's past results and may affect
future results.
RECENT DEVELOPMENTS
FOUNDATION HEALTH CORPORATION
On April 1, 1997, the Company and FH Acquisition Corp., a wholly owned
subsidiary of the Company ("Merger Sub"), completed the Merger with FHC,
whereby Merger Sub merged with and into FHC and FHC survived as a wholly
owned subsidiary of the Company. Pursuant to the Merger Agreement FHC
stockholders received 1.3 shares of the Company's Class A Common Stock for
every share of FHC common stock held. The shares of the Company's Class A
Common Stock issued to FHC's stockholders in the Merger constituted
approximately 61% of the outstanding stock of the Company after the Merger
and the Company's stockholders prior to the Merger now hold approximately 39%
of the outstanding stock of the Company after the Merger.
In connection with the Merger, the Company amended its Certificate of
Incorporation to change the name of the Company to Foundation Health Systems,
Inc. and to increase the number of authorized shares of the Company's Common
Stock to 380,000,000
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shares consisting of 350,000,000 shares of Class A Common Stock and
30,000,000 shares of Class B Common Stock.
In connection with the Merger, the Company also, among other things,
amended the Company's By-Laws to effect certain changes to the governance
provisions of the Company following the merger, including provisions related
to the structure of the Company's Board of Directors and the committees of
the Company's Board of Directors. Except in certain circumstances, during a
transaction period following the consummation of the Merger and up to, but
not including, the election of directors at the Company's May 2000 Annual
Meeting of Stockholders, the Company's Board of Directors will consist of 11
members, six of whom (Daniel D. Crowley and five other independent directors)
were designated by FHC and five of whom (Malik M. Hasan, M.D. and four other
independent directors) is designated by the Company. Pursuant to such
designations the Company's Board of Directors is comprised of the following
members: J. Thomas Bouchard, Daniel D. Crowley, George Deukmejian, Thomas T.
Farley, Patrick Foley, Earl B. Fowler, Roger F. Greaves, Richard W.
Hanselman, Malik M. Hasan, M.D., Richard J. Stegemeier and Raymond S. Troubh.
RECENT MANAGEMENT CHANGES
On May 8, 1997, the Company announced that Daniel D. Crowley had been
replaced by Malik M. Hasan, M.D. as the Chairman of the Board of Directors of
the Company, and that Mr. Crowley would remain as a director and serve as a
consultant to the Company for three years. It was also announced that Dr.
Hasan would retain the office of Chief Executive Officer of the Company, and
that Jay M. Gellert was elected to the offices of President and Chief
Operating Officer of the Company.
FIRST OPTION HEALTH PLAN
On April 30, 1997, the Company purchased convertible debentures (the
"FOHP Debentures") of FOHP, Inc., a New Jersey corporation ("FOHP"), in the
aggregate principal amount of approximately $51.7 million. The FOHP
Debentures are convertible into up to 71 percent of the outstanding equity of
FOHP at the Company's discretion. At any time during the 1999 calendar year,
the Company may acquire the remaining shares of FOHP not owned thereby
pursuant to a tender offer, merger, combination or other business combination
transaction for consideration (to be paid in cash or stock of the Company)
equal to the value of such FOHP stock based on appraiser determinations.
FOHP (headquartered in Red Bank, New Jersey) is owned by physicians,
hospitals and other health care providers and is the sole shareholder of
First Option Health Plan of New Jersey, Inc. a New Jersey corporation and a
wholly-owned subsidiary of FOHP ("FOHP-NJ"). FOHP-NJ is a managed health
care company providing commercial products for businesses and individuals,
along with Medicare, Medicaid and Workers' Compensation programs. FOHP-NJ
currently has more than 250,000 members in New Jersey enrolled in its
commercial, Medicare, Medicaid and PPO programs.
As part of the transaction, the Company will also provide a variety of
management services to FOHP, including provider contracting, utilization
review and quality assurance and employee relations, sales and marketing and
strategic planning. The Company will receive monthly management fees from
FOHP for such services in an amount equal to two percent of FOHP's premium
revenue. The Company, at its option, may also provide information systems
and claims processing services to FHP. Approximately $1,700,000 of the $51.7
million principal
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amount of the FOHP Debentures reflected fees paid to the Company by FOHP for
such management services provided by the Company prior to the closing of the
sale of the FOHP Debentures; such principal amount was immediately converted
into FOHP common stock.
ADVANTAGE HEALTH
On April 1, 1997, the Company completed the acquisition from St. Francis
Health System of Advantage Health, a group of managed health care companies
with approximately 40,000 full-risk members in Western Pennsylvania, Ohio and
West Virginia, for $12.5 million in cash. In 1996 Advantage Health recorded
revenue of approximately $56 million. St. Francis has a short-term option to
reacquire a 20% interest in Advantage Health for $2.5 million.
Advantage Health remains a party to long-term provider agreements with
the St. Francis Health System and a management agreement with the Company.
The Company will operate Advantage Health under combined management with its
Philadelphia-based plan, QualMed Plans for Health, Inc.
PACC
Pursuant to the Agreement and Plan of Reorganization, dated as of March
20, 1997 and effective on April 9, 1997 (the "Reorganization Agreement"),
among the Company, QualMed Health Plan, Inc., an Oregon corporation and an
indirect wholly-owned subsidiary of the Company ("QMO"), and PACC HMO and
PACC Health Plans, each an Oregon non-profit corporation (PACC HMO and PACC
Health Plans being referred to herein, collectively, as "PACC"), the Company
agreed to acquire PACC for an undisclosed amount.
PACC (based in Clackamas, Oregon) has health plan operations in Oregon
and Washington, with approximately 116,000 medical members (approximately
108,000 of which are located in the Portland, Oregon area). Approximately
67,000 of such members are in PACC HMO (a commercial health maintenance
organization), with the balance in PACC Health Plans (primarily a preferred
provider organization). PACC recorded more than $133 million in revenues in
1996.
The transaction is structured as a merger of PACC into QMO, with QMO as
the surviving corporation to be renamed FHS of Oregon, Inc. or a similar-type
name. Such merger will be immediately preceded by an acquisition and
assumption by QualMed Washington Health Plan, Inc. (a Washington corporation
and an indirect wholly-owned subsidiary of the Company) of various contracts
of PACC relating to PACC's health care service contractor business in the
State of Washington and the acquisition and assumption by QualMed Health &
Life Insurance Company (an insurance company domesticated under the laws of
the State of Colorado and an indirect wholly-owned subsidiary of the Company)
of various contracts of PACC relating to PACC's health maintenance
organization business in the State of Washington.
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The Reorganization Agreement contemplates that PACC will organize
Northwest Health Foundation (the "PACC Foundation") as an Oregon nonprofit
public benefit corporation which will receive the net acquisition
consideration proceeds. The PACC Foundation will assume certain of PACC's
obligations under the Reorganization Agreement (including indemnification
obligations) at closing.
Consummation of the PACC acquisition transaction is subject to approvals
from regulatory authorities and other customary conditions of closing.
PHYSICIANS HEALTH SERVICES, INC.
On May 8, 1977 the Company entered into a definitive agreement to acquire
Physicians Health Services, Inc. ("PHS") for $29.25 per share, or a total
consideration to PHS shareholders of approximately $280 million. PHS is a
440,000-member health plan with operations in the New York metropolitan area,
including northern New Jersey, and throughout the state of Connecticut.
Consummation of the transaction is subject to customary conditions, including
approval by PHS's stockholders and the receipt of all necessary governmental
authorizations. In connection with entering into the definitive acquisition
agreement, the Greater Bridgeport Individual Practice Association, Inc.,
holding a majority of the outstanding voting power of PHS stock, agreed to
vote in favor of the transaction. The Company will fund the acquisition with
cash on hand and existing bank credit lines. The Company presently expects
that the transaction will close in the third quarter or fourth quarter of
1997.
HEALTH NET ASSOCIATE TRUST
Certain founding stockholders of the Company had transferred their shares
(initially 6,548,784) of Class A Common Stock of the Company (the "Class A
Shares") into that certain Amended and Restated Health Net Associate Trust
Agreement dated as of May 1, 1994 (the "Associate
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Trust Agreement"). Among other things, the Associate Trust Agreement in
general restricted the sale and transfer of the Class A Shares to any entity
other than the Company until February 1997. Effective February 7, 1997 the
trust created pursuant to the Health Net Associate Trust Agreement was
dissolved pursuant to its terms, thereby lifting the transfer restrictions of
the Class A Shares.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following exhibits are filed as part of this Quarterly Report on Form
10-Q or are incorporated herein by reference:
2.1 Agreement and Plan of Merger, dated October 1, 1996, by and among
Health Systems International, Inc., FH Acquisition Corp. and
Foundation Health Corporation (filed as Exhibit 2.5 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1996, which is incorporated by reference herein).
*2.2 Agreement and Plan of Merger, dated May 8, 1997, by and among
the Company, PHS Acquisition Corp. and Physicians Health
Services, Inc., a copy of which is filed herewith.
3.1 Fourth Amended and Restated Certificate of Incorporation of the
Registrant (filed as Exhibit 4.1 to the Company's Registration
Statement on Form S-8 (File No. 333-24621), which is incorporated
by reference herein).
3.2 Fourth Amended and Restated Bylaws of the Registrant (filed as
Exhibit 4.2 to the Company's Registration Statement on Form S-8
(File No. 333-24621), which is incorporated by reference herein)).
4.1 Form of Class A Common Stock Certificate (included as Exhibit 4.2
to the Company's Registration Statements on Forms S-1 and S-4
(File nos. 33-72892 and 33-72892-01, respectively) which is
incorporated by reference herein).
4.2 Form of Class B Common Stock Certificate (included as Exhibit 4.3
to the Company's Registration Statements on Forms S-1 and S-4
(File nos. 33-72892 and 33-72892-01, respectively) which is
incorporated by reference herein).
4.3 Form of Indenture of Foundation Health Corporation ("FHC") (filed
as an exhibit to FHC's Registration Statement on Form S-3 (File
No. 33-61684), which is incorporated by reference herein).
4.4 Form of Senior Notes of FHC (filed as an exhibit to FHC's
Registration Statement on Form S-3 (File No. 33-61684), which is
incorporated by reference herein).
10.1 Employment Agreement, dated August 28, 1993, by and among
QualMed, Inc., HN Management Holdings, Inc. and Malik M. Hasan,
M.D. (filed as Exhibit 10.18 to the Company's Registration
Statements on Forms S-1 and S-4 (File nos. 33-72892 and
33-72892-01, respectively) which is incorporated by reference
herein).
10.2 Employment Agreement, dated August 28, 1993, by and among
QualMed, Inc., HN Management Holdings, Inc. and Dale T.
Berkbigler, M.D. (filed as Exhibit 10.20 to the Company's
Registration Statements on Forms S-1 and S-4 (File nos. 33-72892
and 33-72892-01, respectively) which is incorporated by reference
herein).
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10.3 Severance Payment Agreement, dated as of April 25, 1994, among
the Company, Health Net and James J. Wilk (filed as Exhibit 10.9
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1994, which is incorporated by reference herein).
*10.4 Severance Payment Agreement dated March 31, 1997 between the
Company and Health Net and James J. Wilk, a copy of which is
filed herewith.
10.5 Severance Payment Agreement, dated as of April 25, 1994, among
the Company, QualMed, Inc. and B. Curtis Westen (filed as
Exhibit 10.10 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1994, which is incorporated by reference
herein).
*10.6 Letter Agreement dated April 23, 1997 between B. Curtis Westen
and the Company, a copy of which is filed herewith.
10.7 Amendment No. 1 to Employment Agreement dated as of April 25,
1994, by and among the Company, QualMed, Inc. and Malik Hasan,
M.D. (filed as Exhibit 10.16 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1994, which is
incorporated by reference herein).
10.8 Amended and Restated Employment Agreement, dated March 10, 1997,
by and between the Company and Malik M. Hasan, M.D. (filed as
Exhibit 10.3 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996, which is incorporated by reference
herein).
10.9 Amendment No. 1 to Employment Agreement dated as of April 27,
1994, by and among the Company, QualMed, Inc. and Dale T.
Berkbigler, M.D. (filed as Exhibit 10.17 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1994, which
is incorporated by reference herein).
10.10 Office Lease, dated as of January 1, 1992, by and between Warner
Properties III and Health Net (filed as Exhibit 10.23 to the
Company's Registration Statements on Forms S-1 and S-4 (File Nos.
33-72892 and 33-72892-01, respectively) which is incorporated by
reference herein).
10.11 The Company's Second Amended and Restated 1991 Stock Option Plan
(filed as Exhibit 10.30 to the Company's Registration Statement
on Form S-4 (File No. 33-86524) which is incorporated by
reference herein).
10.12 The Company's Second Amended and Restated Non-Employee Director
Stock Option Plan (filed as Exhibit 10.31 to the Company's
Registration Statement on Form S-4 (File No. 33-86524) which is
incorporated by reference herein).
10.13 The Company's Employee Stock Purchase Plan (filed as Exhibit
10.33 to the Company's Registration Statements on Forms S-1 and
S-4 (File nos. 33-72892 and 33-72892-01, respectively) which is
incorporated by reference herein).
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10.14 The Company's Performance-Based Annual Bonus Plan (filed as
Exhibit 10.35 to the Company's Registration Statement on Form S-4
(File No. 33-86524) which is incorporated by reference herein).
10.15 Deferred Compensation Agreement dated as of March 3, 1995, by and
among Malik M. Hasan, M.D., the Company and the Compensation and
Stock Option Committee of the Board of Directors of the Company
(filed as Exhibit 10.31 to the Company's Annual Report on Form
10-K for the year ended December 31, 1994, which is incorporated
by reference herein).
10.16 Trust Agreement for Deferred Compensation Arrangement for Malik
M. Hasan, M.D., dated as of March 3, 1995, by and between the
Company and Norwest Bank Colorado N.A. (filed as Exhibit 10.32 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1994, which is incorporated by reference herein).
10.17 Registration Rights Agreement dated as of March 2, 1995 between
the Company and the Foundation (filed as Exhibit No. 28.2 to the
Company's Current Report on Form 8-K dated March 2, 1995, which
is incorporated by reference herein).
10.18 Description of Retention Payment Arrangement between the Company
and Andrew Wang (filed as Exhibit 10.10 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1995, which is incorporated by reference herein).
10.19 The Company's 1995 Stock Appreciation Right Plan (filed as
Exhibit 10.12 to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1995, which is incorporated by
reference herein).
10.20 Letter Agreement Re: Temporary Warehouse/Mail Center Operations
Support, dated October 16, 1995, between Health Net and CBS
Associates, Inc. (an affiliate of Charles Braden, a director of
the Company) (filed as Exhibit 10.15 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1995,
which is incorporated by reference herein).
28
<PAGE>
10.21 Amended and Restated Credit Agreement dated as of April 26, 1996
among the Company, Bank of America National Trust and Savings
Association, as Agent, and financial institutions party thereto
(filed as Exhibit 10.1 to the Company's Current Report on Form
8-K dated May 3, 1996, which is incorporated by reference
herein).
10.22 Amendment No. 1 to Credit Agreement dated as of May 10, 1996
among the Company, Bank of America National Trust and Savings
Association, as Agent, and financial institutions party thereto
(filed as Exhibit 10.32 to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1996, which is incorporated
by reference herein).
10.23 Amendment No. 2 to Credit Agreement dated as of May 28, 1996
among the Company, Bank of America National Trust and Savings
Association, as Agent, and financial institutions party thereto,
(filed as Exhibit 10.33 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1996, which is incorporated
by reference herein).
10.24 Amendment No. 3 to Credit Agreement dated as of January 31, 1997
among the Company, Bank of America National Trust and Savings
Association, as Agent, and financial institutions party thereto
(filed as Exhibit 10.33 to the Company's Annual Report on Form
10-K for the year ended December 31, 1996, which is incorporated
by reference herein).
10.25 Employment Letter Agreement dated May 28, 1996 between Michael D.
Pugh and QualMed, Inc., (filed as Exhibit 10.35 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1996, which is incorporated by reference herein).
10.26 Employment Letter Agreement dated June 4, 1996 between Arthur M.
Southam and the Company and Health Net (filed as Exhibit 10.36
to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1996, which is incorporated by reference herein).
10.27 Employment Letter Agreement dated July 3, 1996 between Jay M.
Gellert and the Company (filed as Exhibit 10.37 to the Company's
Quarterly Report on Form 10-K for the quarter ended September 30,
1996, which is incorporated by reference herein).
29
<PAGE>
10.28 Employment Letter Agreement dated September 30, 1996 between
Douglas C. Werner and the Company (filed as Exhibit 10.38 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996, which is incorporated by reference herein).
10.29 Rights Agreement dated as of June 1, 1996 by and between the
Company and Harris Trust and Savings Bank, as Rights Agent (filed
as Exhibit 99.1 to the Company's Registration Statement on Form
8-A (File No. 001-12718) which is incorporated by reference
herein).
10.30 First Amendment to the Rights Agreement dated as of October 1,
1996, by and between the Company and Harris Trust and Savings
Bank, as Rights Agent (filed as Exhibit 10.40 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996,
which is incorporated by reference herein).
10.31 Amended and Restated Employment Agreement, dated December 16,
1996, by and among the Company, Foundation Health Corporation and
Daniel D. Crowley (filed as Exhibit 10.1 to the Company's
Registration Statement on Form S-4 (File No. 333-19273), which is
incorporated by reference herein).
*10.32 Employment Agreement Termination Agreement, dated as of May 1,
1997, by and between Daniel D. Crowley, the Company and FHC, a
copy of which is filed herewith.
10.33 Amended and Restated Employment Agreement, dated December 16,
1996, by and among the Company, Foundation Health Corporation and
Kirk A. Benson (filed as Exhibit 10.2 to the Company's
Registration Statement on Form S-4 (File No. 333-19273), which is
incorporated by reference herein).
10.34 Amended and Restated Employment Agreement, dated December 16,
1996, by and among the Company, Foundation Health Corporation and
Jeffrey L. Elder (filed as Exhibit 10.4 to the Company's
Registration Statement on Form S-4 (File No. 333-19273), which is
incorporated by reference herein).
10.35 Amended and Restated Employment Agreement, dated December 16,
1996, by and among the Company, Foundation Health Corporation and
Allen J. Marabito (filed as Exhibit 10.5 to the Company's
Registration Statement on Form S-4 (File No. 333-19273), which is
incorporated by reference herein).
10.36 Foundation Health Corporation Employee Stock Purchase Plan (filed
as Exhibit 4.3 to the Company's Registration Statement on Form S-8
(File No. 333-24621), which is incorporated by reference herein).
10.37 Foundation Health Corporation Profit Sharing and 401(k) Plan
(Amended and Restated effective January 1, 1994) (filed as
Exhibit 4.4 to the Company's Registration Statement on Form S-8
(File No. 333-24621), which is incorporated by reference herein).
30
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10.38 1990 Stock Option Plan of Foundation Health Corporation (filed as
Exhibit 4.5 to the Company's Registration Statement on Form S-8
(File No. 333-24621), which is incorporated by reference herein).
10.39 1992 Nonstatutory Stock Option Plan of Foundation Health
Corporation (filed as Exhibit 4.6 to the Company's Registration
Statement on Form S-8 (File No. 333-24621), which is incorporated
by reference herein).
10.40 1989 Stock Plan of Business Insurance Corporation (as Amended and
Restated Effective September 22, 1992) (filed as Exhibit 4.7 to
the Company's Registration Statement on Form S-8 (File No.
333-24621), which is incorporated by reference herein).
10.41 Managed Health Network, Inc. Incentive Stock Option Plan (filed
as Exhibit 4.8 to the Company's Registration Statement on Form
S-8 (File No. 333-24621), which is incorporated by reference
herein).
10.42 Managed Health Network, Inc. Amended and Restated 1991 Stock
Option Plan (filed as Exhibit 4.9 to the Company's Registration
Statement on Form S-8 (File No. 333-24621), which is incorporated
by reference herein).
10.43 1993 Nonstatutory Stock Option Plan of Foundation Health
Corporation (as amended and restated September 7, 1995) (filed as
Exhibit 4.10 to the Company's Registration Statement on Form S-8
(File No. 333-24621), which is incorporated by reference herein).
10.44 FHC Directors Retirement Plan (filed as an exhibit to FHC's Form
10-K for the year ended June 30, 1994 filed with the Commission on
September 24, 1994, which is incorporated by reference herein).
10.45 Participation Agreement dated as of May 25, 1995 among Foundation
Health Medical Services, as Construction Agent and Lessee, FHC, 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 FHC for the benefit of First
Security Bank of Utah, N.A., (filed as an exhibit to FHC's
Form 10-K for the year ended June 30, 1995, filed with the
Commission on September 27, 1995, which is incorporated by
reference by herein).
10.46 FHC's Deferred Compensation Plan, as amended and restated
(filed as an exhibit to FHC's Form 10-K for the year ended
June 30, 1995, filed with the Commission on September 27, 1995,
which is incorporated by reference herein).
10.47 FHC's Supplemental Executive Retirement Plan, as amended and
restated (filed as an exhibit to FHC's Form 10-K for the year
ended June 30, 1995, filed with the Commission on September 27,
1995, which is incorporated by reference herein).
10.48 FHC's Executive Retiree Medical Plan, as amended and restated
(filed as an exhibit to FHC's Form 10-K for the year ended
June 30, 1995, filed with the Commission on September 27, 1995,
which is incorporated by reference herein).
10.49 Agreement and Plan Reorganization dated January 9, 1996 by and
between FHC and Managed Health Network, Inc. (filed as Annex 1 of
Proxy Statement/Prospectus contained in FHC's Registration
Statement on Form S-4 (File No. 333-00517), which is incorporated
by reference herein).
10.50 Stock and Note Purchase Agreement by and between FHC, Jonathan H.
Schoff, M.D., FPA Medical Management, Inc., FPA Medical Management
of California, Inc. and FPA Independent Practice Association dated
as of June 28, 1996 (filed as Exhibit 10.109 to FHC's Annual
Report on Form 10-K for the year ended June 30, 1996, which is
incorporated by reference herein).
10.51 $300 Million Revolving Credit Agreement (the "FHC Credit
Agreement") dated as of December 5, 1994, among FHC, 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 (filed as an Exhibit
to FHC's quarterly report on Form 10-Q for the quarter ended
December 31, 1994 filed with the Commission on February 14,
1995, which is incorporated by reference herein).
*10.52 First Amendment Agreement (to the FHC Credit Agreement) dated as
of August 9, 1995 among FHC, as Borrower, the Lenders parties to
the FHC Credit Agreement, 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, a
copy of which is filed herewith.
*10.53 Second Amendment Agreement (to the FHC Credit Agreement), dated as
of June 28, 1996 among FHC, the Lenders and Citicorp USA, Inc., as
Administrative Agent, a copy of which is filed herewith.
*10.54 Third Amendment Agreement and Waiver (to the FHC Credit Agreement)
dated December 13, 1996 among FHC, the Lenders and Citibank, N.A.,
(as successor to Citicorp USA, Inc.), as Administrative Agent, a
copy of which is filed herewith.
*10.55 Fourth Amendment Agreement and Waiver (to the FHC Credit
Agreement) dated as of January 28, 1997 among FHC, the Lenders
and Citibank, N.A. (as successor to Citicorp USA, Inc.), as
Administrative Agent, a copy of which is filed herewith.
*10.56 Fifth Amendment Agreement (to the FHC Credit Agreement) dated
as of April 1, 1997 among FHC, the Lenders and Citibank, N.A. (as
successor to Citicorp USA, Inc.), as Administrative Agent, a copy
of which is filed herewith.
*10.57 $200 million Revolving Credit Agreement (the "FHC Revolving
Credit Agreement") dated as of December 17, 1996 among FHC, the
Lenders and Citibank, N.A., as Administrative Agent for the
Lenders, a copy of which is filed herewith.
*10.58 First Amendment Agreement and Waiver (to the FHC Revolving Credit
Agreement) dated as of January 28, 1997 among FHC, the Lenders and
Citibank, N.A., as Administrative Agent for the Lenders, a copy of
which is filed herewith.
*10.59 Second Amendment Agreement and Waiver (to the FHC Revolving Credit
Agreement) among FHC, the Lenders and Citibank, N.A., as
Administrative Agent for the Lenders, a copy of which is filed
herewith.
10.60 Lease Agreement between HAS-First Associates and FHC dated
August 1, 1998 and form of amendment thereto (filed as an exhibit
to FHC's Registration Statement on Form S-1 (File No. 33-34963),
which is incorporated by reference herein).
10.61 Agreement and Plan of Reorganization dated as of June 27, 1994 by
and among FHC, CareFlorida Health Systems, Inc., and the other
parties signatory thereto (filed as an exhibit to FHC's Current
Report on Form 8-K filed with the Commission on June 28, 1994,
which is incorporated by reference herein).
10.62 Agreement and Plan of Merger dated as of July 28, 1994 between FHC
and Intergroup Healthcare Corporation (filed as an exhibit to
FHC's Current Report on Form 8-K filed with the Commission on
August 9, 1994, which is incorporated by reference herein).
10.63 Agreement and Plan of Merger dated as of July 28, 1994 between FHC
and Thomas-Davis Medical Centers, P.C. (filed as an exhibit to
FHC's Current Report on Form 8-K filed with the Commission on
August 9, 1994, which is incorporated by reference herein).
*11.1 Statement relative to computation of earnings per share of the
Company, a copy of which is filed herewith.
*21.1 Subsidiaries of the Company, a copy of which is filed herewith.
31
<PAGE>
*27.1 Financial Data Schedule, a copy of which is filed with the EDGAR
version of this filing.
*99.1 Pro Forma Unaudited Consolidated Balance Sheet as of March 31,
1997, a copy of which is filed herewith.
*99.2 Pro Forma Unaudited Consolidated Statement of Operations for
the quarters ended March 31, 1996 and 1997, a copy of which is
filed herewith.
*99.3 Pro Forma Medical Covered Lives at March 31, 1997, a copy of
which is filed herewith.
* A copy of the Exhibit is filed herewith.
32
<PAGE>
(b) REPORTS ON FORM 8-K
No Current Reports on Form 8-K were filed by the Company during the
quarterly period ended March 31, 1997.
33
<PAGE>
SIGNATURES
Pursuant to the requirements 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 SYSTEMS INC.
(Registrant)
Date: May 13, 1997 /s/ JAY M. GELLERT
------------------------
Jay M. Gellert
President and Chief
Operating Officer
Date: May 13, 1997 /s/ JEFFREY L. ELDER
------------------------
Jeffrey L. Elder, Senior Vice President
and Chief Financial Officer
34
<PAGE>
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
FOUNDATION HEALTH SYSTEMS, INC.,
PHS ACQUISITION CORP.
and
PHYSICIANS HEALTH SERVICES, INC.
May 8, 1997
<PAGE>
TABLE OF CONTENTS
PAGE
----
ARTICLE I
THE MERGER
1.1 The Merger. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.2 Effective Time. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.3 Effects of the Merger; Subsequent Actions . . . . . . . . . . . . . . . . 2
1.4 Time and Place of Closing . . . . . . . . . . . . . . . . . . . . . . . . 3
1.5 Certificate of Incorporation and Bylaws . . . . . . . . . . . . . . . . . 3
1.6 Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.7 Officers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.8 Consideration for the Merger; Conversion or Cancellation of Shares in the
Merger. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.9 Company Stock Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
ARTICLE II
DISSENTING SHARES; EXCHANGE OF SHARES
2.1 Dissenting Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.2 Exchange of Certificates. . . . . . . . . . . . . . . . . . . . . . . . . 5
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
3.1 Corporate Organization and Qualification. . . . . . . . . . . . . . . . . 8
3.2 Capitalization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.3 Other Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3.4 Authority Relative to this Agreement; Fairness Opinion. . . . . . . . . . 9
3.5 Governmental Authorization. . . . . . . . . . . . . . . . . . . . . . . 10
3.6 Non-Contravention . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
3.7 SEC Reports; Financial Statements . . . . . . . . . . . . . . . . . . . 12
3.8 Absence of Certain Changes or Events. . . . . . . . . . . . . . . . . . 13
3.9 Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
3.10 Proxy Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
3.11 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
3.12 Compliance with Applicable Law. . . . . . . . . . . . . . . . . . . . . 15
3.13 Employee Benefit Plans. . . . . . . . . . . . . . . . . . . . . . . . . 16
3.14 Labor Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
3.15 Environmental Laws and Regulations. . . . . . . . . . . . . . . . . . . 19
3.16 Computer Systems; Intangible Property . . . . . . . . . . . . . . . . . 20
3.17 DOI Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
3.18 Covered Lives/Subscribers . . . . . . . . . . . . . . . . . . . . . . . 21
i
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PAGE
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3.19 Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
3.20 Brokers and Finders . . . . . . . . . . . . . . . . . . . . . . . . . . 22
3.21 Company Rights Plan . . . . . . . . . . . . . . . . . . . . . . . . . . 22
3.22 Certain Real Property . . . . . . . . . . . . . . . . . . . . . . . . . 22
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT
AND MERGER SUB
4.1 Corporate Organization and Qualification. . . . . . . . . . . . . . . . 22
4.2 Authority Relative to This Agreement. . . . . . . . . . . . . . . . . . 23
4.3 Governmental Authorization. . . . . . . . . . . . . . . . . . . . . . . 23
4.4 Non-Contravention . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
4.5 SEC Reports; Financial Statements . . . . . . . . . . . . . . . . . . . 25
4.6 Information Supplied. . . . . . . . . . . . . . . . . . . . . . . . . . 25
4.7 Interim Operations of Merger Sub. . . . . . . . . . . . . . . . . . . . 26
4.8 Brokers and Finders . . . . . . . . . . . . . . . . . . . . . . . . . . 26
ARTICLE V
ADDITIONAL COVENANTS AND AGREEMENTS
5.1 Conduct of Business of the Company. . . . . . . . . . . . . . . . . . . 26
5.2 Reasonable Best Efforts . . . . . . . . . . . . . . . . . . . . . . . . 29
5.3 Access to Information . . . . . . . . . . . . . . . . . . . . . . . . . 30
5.4 Publicity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
5.5 Notices of Certain Events . . . . . . . . . . . . . . . . . . . . . . . 31
5.6 Stockholder Meeting; Proxy Materials; Opinion of Financial Advisor. . . 31
5.7 No Solicitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
5.8 Termination of Company Stock Plans. . . . . . . . . . . . . . . . . . . 34
5.9 Indemnification of Directors and Officers . . . . . . . . . . . . . . . 35
5.10 Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
5.11 Employee Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
ARTICLE VI
CONDITIONS TO CONSUMMATION OF THE MERGER
6.1 Conditions to Obligations of Parent and Merger Sub. . . . . . . . . . . 37
6.2 Conditions to Obligations of the Company. . . . . . . . . . . . . . . . 37
6.3 Conditions to Obligations of Each Party . . . . . . . . . . . . . . . . 38
ARTICLE VII
TERMINATION OF AGREEMENT
ii
<PAGE>
PAGE
----
7.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
7.2 Certain Actions Prior to Termination. . . . . . . . . . . . . . . . . . 41
7.3 Effect of Termination . . . . . . . . . . . . . . . . . . . . . . . . . 41
7.4 Termination Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
ARTICLE VIII
MISCELLANEOUS AND GENERAL
8.1 Survival. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
8.2 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
8.3 Governing Laws and Consent to Jurisdiction. . . . . . . . . . . . . . . 43
8.4 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
8.5 Entire Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
8.6 Parties in Interest . . . . . . . . . . . . . . . . . . . . . . . . . . 45
8.7 Amendment and Waivers . . . . . . . . . . . . . . . . . . . . . . . . . 45
8.8 Certain Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . 45
8.9 Validity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
8.10 Captions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
8.11 Assignment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
8.12 Disclosure Schedules. . . . . . . . . . . . . . . . . . . . . . . . . . 46
8.13 Specific Performance. . . . . . . . . . . . . . . . . . . . . . . . . . 47
EXHIBIT A Form of Voting Trust Agreement
iii
<PAGE>
PAGE
----
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (this "AGREEMENT"), dated as of May 8,
1997, by and among Foundation Health Systems, Inc., a Delaware corporation
("PARENT"), PHS Acquisition Corp., a Delaware corporation and a wholly owned
subsidiary of Parent ("MERGER SUB"), and Physicians Health Services, Inc., a
Delaware corporation (the "COMPANY").
RECITALS
WHEREAS, the Boards of Directors of Parent, Merger Sub and the
Company have each approved the acquisition of the Company by Parent upon the
terms and subject to the conditions set forth in this Agreement; and
WHEREAS, in furtherance thereof, upon the terms and subject to the
conditions set forth in this Agreement, (i) Merger Sub would be merged (the
"MERGER") with and into the Company in accordance with the General
Corporation Law of the State of Delaware ("DELAWARE LAW") and (ii) each share
of Class A Common Stock, par value $.01 per share, together with the
associated Right (as defined in Section 3.2) (collectively, "CLASS A COMMON
STOCK"), and Class B Common Stock, par value $.01 per share, together with
the associated Right (collectively, "CLASS B COMMON STOCK"), of the Company
issued and outstanding (the "SHARES") immediately prior to the Effective Time
(as defined in Section 1.2) would, except as otherwise expressly provided
herein, be converted into the right to receive the Merger Consideration (as
defined in Section 1.8); and
WHEREAS, concurrently herewith and as a condition and inducement to
Parent's and Merger Sub's willingness to enter into this Agreement, the
Company, Greater Bridgeport Individual Practice Association, Inc., a
stockholder of the Company, and American Stock Transfer & Trust Company, as
voting trustee, have entered into a Voting Trust Agreement (the "VOTING TRUST
AGREEMENT"), substantially in the form of Exhibit A hereto; and
WHEREAS, Parent, Merger Sub and the Company desire to make certain
representations, warranties, covenants and agreements in connection with the
Merger.
NOW, THEREFORE, in consideration of the foregoing and the
representations, warranties, covenants and agreements set forth herein,
Parent, Merger Sub and the Company hereby agree as follows:
<PAGE>
ARTICLE I
THE MERGER
1.1 THE MERGER. At the Effective Time and upon the terms and
subject to the conditions hereof and in accordance with the provisions of
Delaware Law, Merger Sub will be merged with and into the Company, whereupon
the separate corporate existence of Merger Sub shall cease and the Company
shall continue as the surviving corporation in the Merger (the "SURVIVING
CORPORATION"). The Company and Merger Sub are sometimes hereinafter referred
to collectively as the "CONSTITUENT CORPORATIONS."
1.2 EFFECTIVE TIME. Subject to the provisions of this Agreement,
the Merger shall be consummated as promptly as practicable (and in any event
within two business days) after satisfaction or, to the extent permitted
hereunder, waiver of all of the conditions to each party's obligation to
consummate the Merger contained in Article VI, by duly filing an appropriate
certificate of merger (the "CERTIFICATE OF MERGER"), in such form as is
required by, and executed in accordance with, the relevant provisions of
Delaware Law. The Merger shall be effective at such time as the Certificate
of Merger is duly filed with the Secretary of State of the State of Delaware
in accordance with Delaware Law or at such later time agreed to by the
parties as is specified in the Certificate of Merger (the "EFFECTIVE TIME").
The date on which the Effective Time shall occur is referred to herein as the
"EFFECTIVE DATE." This Agreement is intended by the parties to constitute
the agreement of merger contemplated by Section 251 of Delaware Law.
1.3 EFFECTS OF THE MERGER; SUBSEQUENT ACTIONS. (a) The separate
corporate existence of the Company, as the Surviving Corporation, shall continue
unimpaired by the Merger. The Surviving Corporation shall succeed to all the
properties and assets of the Constituent Corporations and to all debts, causes
of action and other interests due or belonging to the Constituent Corporations
and shall be subject to, and responsible for, all the debts, liabilities and
duties of the Constituent Corporations with the effect set forth in Section 259
of Delaware Law.
(b) If, at any time after the Effective Time, the Surviving
Corporation shall consider or be advised that any deeds, bills of sale,
assignments, assurances or any other actions or things are necessary or
desirable to vest, perfect or confirm of record or otherwise in the Surviving
Corporation its right, title or interest in, to or under any of the rights,
properties or assets of the Company or Merger Sub acquired or to be acquired
by the Surviving Corporation as a result of or in connection with the Merger,
or otherwise to carry out this Agreement, the officers and directors of the
Surviving Corporation shall be authorized to execute
2
<PAGE>
and deliver, in the name and on behalf of the Company or Merger Sub, all such
deeds, bills of sale, assignments, assumption agreements and assurances and
to take and do, in the name and on behalf of each of such corporations or
otherwise, all such other actions and things as may be necessary or desirable
to vest, perfect or confirm any and all right, title and interest in, to and
under such rights, properties or assets of the Surviving Corporation or
otherwise to carry out this Agreement.
.1 TIME AND PLACE OF CLOSING. The closing (the "CLOSING") of the
Merger shall take place at the offices of Skadden, Arps, Slate, Meagher &
Flom LLP, 919 Third Avenue, New York, New York, as promptly as practicable
(and in any event within two business days) after satisfaction or, to the
extent permitted hereunder, waiver of all of the conditions to each party's
obligation to consummate the Merger contained in Article VI, or at such other
place or time as Parent and the Company may agree.
.2 CERTIFICATE OF INCORPORATION AND BYLAWS. (a) The Certificate
of Incorporation of Merger Sub, as in effect immediately prior to the
Effective Time, shall be amended to change the name of Merger Sub to
"Physicians Health Services, Inc." and, as so amended, the Certificate of
Incorporation of Merger Sub shall be the Certificate of Incorporation of the
Surviving Corporation until thereafter changed or amended as provided therein
or under applicable law.
(b) The Bylaws of Merger Sub, as in effect immediately prior
to the Effective Time, shall be the Bylaws of the Surviving Corporation until
thereafter changed or amended as provided therein or under applicable law.
.1 DIRECTORS. The directors of Merger Sub at the Effective Time
shall, from and after the Effective Time, be the initial directors of the
Surviving Corporation until their successors have been duly elected or
appointed and qualified or until their earlier death, resignation or removal
in accordance with the Surviving Corporation's Certificate of Incorporation
and Bylaws.
.2 OFFICERS. The officers of the Company at the Effective Time
shall, from and after the Effective Time, be the initial officers of the
Surviving Corporation, and as a result Robert L. Natt will be the Chief
Executive Officer of the Surviving Corporation, until their successors have
been duly elected or appointed and qualified or until their earlier death,
resignation or removal in accordance with the Surviving Corporation's
Certificate of Incorporation and Bylaws.
.3 CONSIDERATION FOR THE MERGER; CONVERSION OR CANCELLATION OF
SHARES IN THE MERGER. At the Effective Time, by virtue of the Merger and
without any action on the part of Parent, Merger Sub, the Company or the
holders of any
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Shares or capital stock of Merger Sub:
(a) Each Share issued and outstanding immediately prior to
the Effective Time (other than Shares to be cancelled pursuant to Section
1.8(b) and Dissenting Shares (as defined in Section 2.1)) shall be cancelled
and extinguished and converted into the right to receive $29.25 in cash,
without interest thereon (the "MERGER CONSIDERATION").
(b) Each Share issued and outstanding immediately prior to
the Effective Time and owned by Parent or Merger Sub or any direct or
indirect subsidiary of Parent or Merger Sub, or which is held in the treasury
of the Company or by any of its subsidiaries, shall cease to be outstanding,
be cancelled and retired without payment of any consideration therefor and
cease to exist.
(c) Each share of common stock, par value $.01 per share, of
Merger Sub issued and outstanding immediately prior to the Effective Time
shall be converted into and become one validly issued, fully paid and
nonassessable share of common stock, par value $.01 per share, of the
Surviving Corporation.
.4 COMPANY STOCK PLANS. As of the Effective Time, each
outstanding option (including any related stock appreciation right) (an
"EMPLOYEE OPTION") issued, awarded or granted pursuant to the Company's 1992
Stock Option Plan or the Company's 1995 Stock Option Plan (the "COMPANY STOCK
PLANS") to purchase Shares shall be cancelled to the Company, subject to
obtaining the consents discussed below, and each holder of a cancelled
Employee Option shall be entitled to receive from the Company (or, at
Parent's option, any subsidiary of the Company) in consideration for the
cancellation of such Employee Option an amount in cash (less applicable
withholding Taxes (as defined in Section 3.11)) equal to the product of (i)
the number of Shares previously subject to such Employee Option and (ii) the
excess, if any, of the Merger Consideration over the exercise price per Share
previously subject to such Employee Option. At or prior to the Closing (x)
the Company shall deliver to Parent agreements (in a form reasonably
acceptable to Parent) executed by each director and officer of the Company
acknowledging that the payment made pursuant to this Section 1.9 is being
made in full satisfaction of such individual's rights under the applicable
Company Stock Plans and any option awards granted thereunder, and (y) the
Company shall use its reasonable best efforts to obtain executed agreements
of the type described in clause (x) from each other holder of an option to
purchase Shares awarded under the Company Stock Plans.
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ARTICLE I
DISSENTING SHARES; EXCHANGE OF SHARES
1.1 DISSENTING SHARES. Notwithstanding anything in this Agreement
to the contrary, Shares outstanding immediately prior to the Effective Time
and held by a holder who has not voted to approve and adopt this Agreement or
consented thereto in writing and who has demanded appraisal for such Shares
in accordance with Section 262 of Delaware Law ("DISSENTING SHARES") shall
not be converted into the right to receive the Merger Consideration unless
such holder fails to perfect or withdraws or otherwise loses his right to
appraisal. If, after the Effective Time, such holder fails to perfect or
withdraws or loses his right to appraisal, such Shares shall no longer be
considered Dissenting Shares for the purposes of this Agreement and shall be
treated as if they had been converted as of the Effective Time into the right
to receive the Merger Consideration without interest thereon. The Company
shall give Merger Sub prompt notice of any demands received by the Company
for appraisal of Shares, and, prior to the Effective Time, Merger Sub shall
have the right to participate in all negotiations and proceedings with
respect to such demands. Prior to the Effective Time, the Company shall not,
except with the prior written consent of Merger Sub, make any payment with
respect to, or settle or offer to settle, any such demands.
1.2 EXCHANGE OF CERTIFICATES. (a) Prior to the Effective Time,
Parent shall designate a bank or trust company reasonably acceptable to the
Company to act as paying agent (the "PAYING AGENT") in effecting the exchange
for the Merger Consideration of certificates (the "CERTIFICATES") that, prior
to the Effective Time, represented Shares. Upon the surrender of each such
Certificate formerly representing Shares, together with a properly completed
letter of transmittal, the Paying Agent shall pay the holder of such
Certificate the Merger Consideration multiplied by the number of Shares
formerly represented by such Certificate, in exchange therefor, and such
Certificate shall forthwith be cancelled. Until so surrendered and
exchanged, each such Certificate (other than Certificates representing
Dissenting Shares or Shares held by Parent, Merger Sub or the Company, or any
direct or indirect subsidiary thereof) shall represent solely the right to
receive the Merger Consideration. No interest shall be paid or accrue on the
Merger Consideration. If the Merger Consideration (or any portion thereof)
is to be delivered to any Person (as defined in Section 8.8) other than the
Person in whose name the Certificate formerly representing Shares surrendered
in exchange therefor is registered, it shall be a condition to such exchange
that the Certificate so surrendered shall be properly endorsed or otherwise
be in proper form for transfer and that the Person requesting such exchange
shall pay to the Paying Agent any transfer or other Taxes (as defined in
Section 3.11) required by reason of the payment of the Merger Consideration
to a Person other than the registered
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holder of the Certificate surrendered, or shall establish to the satisfaction
of the Paying Agent that such Tax has been paid or is not applicable.
(b) Prior to the Effective Time, Parent or Merger Sub shall
deposit, or cause to be deposited, in trust with the Paying Agent for the
benefit of the holders of Shares the aggregate Merger Consideration to which
holders of Shares shall be entitled at the Effective Time pursuant to Section
1.8(a); PROVIDED that no such deposit shall relieve Parent of its obligation
to pay the Merger Consideration pursuant to Section 1.8(a).
(c) The Merger Consideration shall be invested by the Paying
Agent, as directed by Parent, provided such investments shall be limited to
direct obligations of the United States of America, obligations for which the
full faith and credit of the United States of America is pledged to provide
for the payment of principal and interest, commercial paper rated of the
highest quality by Moody's Investors Services, Inc. or Standard & Poor's
Corporation, or certificates of deposit issued by a commercial bank having at
least $1,000,000,000 in assets; PROVIDED, that no loss on investments made
pursuant to this Section 2.2(c) shall relieve Parent of its obligation to pay
the Merger Consideration pursuant to Section 1.8(a).
(d) Promptly following the date which is six months after the
Effective time, the Paying Agent shall deliver to Parent all cash and
documents in its possession relating to the transactions described in this
Agreement, and the Paying Agent's duties shall terminate. Thereafter, each
holder of a Certificate formerly representing a Share may surrender such
Certificate to the Surviving Corporation and (subject to applicable abandoned
property, escheat and similar laws) receive in exchange therefor the Merger
Consideration, without any interest thereon.
(e) Promptly after the Effective Time, the Paying Agent shall
mail to each record holder of Certificates that immediately prior to the
Effective Time represented Shares a form of letter of transmittal and
instructions for use in surrendering such Certificates and receiving the
Merger Consideration in exchange therefor.
(f) After the Effective Time, there shall be no transfers on
the stock transfer books of the Surviving Corporation of any Shares. If,
after the Effective Time, Certificates formerly representing Shares are
presented to the Surviving Corporation or the Paying Agent, they shall be
cancelled and exchanged for the Merger Consideration, as provided in this
Article II, subject to applicable law in the case of Dissenting Shares.
(g) If any Certificate shall have been lost, stolen or
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destroyed, upon the making of an affidavit of that fact by the Person
claiming such Certificate to be lost, stolen or destroyed and, if required by
the Surviving Corporation, the posting by such Person of a bond in such
reasonable amount as the Surviving Corporation may direct as indemnity
against any claim that may be made against it with respect to such
Certificate, the Paying Agent will pay in exchange for such lost, stolen or
destroyed Certificate the Merger Consideration deliverable in respect
therefor pursuant to this Agreement.
ARTICLE I
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Parent and Merger Sub
that, except as set forth with respect to a specifically identified
representation and warranty on the Disclosure Schedule delivered by the
Company to Parent prior to the execution of this Agreement (the "COMPANY
DISCLOSURE SCHEDULE"):
1.1 CORPORATE ORGANIZATION AND QUALIFICATION. Each of the Company
and each of its Significant Subsidiaries (as defined in Section 8.8) is a
corporation duly organized, validly existing and in good standing under the
laws of its respective jurisdiction of incorporation and is qualified and in
good standing as a foreign corporation in each jurisdiction where the
properties owned, leased or operated, or the business conducted, by it
require such qualification, except where the failure to so qualify or be in
good standing would not have a Material Adverse Effect (as defined in Section
8.8) on the Company. Each of the Company and each of its Significant
Subsidiaries has all requisite power and authority (corporate or otherwise)
to own its properties and to carry on its business as it is now being
conducted, except where the failure to have such power and authority would
not have a Material Adverse Effect on the Company. The Company has
heretofore made available to Parent complete and correct copies of its
Amended and Restated Certificate of Incorporation and Amended and Restated
Bylaws as in effect on the date hereof.
1.2 CAPITALIZATION. The authorized capital stock of the Company
consists of (i) 13,000,000 shares of Class A Common Stock of which, as of the
close of business on May 7, 1997, 5,767,196 shares were issued and
outstanding, (ii) 6,369,789 shares of Class B Common Stock of which, as of
the close of business on May 7, 1997, 3,542,921 shares were issued and
outstanding and (iii) 500,000 shares of preferred stock, par value $.01 per
share, none of which is issued or outstanding. All of the outstanding shares
of capital stock of the Company have been duly authorized and validly issued
and are fully paid and nonassessable and are not subject to preemptive
rights. As of May 7, 1997, (i) 1,348,272 shares of Class A Common Stock were
reserved for issuance upon
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exercise of outstanding Employee Options pursuant to the Company Plans and
(ii) 200,000 shares of Series A Junior Participating Preferred Stock, par
value $.01 per share ("JUNIOR PREFERRED STOCK"), were reserved for issuance
in connection with the rights (the "RIGHTS") to purchase shares of Junior
Preferred Stock issued pursuant to the Rights Agreement, dated as of February
21, 1995, between the Company and American Stock Transfer & Trust Company, as
rights agent (as amended from time to time, the "RIGHTS AGREEMENT"). Except
as set forth above and except for or as a result of the exercise of Employee
Options outstanding as of May 7, 1997, there are outstanding (i) no shares of
capital stock or other voting securities of the Company, (ii) no securities
of the Company convertible into or exchangeable for shares of capital stock
or voting securities of the Company, (iii) no options, subscriptions,
warrants, calls or other rights to acquire from the Company, and no
obligation of the Company to issue, deliver or sell, any capital stock,
voting securities or securities convertible into or exchangeable for capital
stock or voting securities of the Company and (iv) no equity equivalents
(including any phantom stock or SAR rights, whether cash or other),
performance shares, interests in the ownership or earnings of the Company or
any of its Subsidiaries or other similar rights issued by the Company
(collectively, "COMPANY SECURITIES"). There are no outstanding obligations
of the Company or any of its Subsidiaries to repurchase, redeem or otherwise
acquire any Company Securities. Each of the outstanding shares of capital
stock of each of the Company's Subsidiaries is duly authorized, validly
issued, fully paid and nonassessable and is directly or indirectly owned by
the Company, free and clear of all security interests, liens, claims,
pledges, charges, voting agreements or other encumbrances of any nature
whatsoever (collectively, "LIENS"). There are no existing options,
subscriptions, warrants, calls or commitments of any character relating to
the issued or unissued capital stock or other equity securities of any
Subsidiary of the Company. The execution, delivery and performance of the
Voting Trust Agreement by the parties thereto, and the transactions
contemplated thereby, will not be deemed to be a transfer of beneficial
ownership of the Class B Common Stock subject to the Voting Trust Agreement
and will not cause the shares of Class B Common Stock subject to the Voting
Trust Agreement to be converted into shares of Class A Common Stock pursuant
to the provisions of the Company's Amended and Restated Certificate of
Incorporation or applicable law.
1.3 OTHER INTERESTS. Except for the Company's interests in its
Subsidiaries, neither the Company nor any of its Subsidiaries owns directly
or indirectly any interest or investment (whether equity or debt) in, nor is
the Company or any of its Subsidiaries subject to any obligation or
requirement to provide for or to make any investment (whether equity or debt)
in, any corporation, limited liability company, partnership, joint venture,
business, trust or other entity.
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1.4 AUTHORITY RELATIVE TO THIS AGREEMENT; FAIRNESS OPINION. The
Company has all necessary corporate power and authority to execute and
deliver this Agreement and the Voting Trust Agreement and (other than, with
respect to the Merger, the approval and adoption of this Agreement by the
holders of a majority of the total outstanding voting power of the Shares,
voting as a single class, as required by Delaware Law (the "Company
Stockholder Approval")) to perform its obligations hereunder and thereunder
and to consummate the transactions contemplated hereby and thereby. The
Board of Directors of the Company, at a meeting duly called and held on May
7, 1997, (i) determined that this Agreement and the transactions contemplated
hereby, including the Merger, are in the best interests of the stockholders
of the Company, (ii) approved this Agreement and the Voting Trust Agreement
and the transactions contemplated hereby and thereby, including the Merger,
and (iii) resolved, subject to Section 5.6, to recommend that the
stockholders of the Company approve and adopt this Agreement. Morgan Stanley
& Co. Incorporated (the "COMPANY FINANCIAL ADVISOR") has delivered to the
Board of Directors of the Company its written opinion dated May 7, 1997 to
the effect that, as of the date of such opinion, the consideration to be
received by the holders of Shares pursuant to the Merger Agreement is fair
from a financial point of view to such holders, a copy of which opinion has
been delivered to Parent. The execution, delivery and performance of this
Agreement and the Voting Trust Agreement by the Company and the consummation
by the Company of the transactions contemplated hereby and thereby have been
duly and validly authorized by the Board of Directors of the Company and no
other corporate proceedings on the part of the Company are necessary to
authorize this Agreement and the Voting Trust Agreement or to consummate the
transactions contemplated hereby and thereby (other than, with respect to the
Merger, the Company Stockholder Approval and the filing of the appropriate
merger documents as required by Delaware Law). The Board of Directors of the
Company has taken all action necessary with respect to the transactions
contemplated hereby and by the Voting Trust Agreement so as to render
inapplicable to such transactions, including, without limitation, the Merger,
the restrictions on business combinations contained in Section 203 of the
Delaware Law. Each of this Agreement and the Voting Trust Agreement has been
duly and validly executed and delivered by the Company and, assuming it
constitutes a valid and binding agreement of the other parties hereto or
thereto, as the case may be, constitutes a legal, valid and binding agreement
of the Company enforceable against the Company in accordance with its terms,
except that the enforcement hereof or thereof may be limited by (i)
bankruptcy, insolvency, reorganization, moratorium or other similar laws now
or hereafter in effect relating to creditors' rights generally and (ii)
general principles of equity (regardless of whether enforceability is
considered in a proceeding in equity or at law).
1.5 GOVERNMENTAL AUTHORIZATION. The execution, delivery and
performance of this Agreement by the Company and the consummation by the
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Company of the transactions contemplated hereby require no action by or in
respect of, or filing with, any court, administrative agency or commission or
other governmental authority or instrumentality, domestic or foreign
("GOVERNMENTAL ENTITY") other than:
(a) the filing of the Certificate of Merger in accordance
with Delaware Law;
(b) compliance with any applicable requirements of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
ACT");
(c) compliance with any applicable requirements of the
Securities Exchange Act of 1934, as amended, and the rules and regulations
promulgated thereunder (the "EXCHANGE ACT");
(d) compliance with any applicable foreign or state
securities or "blue sky" laws, rules or regulations;
(e) compliance with Federal, foreign and state laws, rules
and regulations governing insurance, health maintenance organizations, health
care services plans, third party administrators, hospitals or other managed
health care organizations or antitrust; and
(f) such other filings or registrations with, or
authorizations, consents or approvals of, Governmental Entities, the failure
of which to be made or obtained would not, individually or in the aggregate,
(i) have a Material Adverse Effect on the Company or the Surviving
Corporation or (ii) impair the ability of the Company to consummate the
transactions contemplated by this Agreement.
1.6 NON-CONTRAVENTION. The execution, delivery and performance of
this Agreement by the Company do not, and the consummation by the Company of
the transactions contemplated hereby will not:
(a) contravene or conflict with any provision of the
respective charters or bylaws (or similar governing documents) of the Company
or any of its Significant Subsidiaries;
(b) assuming compliance with the matters referred to in
Section 3.5 and assuming the Company Stockholder Approval has been obtained,
contravene or conflict with or constitute a violation of any provision of any
law, regulation, judgment, injunction, order or decree binding upon or
applicable to the Company or any Subsidiary of the Company or any of their
respective properties
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or assets;
(c) conflict with or result in a breach or violation of, or
constitute a default (or an event that with notice or lapse of time or both
would become a default) under, or result in any third party having any right
of termination, amendment, acceleration or cancellation of, or loss of a
material benefit under, (i) any agreement, contract or other instrument
binding upon the Company or any Subsidiary of the Company or, (ii) assuming
compliance with the matters referred to in Section 3.5, any license,
franchise, permit or other similar authorization held by the Company or any
Subsidiary of the Company; or
(d) result in the creation or imposition of any Lien on any
asset of the Company or any Subsidiary of the Company;
except, with respect to clauses (b), (c) and (d) above, for contraventions,
defaults, losses, Liens and other matters referred to in such clauses that
would not, individually or in the aggregate, (i) have a Material Adverse
Effect on the Company or the Surviving Corporation, (ii) impair the ability
of the Company to consummate the transactions contemplated by this Agreement
or (iii) prevent or materially delay the consummation of any of the
transactions contemplated by this Agreement.
1.7 SEC REPORTS; FINANCIAL STATEMENTS. Each periodic report,
registration statement, definitive proxy statement and other document filed
by the Company with the Securities and Exchange Commission (the "SEC") since
January 1, 1995 (as such documents have since the time of their filing been
amended, the "COMPANY SEC REPORTS"), as of their respective dates, complied
in all material respects with the requirements of the Securities Act of 1933,
as amended, and the rules and regulations promulgated thereunder (the
"SECURITIES ACT") or the Exchange Act, as the case may be, applicable to such
Company SEC Reports and none of the Company SEC Reports contained any untrue
statement of a material fact or omitted to state a material fact required to
be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading, except
for such statements, if any, as have been modified by subsequent filings
prior to the date hereof. The Company SEC Reports include all the documents
(other than preliminary material) that the Company was required to file with
the SEC since January 1, 1995. The financial statements of the Company
included in the Company SEC Reports, as of their respective filing dates with
the SEC, complied as to form in all material respects with applicable
accounting requirements and with the published rules and regulations of the
SEC with respect thereto, have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis during the
periods involved (except as may be indicated in the notes thereto or, in the
case of the unaudited statements, as permitted by Form 10-Q of the SEC) and
present
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fairly the consolidated financial position of the Company and its
consolidated Subsidiaries as of the dates thereof and the consolidated
results of their operations and cash flows for the periods then ended
(subject in the case of the unaudited statements, to normal, year-end audit
adjustments). Since December 31, 1996, neither the Company nor any of its
Subsidiaries has incurred any liabilities or obligations, whether absolute,
accrued, fixed, contingent, liquidated, unliquidated or otherwise and whether
due or to become due, except (i) as and to the extent set forth on the
audited balance sheet of the Company and its Subsidiaries as of December 31,
1996 (including the notes thereto) (the "COMPANY BALANCE SHEET"), (ii) for
liability under this Agreement, (iii) as incurred after December 31, 1996 in
the ordinary course of business and consistent with past practices, (iv) as
described in the Company SEC Reports filed and publicly available prior to
the date hereof or (v) as would not, individually or in the aggregate, have a
Material Adverse Effect on the Company.
1.8 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in
the Company SEC Reports filed and publicly available prior to the date
hereof, since December 31, 1996, the Company and its Subsidiaries have
conducted their respective business only in the ordinary course, consistent
with past practice, and there has not occurred or arisen any event which
would, individually or in the aggregate, have a Material Adverse Effect on
the Company.
1.9 LITIGATION. There is no action, suit, proceeding, claim or
investigation pending or, to the knowledge of the Company, threatened against
or affecting the Company or any of its Subsidiaries or any of their assets or
against or involving any of its officers, directors or employees in
connection with the business or affairs of the Company, including, without
limitation, any claims for indemnification arising under any agreement to
which the Company or any of its Subsidiaries is a party, which would,
individually or in the aggregate, have a Material Adverse Effect on the
Company. The Company is not subject to or in default with respect to any
writ, order, judgment, injunction or decree which would, individually or in
the aggregate, have a Material Adverse Effect on the Company. The parties
agree that this representation and warranty shall not cover any actions,
suits, proceedings, claims, investigations, writs, orders, judgments,
injunctions or decrees, pending or threatened, which seek to prevent or
materially delay the consummation of the transactions contemplated by this
Agreement or impose material conditions with respect thereto.
1.10 PROXY STATEMENT. The proxy or information statement or
similar materials distributed to the Company's stockholders in connection
with the Merger, including any amendments or supplements thereto (the "PROXY
STATEMENT"), will not, at the time of mailing to stockholders of the Company
or at the time of the special meeting of the Company's stockholders called
for the purpose
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of considering and taking action upon this Agreement (the "SPECIAL MEETING"),
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made,
not misleading. The Proxy Statement will comply as to form in all material
respects with the provisions of the Exchange Act. Notwithstanding the
foregoing two sentences, the Company makes no representation or warranty with
respect to information supplied by Parent or Merger Sub specifically for
inclusion in the Proxy Statement.
1.11 TAXES.
(a) The Company and each of its Subsidiaries (i) has filed
(or the Company has had timely filed on their behalf) when due (taking into
account extensions) with the appropriate Federal, state, local, foreign and
other governmental agencies, all material tax returns, estimates, reports and
documents of a similar nature relating to taxes required to be filed by it,
and all such returns, estimates and reports are or will be at the time of
filing true, correct and complete in all material respects and (ii) has
either paid when due and payable or has established adequate reserves
(including Taxes (as defined below) being contested in good faith) or
otherwise accrued on the Company Balance Sheet, all material Federal, state,
local or foreign taxes, levies, imposts, duties, licenses and registration
fees and charges of any nature whatsoever, and unemployment and social
security taxes and income tax withholding, including interest and penalties
thereon ("TAX" or "TAXES"). There are no Tax liens upon any property of the
Company or any of its Subsidiaries except liens for current Taxes not yet
due, and there are no material Taxes, interest, penalties, assessments or
deficiencies claimed in writing by any Taxing authority and received by the
Company or any such Subsidiary that, in the aggregate, would result in any
Tax liability in excess of the amount of the reserves or accruals, and the
Company and each of its Subsidiaries has or will establish in accordance with
its normal accounting practices and procedures accruals and reserves that are
adequate for the payment of all material Taxes not yet due and payable and
attributable to any period preceding the Closing. The Company has not filed a
consent to the application of Section 341(f)(2) of the Code.
(b) No audit, assessment or other examination relating to
Taxes by any Taxing authority is pending with respect to any material Taxes
due by the Company or any of its Subsidiaries.
(c) Neither the Company nor any predecessor corporation, nor
any of their respective Subsidiaries, has executed or filed with the Internal
Revenue Service or any other governmental authority or any other Taxing
authority any agreement or other document extending, or having the effect of
extending, the period of assessment or collection of any material Taxes.
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(d) Neither the Company nor any of its Subsidiaries is a
party to or is bound by (or will prior to the Closing become a party to or
bound by) any Tax indemnity, Tax sharing or Tax allocation agreement or other
similar arrangement which includes a party other than the Company and its
Subsidiaries. Neither the Company nor any of its Subsidiaries has been a
member of an affiliated group other than one of which Company was the common
parent, or filed or been included in a combined, consolidated or unitary Tax
return other than one filed by the Company (or a return for a group
consisting solely of its Subsidiaries and predecessors).
(e) The Company has not agreed, nor is it required, to make
any adjustment under section 481(a) of the Code by reason of a change in
accounting method or otherwise.
(f) Neither the Company nor any of its Subsidiaries has
entered into a transaction which is being accounted for as an installment
obligation under section 453 of the Code, nor has the Company or any of its
Subsidiaries entered into an interest rate swap, currency swap or other
similar transaction.
1.12 COMPLIANCE WITH APPLICABLE LAW. Section 3.12 of the Company
Disclosure Schedule contains a true and complete list of all regulatory
undertakings, orders or other commitments of any nature not embodied in
applicable statutes or regulations or specifically disclosed in the Company
SEC Reports filed and publicly available prior to the date of this Agreement
entered into by the Company or any of its Subsidiaries with any regulatory
entity, including any insurance or HMO regulatory bodies, which undertakings,
orders or other commitments limit or purport to limit the business of the
Company or any of its Significant Subsidiaries as presently conducted or as
the same may be conducted in the future. The Company and its Subsidiaries
hold, and at all times since January 1, 1995 have held, all permits,
licenses, variances, exemptions, orders and approvals of all Governmental
Entities necessary for the lawful conduct of their respective businesses (the
"COMPANY PERMITS"), except for failures to hold such permits, licenses,
variances, exemptions, orders and approvals which would not, individually or
in the aggregate, have a Material Adverse Effect on the Company. The Company
and its Subsidiaries are, and at all times since January 1, 1995 have been,
in compliance with the terms of the Company Permits, except where the failure
so to comply would not, individually or in the aggregate, have a Material
Adverse Effect on the Company. Except as specifically disclosed in the
Company SEC Reports filed and publicly available prior to the date of this
Agreement, the conduct of the respective businesses of the Company and its
Subsidiaries is, and at all times has been, in conformity with all applicable
federal, state and other governmental and regulatory requirements, except
where nonconformity or noncompliance would not, individually or in the
aggregate, have a Material
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Adverse Effect on the Company. No investigation or review by any Governmental
Entity with respect to the Company or any of its Subsidiaries is pending or,
to the knowledge of the Company, threatened, other than those which would
not, individually or in the aggregate, have a Material Adverse Effect on the
Company.
1.13 EMPLOYEE BENEFIT PLANS.
(a) Section 3.13(a) of the Company Disclosure Schedule
contains a true and complete list of each deferred compensation and each
bonus or other incentive compensation, stock purchase, stock option and other
equity compensation plan, program, agreement or arrangement; each severance
or termination pay, medical, surgical, hospitalization, life insurance and
other "welfare" plan, fund or program (within the meaning of section 3(1) of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA");
each "pension" plan, fund or program (within the meaning of section 3(2) of
ERISA); each employment, termination or severance agreement; and each other
employee benefit plan, fund, program, agreement or arrangement, in each case,
that is sponsored, maintained or contributed to or required to be contributed
to by the Company or by any trade or business, whether or not incorporated
(an "ERISA AFFILIATE"), that together with the Company would be deemed a
"single employer" within the meaning of section 4001(b) of ERISA, or to which
the Company or an ERISA Affiliate is party, whether written or oral, for the
benefit of any employee or former employee of the Company or any Subsidiary
of the Company (the "PLANS"). Neither the Company, any Subsidiary of the
Company nor any ERISA Affiliate has any legal commitment to create any
additional employee benefit plan or modify or change any existing Plan that
would affect any employee (an "Employee") or former employee of the Company
or any Subsidiary of the Company.
(b) With respect to each Plan, the Company has heretofore
delivered or made available to Buyer true and complete copies of each of the
following documents:
(i) a copy of the Plan and any amendments thereto (or
if the Plan is not a written Plan, a description thereof);
(ii) a copy of the two most recent annual reports and
actuarial reports, if required under ERISA, and the most recent report
prepared with respect thereto in accordance with Statement of
Financial Accounting Standards No. 87;
(iii) a copy of the most recent Summary Plan Description
required under ERISA with respect thereto;
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(iv) if the Plan is funded through a trust or any third
party funding vehicle, a copy of the trust or other funding agreement
and the latest financial statements thereof; and
(v) the most recent determination letter received from
the Internal Revenue Service with respect to each Plan intended to
qualify under section 401 of the Code.
(c) No Plan is subject to Title IV of ERISA. No Title IV Plan
is a "multiemployer pension plan," as defined in section 3(37) of ERISA, nor is
any Title IV Plan a plan described in section 4063(a) of ERISA.
(d) All contributions required to be made with respect to any
Plan on or prior to the Closing Date have been or will be timely made on or
prior to the Closing Date.
(e) Neither the Company or any Subsidiary of the Company nor,
to the knowledge of the Company, any trustee or administrator thereof, has
engaged in a transaction in connection with which the Company or any
Subsidiary of the Company or any trustee or administrator thereof could
reasonably be expected to be subject to either a material civil penalty
assessed pursuant to section 409 or 502(i) of ERISA or a material tax imposed
pursuant to section 4975 or 4976 of the Code.
(f) Each Plan has been operated and administered in all
material respects in accordance with its terms and applicable law, including
but not limited to ERISA and the Code.
(g) Each Plan intended to be "qualified" within the meaning
of section 401(a) of the Code has received a favorable determination letter
to the effect that the Plan is so qualified and that its related trust
maintained thereunder is exempt from taxation under section 501(a) of the
Code.
(h) No Plan provides medical, surgical, hospitalization,
death or similar benefits (whether or not insured) for employees or former
employees of the Company or any Subsidiary for periods extending beyond their
retirement or other termination of service, other than (i) coverage mandated
by applicable law, (ii) death benefits under any "pension plan," or (iii)
benefits the full cost of which is borne by the current or former employee
(or his beneficiary).
(i) Except as previously disclosed in writing to Parent, no
amounts payable under the Plans will fail to be deductible for federal income
tax purposes by virtue of section 280G of the Code.
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(j) Except as set forth in Section 3.13(j) of the Company
Disclosure Schedule or as expressly provided in this Agreement, the
consummation of the transactions contemplated by this Agreement will not (i)
entitle any current or former employee or officer of the Company or any ERISA
Affiliate to severance pay, unemployment compensation or any other payment,
or (ii) accelerate the time of payment or vesting, or increase the amount of
compensation due any such employee or officer.
(k) There are no pending or, to the knowledge of the Company,
threatened or anticipated claims by or on behalf of any Plan, by any employee
or beneficiary covered under any such Plan, or otherwise involving any such
Plan (other than routine claims for benefits).
1.14 LABOR MATTERS. Neither the Company nor any of its
Subsidiaries is a party to any collective bargaining agreement or other labor
union contract applicable to persons employed by the Company or any such
Subsidiary and, to the knowledge of the Company, there are no activities or
proceedings of any labor union to organize any such employees.
1.15 ENVIRONMENTAL LAWS AND REGULATIONS.
(a) No written notice, notification, demand, request for
information, citation, summons, complaint or order has been received by the
Company or any of its Subsidiaries, no complaint has been served on the
Company or any of its Subsidiaries, no penalty has been assessed and, to the
knowledge of the Company, no investigation is pending or has been threatened
(each, an "ACTION") by any Governmental Entity or other party with respect to
any (i) alleged violation by the Company or any of its Subsidiaries of any
Environmental Law, (ii) alleged failure by the Company or any such Subsidiary
to have any environmental permit, certificate, license, approval,
registration or authorization required in connection with the conduct of its
business or (iii) Regulated Activity, in each case where such Action has had
or would have, individually or in the aggregate, a Material Adverse Effect on
the Company.
(b) Neither the Company nor any of its Subsidiaries has any
Environmental Liabilities that has had, or would have, individually or in the
aggregate, a Material Adverse Effect on the Company. There has been no
release of Hazardous Substances into the environment or violation of any
Environmental Law in either case by the Company or any such Subsidiary which
in either case has had, or would have, individually or in the aggregate, a
Material Adverse Effect on the Company.
(c) For the purposes of this Agreement, the following terms
have the following meanings:
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"ENVIRONMENTAL LAWS" shall mean any and all Federal, state,
local and foreign statutes, laws, regulations, ordinances, rules,
judgments, orders, decrees, codes, injunctions and governmental
restrictions relating to the environment or to emissions, discharges
or releases of Hazardous Substances into the environment or otherwise
relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of Hazardous Substances or
the clean-up or other remediation thereof.
"ENVIRONMENTAL LIABILITIES" shall mean all liabilities which
(i) arise under Environmental Laws and (ii) relate to Regulated
Activities occurring or conditions existing on or prior to the
Effective Time.
"HAZARDOUS SUBSTANCES" shall mean any pollutants,
contaminants, toxic, radioactive, caustic or otherwise hazardous
substance or waste, including petroleum, its derivatives, by-products
and other hydrocarbons and medical or infectious waste that is
regulated under or by any applicable Environmental Law.
"REGULATED ACTIVITY" shall mean any generation, treatment,
storage, recycling, transportation, disposal or release of any
Hazardous Substances.
1.16 COMPUTER SYSTEMS; INTANGIBLE PROPERTY.
(a) Except as set forth on Section 3.16 of the Company
Disclosure Schedule, the Company's computer systems, including all hardware and
software (collectively, the "COMPUTER SYSTEMS"), are presently serving the
Company's needs adequately. There are no infringement suits, actions or
proceedings pending or, to the Company's knowledge, threatened, with respect to
the Computer Systems.
(b) The Company or one of its Subsidiaries is the owner of, or a
licensee under a valid license for, all items of intangible property which are
material to the business of the Company and its Subsidiaries as currently
conducted, taken as a whole, including, without limitation, trade names,
unregistered trademarks and service marks, brand names, patents and copyrights.
There are no claims pending or, to the Company's knowledge, threatened, that the
Company or any of its Subsidiaries is in violation of any such intangible
property of any third party which would, individually or in the aggregate, have
a Material Adverse Effect on the Company. No material infringement of any
proprietary right owned by or licensed by or to the Company or any of its
Subsidiaries is
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known to the Company.
1.17 DOI REPORTS. The Company has made available to Parent at the
Company's offices true, correct and complete copies of all material reports
filed by the Company or any of its Subsidiaries regarding the activities of
the Company and its Subsidiaries in the States of Connecticut, New Jersey and
New York with, and any license applications filed by the Company in such
States with, and all material correspondence regarding such activities and
license applications sent to, or received by the Company or any of its
Subsidiaries from, applicable insurance and HMO regulatory bodies since
January 1, 1995. Each material report required to be filed by the Company or
any of its Subsidiaries with applicable insurance and HMO regulatory bodies
since January 1, 1995 (as such documents have since the time of their filing
been amended, the "DOI REPORTS") has been filed. As of their respective
dates, the DOI Reports complied in all material respects with the
requirements of the laws, rules and regulations applicable to such DOI
Reports, and none of the DOI Reports contained any untrue statement of a
material fact or omitted to state a material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, except for such
statements, if any, as have been modified by subsequent filings prior to the
date hereof.
1.18 COVERED LIVES/SUBSCRIBERS. As of April 30, 1997, (i) the
Company had a total of 379,026 at-risk members covered under its various
managed health care plans, including 339,742 commercial HMO members, 15,254
Medicare members, 24,030 Medicaid members, and no commercial PPO members, and
(ii) there were 68,844 persons covered by self-funded and other plans for
which the Company provided ASO services.
1.19 CONTRACTS. Neither the Company nor its Subsidiaries is a
party to, or has any obligation under, any contract or agreement, written or
oral, which contains any covenants currently or prospectively limiting the
freedom of the Company, any of its Subsidiaries or any of their respective
affiliates to engage in any line of business or to compete with any entity.
All contracts and agreements to which the Company or any of its Subsidiaries
is a party or by which any of their respective assets are bound are valid and
binding, in full force and effect and enforceable against the parties thereto
in accordance with their respective terms, subject to applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to
creditors' rights generally and general principles of equity, other than such
failures to be so valid and binding, in full force and effect or enforceable
which would not, individually or in the aggregate, have a Material Adverse
Effect on the Company. There is not under any such contract or agreement any
existing default, or event which, after notice or lapse of time, or both,
would constitute a default, by the Company or any of its Subsidiaries or, to
the Company's knowledge, any other party, except to the extent such default
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would not, individually or in the aggregate, have a Material Adverse Effect
on the Company.
1.20 BROKERS AND FINDERS. Except for the fees and expenses
payable to the Company Financial Advisor, which fees and expenses are
reflected in its agreements with the Company, true and complete copies of
which have been furnished to Parent, the Company has not engaged any
investment banker, broker, finder, consultant or intermediary in connection
with the transactions contemplated by this Agreement which would be entitled
to any investment banking, brokerage, finder's or similar fee or commission
in connection with this Agreement or the transactions contemplated hereby.
1.21 COMPANY RIGHTS PLAN. The Rights Agreement has been amended
to (i) render the Rights Agreement inapplicable to the Merger and the other
transactions contemplated by this Agreement and (ii) ensure that (y) neither
Parent nor any of its wholly owned Subsidiaries is an Acquiring Person (as
defined in the Rights Agreement) pursuant to the Rights Agreement and (z) a
Stock Acquisition Date or Distribution Date (in each case as defined in the
Rights Agreement) does not occur solely by reason of the execution of this
Agreement or the consummation of the Merger or the other transactions
contemplated by this Agreement.
1.22 CERTAIN REAL PROPERTY. The Company does not directly own any
real property located in the State of Connecticut.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF PARENT
AND MERGER SUB
Each of Parent and Merger Sub represent and warrant jointly and
severally to the Company that, except as set forth with respect to a
specifically identified representation and warranty on the Disclosure
Schedule delivered by Parent to the Company prior to the execution of this
Agreement (the "PARENT DISCLOSURE SCHEDULE"):
II.1 CORPORATE ORGANIZATION AND QUALIFICATION. Each of Parent and
each of its Significant Subsidiaries is a corporation duly organized, validly
existing and in good standing under the laws of its respective jurisdiction
of incorporation and is qualified and in good standing as a foreign
corporation in each jurisdiction where the properties owned, leased or
operated, or the business conducted, by it require such qualification, except
where the failure to so qualify or be in good standing would not have a
Material Adverse Effect on Parent. Each of Parent and
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each of its Subsidiaries has all requisite power and authority (corporate or
otherwise) to own its properties and to carry on its business as it is now
being conducted, except where the failure to have such power and authority
would not have a Material Adverse Effect on Parent. Parent and Merger Sub
have heretofore made available to the Company complete and correct copies of
their respective Certificates of Incorporation and Bylaws as in effect on the
date hereof.
II.2 AUTHORITY RELATIVE TO THIS AGREEMENT. Each of Parent and
Merger Sub has all necessary corporate power and authority to execute and
deliver this Agreement, to perform its obligations hereunder and to
consummate the transactions contemplated hereby. The execution, delivery and
performance of this Agreement by Parent and Merger Sub and the consummation
by Parent and Merger Sub of the transactions contemplated hereby have been
duly and validly authorized by the respective Boards of Directors of Parent
and Merger Sub and by Parent as sole stockholder of Merger Sub, and no other
corporate proceedings on the part of Parent and Merger Sub are necessary to
authorize this Agreement or to consummate the transactions contemplated
hereby. This Agreement has been duly and validly executed and delivered by
each of Parent and Merger Sub and, assuming this Agreement constitutes the
valid and binding agreement of the Company, constitutes a legal, valid and
binding agreement of each of Parent and Merger Sub, enforceable against each
of them in accordance with its terms, except that the enforcement hereof may
be limited by (i) bankruptcy, insolvency, reorganization, moratorium or other
similar laws now or hereafter in effect relating to creditors' rights
generally and (ii) general principles of equity (regardless of whether
enforceability is considered in a proceeding in equity or at law).
II.3 GOVERNMENTAL AUTHORIZATION. The execution, delivery and
performance of this Agreement by Parent and Merger Sub and the consummation
by Parent and Merger Sub of the transactions contemplated hereby require no
action by or in respect of, or filing with, any Governmental Entity other
than:
(a) the filing of the Certificate of Merger in accordance
with Delaware Law;
(b) compliance with any applicable requirements of the HSR
Act;
(c) compliance with any applicable requirements of the
Exchange Act;
(d) compliance with any applicable foreign or state
securities or "blue sky" laws, rules or regulations;
(e) compliance with Federal, foreign and state laws, rules
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and regulations governing insurance, health maintenance organizations, health
care services plans, third party administrators, hospitals or other managed
health care organizations or antitrust; and
(f) such other filings or registrations with, or
authorizations, consents or approvals of, Governmental Entities, the failure
of which to be made or obtained would not, individually or in the aggregate,
(i) have a Material Adverse Effect on Parent or (ii) impair the ability of
Parent and Merger Sub to consummate the transactions contemplated by this
Agreement.
II.4 NON-CONTRAVENTION. The execution, delivery and performance of
this Agreement by Parent and Merger Sub do not, and the consummation by
Parent and Merger Sub of the transactions contemplated hereby will not:
(a) contravene or conflict with any provisions of the
respective charters or bylaws (or similar governing documents) of Parent or
any of its Significant Subsidiaries;
(b) assuming compliance with the matters referred to in
Section 4.3, contravene or conflict with or constitute a violation of any
provision of any law, regulation, judgment, injunction, order or decree
binding upon or applicable to Parent or any Subsidiary of Parent or any of
their respective properties or assets;
(c) conflict with or result in a breach or violation of, or
constitute a default (or an event that with notice or lapse of time or both
would become a default) under, or result in any third party having any right
of termination, amendment, acceleration or cancellation of or loss of a
material benefit under, (i) any agreement, contract or other instrument
binding upon Parent or any Subsidiary of Parent or (ii) assuming compliance
with the matters referred to in Section 4.3, any license, franchise, permit
or other similar authorization held by Parent or any Subsidiary of Parent; or
(d) result in the creation or imposition of any Lien on any
material asset of Parent or any Subsidiary of Parent;
except, with respect to clauses (b), (c) and (d) above, for contraventions,
defaults, losses, Liens and other matters referred to in such clauses that
would not, individually or in the aggregate, (i) have a Material Adverse
Effect on Parent, (ii) impair the ability of Parent and Merger Sub to
consummate the transactions contemplated by this Agreement or (iii) prevent
or materially delay the consummation of any of the transactions contemplated
by this Agreement.
II.5 SEC REPORTS; FINANCIAL STATEMENTS. Each periodic report,
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registration statement, definitive proxy statement and other document filed
by the Parent with the SEC since January 1, 1995 (as such documents have
since the time of their filing been amended, the "PARENT SEC REPORTS"), as of
their respective dates, complied in all material respects with the
requirements of the Securities Act or the Exchange Act, as the case may be,
applicable to such Parent SEC Reports and none of the Parent SEC Reports
contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading, except for such statements, if any, as have been modified by
subsequent filings prior to the date hereof. The Parent SEC Reports include
all the documents (other than preliminary material) that Parent was required
to file with the SEC since January 1, 1995. The financial statements of
Parent included in the Parent SEC Reports, as of their respective filing
dates with the SEC, complied as to form in all material respects with
applicable accounting requirements and with the published rules and
regulations of the SEC with respect thereto, have been prepared in accordance
with generally accepted accounting principles applied on a consistent basis
during the periods involved (except as may be indicated in the notes thereto
or, in the case of the unaudited statements, as permitted by Form 10-Q of the
SEC) and present fairly the consolidated financial position of Parent and its
consolidated Subsidiaries as of the dates thereof and the consolidated
results of their operations and cash flows for the periods then ended
(subject in the case of the unaudited statements, to normal, year-end audit
adjustments).
II.6 INFORMATION SUPPLIED. None of the information supplied or to
be supplied by Parent or Merger Sub specifically for inclusion in the Proxy
Statement will, at the time of mailing to stockholders of the Company or at
the time of the Special Meeting, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading.
II.7 INTERIM OPERATIONS OF MERGER SUB. Merger Sub was formed
solely for the purpose of engaging in the transactions contemplated hereby
and has not engaged in any business activities or conducted any operations
other than in connection with the transactions contemplated hereby.
II.8 BROKERS AND FINDERS. Except for the fees and expenses
payable to Credit Suisse First Boston, which fees and expenses are reflected
in its agreements with Parent, Parent has not engaged any investment banker,
broker, finder, consultant or intermediary in connection with the
transactions contemplated by this Agreement which would be entitled to any
investment banking, brokerage, finder's or similar fee or commission in
connection with this Agreement or the transactions contemplated hereby.
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ARTICLE III
ADDITIONAL COVENANTS AND AGREEMENTS
III.1 CONDUCT OF BUSINESS OF THE COMPANY. Except as set forth in
Section 5.1 of the Company Disclosure Schedule or Section 5.8 hereof, the
Company agrees that during the period from the date of this Agreement to the
Effective Time, the Company shall, and shall cause each of its Subsidiaries
to, conduct its operations according to its ordinary and usual course of
business consistent with past practice and, to the extent consistent
therewith, use its reasonable best efforts to preserve intact its current
business organizations, keep available the service of its current officers
and employees and preserve its relationships with customers, suppliers and
others having business dealings with it to the end that goodwill and ongoing
businesses shall not be impaired. Except as set forth in Section 5.1 of the
Company Disclosure Schedule or Section 5.8 hereof, without limiting the
generality of the foregoing, and except as otherwise expressly permitted in
this Agreement prior to the Effective Time, neither the Company nor any of
its Subsidiaries shall:
(a) except for shares of Class A Common Stock to be issued or
delivered in connection with the exercise of Employee Options outstanding on
the date hereof in accordance with their current terms, issue, deliver, sell,
dispose of, pledge or otherwise encumber, or authorize or propose the
issuance, sale, disposition or pledge or other encumbrance of (A) any
additional shares of capital stock of any class (including the Shares), or
any securities or rights convertible into, exchangeable for, or evidencing
the right to subscribe for any shares of capital stock, or any rights,
warrants, options, calls, commitments or any other agreements of any
character to purchase or acquire any shares of capital stock, or (B) any
other securities in respect of, in lieu of, or in substitution for, Shares
outstanding on the date hereof;
(b) except pursuant to the Plans as in effect on the date
hereof, redeem, purchase or otherwise acquire, or propose to redeem, purchase
or otherwise acquire, any shares of capital stock of the Company or any of
its Subsidiaries;
(c) split, combine, subdivide or reclassify any of its
capital stock or declare, set aside for payment or pay any dividend, or make
any other actual, constructive or deemed distribution in respect of any of
its capital stock or otherwise make any payments to stockholders of the
Company in their capacity as such, except for dividends payable to the
Company declared by any wholly owned subsidiary of the Company;
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(d) adopt or propose to adopt a plan of complete or partial
liquidation, dissolution, merger, consolidation, restructuring,
recapitalization or other reorganization of the Company or any of its
Subsidiaries (other than the Merger);
(e) adopt or propose to adopt any amendments to its Amended
and Restated Certificate of Incorporation or Amended and Restated Bylaws;
(f) waive, amend or otherwise alter the Rights Agreement or
redeem the Rights;
(g) acquire or agree to acquire by merging or consolidating
with, or by purchasing a substantial portion of the assets of or equity in,
or by any other manner, any business or any corporation, partnership,
association or other business organization or division thereof or otherwise
acquire or agree to acquire any assets, in each case that are material,
individually or in the aggregate, to the Company and its Subsidiaries taken
as a whole;
(h) sell (including by sale-leaseback), lease or otherwise
dispose of, or agree to sell, lease or otherwise dispose of, any of its
assets that are material, individually or in the aggregate, to the Company
and its Subsidiaries taken as a whole;
(i) make or agree to make any capital expenditure or
expenditures which, individually, is in excess of $100,000 or, in the
aggregate, are in excess of $500,000, except as set forth in Section 5.1(i)
of the Company Disclosure Schedule;
(j) enter into any non-competition or other agreement which
may restrict in any way the conduct of the respective businesses of the
Company or any of its Subsidiaries;
(k) modify its existing provider fee or rate schedules, the
result of which modifications would be, based upon 1996 utilization, an
increase in either (i) the aggregate reimbursements to all physician,
hospital and ancillary providers, taken together, or (ii) reimbursements to
any individual physician, hospital or ancillary provider representing at
least $1,000,000 or more in annual payments for services during 1996;
(l) except as required by law, effect material changes to
rating plans or issue new business or renewal quotations to groups of more
than 1,000 employees or enter into any amendment or modification of any of
its
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agreements with providers, other than amendments expressly contemplated
hereby, without reasonable evidence that doing so would be in the economic
interests of the Company and would not adversely affect the Company's rights
to medically manage the provision of healthcare except in immaterial respects;
(m) other than in the ordinary course of business consistent
with past practice, incur any indebtedness for borrowed money or guarantee
any such indebtedness or issue or sell any debt securities or guarantee any
debt securities of others, or make any loans, advances or capital
contributions to, or investments in, any other Person, other than to the
Company or any wholly owned Subsidiary of the Company;
(n) except as may be required as a result of a change in law
or in generally accepted accounting principles, change any of the accounting
principles or practices used by it;
(o) settle or compromise any pending or threatened material
suit, action or claim relating to the transactions contemplated hereby;
(p) pay, discharge or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction in the ordinary
course of business consistent with past practice, or as required by their by
terms, of liabilities reflected or reserved against in, or contemplated by,
the Company Balance Sheet (or the notes thereto) or incurred in the ordinary
course of business consistent with past practice or immaterial liabilities
not incurred in the ordinary course of business consistent with past practice;
(q) increase in any manner the compensation or fringe
benefits of any of its directors, officers or other employees receiving an
annual salary in excess of $40,000, or pay any pension or retirement
allowance not required by any existing plan or agreement to any such
employees, or become a party to, amend or commit itself to any pension,
retirement, profit-sharing or welfare benefit plan or agreement or employment
agreement with or for the benefit of any employee (other than increases in
the compensation of employees who are not officers or directors of the
Company made in the ordinary course of business consistent with past
practice) or voluntarily accelerate the vesting of any compensation or
benefit;
(r) waive, amend or allow to lapse any term or condition of
any confidentiality or "standstill" agreement to which the Company is a
party; or
(s) take, or agree in writing or otherwise to take, any of
the foregoing actions.
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III.2 REASONABLE BEST EFFORTS. Upon the terms and subject to the
conditions set forth in this Agreement, each of the parties agrees to use its
reasonable best efforts to take, or cause to be taken, all actions, and to
do, or cause to be done, and to assist and cooperate with the other parties
in doing, all things necessary, proper or advisable to consummate and make
effective, in the most expeditious manner practicable, the Merger, and the
other transactions contemplated by this Agreement, including (a) the prompt
making of their respective filings and thereafter the making of any other
required submission under the HSR Act with respect to the Merger, (b) the
obtaining of all additional necessary actions or non-actions, waivers,
consents and approvals from Governmental Entities and the making of all
necessary registrations and filings (including filings with Governmental
Entities) and the taking of all reasonable steps as may be necessary to
obtain an approval or waiver from any Governmental Entity, (c) the obtaining
of all necessary consents, approvals or waivers from third parties, (d) the
defending of any lawsuits or other legal proceedings, whether judicial or
administrative, challenging this Agreement or the consummation of the
transactions contemplated hereby, including seeking to have any stay or
temporary restraining order entered by any court or other Governmental Entity
vacated or reversed, and (e) the execution and delivery of any additional
instruments necessary to consummate the transactions contemplated by this
Agreement.
III.3 ACCESS TO INFORMATION. The Company shall, and shall cause
each of its Subsidiaries to, afford to Parent, and to Parent's accountants,
counsel and other representatives, reasonable access and permit them to make
such inspections as they may reasonably require during normal business hours
during the period from the date of this Agreement through the Effective Time
to all their respective properties, books, contracts, commitments and records
and, during such period, the Company shall, and shall cause each of its
Subsidiaries to, furnish promptly to Parent (i) copy of each report,
schedule, registration statement and other document filed by it during such
period pursuant to the requirements of Federal or state laws other than
product and product-related filings with departments of insurance and (ii)
all other information concerning its business, properties and personnel as
Parent may reasonably request. The financial and operating data requested
pursuant to this Section 5.3 shall specifically include, but shall not be
limited to, all correspondence and reports reasonably relating to any actual
or threatened adverse actions, denials or revocations of accreditation,
sanctions or investigations by the National Committee on Quality Assurance,
the Joint Commission on Hospital Accreditation, the Health Care Financing
Administration or any other state or federal agency and any notice of
termination from any employee group or program representing five percent or
more of the revenue of any Subsidiary of the Company. Parent and each of its
Subsidiaries will hold, and will cause its respective affiliates, associates
and representatives to hold, any nonpublic information in accordance with the
terms of the Confidentiality Agreement, dated
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as of March 3, 1997, between Parent and Company (the "CONFIDENTIALITY
AGREEMENT").
III.4 PUBLICITY. The parties will consult with each other and
will mutually agree upon any press releases or public announcements
pertaining to this Agreement and the transactions contemplated hereby and
shall not issue any such press releases or make any such public announcements
prior to such consultation and agreement, except as may be required by
applicable law or by obligations pursuant to any listing agreement with any
national securities exchange, in which case the party proposing to issue such
press release or make such public announcement shall use its reasonable best
efforts to consult in good faith with the other party before issuing any such
press releases or making any such public announcements.
III.5 NOTICES OF CERTAIN EVENTS. The Company shall, upon obtaining
knowledge of any of the following, promptly notify Parent in writing of: (i)
any Material Adverse Effect with respect to the Company; (ii) any change which
makes it likely that any representation or warranty set forth in this Agreement
regarding the Company or any of its Subsidiaries will not be true in any
material respect at the Closing and which would be likely to cause any condition
to the obligations of any party to effect the Merger not to be satisfied; (iii)
the occurrence or non-occurrence of any event the occurrence or non-occurrence
of which would be likely to cause any condition to the obligations of any party
to effect the Merger not to be satisfied; (iv) the failure of the Company to
comply with or satisfy any covenant, condition or agreement to be complied with
or satisfied by it pursuant to this Agreement which would be likely to cause any
condition to the obligations of any party to effect the Merger not to be
satisfied; (v) any notice or other communication from any Governmental Entity in
connection with the Merger; or (vi) any actions, suits, claims, investigations
or other proceedings (or communications indicating that the same may be
contemplated) commenced or threatened against the Company or any of its
Subsidiaries which, if pending on the date of this Agreement, would have
resulted in any of the representations and warranties set forth in Section 3.9
being untrue or inaccurate or which relate to the consummation of the Merger;
PROVIDED, HOWEVER, that the delivery of any notice pursuant to this Section 5.5
shall not cure any breach of any representation or warranty or otherwise limit
or affect the remedies available to Parent.
III.6 STOCKHOLDER MEETING; PROXY MATERIALS; OPINION OF FINANCIAL
ADVISOR.
(a) Unless the Board of Directors of the Company shall take any
action permitted by the third sentence of this Section 5.6(a), the Company shall
cause the Special Meeting to be duly called and held as soon as practicable
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after the date of this Agreement for the purpose of voting on the approval
and adoption of this Agreement (the "COMPANY STOCKHOLDER APPROVAL"). Except
as provided in the next sentence, the Board of Directors of the Company shall
recommend approval and adoption of this Agreement by the Company's
stockholders. The Board of Directors of the Company shall be permitted to (i)
not recommend to the Company's stockholders that they vote in favor of the
approval and adoption of this Agreement or (ii) withdraw or modify in a
manner adverse to Parent its recommendation to the Company's stockholders
that they vote in favor of the approval and adoption of this Agreement, but
in each of cases (i) and (ii) only if and to the extent that the Company has
complied with Section 5.7, a Superior Proposal (as defined in Section 5.6(b))
is pending at the time the Company's Board of Directors determines to take
any such action or inaction and the Company's Board of Directors determines
in good faith, based upon the advice of its outside legal counsel, that such
action or inaction is necessary for such Board of Directors to comply with
its fiduciary duties under applicable law; PROVIDED that no such failure to
recommend, withdrawal or modification shall be made unless the Company shall
have delivered to Parent a written notice advising Parent that the Board of
Directors of the Company has received a Superior Proposal and identifying the
Person making such Superior Proposal; PROVIDED, FURTHER, that nothing
contained in this Agreement shall prevent the Board of Directors of the
Company from complying with Rule 14e-2 under the Exchange Act with regard to
an Acquisition Proposal (as defined in Section 5.6(b)).
(b) For purposes of this Agreement, "SUPERIOR PROPOSAL" means
any bona fide written Acquisition Proposal for all of the outstanding Shares
or all or substantially all of the assets of the Company and its Subsidiaries
on terms that the Board of Directors of the Company determines in good faith
(based on the advice of a financial advisor of nationally recognized
reputation) are more favorable and provide greater value to all the Company's
stockholders than this Agreement and the Merger. For purposes of this
Agreement, "ACQUISITION PROPOSAL" means any offer or proposal for, or any
indication of interest in, a merger or other business combination involving
the Company or any Significant Subsidiary of the Company or the acquisition
of any equity interest in, or a substantial portion of the assets of, the
Company or any Significant Subsidiary of the Company, other than the
transactions contemplated by this Agreement.
(c) In connection with such Special Meeting, the Company (i)
will promptly prepare and file with the SEC, will use its reasonable best
efforts to have cleared by the SEC as promptly as practicable and will
promptly thereafter mail to its stockholders the Proxy Statement and all
other proxy materials for such meeting, (ii) will use its reasonable best
efforts, subject to the immediately preceding sentence, to obtain the Company
Stockholder Approval and (iii) will otherwise comply with all legal
requirements applicable to such meeting. The Company shall notify Parent
promptly of the receipt of comments from the SEC
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and of any request by the SEC for amendments or supplements to the Proxy
Statement or for additional information, and shall supply Parent with copies
of all correspondence between the Company or its representatives, on the one
hand, and the SEC or members of its staff, on the other hand, with respect to
the Proxy Statement. If at any time prior to the Special Meeting, any event
should occur relating to the Company or its officers or directors which
should be described in an amendment of, or a supplement to, the Proxy
Statement, the Company shall promptly inform Parent. Whenever any event
occurs which should be described in an amendment of, or a supplement to, the
Proxy Statement, the Company shall, upon learning of such event, prepare
promptly, file and clear with the SEC and mail to the Company's stockholders
such amendment or supplement; PROVIDED, HOWEVER, that prior to such mailing,
to the extent practicable (i) the Company shall consult with Parent with
respect to such amendment or supplement and (ii) the Company shall afford
Parent reasonable opportunity to comment thereon, it being understood that
the Company will not mail any Proxy Statement, or any amendment or supplement
thereto, to which Parent reasonably objects.
(d) The Company shall use its reasonable best efforts to
cause the Company Financial Advisor to provide its opinion to the effect
that, as of a date no earlier than three business days prior to the date that
the Proxy Statement is mailed to stockholders of the Company, the
consideration to be received by the holders of Shares pursuant to the Merger
is fair to such holders from a financial point of view, and shall include
such updated opinion in the Proxy Statement.
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III.7 NO SOLICITATION.
(a) The Company shall not, directly or indirectly, through
any officer, director, employee, investment banker, attorney, representative
or agent of the Company or any of its Subsidiaries, (i) solicit, initiate, or
encourage any inquiries or proposals that constitute, or could reasonably be
expected to lead to, an Acquisition Proposal, (ii) engage in negotiations or
discussions concerning, or provide any non-public information or data to any
Person or entity relating to, any Acquisition Proposal, or (iii) agree to,
approve or recommend any Acquisition Proposal, or otherwise facilitate any
effort or attempt to make or implement an Acquisition Proposal; PROVIDED,
HOWEVER, that nothing contained in this Agreement shall prevent the Company
or its Board of Directors from (A) furnishing nonpublic information or data
to, or entering into discussions or negotiations with, any Person in
connection with an unsolicited Acquisition Proposal, if and only to the
extent that the Company's Board of Directors determines in good faith, based
upon the advice of its outside legal counsel, that such action is necessary
for such Board of Directors to comply with its fiduciary duties under
applicable law and prior to furnishing such non-public information to, or
entering into discussions or negotiations with, such Person or entity, the
Company or its Board of Directors receives from such Person or entity an
executed customary confidentiality agreement, PROVIDED, that in the event
that any term of such confidentiality agreement is more favorable to such
Person or entity than the Confidentiality Agreement is to Parent, (x) the
Company shall promptly (and in no event later than 24 hours after execution
thereof) notify Parent of the more favorable provisions of such
confidentiality agreement and (y) the Confidentiality Agreement shall
automatically be deemed to have been amended to provide Parent with the
benefit of the more favorable term(s); (B) complying with Rule 14e-2
promulgated under the Exchange Act with regard to an Acquisition Proposal.
The Company will immediately cease and cause to be terminated any existing
activities, discussions or negotiations with any parties conducted heretofore
with respect to any of the foregoing.
(b) The Company shall (i) promptly (and in no event later
than 24 hours after receipt of any Acquisition Proposal) notify Parent after
receipt by it (or its advisors) of any Acquisition Proposal or any inquiries
indicating that any Person is considering making or wishes to make an
Acquisition Proposal, identifying such Person, (ii) promptly notify Parent
after receipt of any request for nonpublic information relating to it or any
of its Subsidiaries or for access to its or any of its Subsidiaries'
properties, books or records by any Person, identifying such Person and the
information requested by such Person, that may be considering making, or has
made, an Acquisition Proposal and promptly provide Parent with any nonpublic
information which is given to such Person pursuant to this Section 5.7(b),
and (iii) keep Parent advised of the status and principal financial terms of
any such Acquisition Proposal, indication or request. The
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Company shall give Parent at least 24 hours' advance notice of any
information to be supplied to any Person making such Acquisition Proposal.
III.8 TERMINATION OF COMPANY STOCK PLANS. Except as may be
otherwise agreed to by Parent and the Company, the Company Stock Plans shall
terminate as of the Effective Time. Prior to the Effective Time, the Board
of Directors of the Company (or, if appropriate, any committee thereof) shall
adopt such resolutions or take such other actions as are required to (i)
effect the transactions contemplated by Section 1.9 and (ii) with respect to
any stock option, stock appreciation or other stock benefit plan of the
Company or any of its Subsidiaries not addressed by the preceding clause (i),
ensure that, following the Effective Time, no participant therein shall have
any right thereunder to acquire any capital stock of the Surviving
Corporation or any subsidiary thereof.
III.9 INDEMNIFICATION OF DIRECTORS AND OFFICERS.
(a) From and after the Effective Time, Parent agrees to, and
to cause the Surviving Corporation to, indemnify and hold harmless all past
and present officers, directors, employees and agents (the "INDEMNIFIED
PARTIES") of the Company and of its Subsidiaries to the full extent such
Persons may be indemnified by the Company pursuant to the Company's Amended
and Restated Certificate of Incorporation and Amended and Restated Bylaws (or
similar charter documents of any of its Subsidiaries), in each case as in
effect as of the date hereof, for acts and omissions occurring at or prior to
the Effective Time and shall advance reasonable litigation expenses incurred
by such Persons in connection with defending any action arising out of such
acts or omissions, provided that such Persons provide the requisite
undertaking, as set forth in the Company's Amended and Restated Bylaws prior
to the Effective Time.
(b) Parent will provide, or cause the Surviving Corporation
to provide, for a period of not less than six years after the Effective Time,
the Company's current directors and officers with an insurance and
indemnification policy that provides coverage for events occurring at or
prior to the Effective Time (the "D&O INSURANCE") that is no less favorable
than the existing policy or, if substantially equivalent insurance coverage
is unavailable, the best available coverage; PROVIDED, HOWEVER, that Parent
and the Surviving Corporation shall not be required to pay an annual premium
for the D&O Insurance in excess of one and one-half times the last annual
premium paid prior to the date hereof, but in such case shall purchase as
much of such coverage as possible for such amount.
III.10 EXPENSES. Except as otherwise provided in Section 7.4 and
in addition to the amounts that may be owed pursuant to Section 7.4, all
costs and expenses incurred in connection with this Agreement and the
transactions contemplated hereby shall be paid by the party incurring such
expenses, except that
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the liability, if any, for New York State Real Estate Transfer Tax, New York
City Real Property Transfer Tax and Connecticut Controlling Interest Transfer
Tax, if and to the extent applicable and due with respect to the Merger, will
be borne by the Surviving Corporation.
III.11 EMPLOYEE MATTERS.
(a) EMPLOYEE BENEFITS. Parent shall maintain (or cause its
Subsidiaries to maintain), without interruption, through December 31, 1997,
employee compensation and benefit plans and arrangements that will provide
benefits to those provided to similarly situated employees of Parent and its
Subsidiaries. Notwithstanding the foregoing, Parent shall provide, or cause
it Subsidiaries to provide, to each Employee severance pay and benefits that
are no less favorable than those provided under the employee benefit plans
and current practices of Parent as in effect on the date of this Agreement.
(b) PARTICIPATION IN BENEFIT PLANS. Employees shall be given
credit for all service with the Company and its Subsidiaries under all
employee benefit plans and arrangements of Parent or any of its Subsidiaries
in which they become participants for purposes of eligibility and vesting to
the same extent as if rendered to Parent or any of its Subsidiaries.
Employees shall also be given credit for any deductible or co-payment amounts
paid in respect of the Plan year in which the Effective Time occurs, to the
extent that, following the Effective Time, they participate in any employee
benefit plan of the Parent for which deductibles or co-payments are required.
Parent shall also cause each of its employee benefit plans to waive (i) any
preexisting condition restriction which was waived under the terms of any
analogous Plan immediately prior to the Effective Time or (ii) waiting period
limitation which would otherwise be applicable to an Employee on or after the
Effective Time to the extent such Employee had satisfied any similar waiting
period limitation under an analogous Plan prior to the Effective Time.
(c) ACCRUED VACATION/SICK/PERSONAL DAYS. Parent shall assume the
Company's obligations to Employees with respect to accrued but untaken
vacation and sick and personal days, to the extent such obligations are
reflected on the Company's balance sheet.
ARTICLE IV
CONDITIONS TO CONSUMMATION OF THE MERGER
IV.1 CONDITIONS TO OBLIGATIONS OF PARENT AND MERGER SUB. The
obligations of Parent and Merger Sub hereunder to consummate the Merger are
subject to the satisfaction or waiver by Parent, at or prior to the Effective
Time, of
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each of the following conditions:
(a) COVENANTS; ACCURACY OF REPRESENTATIONS AND WARRANTIES.
(i) The Company shall have performed in all material respects all of its
material obligations and complied in all material respects with all of its
material agreements and covenants to be performed or complied with by it
under this Agreement at or prior to the Effective Time; (ii) the
representations and warranties of the Company contained in Article III shall
be true and accurate at the date of this Agreement and as of the Effective
Time with the same force and effect as if they had been made as of the
Effective Time (except to the extent a representation or warranty speaks
specifically as of an earlier date and except as contemplated by this
Agreement), except, in each case, for inaccuracies in any such
representations and warranties that would not, individually or in the
aggregate, have or reasonably be expected to have a Material Adverse Effect
on the Company and the Surviving Corporation; and (iii) the Company shall
have provided Parent with a certificate executed by two executive officers of
the Company, dated as of the Effective Date, to such effect.
(b) CERTAIN WAIVERS. The Company shall have obtained waivers
or amendments, as the case may be, from each of the parties other than the
Company to the agreements set forth on Schedule 6.1, whereby each such other
party expressly waives any rights to termination under the applicable
agreement that may arise as a result of the consummation of the transactions
contemplated by this Agreement and consents to those matters more
specifically set forth on Schedule 6.1.
IV.2 CONDITIONS TO OBLIGATIONS OF THE COMPANY. The obligation of
the Company hereunder to consummate the Merger is subject to the satisfaction
or waiver by the Company, at or prior to the Effective Time, of the following
condition:
(a) COVENANTS; ACCURACY OF REPRESENTATIONS AND WARRANTIES.
(i) Parent shall have performed in all material respects all of its material
obligations and complied in all material respects with all of its material
agreements and covenants to be performed or complied with by it under this
Agreement at or prior to the Effective Time; (ii) the representations and
warranties of Parent contained in Article IV shall be true and accurate at
the date of this Agreement and as of the Effective Time with the same force
and effect as if they had been made as of the Effective Time (except to the
extent a representation or warranty speaks specifically as of an earlier date
and except as contemplated by this Agreement) except, in each case, for
inaccuracies in any such representations and warranties that would not,
individually or in the aggregate, have or reasonably be expected to have a
Material Adverse Effect on Parent; and (iii) Parent shall have provided the
Company with a certificate executed by two executive officers of Parent,
dated as of the Effective Date, to such effect.
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IV.3 CONDITIONS TO OBLIGATIONS OF EACH PARTY. The respective
obligations of the Company, on the one hand, and Parent and Merger Sub, on
the other hand, to consummate the Merger are further subject to the
satisfaction or waiver, at or prior to the Effective Time, of each of the
following conditions:
(a) STOCKHOLDER APPROVAL. The Company Stockholder Approval
shall have been obtained.
(b) ILLEGALITY OR LEGAL CONSTRAINT. No statute, rule,
regulation, executive order, decree, injunction or restraining order shall
have been enacted, promulgated or enforced (and not repealed, superseded or
otherwise made inapplicable) by any court of competent jurisdiction or other
Governmental Entity which prohibits the consummation of the transactions
contemplated by this Agreement or imposes material conditions with respect
thereto (collectively, "RESTRAINTS"); PROVIDED, HOWEVER, that the party
asserting the failure of this condition shall have used reasonable best
efforts to prevent the entry of any such Restraint and, if applicable to such
party, to appeal promptly any such Restraints that may be entered.
(c) GOVERNMENTAL APPROVALS. The parties hereto shall have
made the requisite filings with all Governmental Entities as shall be
required pursuant to applicable laws, rules and regulations, and such
Governmental Entities (including, but not limited to, the Insurance
Departments of the States of New York, New Jersey and Connecticut), to the
extent required by applicable law, shall have approved the transactions
contemplated by this Agreement, except where the failure to obtain any such
approval would not, individually or in the aggregate, have a Material Adverse
Effect on Parent and the Surviving Corporation, taken as a whole, or upon the
consummation of the transactions contemplated hereby.
(d) HSR ACT. The waiting period (and any extension thereof)
applicable to the Merger under the HSR Act shall have expired or been
terminated.
ARTICLE V
TERMINATION OF AGREEMENT
V.1 TERMINATION. This Agreement may be terminated at any time
prior to the Effective Time whether before or after the approval by the
stockholders of the Company:
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(a) by mutual written consent of Parent and the Company;
(b) by either Parent or the Company (i) if the Effective Date
shall not have occurred on or before December 31, 1997, subject to the two
business day period set forth in Section 1.4 (or February 28, 1998, subject
to the two business day period set forth in Section 1.4, if the only
condition remaining unfulfilled on December 31, 1997 is any required approval
by any Governmental Entity or the expiration of any waiting period), (ii) if
any Governmental Entity, the approval of which is a condition to the
obligations of Parent, Merger Sub and the Company to consummate the Merger,
shall have determined not to grant its approval and all appeals of such
determination shall have been taken and have been unsuccessful or (iii) if
any court of competent jurisdiction shall have issued an order, judgment or
decree (other than a temporary restraining order or temporary injunction)
restraining, enjoining or otherwise prohibiting the Merger and such order,
judgment or decree shall have become final and nonappealable; PROVIDED,
HOWEVER, that the right to terminate this Agreement pursuant to clause (i)
shall not be available to any party whose failure to fulfill any obligation
under this Agreement has been the cause of, or resulted in, the failure of
the Effective Date to occur on or before such date;
(c) by either Parent or the Company, if, at the Special
Meeting (including any adjournment or postponement thereof) called pursuant
to Section 5.6, the Company Stockholder Approval shall not have been obtained;
(d) by Parent (i) if there has been a breach by the Company
of any representation or warranty set forth in this Agreement, which breach
would give rise to the failure of a condition set forth in Section 6.1 or
6.3, which has not been cured within 15 business days following receipt by
the Company of written notice of such breach; (ii) if there has been a breach
by the Company of any covenant or agreement set forth in this Agreement,
which breach would give rise to the failure of a condition set forth in
Section 6.1 or 6.3, which has not been cured within 15 business days
following receipt by the Company of written notice of such breach; or (iii)
if the Board of Directors of the Company shall have failed to recommend or
withdrawn or modified or changed in a manner adverse to Parent its approval
or recommendation of this Agreement, or recommended an Acquisition Proposal
or shall have entered into a definitive agreement providing for the
transaction or transactions contemplated by an Acquisition Proposal (or the
Board of the Directors of the Company shall have resolved to do any of the
foregoing); PROVIDED, HOWEVER, that the right to terminate this Agreement
pursuant to this Section 7.1(d)(i) or (ii) shall not be available to Parent
if it, at such time, is in breach of any representation, warranty, covenant
or agreement set forth in this Agreement, which breach would give rise to the
failure of a condition set forth in Section 6.2 or 6.3, which has not been
cured within 15 business days following receipt by Parent of written notice
of such breach;
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(e) by the Company (i) if there has been a breach by Parent
of any representation or warranty set forth in this Agreement, which breach
would give rise to the failure of a condition set forth in Section 6.2 or
6.3, which has not been cured within 15 business days following receipt by
Parent of written notice of such breach; (ii) if there has been a breach by
Parent of any covenant or agreement set forth in this Agreement, which breach
would give rise to the failure of a condition set forth in Section 6.2 or
6.3, which has not been cured within 15 business days following receipt by
Parent of written notice of such breach; or (iii) subject to Section 7.2, if
the Board of Directors of the Company shall have failed to recommend or
withdrawn or modified or changed in a manner adverse to Parent its approval
or recommendation of this Agreement in order to permit the Company to execute
a definitive agreement providing for the transaction or transactions
contemplated by a Superior Proposal; PROVIDED, HOWEVER, that the right to
terminate this Agreement pursuant to this Section 7.1(e)(i) or (ii) shall not
be available to the Company if it, at such time, is in breach of any
representation, warranty, covenant or agreement set forth in this Agreement,
which breach would give rise to the failure of a condition set forth in
Section 6.1 or 6.3, which has not been cured within 15 business days
following receipt by the Company of written notice of such breach.
(f) by Parent at any time following the date 30 days after
notice is delivered by the Company as required in Section 5.7(b)(i)
concerning the receipt of an Acquisition Proposal unless, prior to
termination under this subsection (f), the Company provides written notice to
Parent that such Acquisition Proposal has been rejected or withdrawn or the
Company is no longer engaged in negotiations or discussions with such other
Person concerning the Acquisition Proposal; PROVIDED that the 30-day time
period shall be reduced with respect to any subsequent Acquisition Proposal
made by a Person whose Acquisition Proposal was previously rejected or
withdrawn as provided in this subsection (f) to a number of days equal to the
greater of (i) 30 minus the number of days lapsed from the receipt of any
notice of any prior Acquisition Proposal from such Person until the rejection
or withdrawal of any such prior Acquisition Proposal(s) and (ii) 10.
V.2 CERTAIN ACTIONS PRIOR TO TERMINATION. The Company shall
provide to Parent the written notice required by Section 5.7(b) prior to any
termination of this Agreement pursuant to Section 7.1(e)(iii) advising Parent
that the Board of Directors of the Company has received a Superior Proposal.
At any time after the third business day following such notice, the Company
may terminate this Agreement as provided in Section 7.1(e)(iii) only if (i)
the Board of Directors of the Company determines that such Superior Proposal
remains more favorable and provides greater value to the Company's
stockholders than this Agreement and the Merger (which determination shall be
made in light of any
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revised proposal made by Parent prior to the expiration of such
three-business day period) and (ii) the termination fee contemplated by
Section 7.4(a) shall have been paid to the Parent.
V.3 EFFECT OF TERMINATION. In the event of termination of this
Agreement by either Parent or the Company as provided in Section 7.1, this
Agreement shall forthwith become void (except as set forth in the last
sentence of Section 5.3 and in Sections 5.10 and 7.4 and Article VIII) and
there shall be no liability on the part of Parent, Merger Sub or the Company
or their respective officers or directors, except (i) as set forth in this
Section 7.3, the last sentence of Section 5.3 or Sections 5.10 or 7.4 or
Article VIII and (ii) nothing herein shall relieve any party from liability
for (x) any willful or intentional breach of any representations or
warranties contained in this Agreement or (y) any breach of any covenant or
agreement contained in this Agreement.
V.4 TERMINATION FEES.
(a) Notwithstanding any other provision of this Agreement, so
long as the Company is not entitled to terminate this Agreement by reason of
Section 7.1(e)(ii), (i) if this Agreement is terminated pursuant to Section
7.1(d)(iii) or Section 7.1(e)(iii), then the Company shall promptly pay to
Parent a fee of $9 million (the amount of such fee being hereinafter referred
to as the "TERMINATION FEE"), plus an amount equal to all of the costs and
expenses incurred by Parent and Merger Sub in connection with this Agreement
and the transactions contemplated hereby (upon receipt of reasonable
documentation in respect thereto) up to an aggregate of $2.5 million (the
"TERMINATION EXPENSES"); (ii) if this Agreement is terminated pursuant to
Section 7.1(c) , then the Company shall promptly pay to Parent an amount
equal to the Termination Expenses; (iii) if within 12 months of a termination
of this Agreement pursuant to Section 7.1(c), the Company or any of its
Subsidiaries accepts a written offer for, or otherwise enters into an
agreement to consummate or consummates, a Transaction Proposal (as defined in
Section 7.4(b)) with another Person, upon the signing of a definitive
agreement relating to such Transaction Proposal, or, if no such agreement is
signed, then upon consummation of any such Transaction Proposal, the Company
shall pay to Parent an amount equal to the Termination Fee; or (iv) if within
12 months of the termination of this Agreement pursuant to Section 7.1(f) the
Company or any of its Subsidiaries accepts a written offer for, or otherwise
enters into an agreement to consummate or consummates, a Transaction Proposal
with another Person, upon the signing of a definitive agreement relating to
such a Transaction Proposal, or, if no such agreement is signed, then upon
consummation of any such Transaction Proposal, the Company shall pay to
Parent an amount equal to the Termination Fee.
(b) As used in this Section 7.4 "TRANSACTION PROPOSAL" shall
mean a proposal or offer (other than by another party hereto) (i) to acquire
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beneficial ownership (as defined under Rule 13(d) of the Exchange Act) of 50%
or more of the outstanding capital stock of the Company or any of its
Subsidiaries holding substantially all of the assets of the Company and its
Subsidiaries pursuant to a merger, consolidation or other business
combination, sale of shares of capital stock, tender offer or exchange offer
or similar transaction, including, without limitation, any single or
multi-step transaction or series of related transactions which is structured
to permit such third party to acquire beneficial ownership of 50% or more of
the outstanding capital stock of the Company or any of its Subsidiaries
holding substantially all of the assets of the Company and its Subsidiaries,
(ii) to purchase all or substantially all of the business or assets of the
Company and its Subsidiaries or (iii) to otherwise effect a business
combination involving the Company or any of its Subsidiaries holding
substantially all of the assets of the Company and its Subsidiaries.
(c) The obligation to pay the Termination Fee or Termination
Expenses pursuant to Section 7.4(a) shall be in addition to the expenses to
be paid by the Company pursuant to Section 5.10. The Company shall make all
such payments promptly (and in any event within two days of receipt by the
Company of written notice from Parent) by wire transfer of immediately
available funds to an account designated by Parent.
ARTICLE VI
MISCELLANEOUS AND GENERAL
VI.1 SURVIVAL. The representations and warranties made herein
shall not survive the termination of this Agreement or the Effective Time.
This Section 8.1 shall not limit any covenant or agreement of the parties
hereto which by its terms contemplates performance after termination of this
Agreement or the Effective Time.
VI.2 COUNTERPARTS. For the convenience of the parties hereto,
this Agreement may be executed in any number of counterparts, each such
counterpart being deemed to be an original instrument, and all such
counterparts shall together constitute the same agreement.
VI.3 GOVERNING LAWS AND CONSENT TO JURISDICTION. The laws of the
State of Delaware (irrespective of its choice of law principles) shall govern
all issues concerning the validity of this Agreement, the construction of its
terms, and the interpretation and enforcement of the rights and duties of the
parties. Each of the parties hereto irrevocably submits to the exclusive
jurisdiction of the courts of the State of Delaware and the Federal courts of
the United States of America located in the State of Delaware (and the
Delaware State and Federal courts having
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jurisdiction over appeals therefrom) in respect of the transactions
contemplated by this Agreement, the other agreements and documents referred
to herein and the transactions contemplated by this Agreement and such other
documents and agreements.
VI.4 NOTICES. Any notice, request, instruction or other document
to be given hereunder by any party to the other parties shall be in writing
and delivered personally or sent by registered or certified mail, postage
prepaid, or by facsimile transmission (with a confirming copy sent by
overnight courier), as follows:
(a) If to the Company, to:
Robert L. Natt
Physicians Health Services, Inc.
One Far Mill Crossing
P.O. Box 904
Shelton, CT 06484
(203) 225-8254 (telephone)
(203) 225-4001 (telecopier)
with a copy to:
Robert A. Kindler, Esq.
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
38th Floor
New York, NY 10019-7475
(212) 474-1640 (telephone)
(212) 765-1047 (telecopier)
(b) If to Parent or Merger Sub, to:
Foundation Health Systems, Inc.
225 North Main
Pueblo, CO 81003
Attn: General Counsel
(719) 585-8077 (telephone)
(719) 585-8175 (telecopier)
40
<PAGE>
with a copy to:
Charles W. Mulaney, Jr., Esq.
Gary P. Cullen, Esq.
Skadden, Arps, Slate, Meagher & Flom (Illinois)
333 West Wacker Drive
Suite 2100
Chicago, IL 60606
(312) 407-0700 (telephone)
(312) 407-0411 (telecopier)
or to such other Persons or addresses as may be designated in writing by the
party to receive such notice.
VI.5 ENTIRE AGREEMENT. This Agreement and the Confidentiality
Agreement constitute the entire agreement among the parties with respect to
the subject matter hereof and supersede all other prior agreements and
understandings, both written and oral, among the parties or any of them with
respect to the subject matter hereof.
VI.6 PARTIES IN INTEREST. This Agreement shall be binding upon
and inure solely to the benefit of each party hereto and their respective
permitted successors and assigns. Nothing in this Agreement, express or
implied, is intended to or shall confer upon any other Person any rights,
benefits or remedies of any nature whatsoever under or by reason of this
Agreement; PROVIDED, HOWEVER, that the provisions of Section 5.9 shall inure
to the benefit of and be enforceable by the Indemnified Parties.
VI.7 AMENDMENT AND WAIVERS. Any term or provision of this
Agreement may be amended, and the observance of any term of this Agreement
may be waived (either generally or in a particular instance and either
retroactively or prospectively) only by a writing signed by the party to be
bound thereby. The waiver by a party of any breach hereof or default in the
performance hereof shall not be deemed to constitute a waiver of any other
default or any succeeding breach or default, unless such waiver so expressly
states. At any time before or after the Company Stockholder Approval and
prior to the Effective Time, this Agreement may be amended or supplemented by
the parties hereto with respect to any of the terms contained in this
Agreement, except that following the Company Stockholder Approval there shall
be no amendment or change to the provisions hereof with respect to the Merger
Consideration without further approval by the stockholders of the Company,
and no other amendment shall be made which by law requires further approval
by such stockholders without such further approval.
41
<PAGE>
VI.8 CERTAIN DEFINITIONS. As used herein:
(a) "MATERIAL ADVERSE EFFECT" shall mean any adverse change
in or effect on the financial condition, business or results of operations of
the Company or any of its Subsidiaries or Parent or any of its Subsidiaries,
as the case may be, which is material to the Company and its Subsidiaries,
taken as a whole, or Parent and its Subsidiaries, taken as a whole, as the
case may be, other than any change or effect relating to the United States
economy in general or to the health care industry in general and not
specifically relating to the Company and its Subsidiaries or to Parent and
its Subsidiaries, as the case may be.
(b) "PERSON" shall mean any individual, partnership, firm,
corporation, association, joint venture, trust or other entity.
(c) "SIGNIFICANT SUBSIDIARY" shall mean, when used with
reference to any entity, any subsidiary of such entity that constitutes a
"significant subsidiary" within the meaning of Rule 1-02 of Regulation S-X
promulgated by the SEC and any Subsidiary that is subject to regulation by
any insurance or HMO regulatory authority.
(d) "SUBSIDIARY" shall mean, when used with reference to any
entity, any corporation a majority of the outstanding voting securities of
which are owned directly or indirectly by such former entity.
VI.9 VALIDITY. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability
of any other provisions of this Agreement, each of which shall remain in full
force and effect.
VI.10 CAPTIONS. The Article, Section and paragraph captions
herein are for convenience of reference only, do not constitute part of this
Agreement and shall not be deemed to limit or otherwise affect any of the
provisions hereof.
VI.11 ASSIGNMENT. Neither this Agreement nor any of the rights,
interests or obligations under this Agreement shall be assigned, in whole or
in part, by operation of law or otherwise, by any of the parties without the
prior written consent of the other parties; PROVIDED, HOWEVER, that Parent
may assign its rights hereunder to any of its Subsidiaries, provided that no
such assignment shall relieve Parent of its obligations hereunder. Any
assignment in violation of the preceding sentence shall be void.
VI.12 DISCLOSURE SCHEDULES. Matters reflected on the Company
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<PAGE>
Disclosure Schedule and the Parent Disclosure Schedule are not necessarily
limited to matters required by this Agreement to be reflected therein and the
inclusion of such matters shall not be deemed an admission that such matters
were required to be reflected on the Company Disclosure Schedule or the
Parent Disclosure Schedule, as the case may be. Such additional matters are
set forth for informational purposes only and do not necessarily include
other matters of a similar nature.
VI.13 SPECIFIC PERFORMANCE. The parties agree that irreparable
damage would occur and that the parties would not have any adequate remedy at
law in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached.
It is accordingly agreed that the parties shall be entitled to an injunction
or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions of this Agreement in any Federal court
located in the State of Delaware or in Delaware state court, this being in
addition to any other remedy to which they are entitled at law or in equity.
43
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their respective duly authorized officers as of the date first
above written.
PHYSICIANS HEALTH SERVICES, INC.
By:
--------------------------------------------
Name:
Title:
FOUNDATION HEALTH SYSTEMS, INC.
By:
--------------------------------------------
Name:
Title:
PHS ACQUISITION CORP.
By:
--------------------------------------------
Name:
Title:
<PAGE>
JAMES J. WILK
SEVERANCE PAYMENT AGREEMENT
This Severance Payment Agreement (this "Agreement") is entered into as
of March 31, 1997, between Health Systems International, Inc., a Delaware
corporation ("HSI") and Health Net, a California corporation (together with
HSI, the "Companies"), on the one hand, and James J. Wilk ("Employee"), on
the other hand.
WHEREAS, the Companies previously employed Employee as its Senior Vice
President, Human Resources and Administrative Services of Health Net and
currently employ Employee as the executive in charge of the Company's
developing "Customer Rewards Initiative" business (the "New Business"); and
WHEREAS, in consideration for past efforts of the Employee and to entice
Employee to continue to provide such efforts the Companies propose to make
the payments set forth in this Agreement in the event Employee's employment
with the Companies is terminated on the terms and conditions set forth in
this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties hereto agree as follows:
1. TERM OF AGREEMENT. The term of this Agreement (the "Covered
Period") shall be the period commencing on the date hereof (the "Effective
Date") and ending on the date two (2) years after the Effective Date. Any
payments to be made pursuant to Section 3 hereof shall only be made if
Employee is terminated by the Companies without Cause or terminated by
Employee with Good Reason and if such termination occurs during the Covered
Period as provided in Section 5 hereof. Upon the expiration of the Covered
Period, Employee will have no further rights under this Agreement and will
only be entitled to receive such severance benefits, if any, that are
afforded to similarly situated employees of the Companies at such time.
2. DUTIES OF EMPLOYEE. Employee shall serve as the executive in charge
of the New Business (which title and capacity Employee acknowledges to be
correct and current as of the Effective Date by executing this Agreement
below). During the term of employment, Employee shall devote his entire
productive time, energies and abilities to the business of the Companies and
shall at all times loyally and conscientiously perform all the duties and
obligations required of him expressly or implicitly by the terms of this
Agreement.
3. TERMINATION OF EMPLOYMENT.
3.1 TERMINATION BY THE COMPANIES WITHOUT CAUSE. The Companies may
terminate Employee's employment without cause at any time. In the event that
the Companies do so at any time during the Covered Period, Employee shall be
entitled, as a severance allowance, to continuation of his
<PAGE>
base salary ("Base Salary") and all medical, health, disability, life and
accident insurance maintained for Employee's benefit immediately prior to the
date of Employee's termination (collectively, "Salary and Benefits") for a
period equal to twenty-four (24) months from the date of termination. It is
understood and agreed that management of the Companies, in their discretion,
may provide a reasonable period of prior notice for any such termination in
order to facilitate an orderly transition of Employee's duties to his
successor.
3.2 TERMINATION BY THE COMPANIES FOR CAUSE. The Companies may
terminate Employee's employment for Cause at any time with or without notice.
In the event of such termination, Employee shall not be eligible to receive
any payments set forth in this Section 3. For purposes of this Agreement,
Cause shall include, without limitation, (a) an act of dishonesty causing
harm to the Companies, (b) the knowing disclosure of confidential information
relating to the Companies' business, (c) habitual drunkenness or narcotic
drug addiction, (d) conviction of a felony, (e) willful refusal to perform or
gross neglect of the duties assigned to Employee, (f) the willful breach of
any law that, directly or indirectly, affects the Companies or (g) breach of
the provisions of Section 8 of this Agreement.
3.3 VOLUNTARY TERMINATION BY EMPLOYEE WITHOUT GOOD REASON.
Notwithstanding anything to the contrary in this Agreement, whether express
or implied, Employee may at any time terminate his employment for any reason
by giving the Companies fourteen (14) days prior written notice of the
effective date of termination. In the event that Employee's employment with
the Companies is voluntarily terminated by Employee without Good Reason (as
defined below), Employee shall not be eligible to receive any payments set
forth in this Section 3.
3.4 VOLUNTARY TERMINATION BY EMPLOYEE WITH GOOD REASON.
Notwithstanding the preceding Section 3.3, in the event that Employee's
employment with the Companies is voluntarily terminated during the Covered
Period by Employee with Good Reason within twelve (12) months after a Change
of Control of HSI, Employee shall nevertheless be entitled, as a severance
allowance, to continuation of his Salary and Benefits for a period of
twenty-four (24) months from the date of termination. For purposes of this
Agreement, Good Reason shall mean any of the following which occurs
subsequent to the Effective Date:
(i) a reduction in the scope of Employee's position, duties,
responsibilities or of Employee's status with the Companies, or any
removal of Employee from or any failure to reelect Employee to any of
the positions referred to in Section 1 hereof, except in connection
with the termination of his employment for disability, normal retirement
or Cause or by Employee voluntarily other than for Good Reason;
(ii) a reduction by the Companies in Employee's Base Salary as in
effect immediately prior to any such reduction without Employee's
consent, or the Companies' failure to increase (within twelve (12) months
of Employee's last increase in Base Salary) Employee's Base Salary by
an amount which at least equals, on a percentage basis, 90% of the
average percentage increase (determined without regard to Employee) in
base salary for all senior executive employees of the Companies
effected in the preceding twelve (12) months; or
(iii) a requirement that Employee travel on the Companies' business
to an extent
2
<PAGE>
materially greater than Employee's normal business travel obligations,
or a relocation of Employee to a location more than twenty-five (25)
miles from Employee's residence at the date of such proposed relocation.
For purposes of this Agreement, Change of Control shall mean any of the
following which occurs subsequent to the Effective Date:
(a) Any person (as such term is defined under Section 13(d)(3) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act")),
corporation or other entity (other than HSI, any employee benefit plan
sponsored by HSI or any of its subsidiaries, the Chairman of the Board
of HSI on the Effective Date or The California Wellness Foundation), is
or becomes the beneficial owner (as such term is defined in Rule 13d-3
under the Exchange Act) of securities of HSI representing twenty percent
(20%) or more of the combined voting power of the outstanding securities
of HSI which ordinarily (and apart from rights accruing under special
circumstances) have the right to vote in the election of directors
(calculated as provided in paragraph (d) of such Rule 13d-3 in the case
of rights to acquire HSI's securities) (the "Securities");
(b) As a result of a tender offer, merger, sale of assets or other
major transaction, the persons who are directors of HSI immediately prior
to such transaction cease to constitute a majority of the Board of
Directors of HSI (or any successor corporations) immediately after such
transaction;
(c) HSI is merged or consolidated with any other person, firm,
corporation or other entity and, as a result, the shareholders of HSI,
as determined immediately before such transaction, own less than eighty
percent (80%) of the outstanding Securities of the surviving or resulting
entity immediately after such transaction;
(d) A tender offer or exchange offer is made and consummated for
the ownership of twenty percent (20%) or more of the outstanding
Securities of HSI;
(e) HSI transfers substantially all its assets to another person,
firm, corporation or other entity that is not a wholly-owned subsidiary
of HSI; or
(f) HSI enters into a management agreement with another person,
firm, corporation or other entity that is not a wholly-owned subsidiary
of HSI and such management agreement extends hiring and firing authority
over Employee to an individual or organization other than HSI.
3.5 DEATH OR DISABILITY. Upon Employee's death during his
employment with the Companies, the estate or beneficiaries of the Employee
shall be entitled to receive the continuation of Employee's Salary and
Benefits for a period equal to twenty-four (24) months from the date of
Employee's death. If during his employment with the Companies Employee
becomes incapacitated due to physical or mental illness and is unable to
perform his duties and responsibilities hereunder, applying the standards set
forth in his disability insurance policy, and such disability continues for
more than three months or for periods aggregating more than three months in
any twelve-month period, this Agreement
3
<PAGE>
may be terminated by the Companies in its discretion at any time thereafter
during the continuance of such disability.
4. STOCK OPTION EXTENSION. All 34,000 stock options (at $27.875 and
$35.25 per share) currently held by Employee under HSI's Second Amended and
Restated 1991 Stock Option Plan (the "Plan") and outstanding as of the
Effective Date have previously become fully vested and exercisable. Such
options shall remain exercisable for a period of one (1) year from Employee's
employment termination date provided such termination is by the Companies
without Cause or by the Employee for Good Reason and such termination takes
place during the Covered Period.
5. OUTPLACEMENT SERVICES. Upon Employee's termination of employment by
the Company without Cause or by Employee with Good Reason, the Companies
shall provide Employee with appropriate "Executive Outplacement Services" to
assist Employee in obtaining new employment, provided that the scope and
extent of such services shall be reasonably commensurate with what the
Companies provide similarly situated executives.
6. WITHHOLDING. All payments required to be made by the Companies
hereunder to Employee or his estate or beneficiaries shall be subject to the
withholding of such amounts relating to taxes as the Companies may reasonably
determine should be withheld pursuant to any applicable law or regulation.
7. TAX CONSEQUENCES. The Companies shall have no obligation to any
person entitled to the benefits of this Agreement with respect to any tax
obligation any such person may incur as a result of or attributed to this
Agreement or arising from any payments made or to be made hereunder. Nothing
contained herein shall be construed as a warranty or representation of any
kind by the Companies to Employee with respect to the tax consequences of his
participation in this Agreement.
8. CONFIDENTIALITY. Employee acknowledges and agrees that, during the
period of his employment by the Companies, he has and will continue to have
access to and become acquainted with various trade secrets, including but not
limited to, various procedures, practices, information regarding the
organization and operation of the Companies, confidential customer
information, marketing methods, compilations of information and records that
are owned by the Companies and that are regularly used in the operation of
its business. The parties stipulate that such items of information are
important material and confidential trade secrets and affect the successful
conduct of the Companies' business and its goodwill, and that any breach of
this Section 8 shall be a material breach of this Agreement. All documents,
memoranda, reports, files, correspondence, lists and other written and
graphic records affecting or relating to the Companies' business that
Employee may prepare, use, observe, possess or control shall be and remain
the Companies' sole property. Employee shall not disclose any of these trade
secrets, directly or indirectly, or use them in any way, either during the
term of his Employment or at any time thereafter, except as required in the
course of his employment by the Companies or as otherwise authorized in
writing by the Companies. In the event of the termination of Employee's
employment with the Companies, Employee shall deliver promptly to the
Companies all written or graphic records containing such trade secrets or
confidential information of the Companies.
4
<PAGE>
9. MISCELLANEOUS.
9.1 ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement between the parties and supersedes any and all other agreements,
whether oral or written (including but not limited to that certain
Severance/Retention Payment Agreement dated May 1, 1995 (the "Prior Severance
Agreement")), between the parties hereto with respect to the subject matter
hereof. Each part to this Agreement acknowledges that no representations,
inducements, promises or agreements, oral or written, have been made by any
party or anyone acting on behalf of any party that are not embodied herein,
and that no other agreement, statement or promise not contained in this
Agreement shall be valid or binding. Upon execution of this Agreement, the
Prior Severance Agreement shall be terminated and have no further force or
effect.
9.2 RIGHT TO TERMINATE EMPLOYMENT. It is hereby agreed that the
relationship between the Companies and Employee is merely an "at-will"
employment relationship and that nothing in this Agreement shall confer upon
Employee the right to continue in the employment of the Companies or affect
any right which the Companies have to terminate the employment of Employee.
9.3 AMENDMENTS. This Agreement may not be amended or terminated
other than by a written instrument signed by the party against whom
enforcement of such amendment or termination is sought. No amendments to this
Agreement or interpretations hereof or any waivers or modifications of any of
the provisions hereof may be made on behalf of the Companies without the
approval of the Board of Directors or the Compensation and Stock Option
Committee of HSI.
9.4 WAIVER. No waiver of any default under this Agreement shall
constitute or operate as a waiver of any subsequent default, and no delay,
failure or omission in exercising or enforcing any right, privilege or option
hereunder shall constitute a waiver, abandonment or relinquishment thereof.
No waiver of any provision hereof by either party hereto shall be deemed to
have been made unless or until such waiver shall have been reduced to writing
and signed by the party making such waiver. Failure by either party to
enforce any of the terms, covenants or conditions of this Agreement for any
length of time or from time to time shall not be deemed to waive or decrease
the rights of such party to insist thereafter upon strict performance by the
other party.
5
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
HEALTH SYSTEMS INTERNATIONAL, INC.
By: /s/ Jay M. Gellert
------------------------------------
Name: Jay M. Gellert
Title: President and Chief Executive
Officer
HEALTH NET
By: /s/ Arthur M. Southam, M.D.
------------------------------------
Name: Arthur M. Southam, M.D.
Title: President and Chief Executive
Officer
/s/ James J. Wilk
---------------------------------------
Employee: James J. Wilk
6
<PAGE>
[LETTERHEAD]
April 23, 1997
B. Curtis Westen, Esq.
225 North Main Street
Pueblo, CO 81003
Dear Curt:
Reference is made to your Severance Payment Agreement (the "Agreement") dated
April 25, 1994 with Health Systems International, Inc. (now Foundation Health
Systems, Inc. ("FHS")) and QualMed, Inc. (collectively, the "Companies").
Defined terms used but not defined herein shall have the meanings set forth
in the Agreement.
As requested, the purpose of this letter agreement is to extend the
expiration of the Covered Period under the Agreement from April 25, 1994
until December 31, 1997. It is anticipated that the new FHS Compensation and
Stock Option Committee will determine the ongoing roles and responsibilities
of senior executives of the Companies such as yourself during the next few
months. This extension of the Covered Period is being provided to you to help
facilitate this process.
In addition, this letter agreement is intended to amend the severance
allowance that may become payable to you under the Agreement in order that
such payment in no event shall be less than the Companies' policy for
similarly situated executives.
Please note that this extension will in no way effect any rights you may or
may not have under the Agreement, and by accepting the extension you will not
be deemed to waive any rights you may currently have under the Agreement.
This letter agreement is meant to be an amendment to the Agreement as
provided by Section 7.3 of the Agreement, and will be effective upon your
counter-execution below and approval by the FHS Compensation and Stock Option
Committee (which approval is anticipated to be received at such committee's
April 22, 1997 meeting).
<PAGE>
B. Curtis Westen, Esq.
April 23, 1997
Page 2
Please do not hesitate to contact me with any questions you may have.
Very truly yours,
FOUNDATION HEALTH SYSTEMS, INC.
/s/ Jay M. Gellert
Jay M. Gellert
Executive Vice President and
Chief Operating Officer
ACCEPTED AND AGREED TO BY:
/s/ B. Curtis Westen
- ---------------------------------
B. Curtis Westen, Esq.
cc: Malik M. Hasan, M.D.
<PAGE>
EMPLOYMENT AGREEMENT TERMINATION AGREEMENT
EMPLOYMENT AGREEMENT TERMINATION AGREEMENT (this "Agreement"), dated as of
May 1, 1997, by and between Daniel D. Crowley (the "Employee"), Foundation
Health Systems, Inc. (formerly, Health Systems International, Inc.), a Delaware
corporation (the "Company"), and Foundation Health Corporation, a Delaware
corporation ("FHC").
WHEREAS, the Company, the Employee and FHC, which became a wholly-owned
subsidiary of the Company upon consummation of the merger on April 1, 1997
pursuant to the Agreement and Plan of Merger, dated October 1, 1996, by and
among the Company, FH Acquisition Corp. and FHC, have previously entered into
(i) that certain Amended and Restated Employment Agreement, dated as of December
16, 1996 (the "Employment Agreement") and (ii) that certain Consulting
Agreement, dated as of October 1, 1996 (the "Consulting Agreement"), pursuant to
which the Employee is to be retained by the Company as an independent consultant
following termination of the Employment Agreement;
WHEREAS, it is mutually in the best interests of the Employee and the
Company to terminate the Employment Agreement;
WHEREAS, the parties desire to enter into this Agreement setting forth
the terms and conditions of the termination of the employment relationship of
the Employee with the Company and to confirm retention of the services of the
Employee under the Consulting Agreement;
WHEREAS, it is mutually in the best interests of the Employee and the
Company to amend the Consulting Agreement effective immediately upon termination
of the Employment Agreement;
NOW, THEREFORE, in order to effect the foregoing, in consideration of
the premises and the respective covenants and agreements of the parties herein
contained, and intending to be legally bound hereby, the parties hereto agree as
follows:
1. TERMINATION OF AGREEMENT.
(a) Except as provided in paragraph (b) below, effective as of the
Effective Date (as defined below), the Employment Agreement shall be termi-
<PAGE>
nated and, except as provided herein, the Company, FHC and the Employee shall
have no further rights and/or obligations under the Employment Agreement.
(b) Notwithstanding paragraph (a) above and other provisions of this
Agreement, (i) the provisions of Sections 5(d) and (e) and Sections 6 through
11 of the Employment Agreement shall survive the termination of the Employment
Agreement (the "Surviving Provisions") and (ii) Mr. Crowley will continue to
have the right to exercise his unexpired outstanding stock options until the
date 90 days after the earlier of the expiration or termination of the
Consulting Agreement pursuant to Section 2 of the Consulting Agreement.
(c) The Consulting Agreement shall commence immediately on the date
on which all Settlement Payments (as defined below) have been made pursuant to
Section 2 hereof (the "Effective Date").
(d) The Employee acknowledges and agrees that (i) effective as of the
Effective Date, the Employee will no longer hold the position of Chairman of the
Board, but will continue to serve as a member of the Company's Board of
Directors and (ii) the Employee hereby submits his resignation as a director to
the Company's Board of Directors which resignation will become effective on the
first anniversary of the Effective Date and hereby agrees to submit such further
evidence of said resignation as the Company may reasonably require.
(e) The Employee hereby agrees and authorizes the Company and
Wachovia Bank of North Carolina, N.A. to amend the Benefit Protection Trust
dated as of April 1, 1997 (the "Trust Agreement") in favor of Mr. Crowley in
order to (i) replace Schedule I to the Trust Agreement with Schedule I attached
hereto and (ii) make such other changes required in order to make payments to
Mr. Crowley required pursuant to this Agreement.
2. FINAL PAYMENT.
(a) The Employee shall be entitled to receive, in full satisfaction
of the Company's and FHC's obligations set forth in the Employment Agreement
(except for the Surviving Provisions), a cash lump sum in an amount equal to
$11,872,000, subject to applicable withholding requirements (the "Settlement
Payment"). The Employee acknowledges that no further amounts are due under
Section 5(c) of the Employment Agreement.
(b) The Settlement Payment shall be made no later than eight (8) days
following the date of the Employee's execution of this Agreement. The Employee
acknowledges that following his receipt of the Settlement Payment, the
2
<PAGE>
Company and FHC shall have no further obligations to the Employee with respect
to the benefits described in the Employment Agreement (except for the Surviving
Provisions).
(c) The Company acknowledges and agrees that the Board of Directors
of FHC recently approved, and the Compensation and Stock Option Committee of the
Board of Directors of the Company recently ratified, the payment of certain
amounts to Deferred Compensation Plan participants, who vote to approve the
suspension of the Deferred Compensation Plan, upon the receipt of the necessary
approvals to suspend the Deferred Compensation Plan. The Company agrees to use
all reasonable efforts to seek and obtain the necessary approvals to suspend the
Deferred Compensation Plan as soon as practicable after the date hereof. The
Employee hereby agrees to such suspension of the Deferred Compensation Plan and
in consideration thereof, the Company agrees to make a lump sum cash payment to
the Employee, within three (3) business days following the date of receipt by
the Company of the consents of 80% or more of the participants in the Deferred
Compensation Plan to suspend the Deferred Compensation Plan, in the amount of
$982,730.
(d) Simultaneously with the payment of the Settlement Payment, the
Company shall make a lump sum cash payment to the Employee in the amount of
$228,461.53, representing full payment for the Employee's accrued but unpaid
vacation time.
3. AMENDMENT OF THE CONSULTING AGREEMENT
(a) Section 5(a) of the Consulting Agreement is hereby amended to
provide that the Company shall pay the amounts due to the Employee as follows:
(i) $6,000,000 related to the first twelve months of the Consulting Period shall
be paid on the Effective Date in return for Mr. Crowley's agreement to provide
substantially full time efforts to help the Company finalize its transition
planning during the short term period immediately following the termination of
the Employment Agreement; (ii) $2,000,000 related to the second twelve months of
the Consulting Period shall be paid in equal monthly installments beginning on
the first anniversary of the Effective Date; and (iii) $1,000,000 related to the
third twelve months of the Consulting Period shall be paid in equal monthly
installments beginning on the second anniversary of the Effective Date,
provided, however, that a pro rata amount paid to Mr. Crowley pursuant to clause
(i) above shall be paid back to the Company by Mr. Crowley upon a breach by Mr.
Crowley of the provisions set forth in Section 6. The "pro rata amount"
referred to in the preceding sentence shall be determined by dividing (A) the
number of months from such "breach" to the end of the first year of the
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<PAGE>
Consulting Period by (B) 12. Notwithstanding Mr. Crowley's agreement to provide
the services described in clause (a) (i) above, the provisions of Section 3 of
the Consulting Agreement will remain unaffected by the terms of clause (a) (i)
above following such short term period referred to above.
(b) In the event Mr. Crowley wishes to enter into a business
relationship or otherwise take any action which he believes will not violate the
terms of Section 6 of the Consulting Agreement, Mr. Crowley may request approval
from the Company's Board of Directors to enter into such relationship or take
such action. If (i) the Company's Board of Directors agrees that Mr. Crowley's
business relationship or taking such action would not violate Section 6 of the
Consulting Agreement or (ii) the Company's Board of Directors fails to respond
to Mr. Crowley's written request to the Company's Board of Directors within 30
days from the receipt of such written request by the Company's President or
Secretary, then Mr. Crowley shall be deemed to have complete approval from the
Company to take such actions or maintain such business relationships described
in Mr. Crowley's written request to the Company's Board of Directors. In the
event the Company's Board of Directors informs Mr. Crowley that it believes Mr.
Crowley's business relationship or actions described in Mr. Crowley's request
would violate Mr. Crowley's obligations under Section 6 of the Consulting
Agreement, so long as Mr. Crowley has not been engaged in such business
relationship or taken such actions for a period of more than 10 days prior to
the date the receipt by the Company's President or Secretary of Mr. Crowley's
request for approval, Mr. Crowley will be deemed to be in compliance with the
terms of Section 6 of the Consulting Agreement, if Mr. Crowley discontinues such
actions or business relationship within 30 days after Mr. Crowley has been
informed that the Company's Board of Directors has determined that such action
or business relationship would violate Section 6 of the Consulting Agreement.
(c) Section 4 of the Consulting Agreement is hereby amended by adding
the following to the end thereof:
"The Company acknowledges and agrees that during the Consulting
Period, Mr. Crowley shall continue to use his existing furniture and
equipment, and that the Company shall pay for or provide full office
support, including phone, fax, photocopy, utilities, parking and all
other expenses reasonably necessary for Mr. Crowley to conduct his
business affairs hereunder. The Company shall also, at its sole
cost and expense, make Mr. Crowley's current secretary available to
provide full-time secretarial support at his office and shall be
responsible for all salary and benefits payable to such individual,
which salary and benefit shall be no
4
<PAGE>
less favorable than other comparably situated full-time regular
employees of the Company. The Company agrees that Mr. Crowley may
maintain, for a period of up to 90 days following the Effective Date,
his office and related office support at its current location until
such time as he has established another office consistent with
Section 4 of the Consulting Agreement."
(d) Section 5(c) of the Consulting Agreement is hereby amended by
adding the following to the end thereof:
"The Company acknowledges and agrees that for each year during the
Consulting Period (1997, 1998, 1999), Mr. Crowley shall be entitled to
a new car and other automobile benefits as provided to Mr. Crowley by
FHC immediately prior to the Merger Date (as defined in the Employment
Agreement). By way of clarification and not limitation, during the
Consulting Period, the Company shall pay for or reimburse Mr. Crowley
for all of his automobile expenses, including but not limited to gas,
tax, insurance, license, registration and other fees, and shall
indemnify Mr. Crowley for any tax liability he incurs as a result of
such payments or reimbursement, it being the intent of the Company to
eliminate any tax liability to Mr. Crowley resulting from expenses
paid or reimbursed under this Section 5(c), consistent with FHC's
automobile benefits provided to Mr. Crowley prior to the Merger Date."
4. RELEASES.
(a) As a material inducement to enter into this Agreement, the
Employee hereby knowingly and voluntarily, fully and finally releases, acquits
and forever discharges the Company and FHC, affiliates thereof, and their past
and present officers, directors, shareholders, partners, trustees,
beneficiaries, managers, employees, attorneys, agents, successors or assigns
(the "Company Released Parties"), from any and all claims, charges, complaints,
liens, demands, causes of action, obligations, damages and liabilities, KNOWN OR
UNKNOWN, SUSPECTED OR UNSUSPECTED, that he had, now has, or may hereafter claim
to have against the Company Released Parties arising out of or relating in any
way to the Employee's employment relationship with the Company or the
termination thereof, or the termination of the Employment Agreement (including
without limitation the Age Discrimination Act). Notwithstanding the generality
of the foregoing, nothing contained herein shall release the Company of FHC or
in any way impair the Employee's rights to insurance coverage or reimbursement
or indemnification from the Company or FHC arising from or relating in any way
to the Employee's service as an employee, officer or director as provided by law
or
5
<PAGE>
under the Company's or FHC's bylaws, or under any applicable indemnification
agreement or insurance policy to which the Company or FHC is a party, including,
but not limited to, the Employee's rights to reimbursement, coverage or
indemnification in connection with any current or future litigation matter
arising from or relating in any way to the Employee's services as an employee,
officer or director of FHC or the Company (including, but not limited to, BURNS
V. CROWLEY/FOUNDATION HEALTH SYSTEMS, INC., Matter No. 97A501687 filed in the
Superior Court of Sacramento County, California); nor shall the foregoing
release the Company or FHC from any claim relating to the breach by the Company
or FHC of its obligations set forth herein, or set forth in provisions of the
Employment Agreement preserved by paragraph 1(b) hereof.
(b) As a material inducement to enter into this Agreement, each of
the Company and FHC, on its behalf and that of its affiliates and their officers
and directors, agents employees, successors and assigns (in their capacity as
officers or directors of the Company or FHC) likewise hereby knowingly and
voluntarily, fully and finally releases, acquits, and forever discharges the
Employee and his agents, employees, successors, heirs, beneficiaries or assigns
(the "Employee Released Parties") from any and all claims, charges, complaints,
liens, demands, causes of action, obligations, damages and liabilities, KNOWN OR
UNKNOWN, SUSPECTED OR UNSUSPECTED, that it had, now has, or may hereafter claim
to have against the Employee Released Parties arising out of or relating in any
way to the Employee's relationship with the Company or FHC as an employee,
whether or not previously asserted before any state or federal court or before
any state, federal or regulatory agency or governmental entity. Notwithstanding
the generality of the foregoing, nothing contained herein shall release the
Employee from any claim relating to the breach by the Employee of any
confidentiality agreements with the Company or FHC or any of its affiliates or
the obligations set forth herein, or set forth in provisions of the Employment
Agreement preserved by paragraph 1(b) hereof.
(c) Each of the Company, FHC and the Employee acknowledges that such
party has been advised by legal counsel regarding, is familiar with and
expressly waives all rights afforded by Section 1542 of the Civil Code of the
State of California ("Section 1542"), or any statute of similar effect in any
other jurisdiction in which any action might be brought, with respect to the
claims described in paragraphs (a) and (b) of this Section 4. Section 1542
states as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES
NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
6
<PAGE>
RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
SETTLEMENT WITH THE DEBTOR.
Thus, notwithstanding the provisions of Section 1542, and for the purpose of
implementing a full and complete release, each of the Company, FHC and the
Employee understands and agrees that this Agreement is intended to include all
claims, if any, described in paragraphs (a) (in the case of the Employee) and
(b) (in the case of the Company and FHC) above, which either party may have and
which neither party now knows or suspects to exist in such party's favor against
the Company Released Parties (in the case of the Employee) or Employee Released
Parties (in the case of the Company and FHC) and that this Agreement
extinguishes those claims.
5. The Employee acknowledges that the Company has advised him to consult
with an attorney of his choosing prior to signing this Agreement and that he has
twenty-one (21) days during which to consider the provisions of this Agreement,
although he may sign and return it sooner. The Employee further acknowledges
that he has been advised by the Company that he has the right to revoke this
Agreement for a period of seven (7) days after signing it and that this
Agreement shall not become effective or enforceable until such seven (7)-day
revocation period has expired. The Employee acknowledges and agrees that, if he
wishes to revoke this Agreement, he must do so in writing, signed by the
Employee and received by the Company at its headquarters no later than 5:00 p.m.
Pacific Standard Time on the seventh (7th) day after Employee has signed the
Agreement. The Employee acknowledges and agrees that, in the event that he
revokes this Agreement, he shall have no right to receive any payment hereunder.
The Employee further acknowledges and agrees that he would not receive the
enhanced payments set forth in paragraphs 3(a) and 3(b) hereof of this Agreement
except for his signing of this Agreement and his fulfillment of his promises set
forth in this Agreement. Employee understands and agrees that the Company is
under no obligation to offer such payment and that he is under no obligation to
consent to the release set forth in paragraph 4(a) of this Agreement. Employee
represents that he has read this Agreement and understands its terms and that he
enters into this Agreement freely, voluntarily, and without coercion.
6. NONDISPARAGEMENT. Neither the Company or FHC on the one had, nor the
Employee on the other hand, will make any derogatory or negative statements
about the other party that may adversely affect the current or potential
business relationships of either. The Company agrees that no announcement of
Mr. Crowley's resignation hereunder shall be made until after the Effective Date
and that Mr. Crowley will have the right to reasonably approve the content of
such announcement.
7
<PAGE>
7. SUCCESSORS: BINDING AGREEMENT. The Company shall require any
successor (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company to expressly assume and agree to perform this Agreement in the same
manner and to the same extent that the Company would be required to perform it
if no such succession had taken place. As used in this Agreement, "Company"
shall mean the Company as hereinbefore defined and any successor to its business
and/or assets as aforesaid which executes and delivers the agreement provided
for in this Section 6 or which otherwise becomes bound by all the terms and
provisions of this Agreement by operation of law. This Agreement and all rights
of the Employee hereunder shall inure to the benefit of and be enforceable by
the Employee's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees.
8. ENTIRE AGREEMENT. This Agreement sets forth the entire agreement of
the parties hereto in respect of the subject matter contained herein and
supersedes all prior agreements, promises, covenants, arrangements,
communications, representations or warranties, whether oral or written, by any
officer, employee or representative of any party hereto which are related to the
subject matter of the Employment Agreement or the termination thereof.
9. COUNTERPARTS. This Agreement may be executed in several counterparts,
each of which shall be deemed to be an original but all of which together will
constitute one and the same instrument.
10. HEADINGS. The headings contained herein are for reference purposes
only and shall not in any way affect the meaning or interpretation of this
Agreement.
11. GOVERNING LAW. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
California without regard to principles of conflicts of laws.
8
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the
date and year first above written.
FOUNDATION HEALTH SYSTEMS, INC.
By: /s/ Jay M. Gellert
------------------------------
Name: Jay M. Gellert
Title: Executive Vice President and
Chief Operating Officer
FOUNDATION HEALTH CORPORATION
By: /s/ Jay M. Gellert
------------------------------
Name: Jay M. Gellert
Title: Director
/s/ Daniel D. Crowley
-----------------------------------
DANIEL D. CROWLEY
9
<PAGE>
FIRST AMENDMENT AGREEMENT
First Amendment Agreement, dated as of August 9, 1995 (this
"Agreement"), among Foundation Health Corporation, a Delaware corporation (the
"Borrower"), the lenders (the "Lenders") parties to the Credit Agreement
referred to below, Citicorp USA, Inc., as administrative agent (the "Agent"),
Wells Fargo Bank, N.A. and NationsBank of Texas, N.A., as co-agents (the
"Co-Agents"), and Citicorp Securities, Inc., as arranger (the "Arranger").
WHEREAS, the Borrower, the Lenders and the Agent are parties to a
$300,000,000 Revolving Credit Agreement, dated as of December 5, 1994 (such
Revolving Credit Agreement being referred to herein as the "Credit
Agreement"; capitalized terms not otherwise defined herein being used herein
as therein defined).
WHEREAS, the Borrower has informed the Agent and the Lenders that
the Borrower proposes to use up to $40,000,000 of Advances to repurchase (the
"Repurchase Program") shares of its outstanding common stock, par value $0.01
per share (the "Common Stock"), during the period commencing on the date
hereof and ending at 5:00 p.m, California time, on February 5, 1996 (such
period being the "Covered Period").
WHEREAS, the Credit Agreement presently prohibits the Borrower from
carrying out the transactions contemplated by the Repurchase Program because
Section 4.01(n) of the Credit Agreement requires the Borrower to represent
that no proceeds of any Revolving Advance will be used to acquire any equity
securities of a class which is registered pursuant to Section 12 of the
Securities Exchange Act of 1934, as amended, including the Common Stock.
WHEREAS, the Borrower has requested that the Majority Lenders amend
Section 4.01(n) of the Credit Agreement to permit the transactions
contemplated by the Repurchase Program.
NOW, THEREFORE, in consideration of the foregoing premises and
other good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged, the parties hereto agree as follows:
SECTION 1. AMENDMENT TO CREDIT AGREEMENT. The Credit Agreement is,
effective as of August 9, 1995 and subject to the satisfaction of the
conditions precedent set forth in Section 2 hereof, hereby amended as
follows:
(a) Section 1.01 of the Credit Agreement is hereby amended by
inserting
<PAGE>
the following definitions of "Covered Period" and "Common Stock"
immediately after the definition of "Convert", "Conversion" and
"Converted":
""COVERED PERIOD" means the period commencing on August 9,
1995 and ending at 5:00 p.m., California time, on February 5,
1996."
""COMMON STOCK" means the common stock, par value $0.01 per
share, of the Borrower."
(b) Section 4.01(n) of the Credit Agreement is hereby amended
in full to read as follows:
"(n) PROHIBITED SECURITIES TRANSACTIONS. No proceeds of any
Revolving Advance will be used by the Borrower or any of its
Subsidiaries to acquire any equity security of a class which
is registered pursuant to Section 12 of the Securities
Exchange Act of 1934, as amended; PROVIDED, HOWEVER, that
proceeds of Revolving Advances may be used by the Borrower
to acquire shares of Common Stock for aggregate consideration
of not to exceed $40,000,000 during the Covered Period."
(c) Section 5.01 of the Credit Agreement is hereby amended by
inserting the following subsection 5.01(k) immediately after subsection
5.01(j):
"(k) RETIREMENT OF REPURCHASED SHARES. The Borrower shall
immediately retire in accordance with the General Corporation
Law of the State of Delaware any shares of Common Stock which
are acquired by the Borrower during the Covered Period."
SECTION 2. CONDITIONS OF EFFECTIVENESS. This Agreement shall become
effective as of August 9, 1995 if, on or prior to that date, the Agent shall
have received (in sufficient copies for each Lender) and in form and
substance satisfactory to the Agent:
(i) counterparts of this Agreement duly executed by the Borrower,
the Majority Lenders and the Agent;
(ii) certified copies of the resolutions of the Board of Directors
of the Borrower approving the Repurchase Program, and of all documents
evidencing other necessary corporate action and governmental approvals,
if any, with respect to the Repurchase Program and the retirement of all
shares of Common Stock that are repurchased pursuant thereto;
<PAGE>
3
(iii) A certificate of the Chief Financial Officer of the Borrower
certifying as follows:
(A) that if the Borrower had used $40,000,000 of Advances
to repurchase shares of Common Stock on June 30, 1995, the
Borrower would have been in compliance with the covenants set
forth in Sections 5.02(b), 5.03(a) and 5.03(c) of the Credit
Agreement; and
(B) that no event has occurred and is continuing, or would
result from the transactions contemplated by the Repurchase
Program, which constitutes an Event of Default or Default; and
(iv) such other documents as the Agent or any Lender party hereto
may request.
SECTION 3. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT. (a)
Upon the effectiveness of this Agreement, on and after the date hereof, each
reference in the Credit Agreement to "this Agreement," "hereunder," "hereof"
or words of like import referring to the Credit Agreement, shall mean and be
a reference to the Credit Agreement as amended hereby.
(b) Except as specifically amended above, the Credit Agreement is
and shall continue to be in full force and effect and is hereby ratified and
confirmed in all respects.
(c) The execution, delivery and effectiveness of this Agreement
shall not operate as a waiver of any right, power or remedy of any Lender or
the Agent under the Credit Agreement, nor constitute a waiver of any
provision of the Credit Agreement.
SECTION 4. FEES, COSTS AND EXPENSES. The Borrower agrees to pay
on demand all costs and expenses of the Agent incurred in connection with the
preparation, execution, delivery, administration, modification, amendment and
enforcement of this Agreement and the other documents to be delivered
hereunder, including, without limitation, the fees and out-of-pocket expenses
of the Agent's legal counsel.
SECTION 5. GOVERNING LAW. This Agreement shall be governed by,
and construed in accordance with, the laws of the State of New York.
SECTION 6. COUNTERPARTS. This Agreement may be executed in any
number of counterparts, by facsimile and by the different parties hereto on
separate counterparts, each of which, when so executed and delivered, shall
be an original, but all such counterparts shall together constitute one and
the same instrument.
<PAGE>
4
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed and delivered by their respective officers thereunto duly
authorized, as of the date first above-written.
THE BORROWER:
FOUNDATION HEALTH CORPORATION
By:
-------------------------------------
Name:
Title:
THE AGENT:
CITICORP USA, INC.
By:
-------------------------------------
Name:
Title:
THE LENDERS:
CITICORP USA, INC.
By:
-------------------------------------
Name:
Title:
<PAGE>
5
NATIONSBANK OF TEXAS, N.A.
By:
-------------------------------------
Name:
Title:
WELLS FARGO BANK, N.A.
By:
-------------------------------------
Name:
Title:
BANK OF AMERICA, N.T. & S.A.
By:
-------------------------------------
Name:
Title:
THE CHASE MANHATTAN BANK, N.A.
By:
-------------------------------------
Name:
Title:
CREDIT LYONNAIS CAYMAN ISLAND BRANCH
By:
-------------------------------------
Name:
Title:
<PAGE>
6
THE LONG-TERM CREDIT BANK OF JAPAN, LTD.
By:
-------------------------------------
Name:
Title:
THE BANK OF NOVA SCOTIA
By:
-------------------------------------
Name:
Title:
By:
-------------------------------------
Name:
Title:
THE FUJI BANK, LIMITED
By:
-------------------------------------
Name:
Title:
THE BANK OF CALIFORNIA, N.A.
By:
-------------------------------------
Name:
Title:
<PAGE>
7
COOPERATIEVE CENTRALE
RAIFFEISEN-BOERENLEENBANK B.A. DSR
"RABOBANK NEDERLAND"
NEW YORK BRANCH
By:
-------------------------------------
Name:
Title:
By:
-------------------------------------
Name:
Title:
THE NIPPON CREDIT BANK LTD., LOS
ANGELES AGENCY
By:
-------------------------------------
Name:
Title:
<PAGE>
SECOND AMENDMENT AGREEMENT
Second Amendment Agreement, dated as of June 28, 1996 (this
"Amendment"), among Foundation Health Corporation, a Delaware corporation
(the "Borrower"), the lenders (the "Lenders") listed on the signature pages
hereof and Citicorp USA, Inc. ("CUSA"), as administrative agent (the
"Agent") for the Lenders.
PRELIMINARY STATEMENTS:
1. The Borrower, the Lenders, the Agent, Wells Fargo Bank,
N.A. and NationsBank of Texas, N.A., as co-agents (the "Co-Agents") for the
Lenders, and Citicorp Securities, Inc., as arranger (the "Arranger"), have
entered into a Revolving Credit Agreement, dated as of December 5, 1994, as
amended by a First Amendment Agreement dated as of August 1, 1995 (such
credit agreement, as it may be amended and in effect from time to time,
being referred to herein as the "Credit Agreement"; terms defined therein and
not otherwise defined herein being used herein as therein defined).
2. The Borrower, the Lenders and the Agent wish to amend the
Credit Agreement to (i) amend the definitions of "Applicable Eurodollar
Margin," "Applicable Percentage," "Cash Equivalents," Exempt Acquisition,"
"Fixed Charges," "Permitted Investments," "Permitted Liens" and "Public Debt
Rating" contained in Section 1.01 of the Credit Agreement; (ii) amend Section
4.01(a) of the Credit Agreement regarding prohibited securities transactions;
(iii) amend Section 5.02(f) of the Credit Agreement regarding Investments in
other Persons; (iv) amend Section 5.03(b) of the Credit Agreement regarding
Fixed Charge Coverage Ratio; and (v) memorialize certain matters with respect
to Lenders, their Commitments and the Co-Agents.
NOW, THEREFORE, in consideration of the premises set forth above
and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree as follows:
SECTION 1. AMENDMENTS TO CREDIT AGREEMENT. The Credit Agreement
is, effective as of June 28, 1996 (the "Amendment Effective Date") and
subject to the satisfaction of the conditions precedent set forth in Section
2 hereof, hereby amended as follows:
(a) The table set forth below the definition of "APPLICABLE
EURODOLLAR MARGIN" is hereby amended in full to read as follows:
<PAGE>
2
<TABLE>
<CAPTION>
---------------------------------------------------------------------
---------------------------------------------------------------------
Public Debt Rating Total Debt/Total Applicable Eurodollar
S&P/Moody's Capitalization Ratio Margin
------------------ ----------------------- ---------------------
<S> <C> <C>
LEVEL 1
A-/or above Less than 0.15 to 1.00 .200%
LEVEL 2
Below A- but equal Greater than or equal
to or above BBB+ to 0.15 to 1.00 but
less than 0.25 to 1.00 .225%
LEVEL 3
Equal to BBB Greater than or equal
to 0.25 to 1.00 but
less than 0.35 to 1.00 .250%
LEVEL 4
Equal to BBB- Greater than or equal
to 0.35 to 1.00 but less
than 0.40 to 1.00 .325%
---------------------------------------------------------------------
---------------------------------------------------------------------
</TABLE>
(b) The table set forth below the definition of "APPLICABLE
PERCENTAGE" is hereby amended in full to read as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------
---------------------------------------------------------------------
Public Debt Rating Total Debt/Total Applicable Percentage
S&P/Moody's Capitalization Ratio
------------------ ----------------------- ---------------------
<S> <C> <C>
LEVEL 1
A-/ or above Less than 0.15 to 1.00 .100%
LEVEL 2
Below A- but equal Greater than or equal
to or above BBB+ to 0.15 to 1.00 but less
than 0.25 to 1.00 .125%
LEVEL 3
Equal to BBB Greater than or equal to
0.25 to 1.00 but less
than 0.35 to 1.00 .150%
LEVEL 4
Equal to BBB- Greater than or equal
to 0.35 to 1.00 but less
than 0.40 to 1.00 .175%
---------------------------------------------------------------------
---------------------------------------------------------------------
(c) Clauses (ii) and (iii) of the definition of "Cash
Equivalents" appearing in Section 1.01 of the Credit Agreement are hereby
amended in full to read as follows.
" (ii) United States Treasury bills, notes, bonds, and securities
issued by an agency of the United States government and having a maturity
within seven years from the date of acquisition, (iii) tax-exempt
securities having a long-term rating at the time of acquisition equivalent
to BBB or higher by any
</TABLE>
<PAGE>
3
Nationally Recognized Statistical Rating Organization or short-term
rating equivalent to MIG-1 by any Nationally Recognized Statistical
Rating Organization, or that are supported by a credit agreement from an
institution whose long- or short-term ratings are as set forth above,
and in each case which have a maturity within seven years from the date
of acquisition; and"
(d) The definition of "Exempt Acquisition" appearing in Section 1.01 of
the Credit Agreement is hereby amended by deleting the reference to
"$50,000,000" and replacing it with "$100,000,000."
(e) The definition of "Fixed Charges" appearing in Section 1.01 of the
Credit Agreement is hereby amended in full to read as follows:
"FIXED CHARGES" means, for any period and without duplication, the sum
of (i) Interest Expense and fees paid on, and amortization of debt
discount in respect of, all Debt (including the interest portion of
rentals under Capital Leases during such period) PLUS (ii) Operating
Lease Rentals paid during such period PLUS (iii) the aggregate principal
amount of all Debt (including the principal portion of rentals under
Capital Leases) paid during such period (excluding (a) voluntary
prepayments of principal not required under the loan documents relating
to such Debt, (b) any contingent portion of the deferred purchase price
incurred in connection with any Acquisition and (c) the principal
portion of any one-time repayments of Indebtedness required to be made
as a result of a change of control in connection with any Acquisition)
PLUS (iv) the aggregate amount of all cash dividends paid by the
Borrower during such period."
(f) The definition of "Permitted Investments" appearing in Section 1.01
of the Credit Agreement is hereby amended in full to read as follows:
""PERMITTED INVESTMENTS" means (i) Cash Equivalents; (ii) commercial
paper issued by companies incorporated in the United States and having a
short-term rating at the time of acquisition equivalent to A-1 or higher
by any Nationally Recognized Statistical Rating Organization and
maturing within 270 days from the date of acquisition; (iii) bonds and
notes issued by companies incorporated in the United States and having a
long-term rating at the time of acquisition equivalent to BBB or higher
by any Nationally Recognized Statistical Rating Organization and having
a maturity within seven years from the date of acquisition; (iv) auction
rate preferred stock issued by companies incorporated in the United
States and having a long-term rating at the time of acquisition
equivalent to BBB or higher by any Nationally Recognized Statistical
Rating Organization; (v) obligations of any foreign government or
authority of any
<PAGE>
4
country in which the Borrower or its Subsidiaries conducts business,
which obligations have a rating at the time of acquisition equivalent to
A or higher by any Nationally Recognized Statistical Rating Organization
and which mature within seven years from the date of acquisition; (vi)
publicly traded common and preferred stock issued by companies
incorporated in the United States and which at the time of acquisition
either (a) has outstanding a series of bonds or notes which have a
long-term rating equivalent to BBB or higher by any Nationally
Recognized Statistical Rating Organization or (b)(i) is in the same or a
related line of business as the Borrower or any of its Material
Subsidiaries; (ii) has been subject to the requirements of Section 12 or
15(d) of the Securities Exchange Act of 1934 and has filed all the
material required to be filed pursuant to Sections 13, 14 or 15(d)
thereof for the preceding twelve calendar months; and (iii) has not, nor
has any of its consolidated subsidiaries, since the end of the last
fiscal year for which certified financial statements were included in a
report filed pursuant to the Securities Exchange Act of 1934, (A) failed
to pay any dividend or sinking fund installment on preferred stock or
(B) defaulted on any Indebtedness which could, with the giving of notice
or lapse of time or both, result in an amount equal to or greater than
10% of the consolidated net income of such company, as reported in the
most recent certified financial statements included in a report filed
pursuant to the Securities Exchange Act of 1934, becoming due and
payable; PROVIDED, that no more than 4.9% of any class of outstanding
equity securities of any company that is subject to the reporting
requirements of the Securities Exchange Act of 1934 may be held by the
Borrower and its Subsidiaries at any one time; and (vii) other
Investments not otherwise described above acquired as a result of a
Permitted Investment, Permitted Acquisition or Exempt Acquisition so
long as such Investment was an Investment of the acquired company on the
date such company was acquired by the Borrower or any of its
Subsidiaries and was not made at the request or instigation of the
Borrower or any of its Subsidiaries. Notwithstanding the foregoing, (a)
any Subsidiary licensed in any jurisdiction to transact life, accident,
health, disability or workers' compensation insurance business may make
Investments otherwise permitted under clauses (i), (ii), (iii), and (v)
above having maturity dates later than those specified under such
clauses so long as any such Investment by any such Subsidiary is rated
at the time of acquisition "BBB" or better by a Nationally Recognized
Statistical Rating Organization, (b) at no time may more than 5% of the
aggregate of all Investments under clauses (i), (ii), (iii), (iv), (v),
(vi) and (vii) represent the securities of any single Person other than
the United States Federal Government or agencies thereof or issuers
whose obligations are guaranteed by the United States Federal Government
or an agency thereof (provided that Investments in the securities of
mutual funds shall not be so limited as long as the mutual fund does not
invest more than 5% of its assets in the securities of
<PAGE>
5
any single Person), (c) at no time may more than 15% of the aggregate of
all Investment under clauses (i), (ii), (iii), (iv), (v), (vi), and (vii)
represent Investments under clause (vi), (d) at no time may more than 5%
of the aggregate of all Investments under clauses (i), (ii), (iii), (iv),
(v), (vi), and (vii) represent Investments under clause (vii), and (e)
any Investment permitted by clause (vii) and not otherwise permitted by
clauses (i), (ii), (iii), (iv), (v) or (vi) shall be disposed of within
one (1) year of the date that such company was acquired by the Borrower
or such Subsidiary. For purposes of the foregoing, "A", "A-1" and "BBB"
shall have the meanings assigned to such terms by S&P as of the date
hereof and the comparable rating terms utilized by any other Nationally
Recognized Statistical Rating Organization."
(g) Clause (x) of the definition of "Permitted Liens" appearing in Section
1.01 of the Credit Agreement is hereby amended in full to read as follows:
"(x) liens on the property or assets of Subsidiaries of the Borrower not
otherwise described in clauses (i) through (ix) above securing obligations
not in excess, at any time, of $65,000,000; and"
(h) The definition of "Public Debt Rating" appearing in Section 1.01 of
the Credit Agreement is hereby amended by deleting the reference to "Level
3" and replacing it with "Level 4."
(i) Section 4.01(n) of the Credit Agreement is hereby amended in full to
read as follows:
"(n) PROHIBITED SECURITIES TRANSACTIONS. No proceeds of any Revolving
Advance will be used by the Borrower or any of its Subsidiaries to
acquire any equity security of a class which is registered pursuant to
Section 12 of the Securities Exchange Act of 1934, as amended, other than
Permitted Investments; PROVIDED, HOWEVER, that proceeds of Revolving
Advances may be used by the Borrower to acquire shares of Common Stock
for aggregate consideration of not to exceed $40,000,000 during the
Covered Period."
(j) Subsection (f) of Section 5.02 of the Credit Agreement is hereby
amended in full to read as follows:
"(f) INVESTMENTS IN OTHER PERSONS. After the date hereof, make, or permit
any of its Subsidiaries to make, any loan or advance or gift to, or
Investment in, any other Person, or purchase or otherwise acquire, or
permit any of its Subsidiaries to purchase or otherwise acquire, any
shares of capital stock, obligations or other securities, or make any
capital contribution to, or
<PAGE>
6
otherwise Invest in or acquire, any other Person (whether through merger,
consolidation, combination or otherwise), except for (i) Permitted
Investments, (ii) loans or advances by a Subsidiary of the Borrower to the
Borrower, by the Borrower to any Subsidiary of the Borrower or by any
Subsidiary of the Borrower to another Subsidiary of the Borrower, (iii)
Permitted Acquisitions, (iv) employee loans and advances, (v) capital
contributions by the Borrower to a Subsidiary of the Borrower or by any
Subsidiary of the Borrower; (vi) Investments in any Person whose business
is connected or related to the Borrower's (including its Subsidiaries')
existing or related line of business, PROVIDED, the aggregate amount of
Investments under this subclause (vi) made after the date hereof and
outstanding at any time does not exceed (A) for Investments made prior to
the end of the Borrower's 1995 Fiscal Year, $50,000,000 and (B) for
Investments made after the end of the Borrower's 1995 Fiscal Year, a sum
equal to (1) $50,000,000 plus (2) $50,000,000 multiplied by the number of
the Borrower's Fiscal Years that have commenced since the end of the
Borrower's 1995 Fiscal Year; (vii) tax-advantaged Investments (whether
through debt, equity, partnership interests or otherwise) in low-income
housing not aggregating in excess of $10,000,000 at any time; (viii)
Investments not otherwise permitted by clauses (i) through (vii) hereof
not in excess of $10,000,000 at any time; and (ix) loans, advances,
guarantees or Investments which arise in connection with the sale,
transfer or other disposition of any business, shares of capital stock or
assets of any Subsidiary or affiliated company or otherwise permitted by
Section 5.02(e) hereof as part of the consideration for such sale,
transfer or disposition."
(k) Subsection (b) of Section 5.03 of the Credit Agreement is hereby
amended in full to read as follows:
"(b) FIXED CHARGE COVERAGE RATIO. Permit, as at the end of any Fiscal
Quarter of the Borrower listed below, the Consolidated Fixed Charge
Coverage Ratio of the Borrower and its Subsidiaries for the four-Fiscal
Quarter period ending on the last day of such Fiscal Quarter to be less
than the minimum ratio set forth opposite such Fiscal Quarter:
Minimum
Fiscal Quarter Ratio
-------------- ---------
December 31, 1994 3.0 to 1.0
March 31, 1995 3.0 to 1.0
June 30, 1995 3.0 to 1.0
September 30, 1995 3.0 to 1.0
December 31, 1995 4.0 to 1.0
<PAGE>
7
March 31, 1996 4.0 to 1.0
June 30, 1996 4.5 to 1.0
September 30, 1996 4.5 to 1.0
December 31, 1996 and each Fiscal
Quarter thereafter 5.0 to 1.0"
(l) Section 2.01 of the Credit Agreement is hereby amended by deleting
the reference to "the signature pages hereof" appearing in the first sentence
thereof and replacing it with "the signature pages of that certain Second
Amendment Agreement, dated as of June 28, 1996 among the Borrower, the
Lenders and the Agent."
(m) The Preamble to the Credit Agreement is hereby amended by deleting
the reference to "Wells Fargo Bank, N.A." and replacing it with "Bank of
America, N.T. & S.A.", and Bank of America, N.T. & S.A. shall be a Co-Agent
under the Credit Agreement as of the Amendment Effective Date.
SECTION 2. CONDITIONS OF EFFECTIVENESS. This Amendment shall become
effective as of the Amendment Effective Date if, on or prior to that date,
(i) the Agent shall have received counterparts of this Amendment duly
executed by the Borrower, the Majority Lenders and the Agent, together with
such other documents or information as the Agent may reasonably request; (ii)
the Agent shall have received (a) confirmatory letters from Wells Fargo Bank,
N.A., and The Nippon Credit Bank Ltd. (the "Departing Banks") acknowledging
the cancellation of their respective Commitments under the Credit Agreement
effectuated by this Amendment and (b) payment from the Borrower, for the
account of the Departing Banks, in immediately available funds, of (x) all
accrued facility and other fees and interest accrued or owed to the Departing
Banks to the Amendment Effective Date and (y) the principal balance of all
Advances owed to the Departing Banks, together with any prepayment premium due
thereon pursuant to the Credit Agreement; and (iii) duly executed Revolving
Notes, dated as of a date specified by the Agent, payable to the order of
each Lender, in the amount of such Lender's Commitment (as in effect
immediately after the Amendment Effective Date) in exchange for which each
Lender shall return the Revolving Note issued to it pursuant to the Credit
Agreement to the Borrower marked "cancelled and exchanged for replacement
note".
SECTION 3. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT. (a)
Upon the effectiveness of this Amendment, on and after the date hereof, each
reference in the Credit Agreement to "this Agreement," "hereunder," "hereof"
or words of like import referring to the Credit Agreement, shall mean and be
a reference to the Credit Agreement as amended hereby.
(b) Except as specifically amended above, the Credit Agreement is
and shall continue to be in full force and effect and is hereby ratified and
confirmed in all respects.
<PAGE>
8
(c) The execution, delivery and effectiveness of this Amendment
shall not operate as a waiver of any right, power or remedy of any Lender or
the Agent under the Credit Agreement, nor constitute a waiver of any
provision of the Credit Agreement. Each of The Sanwa Bank, Limited, The
Dai-Ichi Kangyo Bank, Limited, and The Sumitomo Bank Limited, shall be a
Lender under the Credit Agreement, as amended hereby.
SECTION 4. FEES, COSTS AND EXPENSES. The Borrower agrees to pay on
demand all reasonable costs and expenses of the Agent incurred in connection
with the preparation, execution, delivery, administration, modification and
amendment of this Amendment and the other documents to be delivered
hereunder, including, without limitation, the reasonable fees and
out-of-pocket expenses of the Agent's legal counsel. The Borrower further
agrees to pay on demand all costs and expenses of the Agent and the Lenders
(including, without limitation, reasonable fees and expenses of the Agent's
legal counsel) in connection with the enforcement (whether through
negotiations, legal proceedings or otherwise) of this Amendment and other
documents to be delivered under this Amendment.
SECTION 5. EXECUTION OF COUNTERPARTS. This Amendment may be
executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed and delivered shall be
deemed to be an original and all of which taken together shall constitute but
one and the same agreement.
SECTION 6. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
<PAGE>
9
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized, as of the
date first above written.
THE BORROWER:
FOUNDATION HEALTH CORPORATION
By:
--------------------------
Name:
Title:
THE AGENT:
CITICORP USA, INC.
By:
--------------------------
Name:
Title:
THE LENDERS:
$35,000,000 CITICORP USA, INC.
By:
--------------------------
Name:
Title:
$30,000,000 NATIONSBANK OF TEXAS, N.A.
By:
--------------------------
Name:
Title:
<PAGE>
10
$30,000,000 BANK OF AMERICA N.T. & S.A.
By:
--------------------------
Name:
Title:
$27,500,000 THE CHASE MANHATTAN BANK N.A.
By:
--------------------------
Name:
Title:
$25,000,000 UNION BANK OF CALIFORNIA N.A.
By:
--------------------------
Name:
Title:
$22,500,000 THE BANK OF NOVA SCOTIA
By:
--------------------------
Name:
Title:
<PAGE>
11
$22,500,000 THE DAI-ICHI KANGYO BANK, LIMITED
SAN FRANCISCO AGENCY
By:
--------------------------
Name:
Title:
$22,500,000 THE FUJI BANK LIMITED
By:
--------------------------
Name:
Title:
$20,000,000 COOPERATIEVE CENTRALE
RAIFFEISEN-BOERENLEENBANK B.A.
"RABOBANK NEDERLAND",
NEW YORK BRANCH
By:
--------------------------
Name:
Title:
By:
----------------------------
Name:
Title:
$20,000,000 THE SUMITOMO BANK, LIMITED,
SAN FRANCISCO AGENCY
By:
-------------------------
Name:
Title:
<PAGE>
12
$15,000,000 CREDIT LYONNAIS NEW YORK BRANCH
By:
-------------------------
Name:
Title:
$15,000,000 THE LONG-TERM CREDIT BANK OF JAPAN, LTD.
By:
-------------------------
Name:
Title:
$15,000,000 THE SANWA BANK, LIMITED
By:
-------------------------
Name:
Title:
- ---------------
$300,000,000
<PAGE>
THIRD AMENDMENT AGREEMENT AND WAIVER
Third Amendment Agreement and Waiver, dated as of December 13, 1996
(this "Amendment"), among Foundation Health Corporation, a Delaware
corporation (the "Borrower"), the lenders (the "Lenders") listed on the
signature pages hereof and Citibank, N.A. (as successor to Citicorp USA,
Inc.), as administrative agent (the "Agent") for the Lenders.
PRELIMINARY STATEMENTS:
1. The Borrower, the Lenders, the Agent, Wells Fargo Bank, N.A. and
NationsBank of Texas, N.A., as co-agents (the "Co-Agents") for the Lenders,
and Citicorp Securities, Inc., as arranger (the "Arranger"), have entered
into a Revolving Credit Agreement, dated as of December 5, 1994, as amended
by a First Amendment Agreement dated as of August 1, 1995 and a Second
Amendment Agreement dated as of June 28, 1996 (such credit agreement, as it
may be amended and in effect from time to time, being referred to herein as
the "Credit Agreement"; terms defined therein and not otherwise defined
herein being used herein as therein defined).
2. The Borrower, the Lenders and the Agent wish to amend the Credit
Agreement to, (i) amend Section 5.02(e) of the Credit Agreement regarding the
sale of certain assets; (ii) amend Section 5.03(b) of the Credit Agreement
regarding the Fixed Charge Coverage Ratio; and (iii) memorialize certain
matters with respect to the Agent and to waive the Borrower's obligation to
comply with certain reporting requirements.
NOW, THEREFORE, in consideration of the premises set forth above and
other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:
SECTION 1. AMENDMENTS TO CREDIT AGREEMENT. The Credit Agreement is,
effective as of December 31, 1996 (the "Amendment Effective Date") and
subject to the satisfaction of the conditions precedent set forth in Section
3 hereof, hereby amended as follows:
(a) Subsection (e) of Section 5.02 of the Credit Agreement is hereby
amended in full to read as follows:
"(e) SALES, TRANSFERS, ETC. OF ASSETS. Sell, lease, transfer or otherwise
dispose of, or permit any of its Material Subsidiaries to sell, lease,
transfer or otherwise dispose of, any assets (including, without
limitation, any portion of assets
<PAGE>
2
constituting the business of a division, branch or other unit of
operation), except for (A) sales in the ordinary course of business
consistent with past practices; (B) sales and dispositions of worn out,
surplus or obsolete assets; (C) sales or transfers of property during any
Fiscal Year of the Borrower the aggregate value of which (determined by
the greater of the book value thereof or the sales or transfer price
thereof) does not exceed 10% of the Borrower's Consolidated Total Assets
(determined as of the end of the Fiscal Quarter of the Borrower
immediately preceding such sale or transfer); (D) sales or transfers or
property from any Material Subsidiary to the Borrower or any other
Subsidiary of the Borrower, PROVIDED, that in the case of any sale or
transfer from a Material Subsidiary to a Subsidiary of the Borrower, such
sale or transfer would not cause such transferring Material Subsidiary to
cease being a Material Subsidiary, unless each transferee Subsidiary
thereby becomes (or is) a Material Subsidiary; and (E) the sale of
Foundation Health Medical Services, Thomas-Davis Medical Centers, P.C.,
Foundation Health Medical Group, Inc., surgery centers and related
healthcare center assets to PPA Medical Management, Inc. or to any other
Person."
(b) Subsection (b) of Section 5.03 of the Credit Agreement is hereby
amended in full to read as follows:
"(b) FIXED CHARGE COVERAGE RATIO. Permit, as at the end of any Fiscal
Quarter of the Borrower ending on or after December 31, 1996, the
Consolidated Fixed Charge Coverage Ratio of the Borrower and its
Subsidiaries for the four-Fiscal Quarter period ending on the last day of
such Fiscal Quarter to be less than 3.75 to 1.0."
(c) Subsection (a) of Section 5.04 of the Credit Agreement is hereby
amended by adding the phrase "(except the last Fiscal Quarter in each Fiscal
Year)" in the second line thereof after the words "Fiscal Quarter".
(d) Section 8.02 of the Credit Agreement is amended by deleting the
address of the Agent in the first sentence thereof and substituting therefor
the following: "399 Park Avenue, New York, New York 10043, Attention: Credit
Department, with a copy to Citicorp Securities, Inc., 399 Park Avenue, 8th
Floor, New York, New York 10043, Attention: Margaret A. Brown."
SECTION 2. WAIVERS TO CREDIT AGREEMENT. Subject to the satisfaction of
the conditions precedent set forth in Section 3 hereof, the obligation of the
Borrower to deliver the financial information required by Section 5.04(a) in
respect of the Fiscal Quarter ended
<PAGE>
3
September 30, 1996 and the financial information required by Section 5.04(b)
in respect of the Fiscal Year ended June 30, 1996 is hereby waived to and
including November 22, 1996.
SECTION 3. CONDITIONS OF EFFECTIVENESS. This Amendment shall become
effective as of the Amendment Effective Date if, on or prior to that date, the
Agent shall have received (i) counterparts of this Amendment duly executed by
the Borrower, the Lenders and the Agent, and (ii) resolutions of the Board of
Directors of the Borrower approving this Amendment and the transactions
contemplated hereby, together with an incumbency certificate with respect to
the officers of the Borrower executing this Amendment.
SECTION 4. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT. (a) Upon the
effectiveness of this Amendment, on and after the date hereof, each reference
in the Credit Agreement to "this Agreement," "hereunder," "hereof" or words of
like import referring to the Credit Agreement, shall mean and be a reference
to the Credit Agreement as amended hereby.
(b) On and after the date hereof, each reference in the Credit Agreement
and the exhibits thereto to "Citicorp USA, Inc." shall be a reference to
"Citibank, N.A.," and each reference to "CUSA" shall be a reference to
"Citibank."
(c) Except as specifically amended above, the Credit Agreement is and
shall continue to be in full force and effect and is hereby ratified and
confirmed in all respects.
(d) The execution, delivery and effectiveness of this Amendment shall not
operate as a waiver of any right, power or remedy of any Lender or the Agent
under the Credit Agreement, nor constitute a waiver of any provision of the
Credit Agreement, except as specifically herein provided.
SECTION 5. FEES, COSTS AND EXPENSES. The Borrower agrees to pay on demand
all reasonable costs and expenses of the Agent incurred in connection with
the preparation, execution, delivery, administration, modification and
amendment of this Amendment and the other documents to be delivered
hereunder, including, without limitation, the reasonable fees and
out-of-pocket expenses of the Agent's legal counsel. The Borrower further
agrees to pay on demand all costs and expenses of the Agent and the Lenders
(including, without limitation, reasonable fees and expenses of the Agent's
legal counsel) in connection with the enforcement (whether through
negotiations, legal proceedings or otherwise) of this Amendment and other
documents to be delivered under this Amendment.
SECTION 6. EXECUTION IN COUNTERPARTS. This Amendment may be executed in
any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed and delivered shall be deemed to
be an original and all of which taken together shall constitute but one and
the same agreement.
<PAGE>
4
SECTION 7. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized, as of the
date first above written.
THE BORROWER:
FOUNDATION HEALTH CORPORATION
By:
-------------------------------------
Name:
Title:
THE AGENT:
CITIBANK, N.A.
By:
-------------------------------------
Name:
Title:
THE LENDERS:
CITIBANK, N.A.
By:
-------------------------------------
Name:
Title:
<PAGE>
5
NATIONSBANK OF TEXAS, N.A.
By:
------------------------------------
Name:
Title:
BANK OF AMERICA, N.T. & S.A.
By:
------------------------------------
Name:
Title:
THE CHASE MANHATTAN BANK
By:
------------------------------------
Name:
Title:
UNION BANK OF CALIFORNIA, N.A.
By:
------------------------------------
Name:
Title:
THE BANK OF NOVA SCOTIA
By:
-------------------------------------
Name:
Title:
<PAGE>
6
THE DAI-ICHI KANGYO BANK, LIMITED,
SAN FRANCISCO AGENCY
By:
------------------------------------
Name:
Title:
THE FUJI BANK, LIMITED
By:
------------------------------------
Name:
Title:
COOPERATIEVE CENTRALE
RAIFFEISEN-BOERENLEENBANK B.A.,
"RABOBANK NEDERLAND",
NEW YORK BRANCH
By:
------------------------------------
Name:
Title:
By:
------------------------------------
Name:
Title:
THE SUMITOMO BANK, LIMITED,
SAN FRANCISCO BRANCH
By:
------------------------------------
Name:
Title:
<PAGE>
7
CREDIT LYONNAIS NEW YORK BRANCH
By:
------------------------------------
Name:
Title:
THE LONG-TERM CREDIT BANK OF
JAPAN, LTD.
By:
------------------------------------
Name:
Title:
THE SANWA BANK, LIMITED
By:
------------------------------------
Name:
Title:
<PAGE>
FOURTH AMENDMENT AGREEMENT AND WAIVER
Fourth Amendment Agreement and Waiver, dated as of January 28, 1997
(this "Amendment"), among Foundation Health Corporation, a Delaware
corporation (the "Borrower"), the lenders (the "Lenders") listed on the
signature pages hereof and Citibank, N.A. (as successor to Citicorp USA,
Inc.), as administrative agent (the "Agent") for the Lenders.
1. The Borrower, the Lenders and the Agent have entered into a Revolving
Credit Agreement, dated as of December 5, 1994, as amended by a First
Amendment Agreement dated as of August 1, 1995, a Second Amendment Agreement
dated as of June 28, 1996 and a Third Amendment Agreement and Waiver dated as
of December 13, 1996 (such credit agreement, as it may be amended and in
effect from time to time, being referred to herein as the "Credit Agreement";
terms defined therein and not otherwise defined herein being used herein as
therein defined).
2. The Borrower Health Systems International, Inc. ("HSI") and FH
Acquisition Corp. on October 1, 1996 entered into an Agreement and Plan of
Merger ("Merger Agreement") pursuant to which the Borrower will become a
wholly owned subsidiary of HSI (the "Merger"). The Borrower has requested the
Lenders and the Agent to amend the Credit Agreement to permit the Credit
Agreement to survive the Merger and to grant a waiver thereunder in
connection therewith. The Lenders and the Agent have agreed to such request
on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises set forth above and
other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:
SECTION 1. AMENDMENTS TO CREDIT AGREEMENT. The Credit Agreement is,
effective as of the consummation of the Merger and subject to the
satisfaction of the conditions precedent set forth in Section 3 hereof,
hereby amended as follows:
(a) Section 1.01 is hereby amended by adding the following defined term
after the definition of "HMO SUBSIDIARY" therein:
"'HSI' means Health System International, Inc., a Delaware
corporation."
(b) Section 6.01 of the Credit Agreement is hereby amended by deleting
the semicolon at the end of Section 6.01 (n) and replacing it with the word";
or" and adding the following subsection (o) after such subsection (n):
<PAGE>
"(o) HSI or any of its Subsidiaries (other than those Subsidiaries
subject to Section 6.01 (d) hereof) shall fail to pay any Debt in a principal
payment amount (whether singly or in the aggregate) equal to or in excess of
$15,000,000 of HSI or such Subsidiary, as the case may be, when the same
becomes due and payable (whether by scheduled maturity, required prepayment,
acceleration, demand or otherwise (and inclusive of principal, interest, fees
and penalties)), and such failure shall continue after the applicable grace
period, if any, specified in the agreements or instruments relating to such
Debt; or any other event shall occur or condition shall exist under any
agreements or instruments relating to such Debt and shall continue after the
applicable grace period, if any, specified in such agreements or instruments,
if the effect of such event or condition is to accelerate, or to permit the
acceleration of, the maturity of such Debt; or any such Debt shall be
declared to be due and payable, or required to be prepaid (other than by a
regularly scheduled required prepayment), prior to the stated maturity
thereof."
SECTION 2. WAIVERS TO CREDIT AGREEMENT. Subject to the satisfaction of
the conditions precedent set forth in Section 3 hereof, any Default or Event
of Default arising from the transactions contemplated by the Merger Agreement
is hereby waived from the date hereof to and including June 30, 1997.
SECTION 3. CONDITIONS OF EFFECTIVENESS. This Amendment shall become
effective if, on or prior to February 9, 1997, the Agent shall have received
(i) counterparts of this Amendment duly executed by the Borrower, the
Majority Lenders and the Agent, (ii) resolutions of the Board of Directors of
the Borrower approving this Amendment and the transactions contemplated
hereby, together with an incumbency certificate with respect to the officers
of the Borrower executing this Amendment and (iii) evidence that the Amended
and Restated Credit Agreement, dated as of April 26, 1996 among HSI, the
lenders thereto and Bank of America, N.T. & S.A., as agent, has been amended,
pursuant to an amendment in form and substance satisfactory to the Agent and
to the Borrower, to permit the Merger and to permit the indebtedness of the
Borrower under the Credit Agreement to continue after the effectiveness of
the Merger.
SECTION 4. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT. (a) Upon the
effectiveness of this Amendment, on and after the date hereof, each reference
in the Credit Agreement to "this Agreement," "hereunder," "hereof" or words
of like import referring to the Credit Agreement, shall mean and be a
reference to the Credit Agreement as amended hereby.
(b) Except as specifically amended above, the Credit Agreement is and
shall continue to be in full force and effect and is hereby ratified and
confirmed in all respects.
<PAGE>
3
(c) The execution, delivery and effectiveness of this Amendment
shall not operate as a waiver of any right, power or remedy of any Lender or
the Agent under the Credit Agreement, nor constitute a waiver of any
provision of the Credit Agreement, except as specifically herein provided.
SECTION 5. FEES, COSTS AND EXPENSES. The Borrower agrees to pay on
demand all reasonable costs and expenses of the Agent incurred in connection
with the preparation, execution, delivery, administration, modification and
amendment of this Amendment and the other documents to be delivered
hereunder, including, without limitation, the reasonable fees and
out-of-pocket expenses of the Agent's legal counsel. The Borrower further
agrees to pay on demand all costs and expenses of the Agent and the Lenders
(including, without limitation, reasonable fees and expenses of the Agent's
legal counsel) in connection with the enforcement (whether through
negotiations, legal proceedings or otherwise) of this Amendment and other
documents to be delivered under this Amendment.
SECTION 6. EXECUTION IN COUNTERPARTS. This Amendment may be
executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed and delivered shall be
deemed to be an original and all of which taken together shall constitute but
one and the same agreement.
SECTION 7. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed by their respective officers thereunto duly authorized, as of the
date first above written.
THE BORROWER:
FOUNDATION HEALTH CORPORATION
By:
---------------------------------
Name:
Title:
THE AGENT:
CITIBANK, N.A.
By:
---------------------------------
Name:
Title:
<PAGE>
4
THE LENDERS:
CITIBANK, N.A.
By:
---------------------------------
Name:
Title:
NATIONSBANK OF TEXAS, N.A.
By:
---------------------------------
Name:
Title:
BANK OF AMERICA, N.T. & S.A.
By:
---------------------------------
Name:
Title:
THE CHASE MANHATTAN BANK,
By:
---------------------------------
Name:
Title:
UNION BANK OF CALIFORNIA, N.A.
By:
---------------------------------
Name:
Title:
<PAGE>
5
THE BANK OF NOVA SCOTIA
By:
---------------------------------
Name:
Title:
THE DAI-ICHI KANGYO BANK, LIMITED,
SAN FRANCISCO AGENCY
By:
---------------------------------
Name:
Title:
THE FUJI BANK, LIMITED
By:
---------------------------------
Name:
Title:
COOPERATIEVE CENTRALE
RAIFFEISEN-BOERENLEENBANK B.A.,
"RABOBANK NEDERLAND",
NEW YORK BRANCH
By:
---------------------------------
Name:
Title:
By:
---------------------------------
Name:
Title:
<PAGE>
6
THE SUMITOMO BANK, LIMITED,
SAN FRANCISCO BRANCH
By:
---------------------------------
Name:
Title:
CREDIT LYONNAIS NEW YORK BRANCH
By:
---------------------------------
Name:
Title:
THE LONG-TERM CREDIT BANK OF
JAPAN, LTD.
By:
---------------------------------
Name:
Title:
THE SANWA BANK, LIMITED
By:
---------------------------------
Name:
Title:
<PAGE>
FIFTH AMENDMENT AGREEMENT
Fifth Amendment Agreement, dated as of April 1, 1997 (this "Waiver"),
among Foundation Health Corporation, a Delaware corporation (the "Borrower"),
the lenders (the "Lenders") listed on the signature pages hereof and
Citibank, N.A. (as successor to Citicorp USA, Inc.), as administrative agent
(the "Agent") for the Lenders.
1. The Borrower, the Lenders and the Agent have entered into a
Revolving Credit Agreement, dated as of December 5, 1994, as amended by a
First Amendment Agreement dated as of August 9, 1995, a Second Amendment
Agreement dated as of June 28, 1996, a Third Amendment Agreement and Waiver
dated as of December 13, 1996 and a Fourth Amendment and Waiver dated as of
January 28, 1997 (such credit agreement, as it may be amended and in effect
from time to time, being referred to herein as the "Credit Agreement", terms
defined therein and not otherwise defined herein being used herein as therein
defined).
2. The Borrower anticipates that it will not be in compliance with the
Fixed Charge Coverage Ratio set forth in Section 5.03(b) of the Credit
Agreement for the fiscal quarters ending December 31, 1996 and March 31, 1997
and that it will no longer prepare audited annual financial statements and
will therefore also not be in compliance with Section 5.04(b) of the Credit
Agreement and has requested the Lenders and the Agent to amend such
covenants. The Lenders and the Agent have agreed to such request on the terms
and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises set forth above and
other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:
SECTION 1. AMENDMENTS TO CREDIT AGREEMENT. (a) Subject to the
satisfaction of the condition precedent set forth in Section 2 hereof,
Section 5.03(b) of the Credit Agreement is hereby amended in full to read as
follows:
"(b) FIXED CHARGE COVERAGE RATIO. Permit, as at the end of any
Fiscal Quarter of the Borrower listed below, the Consolidated Fixed
Charge Coverage Ratio of the Borrower and its Subsidiaries for the
four-Fiscal Quarter period ending on the last day of such Fiscal Quarter
to be less than the minimum ratio set forth opposite such Fiscal Quarter:
Fiscal Quarter Minimum Ratio
-------------- -------------
December 31, 1996 1.5 to 1.0
March 31, 1997 1.5 to 1.0
Each Fiscal Quarter thereafter (if any) 3.75 to 1.0
<PAGE>
2
(b) Subject to the satisfaction of the condition precedent set forth in
Section 2 hereof, Section 5.04(b) of the Credit Agreement is hereby amended
in full to read as follows:
"(b) As soon as available and in any event within 120 days after
the end of each Fiscal Year, a Consolidated balance sheet of the
Borrower and its Subsidiaries as of the end of such Fiscal Year and
Consolidated statements of operations, stockholders' equity and cash
flows of the Borrower and its Subsidiaries for such Fiscal Year,
certified by the chief financial officer of the Borrower, together with
(i) a certificate of said officer stating that, to his or her knowledge,
no Default has occurred and is continuing or, if a Default has occurred
and is continuing, a statement as to the nature thereof and the action
the Borrower has taken or proposes to take with respect thereto and (ii)
a schedule in form satisfactory to the Agent of the computations used by
the Borrower in determining compliance with the covenants contained in
Section 5.03 and in sufficient detail for determining the Applicable
Eurodollar Margin and Applicable Percentage in accordance with the
definition of such terms set forth in Section 1.01."
SECTION 2. CONDITION OF EFFECTIVENESS. This Amendment shall become
effective if, on or prior to April 11, 1997, the Agent shall have received
counterparts of this Amendment duly executed by the Borrower, the Majority
Lenders and the Agent.
SECTION 3. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT. (a) Except
as specifically amended above, the Credit Agreement is and shall continue to
be in full force and effect and is hereby ratified and confirmed in all
respects.
(b) The execution, delivery and effectiveness of this Amendment shall
not operate as a waiver of any right, power or remedy of any Lender or the
Agent under the Credit Agreement, nor constitute a waiver of any provision
of the Credit Agreement, except as specifically herein provided.
(c) Upon effectiveness of this Amendment on and after the date hereof,
each reference in the Credit Agreement to this Agreement, "hereunder",
"hereof", or words of like import referring to the Credit Agreement shall
mean and be a reference to the Credit Agreement as amended hereby.
SECTION 4. FEES, COSTS AND EXPENSES. The Borrower agrees to pay on
demand all reasonable costs and expenses of the Agent incurred in connection
with the preparation, execution and delivery of this Amendment, including,
without limitation, the reasonable fees and out-of-pocket expenses of the
Agent's legal counsel.
<PAGE>
3
SECTION 5. EXECUTION IN COUNTERPARTS. This Amendment may be executed in
any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed and delivered shall be deemed to
be an original and all of which taken together shall constitute but one and
the same agreement.
SECTION 6. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized, as of the
date first above written.
THE BORROWER:
------------
FOUNDATION HEALTH CORPORATION
By:
-----------------------------------
Name:
Title:
THE AGENT:
---------
CITIBANK, N. A.
By:
-----------------------------------
Name:
Title:
<PAGE>
4
THE LENDERS:
-----------
CITIBANK, N. A.
By:
---------------------------------
Name:
Title:
NATIONSBANK OF TEXAS, N.A.
By:
---------------------------------
Name:
Title:
BANK OF AMERICA, N.T. & S.A.
By:
---------------------------------
Name:
Title:
THE CHASE MANHATTAN BANK, N.A.
By:
---------------------------------
Name:
Title:
UNION BANK OF CALIFORNIA, N.A.
By:
---------------------------------
Name:
Title:
<PAGE>
5
THE BANK OF NOVA SCOTIA
By:
---------------------------------
Name:
Title:
THE DAI-ICHI KANGYO BANK, LIMITED,
SAN FRANCISCO AGENCY
By:
---------------------------------
Name:
Title:
THE FUJI BANK, LIMITED
By:
---------------------------------
Name:
Title:
COOPERATIEVE CENTRALE
RAIFFEISEN-BOERENLEENBANK B.A.,
"RABOBANK NEDERLAND",
NEW YORK BRANCH
By:
---------------------------------
Name:
Title:
By:
---------------------------------
Name:
Title:
<PAGE>
6
THE SUMITOMO BANK, LIMITED,
SAN FRANCISCO BRANCH
By:
---------------------------------
Name:
Title:
CREDIT LYONNAIS NEW YORK BRANCH
By:
---------------------------------
Name:
Title:
THE LONG-TERM CREDIT BANK OF
JAPAN, LTD.
By:
---------------------------------
Name:
Title:
THE SANWA BANK, LIMITED
By:
---------------------------------
Name:
Title:
<PAGE>
$200,000,000
REVOLVING CREDIT AGREEMENT
DATED AS OF DECEMBER 17 1996
AMONG
FOUNDATION HEALTH CORPORATION,
AS BORROWER,
CITIBANK, N.A.
AS ADMINISTRATIVE AGENT,
AND
CITICORP SECURITIES, INC.,
AS ARRANGER,
and
THE OTHER BANKS AND
FINANCIAL INSTITUTIONS
PARTIES HERETO
<PAGE>
T A B L E O F C O N T E N T S
- - - - - - - - - - - - - - -
SECTION PAGE
- ------- ----
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
1.01. Certain Defined Terms . . . . . . . . . . . . . . . . . . . . . 1
1.02. Computation of Time Periods . . . . . . . . . . . . . . . . . . 19
1.03. Accounting Terms. . . . . . . . . . . . . . . . . . . . . . . . 19
1.04. References. . . . . . . . . . . . . . . . . . . . . . . . . . . 19
ARTICLE II
AMOUNTS AND TERMS OF THE ADVANCES
2.01. The Revolving Advances. . . . . . . . . . . . . . . . . . . . . 19
2.02. Making the Advances . . . . . . . . . . . . . . . . . . . . . . 20
2.03. Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
2.04. Termination or Reduction of the Commitments . . . . . . . . . . 22
2.05. Repayment of Revolving Advances . . . . . . . . . . . . . . . . 22
2.06. Interest on Revolving Advances. . . . . . . . . . . . . . . . . 22
2.07. Additional Interest on Eurodollar Rate Advances . . . . . . . . 23
2.08. Interest Rate and Facility Fee Determination. . . . . . . . . . 23
2.09. Prepayments of Revolving Advances . . . . . . . . . . . . . . . 24
2.10. Notice of Conversion/Continuation . . . . . . . . . . . . . . . 24
2.11. Increased Costs . . . . . . . . . . . . . . . . . . . . . . . . 25
2.12. Illegality. . . . . . . . . . . . . . . . . . . . . . . . . . . 25
2.13. Payments and Computations . . . . . . . . . . . . . . . . . . . 26
2.14. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
2.15. Sharing of Payments, Etc. . . . . . . . . . . . . . . . . . . . 28
2.16. Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . 29
ARTICLE III
CONDITIONS OF BORROWING
3.01. Conditions Precedent to the Initial Advances. . . . . . . . . . 29
3.02. Conditions Precedent to Each Revolving Borrowing. . . . . . . . 29
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
4.01. Representations and Warranties of the Borrower. . . . . . . . . 30
<PAGE>
ARTICLE V
COVENANTS OF THE BORROWER
5.01. Affirmative Covenants . . . . . . . . . . . . . . . . . . . . . 34
5.02. Negative Covenants. . . . . . . . . . . . . . . . . . . . . . . 36
5.03. Financial Covenants . . . . . . . . . . . . . . . . . . . . . . 40
5.04. Reporting Requirements. . . . . . . . . . . . . . . . . . . . . 40
5.05. Acquisitions. . . . . . . . . . . . . . . . . . . . . . . . . . 42
ARTICLE VI
EVENTS OF DEFAULT
6.01. Events of Default . . . . . . . . . . . . . . . . . . . . . . . 42
ARTICLE VII
THE AGENT AND THE ARRANGER
7.01. Authorization and Action. . . . . . . . . . . . . . . . . . . . 45
7.02. Agent's Reliance, Etc. . . . . . . . . . . . . . . . . . . . . 46
7.03. Citibank and Affiliates . . . . . . . . . . . . . . . . . . . . 46
7.04. Lender Credit Decision. . . . . . . . . . . . . . . . . . . . . 46
7.05. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . 47
7.06. Successor Agent . . . . . . . . . . . . . . . . . . . . . . . . 47
7.07. The Arranger. . . . . . . . . . . . . . . . . . . . . . . . . . 48
ARTICLE VIII
MISCELLANEOUS
8.01. Amendments, Etc.. . . . . . . . . . . . . . . . . . . . . . . . 48
8.02. Notices, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . 48
8.03. No Waiver; Remedies . . . . . . . . . . . . . . . . . . . . . . 48
8.04. Costs, Expenses and Indemnities . . . . . . . . . . . . . . . . 49
8.05. Right of Set-off. . . . . . . . . . . . . . . . . . . . . . . . 50
8.06. Binding Effect. . . . . . . . . . . . . . . . . . . . . . . . . 50
8.07. Assignments and Participations. . . . . . . . . . . . . . . . . 50
8.08. Severability of Provisions. . . . . . . . . . . . . . . . . . . 53
8.09. Independence of Provisions. . . . . . . . . . . . . . . . . . . 53
8.10. Headings. . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
8.11. Execution in Counterparts . . . . . . . . . . . . . . . . . . . 53
8.12. Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . 53
8.13. Consent to Jurisdiction . . . . . . . . . . . . . . . . . . . . 54
8.14. GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . . 54
ii
<PAGE>
8.15. WAIVER OF JURY TRIAL. . . . . . . . . . . . . . . . . . . . . . 54
iii
<PAGE>
SCHEDULES TO REVOLVING CREDIT AGREEMENT
Schedule 1 - Lending Offices, Addresses, Etc.
Schedule 2 - Subsidiaries
EXHIBITS TO REVOLVING CREDIT AGREEMENT
Exhibit A - Assignment and Acceptance
Exhibit B - Form of Revolving Note
Exhibit C - Notice of Revolving Borrowing
Exhibit D - Notice of Conversion/Continuation
Exhibit E - Form of Borrower Counsel's Opinion
Exhibit F - Form of Opinion of Shearman & Sterling
iv
<PAGE>
REVOLVING CREDIT AGREEMENT
Revolving Credit Agreement, dated as of December 17, 1996, among
Foundation Health Corporation, a Delaware corporation (the "Borrower"), the
banks (the "Banks") listed on the signature pages hereof and the Lenders (as
defined below) from time to time party hereto, Citibank, N.A. ("Citibank"),
as administrative agent (the "Agent") for the Lenders, and Citicorp
Securities, Inc., as arranger (the "Arranger").
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
SECTION 1.01. CERTAIN DEFINED TERMS. As used in this Agreement (as
hereinafter defined), the following terms shall have the following meanings
(such meanings to be equally applicable to both the singular and plural forms
of the terms defined):
"ACQUISITION" means the purchase of capital stock (or options,
warrants or similar instruments convertible into capital stock) of, or
merger with, purchase of assets of, purchase of convertible debt of, a
Person not an Affiliate of the Borrower or one of its Subsidiaries on the
date of determination, or any combination thereof, in each case involving a
purchase in connection with which the acquiring Person owns 50% or more of
the equity interest of such Person after giving effect to such purchase,
substantially all of such Person's assets, or a line of business or
business of such Person, but excluding purchases of inventory, equipment
and supplies in the ordinary course of business.
"ADVANCE" means a Revolving Advance.
"AFFILIATE" means, with respect to any Person, any other Person
directly or indirectly controlling, controlled by or under common control
with such Person. The term "control" means the possession, directly or
indirectly, of the power, whether or not exercised, to direct or cause the
direction of the management or policies of any Person, whether through
ownership of voting securities, by contract or otherwise.
"AGENT" has the meaning specified in the introduction to this
Agreement.
"AGREEMENT" means this Revolving Credit Agreement, as hereinafter
amended, modified and supplemented from time to time.
"APPLICABLE LENDING OFFICE" means, with respect to each Lender, such
Lender's Domestic Lending Office in the case of a Base Rate Advance and
such Lender's Eurodollar Lending Office in the case of a Eurodollar Rate
Advance.
<PAGE>
"ASSIGNMENT AND ACCEPTANCE" means an assignment and acceptance entered
into by a Lender and an Eligible Assignee, and accepted by the Agent, in
substantially the form of Exhibit A hereto.
"BANKS" has the meaning specified in the introduction to this
Agreement.
"BASE RATE" means, for any period, a fluctuating interest rate per
annum as shall be in effect from time to time which rate per annum shall at
all times be equal to the highest of:
(a) the rate of interest announced publicly by Citibank in New
York, New York, from time to time, as Citibank's base rate;
(b) the sum (adjusted to the nearest 1/4 of one percent or, if
there is no nearest 1/4 of one percent, to the next higher 1/4 of one
percent) of (i) 1/2 of one percent per annum PLUS (ii) the rate per
annum obtained by dividing (A) the latest three-week moving average of
secondary market morning offering rates in the United States for
three-month certificates of deposit of major United States money
market banks, such three-week moving average (adjusted to the basis of
a year of 360 days) being determined weekly on each Monday (or, if any
such day is not a Business Day, on the next succeeding Business Day)
for the three-week period ending on the previous Friday by the Agent
on the basis of such rates reported by certificate of deposit dealers
to and published by the Federal Reserve Bank of New York or, if such
publication shall be suspended or terminated, on the basis of
quotations for such rates received by the Agent from three New York
certificate of deposit dealers of recognized standing selected by the
Agent, by (B) a percentage equal to 100% MINUS the average of the
daily percentages specified during such three-week period by the Board
of Governors of the Federal Reserve System (or any successor) for
determining the maximum reserve requirement (including, but not
limited to, any emergency, supplemental or other marginal reserve
requirement) for the Agent in respect of liabilities consisting of or
including (among other liabilities) three-month U.S. dollar
nonpersonal time deposits in the United States, PLUS (iii) the average
during such three-week period of the annual assessment rates estimated
by the Agent for determining the then current annual assessment
payable by the Agent to the Federal Deposit Insurance Corporation (or
any successor) for insuring U.S. dollar deposits of the Agent in the
United States; and
(c) 1/2 of one percent above the Federal Funds Rate.
Each change in the fluctuating interest rate hereunder shall take effect
simultaneously with the corresponding change in the Base Rate.
"BASE RATE ADVANCE" means a Revolving Advance which bears interest as
provided in Section 2.07(a)(i).
2
<PAGE>
"BOARD OF DIRECTORS" of any corporation means the Board of Directors
of such corporation or a duly constituted committee thereof having
authority over matters to which the action proposed to be taken or
authorized relates.
"BORROWER" has the meaning specified in the introduction to this
Agreement.
"BORROWING" means an Auction Borrowing or a Revolving Borrowing.
"BUSINESS DAY" means a day of the year on which banks are not required
or authorized to close in New York City or San Francisco, California and,
if the applicable Business Day relates to any Eurodollar Rate Advances, a
day on which dealings in dollar deposits are carried on in the London
interbank market.
"CAPITAL LEASE" means any lease of property which, in accordance with
generally accepted accounting principles, should be capitalized on the
lessee's balance sheet or disclosed in a footnote thereto as a capitalized
lease.
"CAPITAL LEASE OBLIGATION" means, with respect to any lease of
property which, in accordance with generally accepted accounting
principles, should be capitalized on the lessee's balance sheet or for
which the amount of the assets and liabilities thereunder, if so
capitalized, should be disclosed in a note to such balance sheet, the
amount of the liability which should be so capitalized or disclosed as a
capitalized lease obligation.
"CASH EQUIVALENTS" means (i) United States dollar denominated
certificates of deposit, banker's acceptances and secured repurchase
agreements entered into with domestic and foreign financial institutions
having a long-term rating at the time of acquisition equivalent to BBB or
higher by any Nationally Recognized Statistical Rating Organization and
having a maturity within one year from the date of acquisition; (ii) United
States Treasury bills, notes, bonds, and securities issued by an agency of
the United States government and having a maturity within seven years from
the date of acquisition; (iii) tax-exempt securities having a long-term
rating at the time of acquisition equivalent to BBB or higher by any
Nationally Recognized Statistical Rating Organization or short-term rating
equivalent to MIG-1 by any Nationally Recognized Statistical Rating
Organization, or that are supported by a credit agreement from an
institution whose long- or short-term ratings are as set forth above, and
in each case which have a maturity within seven years from the date of
acquisition; and (iv) United States dollar denominated money market funds
that invest only in "eligible securities" as defined by Rule 2a-7 under the
Investment Company Act of 1940 and otherwise comply with the provisions of
such Rule 2a-7 as to quality, maturity and diversification standards. For
purposes of the foregoing "BBB" and "MIG-1" shall have the meanings
assigned to such ratings by Standard & Poor's Corporation and Moody's
Investors Service, respectively, as of the date hereof and the comparable
rating terms utilized by any other Nationally Recognized Statistical Rating
Organization.
3
<PAGE>
"CHANGE OF CONTROL" means an event or series of events by which:
(i) any "person" or "group" (as such terms are used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934, provided that in no event
shall an existing Borrower employee stock ownership plan or any other
Borrower employee benefit plan which may hereafter be established by the
Borrower be deemed a "person" or part of a "group") is or becomes the
"beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange
Act), directly or indirectly of 50% or more of the Borrower's then
outstanding voting stock, otherwise than through a transaction consummated
with the prior approval of the Borrower's Board of Directors, a majority of
whose members are Continuing Directors (as defined below); or (ii) during
any period of two consecutive calendar years, individuals who, on the date
hereof, constitute the Borrower's Board of Directors (together with any new
director whose election by the Borrower's Board of Directors or whose
nomination for election by the Borrower's stockholders was approved by a
vote of at least a majority of the directors then still in office who
either were directors on the date hereof or whose election or nomination
for election was previously so approved) cease for any reason to constitute
a majority of the directors then in office. For the purposes of the
foregoing, the term "Continuing Directors" means, as of the date of any
such approval, (1) individuals who, on the date hereof, are members of the
Borrower's Board of Directors and (2) any new director whose election by
the Borrower's Board of Directors or whose nomination for election by the
Borrower's stockholders is approved by a vote of at least a majority of the
directors then still in office who either are directors on the date hereof
or whose election or nomination for election was previously so approved.
"CODE" means the Internal Revenue Code of 1986, as amended from time
to time.
"COMMITMENT" has the meaning specified in Section 2.01 hereof.
"COMMON STOCK" means the common stock, par value $0.01 per share, of
the Borrower.
"CONSOLIDATED", "CONSOLIDATING" and similar derivatives of each such
word refers to the consolidation of accounts in accordance with generally
accepted accounting principles.
"CONSOLIDATED NET TANGIBLE ASSETS" of any Person means, as of any
date, the sum of the Total Assets of such Person and its subsidiaries on a
Consolidated basis at such date, after deducting therefrom (i) all
liabilities of such Person and its Subsidiaries, (ii) all assets of such
Person and its Subsidiaries that would be classified as intangibles under
generally accepted accounting principles (including, without limitation,
goodwill, organizational expenses, trademarks, trade names, copyrights,
patents, licenses and any rights in any thereof) and (iii) all reserves,
intercompany items or unamortized debt discount and expense not otherwise
included in (i), each such item determined in accordance with generally
accepted accounting principles.
4
<PAGE>
"CONVERT", "CONVERSION" and "CONVERTED" each refer to a conversion of
Advances of one Type into Advances of another Type pursuant to Section 2.11
or as is otherwise provided for herein.
"DEBT" of any Person means, without duplication, (i) all indebtedness
of such Person for borrowed money or for the deferred purchase price of
property or services (including, without limitation, all obligations,
contingent or otherwise, of such Person in connection with letter of credit
facilities, acceptance facilities or other similar facilities and in
connection with any agreement to purchase, redeem, exchange, convert or
otherwise acquire for value any capital stock of such Person or any
warrants, rights or options to acquire such capital stock, now or hereafter
outstanding), excluding payables for goods or services incurred in the
ordinary course of business and not overdue for a period of ninety days or
more and deferred compensation arrangements with officers, directors and
employees, (ii) all obligations of such Person evidenced by bonds, notes,
debentures or other similar instruments, (iii) all indebtedness created or
arising under any conditional sale or other title retention agreement with
respect to property acquired by such Person (even though the rights and
remedies of the seller or lender under such agreement in the event of
default are limited to repossession or sale of such property), (iv) all
Capital Lease Obligations of such Person, (v) all obligations, contingent
or otherwise, of such Person in connection with interest rate exchange
agreements, foreign exchange rate agreements and similar agreements
(provided that the obligations under such agreements shall be recorded on a
net basis and marked to market on a current basis), (vi) all Debt of
another Person secured by (or for which the holder of such Debt has an
existing right, contingent or otherwise, to be secured by) any lien,
security interest or other charge or encumbrance upon or in property
(including, without limitation, accounts and contract rights) owned by such
Person, even though such Person has not assumed or become liable for the
payment of such Debt, (vii) all Guaranteed Debt and (viii) if an ERISA
Event shall have occurred with respect to any Plan, the Insufficiency (if
any) of such Plan (or, in the case of a Plan with respect to which an ERISA
Event described in clause (iii) through (vi) of the definition of ERISA
Event shall have occurred, the liability related thereto).
"DEFAULT" means any Event of Default or any event that would
constitute an Event of Default but for the requirement that notice be given
or time elapse or both.
"DOMESTIC LENDING OFFICE" means, with respect to any Lender, the
office of such Lender specified as its "Domestic Lending Office" opposite
its name on Schedule 1 hereto or in the Assignment and Acceptance pursuant
to which it became a Lender, or such other office of such Lender as such
Lender may from time to time specify to the Borrower and the Agent.
"ELIGIBLE ASSIGNEE" means (i) a commercial bank organized under the
laws of the United States, or any State thereof, and having a combined
capital and surplus of at least $400,000,000; (ii) a savings and loan
association or savings bank organized under the laws of the United States,
or any State thereof, and having a combined capital and surplus of at least
$400,000,000; (iii) a commercial bank organized under
5
<PAGE>
the laws of any other country which is a member of the Organization for
Economic Cooperation and Development (the "OECD"), or a political
subdivision of any such country, and having a combined capital and surplus
of at least $400,000,000, provided that such bank is acting through a branch
or agency located in the United States; (iv) a commercial finance company or
finance subsidiary of a corporation organized under the laws of the United
States or any state thereof, and having a Consolidated Net Worth of at least
$400,000,000; (v) any Bank or Lender and any Affiliate of a Bank or Lender;
(vi) any "qualified institutional buyer" as defined in Rule 144A(a)(1) of
the rules and regulations prescribed by the Securities and Exchange
Commission pursuant to the Securities Act of 1933, as amended; and (vii) any
other Person mutually acceptable to the Borrower and the Agent.
"ENVIRONMENTAL LAW" means any and all statutes, laws, regulations,
ordinances, rules, judgments, orders, decrees, permits, concessions,
grants, franchises, licenses, agreements or other governmental restrictions
of any federal, state or local governmental authority within the United
States or any state or territory thereof and which relate to the
environment or the release of any materials into the environment.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, and the regulations promulgated and rulings
issued thereunder.
"ERISA AFFILIATE" means any Person that for the purposes of Title IV
of ERISA is a member of the Borrower's controlled group, or under common
control with the Borrower within the meaning of Section 414 of the Code and
the regulations promulgated and rulings issued thereunder.
"ERISA EVENT" means (i) the occurrence of a reportable event, within
the meaning of Section 4043 of ERISA, unless the 30-day notice requirement
with respect thereto has been waived by the PBGC; (ii) the provision by the
administrator of any Plan of a notice of intent to terminate such Plan,
pursuant to Section 4041(a)(2) of ERISA (including any such notice with
respect to a plan amendment referred to in Section 4041(e) of ERISA);
(iii) the cessation of operations at a facility in the circumstances
described in Section 4068(f) of ERISA; (iv) the withdrawal by the Borrower
or an ERISA Affiliate from a Multiple Employer Plan during a plan year for
which it was a substantial employer, as defined in Section 4001(a)(2) of
ERISA; (v) the failure by the Borrower or any ERISA Affiliate to make a
payment to a Plan required under Section 302(f)(l) of ERISA, which Section
imposes a lien for failure to make required payments; (vi) the adoption of
an amendment to a Plan requiring the provision of security to such Plan,
pursuant to Section 307 of ERISA; or (vii) the institution by the PBGC of
proceedings to terminate a Plan, pursuant to Section 4042 of ERISA, or the
occurrence of any event or condition which might constitute grounds under
Section 4042 of ERISA for the termination of, or the appointment of a
trustee to administer, a Plan.
6
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"EUROCURRENCY LIABILITIES" has the meaning assigned to that term in
Regulation D of the Board of Governors of the Federal Reserve System, as in
effect from time to time.
"EURODOLLAR LENDING OFFICE" means, with respect to each Lender, the
office of such Lender specified as its "Eurodollar Lending Office" opposite
its name on Schedule 1 hereto or in the Assignment and Acceptance pursuant
to which it became a Lender (or, if no such office is specified, its
Domestic Lending Office), or such other office of such Lender as such
Lender may from time to time specify to the Borrower and the Agent.
"EURODOLLAR RATE" means, for any Interest Period for each Eurodollar
Rate Advance comprising part of the same Revolving Borrowing, an interest
rate per annum equal to the rate (rounded upward to the nearest whole
multiple of 1/16 of 1% per annum, if such rate is not such a multiple) per
annum at which deposits in U.S. dollars are offered by the principal office
of the Agent to prime banks in the London interbank market at 11:00 A.M.
(London time) two Business Days before the first day of such Interest
Period in an amount substantially equal to the Agent's Eurodollar Rate
Advance comprising part of such Revolving Borrowing and for a period equal
to such Interest Period.
"EURODOLLAR RATE ADVANCE" means a Revolving Advance which bears
interest as provided in Section 2.07(a)(ii).
"EURODOLLAR RATE RESERVE PERCENTAGE" of any Lender for any Interest
Period for any Eurodollar Rate Advance means the reserve percentage
applicable during such Interest Period (or if more than one such percentage
shall be so applicable, the daily average of such percentages for those
days in such Interest Period during which any such percentage shall be so
applicable) under regulations issued from time to time by the Board of
Governors of the Federal Reserve System (or any successor) for determining
the maximum reserve requirement (including, without limitation, any
emergency, supplemental or other marginal reserve requirement) for such
Lender with respect to liabilities or assets consisting of or including
Eurocurrency Liabilities having a term equal to such Interest Period.
"EVENTS OF DEFAULT" has the meaning specified in Section 6.01.
"EXEMPT ACQUISITION" means, at any date of determination, any
Acquisition by the Borrower and its Subsidiaries of Persons and/or assets
involved (or to be used) in connection with or related to the Borrower's
and its Subsidiaries' existing or related lines of business; PROVIDED, THAT
(i) the aggregate amount of consideration paid by the Borrower or any of
its Subsidiaries in connection with other Exempt Acquisitions in the
twelve-month period (or shorter period of time as may have elapsed since
the date hereof) immediately preceding such Acquisition PLUS the amount to
be paid with respect to such Acquisition at the date of determination does
not exceed the greater of (A) $100,000,000 and (B) 5% of the Borrower's
Consolidated Net Worth as at the end of the Borrower's Fiscal Quarter ended
most recently before the consummation of
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<PAGE>
such Acquisition, (ii) any Acquisition involving a merger to which the
Borrower is a party must provide that the Borrower is the surviving
corporation in such merger and (iii) immediately before and after giving
effect to the consummation of each such Acquisition, no Default has occurred
and is continuing or will exist.
"FEDERAL FUNDS RATE" means, for any period, a fluctuating interest
rate per annum equal for each day during such period to the weighted
average of the rates on overnight Federal funds transactions with members
of the Federal Reserve System arranged by Federal funds brokers, as
published for such day (or, if such day is not a Business Day, for the next
preceding Business Day) by the Federal Reserve Bank of New York, or, if
such rate is not so published for any day which is a Business Day, the
average of the quotations for such day on such transactions received by the
Agent from three Federal funds brokers of recognized standing selected by
it.
"FISCAL QUARTER" means, with respect to any Person, a fiscal quarter
of such Person.
"FISCAL YEAR" means, with respect to any Person, a fiscal year of such
Person.
"FIXED CHARGE COVERAGE RATIO" means, with respect to any Person as at
the end of any period, the ratio of (i) such Person's Consolidated Net
Income (the amount of such Consolidated Net Income, in the case of the
Borrower, to be calculated by adding back thereto (to the extent deducted
therefrom) up to $125,000,000 of restructuring charges incurred by the
Borrower in the Borrower's 1995 Fiscal Year) PLUS Interest Expense PLUS Tax
Expense PLUS Operating Lease Rentals, in each case for such period, to
(ii) such Person's Fixed Charges for such period.
"FIXED CHARGES" means, for any period and without duplication, the sum
of (i) Interest Expense and fees paid on, and amortization of debt discount
in respect of, all Debt (including the interest portion of rentals under
Capital Leases during such period) PLUS (ii) Operating Lease Rentals paid
during such period PLUS (iii) the aggregate principal amount of all Debt
(including the principal portion of rentals under Capital Leases) paid
during such period (excluding (a) voluntary prepayments of principal not
required under the loan documents relating to such Debt, (b) any contingent
portion of the deferred purchase price incurred in connection with any
Acquisition and (c) the principal portion of any one-time repayments of
Indebtedness required to be made as a result of a change of control in
connection with any Acquisition) PLUS (iv) the aggregate amount of all cash
dividends paid by the Borrower during such period.
"FUNDED DEBT" means (i) Debt under this Agreement with respect to
Revolving Advances and (ii) all other Debt which matures more than one year
from the date of creation or matures within one year from such date but is
renewable or extendible, at the option of the debtor, to a date more than
one year from such date or is outstanding under a revolving credit or
similar agreement which obligates the lender or lenders to extend credit
during a period of more than one year from such date.
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<PAGE>
"GUARANTEED DEBT" of any Person means all Debt referred to in clause
(i), (ii), (iii), (iv) or (v) of the definition of "Debt" in this Section
1.01 guaranteed directly or indirectly in any manner by such Person, or in
effect guaranteed directly or indirectly by such Person through an
agreement (i) to pay or purchase such Debt or to advance or supply funds
for the payment or purchase of such Debt, (ii) to purchase, sell or lease
(as lessee or lessor) property, or to purchase or sell services, primarily
for the purpose of enabling the debtor to make payment of such Debt or to
assure the holder of such Debt against loss, (iii) to supply funds to, or
in any other manner invest in, the debtor (including any agreement to pay
for property or services irrespective of whether such property is received
or such services are rendered) or (iv) otherwise to assure a creditor
against loss.
"HAZARDOUS MATERIALS" means any flammable materials, explosives,
radioactive materials, hazardous materials, hazardous wastes, hazardous or
toxic substances, infectious wastes, or related or similar materials,
asbestos or any material containing asbestos, or any other substance or
material as so defined and regulated by any Federal, state or local
environmental law, ordinance, rule or regulation, including, without
limitation, the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended (42 U.S.C. Sections 9601, ET SEQ.), the
Hazardous Materials Transportation Act, as amended (49 U.S.C. Sections
1801, ET SEQ.), RCRA, and the regulations adopted and publications
promulgated pursuant thereto.
"HMO" means a health maintenance organization doing business as such
(or required to qualify or to be licensed as such) under HMO Regulations.
"HMO EVENT" means material non-compliance by the Borrower or any of
its Material Subsidiaries with any of the terms and provisions of the HMO
Regulations pertaining to fiscal soundness, solvency or financial
condition; or the assertion in writing, after the date hereof, by an HMO
Regulator that it intends to take administrative action against the
Borrower or any of its Material Subsidiaries to revoke or modify any
material contract of insurance, license, charter or permit, or to enforce
the fiscal soundness, solvency or financial provisions or requirements of
the HMO Regulations against any of such entities as a result of any material
non-compliance therewith.
"HMO REGULATIONS" means all laws, regulations, directives and
administrative orders applicable under federal or state law to HMO's as
such.
"HMO REGULATOR" means any Person charged with the administration,
oversight or enforcement of an HMO Regulation.
"HMO SUBSIDIARY" means any Subsidiary of the Borrower that is an HMO
at the time of determination.
"INSUFFICIENCY" means, with respect to any Plan, the amount, if any,
of its unfunded benefit liabilities, as defined in Section 4001(a)(18) of
ERISA.
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<PAGE>
"INSURANCE COMPANY" means an organization licensed under the Insurance
Regulations to conduct insurance operations (or an organization required to
be licensed as such).
"INSURANCE REGULATION" means any law, regulation, rule, directive or
order applicable to an Insurance Company as such.
"INSURANCE REGULATOR" means any Person charged with the
administration, oversight or enforcement of any Insurance Regulation.
"INSURANCE SUBSIDIARY" means any Subsidiary of the Borrower that is an
Insurance Company at the time of determination.
"INTEREST EXPENSE" of any Person for any period means the aggregate
amount of interest paid, accrued or scheduled to be paid or accrued in
respect of any Debt (including the interest portion of rentals under
Capital Leases) and all but the principal component of payments in respect
of conditional sales, equipment trust or other title retention agreements
or under a Capital Lease paid, accrued or scheduled to be paid or accrued
by such Person during such period, in each case determined in accordance
with generally accepted accounting principles and excluding periodic
maintenance, insurance, taxes and similar charges not properly
characterized as interest expense under generally accepted accounting
principles.
"INTEREST PERIOD" means, for each Eurodollar Rate Advance comprising
part of the same Revolving Borrowing, the period commencing on the date of
such Eurodollar Rate Advance or the date of Conversion of any Base Rate
Advance into such Eurodollar Rate Advance or the date of continuation of
any Eurodollar Rate Advance as an Eurodollar Rate Advance and ending on the
last day of the period selected by the Borrower pursuant to the provisions
below, and thereafter, each subsequent period commencing on the last day of
the immediately preceding Interest Period and ending on the last day of the
period selected by the Borrower pursuant to the provisions below. The
duration of each such Interest Period shall be 1, 2, 3, 4, or 6 months, in
each case as the Borrower may select in a Notice of Revolving Borrowing
and/or a Notice of Conversion/Continuation for such Eurodollar Rate
Advance; PROVIDED, HOWEVER, that:
(i) the Borrower may not select any Interest Period which ends
after the Termination Date;
(ii) Interest Periods commencing on the same date for Eurodollar
Rate Advances comprising part of the same Revolving Borrowing shall be
of the same duration;
(iii) whenever the last day of any Interest Period would
otherwise occur on a day other than a Business Day, the last day of
such Interest Period shall be extended to occur on the next succeeding
Business Day, PROVIDED, HOWEVER, that if such extension would cause
the last day of such Interest
10
<PAGE>
Period to occur in the next following calendar month, the last day of
such Interest Period shall occur on the next preceding Business Day;
and
(iv) the Borrower may not have more than twelve Eurodollar Rate
Borrowings outstanding at any given time.
"INVESTMENT" means, with respect to any Person, (i) any amount paid by
such Person, directly or indirectly, or any transfer of property by such
Person, directly or indirectly (such amount to be the fair market value of
such property at the time of transfer), to any other Person for capital
stock of, or as a capital contribution to any other Person, or for all or
substantially all of the assets of such Person or a line of business or
businesses owned by such Person, and (ii) any direct or indirect loan or
advance to any other Person.
"IRS" means the Internal Revenue Service or any successor thereto.
"LEASEHOLDS" means all of the right, title and interest of the
Borrower or any of its Subsidiaries in, to and under any leases, licenses
or other agreements granting rights to enter, occupy or use any land,
improvements or fixtures (to the extent interests arise therein under the
real property law of the jurisdiction where located).
"LENDERS" means the Banks listed on the signature pages hereto and
each Eligible Assignee that becomes a party hereto pursuant to Section
8.07.
"LOAN DOCUMENTS" means this Agreement and the Notes, in each case as
amended, supplemented or otherwise modified from time to time.
"MAJORITY LENDERS" means at any time Lenders owed more than 66-2/3% of
the then aggregate unpaid principal amount of the Revolving Advances owing
to Lenders, or, if no such principal amount is then outstanding, Lenders
having more than 66-2/3% of the Commitments.
"MATERIAL ADVERSE CHANGE" means a material adverse change in the
business, condition (financial or otherwise) or in the results of
operations of the Borrower and its Subsidiaries taken as a whole.
"MATERIAL ADVERSE EFFECT" means, when referring to the taking of an
action or the omission to take an action, that such action, if taken, or
omission, would have a material adverse effect on the business, condition
(financial or otherwise) or results of operations of the Borrower and its
Subsidiaries taken as a whole.
"MATERIAL SUBSIDIARY" means each Subsidiary that (i) for the most
recent Fiscal Year of the Borrower, accounted for more than 5% of the
Consolidated revenues of the Borrower or (ii) as at the end of such fiscal
year, was the owner, directly or indirectly, of more than 5% of the
Consolidated assets of the Borrower, all as shown on its Consolidated
financial statements for such Fiscal Year, PROVIDED that in the case of a
Subsidiary acquired during a Fiscal Year, clause (i) shall not be
applicable until
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<PAGE>
the following Fiscal Year and clause (ii) shall be determined on a pro forma
basis in the case of such Subsidiary, giving effect to such acquisition as
if it occurred at the end of such Fiscal Year.
"MOODY'S" means Moody's Investor Service, Inc.
"MULTIEMPLOYER PLAN" means a "multiemployer plan" as defined in
Section 4001(a)(3) of ERISA to which the Borrower or any ERISA Affiliate is
making or accruing an obligation to make contributions, or has within any
of the preceding five plan years made or accrued an obligation to make
contributions, such plan being maintained pursuant to one or more
collective bargaining agreements.
"MULTIPLE EMPLOYER PLAN" means a single employer plan, as defined in
Section 4001(a)(15) of ERISA, which (i) is maintained for employees of the
Borrower or an ERISA Affiliate and at least one Person other than the
Borrower and its ERISA Affiliates or (ii) was so maintained and in respect
of which the Borrower or any ERISA Affiliate could have liability under
Section 4064 or 4069 of ERISA in the event such plan has been or were to be
terminated.
"NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATION" means Moody's,
S&P, Duff & Phelps Inc., Fitch Investors Service Inc., International Bank
Center of Atlanta or Thompson Bank Watch, Inc.
"NET CASH PROCEEDS" means, with respect to any sale of equity, the
cash proceeds thereof (including, without limitation, all deferred cash
proceeds) received by the Borrower, net of (i) brokerage and underwriting
commissions and other fees and expenses related thereto and (ii) provision
for all taxes payable as a result of such sale.
"NET INCOME" means, for any period, net income (or loss) after taxes
and extraordinary items determined in accordance with generally accepted
accounting principles, and, to the extent not deducted therefrom, net
income (or loss) after taxes and extraordinary items determined in
accordance with generally accepted accounting principles associated with
the portion of capital stock of any Subsidiary that is not owned, directly
or indirectly, by the Borrower.
"NET WORTH" of any Person on any date of determination means an amount
equal to the excess of Total Assets over Total Liabilities of such Person.
"NOTES" means the Revolving Notes.
"NOTICE OF REVOLVING BORROWING" has the meaning ascribed thereto in
Section 2.02 hereof.
"NOTICE OF CONVERSION/CONTINUATION" means a written notice,
substantially in the form of Exhibit D hereto, delivered in accordance
with, and within the period specified in, Section 2.10 hereof, wherein the
Borrower elects to Convert or continue
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<PAGE>
Revolving Advances and/or elects an Interest Period and Type for such
Converted or continued Revolving Advances.
"OBLIGATIONS" means all obligations of the Borrower now or hereafter
existing under the Loan Documents, whether for principal, interest, fees,
expenses, indemnification or otherwise, including without limitation, all
amounts accruing during a proceeding under the United States Bankruptcy
Code and the amounts payable to Agent pursuant to the letter agreement
referred to in Section 2.03(b).
"OPERATING LEASE" means any noncancellable lease of property having a
term more than one year (real, personal or mixed) which lease does not
constitute a Capital Lease.
"OPERATING LEASE RENTALS" means all rents and other amounts paid or
accrued by the Borrower and its Subsidiaries under and with respect to
Operating Leases during and for the relevant period, but excluding periodic
maintenance, insurance, taxes and similar charges not properly
characterized as rent under generally accepted accounting principles.
"OTHER TAXES" has the meaning specified in Section 2.14.
"PBGC" means the Pension Benefit Guaranty Corporation.
"PERMITTED ACQUISITIONS" means Acquisitions by the Borrower and its
Subsidiaries of Persons and/or assets involved (or to be used) in
connection with or related to the Borrower's and its Subsidiaries' existing
or related lines of business PROVIDED, that (i) any Acquisition involving a
merger to which the Borrower is a party must provide that the Borrower is
the surviving corporation in such merger, (ii) immediately before and after
giving effect to the consummation of each Acquisition, no Default has
occurred and is continuing or will exist; and (iii) the Borrower shall have
complied with the requirements of Section 5.05 if applicable.
"PERMITTED INVESTMENTS" means (i) Cash Equivalents; (ii) commercial
paper issued by companies incorporated in the United States and having a
short-term rating at the time of acquisition equivalent to A-1 or higher by
any Nationally Recognized Statistical Rating Organization and maturing
within 270 days from the date of acquisition; (iii) bonds and notes issued
by companies incorporated in the United States and having a long-term
rating at the time of acquisition equivalent to BBB or higher by any
Nationally Recognized Statistical Rating Organization and having a maturity
within seven years from the date of acquisition; (iv) auction rate
preferred stock issued by companies incorporated in the United States and
having a long-term rating at the time of acquisition equivalent to BBB or
higher by any Nationally Recognized Statistical Rating Organization;
(v) obligations of any foreign government or authority of any country in
which the Borrower or its Subsidiaries conducts business, which obligations
have a rating at the time of acquisition equivalent to A or higher by any
Nationally Recognized Statistical Rating Organization and which mature
within seven years from the date of acquisition; (vi) publicly traded
common and
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<PAGE>
preferred stock issued by companies incorporated in the United States and
which at the time of acquisition either (a) has outstanding a series of
bonds or notes which have a long-term rating equivalent to BBB or higher by
any Nationally Recognized Statistical Rating Organization or (b) (i) is in
the same or a related line of business as the Borrower or any of its
Material Subsidiaries; (ii) has been subject to the requirements of Section
12 or 15(d) of the Securities Exchange Act of 1934 and has filed all the
material required to be filed pursuant to Sections 13, 14 or 15(d) thereof
for the preceding twelve calendar months; and (iii) has not, nor has any of
its consolidated subsidiaries, since the end of the last fiscal year for
which certified financial statements were included in a report filed
pursuant to the Securities Exchange Act of 1934, (A) failed to pay any
dividend or sinking fund installment on preferred stock or (B) defaulted on
any Indebtedness which could, with the giving of notice or lapse of time or
both, result in an amount equal to or greater than 10% of the consolidated
net income of such company, as reported in the most recent certified
financial statements included in a report filed pursuant to the Securities
Exchange Act of 1934, becoming due and payable; PROVIDED, that no more than
4.9% of any class of outstanding equity securities of any company that is
subject to the reporting requirements of the Securities Exchange Act of 1934
may be held by the Borrower and its Subsidiaries at any one time; and (vii)
other Investments not otherwise described above acquired as a result of a
Permitted Investment, Permitted Acquisition or Exempt Acquisition so long as
such Investment was an Investment of the acquired company on the date such
company was acquired by the Borrower or any of its Subsidiaries and was not
made at the request or instigation of the Borrower or any of its
Subsidiaries. Notwithstanding the foregoing, (a) any Subsidiary licensed in
any jurisdiction to transact life, accident, health, disability or workers'
compensation insurance business may make Investments otherwise permitted
under clauses (i), (ii), (iii), and (v) above having maturity dates later
than those specified under such clauses so long as any such Investment by
any such Subsidiary is rated at the time of acquisition "A" or better by a
Nationally Recognized Statistical Rating Organization, (b) at no time may
more than 5% of the aggregate of all Investments under clauses (i), (ii),
(iii), (iv), (v), (vi) and (vii) represent the securities of any single
Person other than the United States Federal Government or agencies thereof
or issuers whose obligations are guaranteed by the United States Federal
Government or an agency thereof (provided that Investments in the securities
of mutual funds shall not be so limited as long as the mutual fund does not
invest more than 5% of its assets in the securities of any single Person),
(c) at no time may more than 15% of the aggregate of all Investments under
clauses (i), (ii), (iii), (iv), (v), (vi) and (vii) represent Investments
under clause (vi), (d) at no time may more than 5% of the aggregate of all
Investments under clauses (i), (ii), (iii), (iv), (v), (vi) and (vii)
represent Investments under clause (vii), and (e) any Investments permitted
by clause (vii) and not otherwise permitted by clauses (i), (ii), (iii),
(iv), (v) or (vi) shall be disposed of within one year of the date that such
company was acquired by the Borrower or such Subsidiary. For purposes of
the foregoing, "A", "A-1" and "BBB" shall have the meanings assigned to
such terms by S&P as of the date hereof and the comparable rating terms
utilized by any other Nationally Recognized Statistical Rating Organization.
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<PAGE>
"PERMITTED LIEN" means any of the following:
(i) liens for taxes, assessments or governmental charges or
levies not yet due and payable;
(ii) inchoate liens imposed by law but not yet having attached to
any property, such as materialmen's, mechanics', carriers', worker's,
employees' and repairmen's liens and other similar liens arising in
the ordinary course of the Borrower's or any of its Subsidiaries'
business securing obligations which are not overdue for a period of
more than ninety (90) days;
(iii) liens imposed by law which have attached to property
but which (1) secure obligations which do not exceed $250,000 in the
aggregate for all such liens described in this clause (iii), and (2)
which in all cases are being contested in good faith and for which
adequate reserves have been made in accordance with generally accepted
accounting principles;
(iv) pledges or deposits to secure obligations under workmen's
compensation laws or similar legislation or to secure public or
statutory obligations of the Borrower or any of its Subsidiaries or
security deposits (on customary terms) to secure performance under
Leaseholds and under other contracts entered into in the ordinary
course;
(v) purchase money liens or purchase money security interests
upon or in any property; PROVIDED, HOWEVER, that no lien or security
interest referred to in this clause (v) shall extend to or cover any
property other than the related property being acquired or leased (as
the case may be) or shall have been incurred in connection with any
Acquisition or at the request or instigation of the Borrower or any of
its Subsidiaries; and PROVIDED, FURTHER, the Indebtedness or other
obligation secured by such purchase money liens or purchase money
security interests shall not, in any event, encumber any capital stock
of the Borrower or any of the Borrower's Subsidiaries;
(vi) liens and interests of the lessor of the type customarily
arising under any lease or agreement to lease with respect to property
located on the premises covered by such lease;
(vii) liens existing on the date hereof;
(viii) any lien or security interest on property or assets
acquired by the Borrower or its Subsidiaries after the date hereof,
PROVIDED, THAT, such lien or security interest existed on the date
such property or assets were acquired and was not incurred at the
request or instigation of the Borrower or any of its Subsidiaries and
PROVIDED, FURTHER, that such lien or security interest shall not, in
any event, encumber any capital stock of the Borrower or any of the
Borrower's Subsidiaries;
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<PAGE>
(ix) liens on the property or assets of any Subsidiary of the
Borrower granted in favor of any HMO Subsidiary or Insurance
Subsidiary to secure intercompany loans or advances made by such HMO
Subsidiary or Insurance Subsidiary to finance construction of new
facilities, where such liens are granted in order to enable such HMO
Subsidiary or Insurance Subsidiary to maintain compliance with, or to
preserve the level of its tangible net equity for purposes of, the HMO
Regulations or Insurance Regulations;
(x) liens on the property or assets of Subsidiaries of the
Borrower not otherwise described in clauses (i) through (ix) above
securing obligations not in excess of $65,000,000; and
(xi) any liens granted in connection with the refinancing or
extension of any of the indebtedness underlying the liens permitted
under clauses (i) through (x) above; PROVIDED that such liens replace
or renew such permitted liens but do not extend them to other
property.
"PERSON" means an individual, partnership, corporation (including a
business trust), joint stock company, trust, unincorporated association,
joint venture or other entity, or a government or any political subdivision
or agency thereof.
"PLAN" means a Single Employer Plan or a Multiple Employer Plan.
"PREFERRED STOCK" of any Person means the capital stock of such Person
of any class or classes (however designated) that ranks prior, as to the
payment of dividends or as to the distribution of assets upon any voluntary
or involuntary liquidation, dissolution or winding up of such Person, to
shares of capital stock of any other class of such Person.
"PUBLIC NOTES" means the promissory notes issued by the Borrower
pursuant to, and as described in, the indenture referred to in the
Borrower's registration statement on Form S-3 (registration statement
number 33-61684), and on Form T-1 (registration statement number 22-24210),
in each case as amended, supplemented and modified from time to time.
"RCRA" means the Resource Conservation and Recovery Act, 42 U.S.C.
Section 6901 ET SEQ. (1976) and the regulations adopted pursuant thereto,
as amended from time to time.
"REAL PROPERTY" means all of the right, title and interest of the
Borrower and any of its Subsidiaries in and to land, improvements and
fixtures (to the extent interests therein arise under the real property law
of the jurisdiction where located).
"REGISTER" has the meaning specified in Section 8.07(c).
"RESPONSIBLE OFFICER" means, with respect to any certificate, report
or notice to be delivered or given hereunder, unless the context otherwise
requires, the
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<PAGE>
president, chief executive officer or chief financial officer or other
officer who in the normal performance of his or her operational duties
would have knowledge of the subject matter relating to such certificate,
report or notice.
"REVOLVING ADVANCE" means an advance by a lender to the Borrower as
part of a Revolving Borrowing and refers to a Base Rate Advance or a
Eurodollar Advance, each of which shall be a "TYPE" of Revolving Advance.
"REVOLVING BORROWING" means a borrowing consisting of simultaneous
Revolving Advances of the same Type made by each of the Lenders pursuant to
Section 2.01.
"REVOLVING NOTE" means a promissory note of the Borrower payable to
the order of any Lender, in substantially the form of Exhibit B-1 hereto,
evidencing the aggregate indebtedness of the Borrower to such Lender
resulting from the Revolving Advances made by such Lender.
"SINGLE-EMPLOYER PLAN" means a single employer plan, as defined in
Section 4001(a)(15) of ERISA, which (i) is maintained for employees of the
Borrower or an ERISA Affiliate and no Person other than the Borrower and
its ERISA Affiliates or (ii) was so maintained and in respect of which the
Borrower or an ERISA Affiliate could have liability under Section 4069 of
ERISA in the event such plan has been or were to be terminated.
"S&P" means Standard & Poor's Corporation.
"SOLVENT" means, with respect to any Person on a particular date, that
on such date (i) the fair value of the property of such Person is greater
than the total amount of liabilities, including, without limitation,
contingent liabilities, of such Person, (ii) the present fair salable value
of the assets of such Person is not less than the amount that will be
required to pay the probable liability of such Person on its debts as they
become absolute and matured, (iii) such Person is able to pay its debts and
other liabilities, contingent obligations and other commitments as they
mature in the normal course of business, (iv) such Person does not intend
to, and does not believe that it will, incur debts or liabilities beyond
such Person's ability to pay as such debts and liabilities mature, (v) such
Person is not engaged in a business or a transaction, and is not about to
engage in a business or a transaction, for which such Person's property
would constitute unreasonably small capital after giving due consideration
to the prevailing practice in the industry in which such Person is engaged,
and (vi) such Person is solvent under all applicable HMO Regulations. In
computing the amount of contingent liabilities at any time, it is intended
that such liabilities will be computed at the amount which, in light of all
the facts and circumstances existing at such time, represents the amount
that can reasonably be expected to become an actual or matured liability.
"SUBSIDIARY" of any Person means any corporation, partnership, joint
venture, trust or estate of which (or in which) more than 50% of:
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(i) the outstanding capital stock having ordinary voting power
to elect a majority of the Board of Directors of such corporation
(irrespective of whether or not at the time capital stock of any other
class or classes of such corporation shall or might have voting power
upon the occurrence of any contingency),
(ii) the interest in the capital or profits of such partnership
or joint venture, or
(iii) the beneficial interest of such trust or estate,
is at the time directly or indirectly owned by such Person, by such Person
and one or more of its other Subsidiaries, or by one or more of such
Person's other Subsidiaries.
"TAX EXPENSE" of any Person for any period means the aggregate amount
of taxes (other than sales or use taxes) paid or accrued by such Person
during such period, determined in accordance with generally accepted
accounting principles.
"TERMINATION DATE" means the day 364 days after the date hereof or
such earlier date of termination in whole of the Commitments pursuant to
Section 6.01 hereof or otherwise.
"TOTAL ASSETS" of any Person means all property, whether real,
personal, tangible, intangible or otherwise, that, in accordance with
generally accepted accounting principles, should be included in determining
total assets as shown on the assets portion of a balance sheet of such
Person.
"TOTAL CAPITALIZATION" of any Person, as of the date of determination,
means the sum of such Person's Funded Debt plus Net Worth.
"TOTAL DEBT/TOTAL CAPITALIZATION RATIO" of any Person means, at any
date of determination, the ratio that such Person's Funded Debt at such
date of determination bears to such Person's Total Capitalization.
"TOTAL LIABILITIES" of any Person at any date means all obligations
that, in accordance with generally accepted accounting principles, would be
included in determining total liabilities as shown on the liabilities side
of a balance sheet of such Person at such date.
"WELFARE PLAN" means a welfare plan, as defined in Section 3(1) of
ERISA, which section covers plans, funds and programs providing (among
other things) medical, surgical, or hospital care or benefits, or benefits
in the event of sickness, accident, disability, death or unemployment,
together with plans which provide worker's compensation, unemployment
compensation or disability insurance benefits.
"WITHDRAWAL LIABILITY" has the meaning given such term under Part I of
Subtitle E of Title IV of ERISA.
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SECTION 1.02. COMPUTATION OF TIME PERIODS. In this Agreement in the
computation of periods of time from a specified date to a later specified date,
the word "from" means "from and including" and the words "to" and "until" each
means "to but excluding".
SECTION 1.03. ACCOUNTING TERMS. All accounting terms not
specifically defined herein shall be construed in accordance with United States
generally accepted accounting principles consistently applied and consistent
with those applied in the preparation of the financial statements referred to in
Section 4.01(f). If any changes in accounting principles from those used in the
preparation of the financial statements referred to in Section 4.01(f) are
hereafter occasioned by promulgation of rules, regulations, pronouncements or
opinions by or are otherwise required by the Financial Accounting Standards
Board or the American Institute of Certified Public Accountants (or successors
thereto or agencies with similar functions), and any of such changes results in
a change in the method of calculation of, or affects the results of such
calculation of, any of the financial covenants, standards or terms found herein,
then the parties hereto agree to enter into and diligently pursue negotiations
in order to amend such financial covenants, standards or terms so as to
equitably reflect such changes, with the desired result that the criteria for
evaluating the Borrower's financial condition and results of operations shall be
the same after such changes as if such changes had not been made; PROVIDED,
HOWEVER, that if the parties, after such negotiations, cannot reach agreement on
amendments to such financial covenants, standards or terms, then the Borrower's
compliance or noncompliance therewith shall be determined as if such changes in
accounting principles had not occurred.
SECTION 1.04. REFERENCES. Unless otherwise indicated, all references
to Sections, subparagraphs, subsections, headings, Exhibits and Schedules made
herein are references to the Sections, subparagraphs, subsections, headings,
Exhibits and Schedules hereof or hereto.
SECTION 1.05. FAS 115. In calculating the Borrower's Consolidated
Net Worth for the first three Fiscal Quarters of the Borrower's Fiscal Year
(including, without limitation, for the purposes of Section 5.03(a)),
fluctuations (both positive and negative) resulting from the Borrower marking to
market (the "Mark-to-Market Effect") its Investments as required by FAS 115
shall not be taken into account. The Mark-to-Market Effect shall be fully
reflected in calculating the Borrower's Consolidated Net Worth as at the end of
the Borrower's fourth Fiscal Quarter in each Fiscal Year.
ARTICLE II
AMOUNTS AND TERMS OF THE ADVANCES
SECTION 2.01. THE REVOLVING ADVANCES. Each Lender severally agrees,
on the terms and conditions hereinafter set forth, to make Revolving Advances to
the Borrower from time to time on any Business Day during the period from the
date hereof until the Termination Date in an aggregate amount not to exceed at
any time outstanding the amount set forth opposite such Lender's name on the
signature pages hereof or, if such Lender has
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entered into an Assignment and Acceptance, set forth for such Lender in the
Register maintained by the Agent pursuant to Section 8.07(c), as such amount
may be reduced pursuant to Section 2.05 (such Lender's "Commitment"). Each
Revolving Borrowing shall be in an aggregate amount not less than $5,000,000
or an integral multiple of $1,000,000 in excess thereof and shall consist of
Revolving Advances of the same Type made on the same day by the Lenders ratably
according to their respective Commitments. Within the limits of each Lender's
Commitment, the Borrower may from time to time borrow under this Section 2.01,
prepay pursuant to Section 2.09 and reborrow under this Section 2.01.
SECTION 2.02. MAKING THE ADVANCES. (a) Each Revolving Borrowing
shall be made on notice, given not later than 1:00 P.M. (New York City time) on
the third Business Day prior to the date of the proposed Revolving Borrowing in
the case of a Revolving Advance consisting of Eurodollar Rate Advances, or the
first Business Day prior to the date of the proposed Revolving Borrowing in the
case of a Revolving Borrowing consisting of Base Rate advances, by the Borrower
to the Agent, which shall give to each Lender prompt notice thereof by facsimile
or telex. Each such notice of a Revolving Borrowing (a "Notice of Revolving
Borrowing") shall be by facsimile or telex, confirmed immediately in writing, in
substantially the form of Exhibit C-1 hereto, specifying therein the requested
(i) date of such Borrowing, (ii) Type of Advances comprising such Revolving
Borrowing, (iii) aggregate amount of such Revolving Borrowing, and (iv) in the
case of a Revolving Borrowing consisting of Eurodollar Rate Advances, initial
Interest Period for each such Advance. Each Lender shall, before 1:00 P.M. (New
York City time) on the date of such Revolving Borrowing, make available for the
account of its Applicable Lending Office to the Agent at its address referred to
in Section 8.02, in same day funds, such Lender's ratable portion of such
Revolving Borrowing. Upon the Agent's receipt of such funds and upon
fulfillment of the applicable conditions set forth in Article III, the Agent
will make such funds available to the Borrower at the Agent's aforesaid address.
(b) Anything in subsection (a) above to the contrary notwithstanding,
(i) the Borrower may not select Eurodollar Rate Advances for any
Revolving Borrowing if the aggregate amount of such Borrowing is less than
$1,000,000 multiplied by the number of Lenders;
(ii) if any Lender shall, at least one Business Day before the
date of any requested Revolving Borrowing, notify the Agent that the
introduction of or any change in or in the interpretation of any law or
regulation makes it unlawful, or that any central bank or other
governmental authority asserts that it is unlawful, for such Lender or its
Eurodollar Lending Office to perform its obligations hereunder to make
Eurodollar Rate Advances or to fund or maintain Eurodollar Rate Advances
hereunder, the right of the Borrower to select Eurodollar Rate Advances for
such Revolving Borrowing or any subsequent Revolving Borrowing shall be
suspended until such Lender shall notify the Agent that the circumstances
causing such suspension no longer exist, and each Revolving Advance
comprising such Revolving Borrowing shall be a Base Rate Advance; and
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(iii) if the Majority Lenders shall, at least one Business
Day before the date of any requested Revolving Borrowing, notify the Agent
that the Eurodollar Rate for Eurodollar Rate Advances comprising such
Revolving Borrowing will not adequately reflect the cost to such Majority
Lenders of making, funding or maintaining their respective Eurodollar Rate
Advances for such Revolving Borrowing, the right of the Borrower to select
Eurodollar Rate Advances for such Revolving Borrowing or any subsequent
Revolving Borrowing shall be suspended until the Agent shall notify the
Borrower and the Lenders that the circumstances causing such suspension no
longer exist, and each Revolving Advance comprising such Revolving
Borrowing shall be a Base Rate Advance.
(c) Each Notice of Revolving Borrowing shall be irrevocable and
binding on the Borrower. In the case of any Revolving Borrowing which the
related Notice of Revolving Borrowing specifies is to be comprised of Eurodollar
Rate Advances, the Borrower shall indemnify each Lender against any loss
(excluding loss of anticipated profits), cost or expense incurred by such Lender
as a result of any failure to fulfill on or before the date specified in such
Notice of Revolving Borrowing for such Revolving Borrowing the applicable
conditions set forth in Article III, including, without limitation, any loss,
cost or expense incurred by reason of the liquidation or reemployment of
deposits or other funds acquired by such Lender to fund the Revolving Advance to
be made by such Lender as part of such Revolving Borrowing when such Revolving
Advance, as a result of such failure, is not made on such date.
(d) Unless the Agent shall have received notice from a Lender prior
to the date of any Revolving Borrowing that such Lender will not make available
to the Agent such Lender's ratable portion of such Revolving Borrowing, the
Agent may assume that such Lender has made such portion available to the Agent
on the date of such Revolving Borrowing in accordance with subsection (a) of
this Section 2.02 and the Agent may, in reliance upon such assumption, make
available to the Borrower on such date a corresponding amount. If and to the
extent that such Lender shall not have so made such ratable portion available to
the Agent, such Lender and the Borrower severally agree to repay to the Agent
forthwith on demand such corresponding amount together with interest thereon,
for each day from the date such amount is made available to the Borrower until
the date such amount is repaid to the Agent, at (i) in the case of the Borrower,
the interest rate applicable at the time to Revolving Advances comprising such
Revolving Borrowing and (ii) in the case of such Lender, the Federal Funds Rate.
If such Lender shall repay to the Agent such corresponding amount, such amount
so repaid shall constitute such Lender's Advance as part of such Revolving
Borrowing for purposes of this Agreement.
(e) The failure of any Lender to make the Revolving Advance to be
made by it as part of any Revolving Borrowing shall not relieve any other Lender
of its obligation, if any, hereunder to make its Revolving Advance on the date
of such Borrowing, but no Lender shall be responsible for the failure of any
other Lender to make the Revolving Advance to be made by such other Lender on
the date of any Revolving Borrowing. Any Lender that fails to make a Revolving
Advance on the occasion of any Borrowing with respect to which all conditions to
lending have been satisfied in accordance with the terms of this Agreement shall
be in breach of this Agreement.
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SECTION 2.03. FEES. (a) FACILITY FEE. The Borrower agrees to pay
to the Agent for the account of each Lender a facility fee on the aggregate
amount of such Lender's Commitment from the date hereof in the case of each Bank
and from the effective date specified in the Assignment and Acceptance pursuant
to which it became a Lender in the case of each other Lender until the
Termination Date, at a rate per annum equal to .100%, payable in arrears on the
last day of each September, December, March and June during the term of such
Lender's Commitment, commencing December 31, 1996, and on the Termination Date.
(b) FEES. The Borrower agrees to pay to Citibank the fees and other
consideration in such amounts and payable at such times as are specified in the
letter agreement dated December , 1996 between the Borrower and Citibank.
SECTION 2.04. TERMINATION OR REDUCTION OF THE COMMITMENTS. The
Borrower shall have the right, upon at least three Business Days' notice to the
Agent, to terminate in whole or reduce ratably in part the unused portions of
the respective Commitments of the Lenders, PROVIDED that each partial reduction
shall be in the aggregate amount of $1,000,000 or an integral $1,000,000
multiple in excess thereof.
SECTION 2.05. REPAYMENT OF REVOLVING ADVANCES. The Borrower shall
repay to the Agent for the ratable account of the Lenders on the Termination
Date the principal amount of each Revolving Advance made by each Lender in
accordance with the Revolving Note to the order of such Lender.
SECTION 2.06. INTEREST ON REVOLVING ADVANCES. (a) SCHEDULED
INTEREST. The Borrower shall pay interest on the unpaid principal amount of
each Revolving Advance made by each Lender from the date of such Revolving
Advance until such principal amount shall be paid in full, at the following
rates per annum:
(i) BASE RATE ADVANCES. During such periods as such Revolving
Advance is a Base Rate Advance, a rate per annum equal at all times to the
Base Rate in effect from time to time, payable quarterly in arrears on the
last day of each September, December, March, and June during such periods
and on the date such Base Rate Advance shall be Converted or paid in full.
(ii) EURODOLLAR RATE ADVANCES. During such periods as such
Revolving Advance is a Eurodollar Rate Advance, a rate per annum equal at
all times during each Interest Period for such Revolving Advance to the sum
of (x) the Eurodollar Rate for such Interest Period for such Revolving
Advance PLUS (y) .250%, payable in arrears on the last day of such Interest
Period and, if such Interest Period has a duration of more than three
months, on each day which occurs during such Interest Period every three
months from the first day of such Interest Period. On the last day of each
Interest Period, the unpaid principal balance thereof shall automatically
become and bear interest as a Base Rate Advance, except to the extent that
the Borrower has elected to pay interest on all or any portion of such
amount for a new Interest Period commencing on such day in accordance with
Section 2.10 and by timely delivering a Notice of Conversion/Continuation
pursuant to Section 2.10.
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(b) DEFAULT INTEREST. The Borrower shall pay interest on the unpaid
principal amount of each Revolving Advance that is not paid when due and on the
unpaid amount of all interest, fees and other amounts payable hereunder that is
not paid when due, payable on demand, at a rate per annum equal at all times to
(i) in the case of any amount of principal, the greater of (x) 2% per annum
above the rate per annum required to be paid on such Revolving Advance
immediately prior to the date on which such amount became due and (y) 2% per
annum above the Base Rate in effect from time to time and (ii) in the case of
all other amounts, 2% per annum above the Base Rate in effect from time to time.
SECTION 2.07. ADDITIONAL INTEREST ON EURODOLLAR RATE ADVANCES. The
Borrower shall pay to each Lender, so long as such Lender shall be required
under regulations of the Board of Governors of the Federal Reserve System to
maintain reserves with respect to liabilities or assets consisting of or
including Eurocurrency Liabilities, additional interest on the unpaid principal
amount of each Eurodollar Rate Advance of such Lender, from the date of such
Revolving Advance until such principal amount is paid in full, at an interest
rate per annum equal at all times to the remainder obtained by subtracting
(i) the Eurodollar Rate for the Interest Period for such Revolving Advance from
(ii) the rate obtained by dividing such Eurodollar Rate by a percentage equal to
100% minus the Eurodollar Rate Reserve Percentage of such Lender for such
Interest Period, payable on each date on which interest is payable on such
Revolving Advance. Such additional interest shall be determined by such Lender
and notified to the Borrower through the Agent and any such determination shall
be conclusive and binding for all purposes absent manifest error.
SECTION 2.08. INTEREST RATE AND FACILITY FEE DETERMINATION. (a) The
Agent shall give prompt notice to the Borrower and the Lenders of the applicable
interest rate determined by the Agent for purposes of Section 2.06(a)(i) or
(ii), which shall be binding on the Borrower and Lenders absent manifest error.
(b) If, with respect to any Eurodollar Rate Advances, the Majority
Lenders notify the Agent that the Eurodollar Rate for any Interest Period for
such Advances will not adequately reflect the cost to such Majority Lenders of
making, funding or maintaining their respective Eurodollar Rate Advances for
such Interest Period, the Agent shall forthwith so notify the Borrower and the
Lenders, whereupon
(i) each Eurodollar Rate Advance will automatically, on the last
day of the then existing Interest Period therefor, Convert into a Base Rate
Advance, and
(ii) the obligation of the Lenders to make, or to Convert
Revolving Advances into, Eurodollar Rate Advances shall be suspended until
the Agent shall notify the Borrower and the Lenders that the circumstances
causing such suspension no longer exist.
(c) If the Borrower shall fail to select the duration of any Interest
Period for any Eurodollar Rate Advances in accordance with the provisions
contained in the definition of "Interest Period" in Section 1.01, the Agent will
forthwith so notify the
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Borrower and the Lenders and such Advances will automatically, on the last day
of the then existing Interest Period therefor, Convert into Base Rate Advances.
(d) On the date on which the aggregate unpaid principal amount of
Revolving Advances comprising any Revolving Borrowing shall be reduced, by
payment or prepayment or otherwise, to less than $1,000,000 multiplied by the
number of lenders, such Revolving Advances shall, if they are Eurodollar Rate
Advances, automatically Convert into Base Rate Advances, and on and after such
date the right of the Borrower to Convert such Revolving Advances into
Eurodollar Advances shall terminate.
SECTION 2.09. PREPAYMENTS OF REVOLVING ADVANCES. The Borrower may,
upon at least one Business Day's notice to the Agent in the case of Base Rate
Advances, and three Business Days' notice to the Agent in the case of Eurodollar
Rate Advances, stating the proposed date and aggregate principal amount of the
prepayment, and if such notice is given the Borrower shall, prepay the
outstanding principal amounts of the Advances comprising part of the same
Revolving Borrowing in whole or ratably in part, together with accrued interest
to the date of such prepayment on the principal amount prepaid; PROVIDED,
HOWEVER, that (x) each partial prepayment shall be in an aggregate principal
amount not less than $1,000,000 and in $100,000 integral multiples thereof and
(y) in the case of any such prepayment of a Eurodollar Rate Advance, the
Borrower shall be obligated to reimburse the Lenders in respect thereof pursuant
to Section 8.04(c).
SECTION 2.10. NOTICE OF CONVERSION/CONTINUATION. (a) The Borrower
may on any Business Day, upon delivery of a Notice of Conversion/Continuation
given to the Agent not later than 12:00 P.M. (New York City time) on the third
Business Day prior to the date of the proposed Conversion or continuation and
subject to the other provisions hereof, continue Eurodollar Rate Advances
comprising part of the same Revolving Borrowing as Eurodollar Rate Advances with
the duration of the Interest Periods therefor to be specified in the Notice of
Conversion/Continuation or Convert all Revolving Advances of one Type comprising
part of the same Revolving Borrowing into Revolving Advances of another Type;
PROVIDED, HOWEVER, that any Conversion of Eurodollar Rate Advances into Base
Rate Advances shall be made on, and only on, the last day of the Interest Period
for such Eurodollar Rate Advances, any Conversion of Base Rate Advances into
Eurodollar Rate Advances shall be in an amount not less than the minimum amount
specified in Section 2.02(b) and no Conversion of Base Rate Advances into
Eurodollar Advances shall result in more separate Eurodollar Rate Borrowings
than permitted under the definition of Interest Period in Section 1.01;
PROVIDED, FURTHER, that if an Event of Default has occurred and is continuing,
the Borrower may not Convert any Base Rate Advance into a Eurodollar Rate
Advance and may not continue any Eurodollar Rate Advance as a Eurodollar Rate
Advance and each such Eurodollar Rate Advance shall automatically Convert to a
Base Rate Advance on the last day of the Interest Period for such Eurodollar
Rate Advance. Each such Notice of a Conversion/Continuation shall, within the
restrictions specified above, specify (i) the date of such Conversion, (ii) the
Revolving Advances to be Converted, (iii) if such Conversion is into Eurodollar
Rate Advances, the duration of the Interest Period for each such Revolving
Advance and (iv) the Eurodollar Rate Advances to be continued as Eurodollar Rate
Advances and the duration of the Interest Periods therefor.
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SECTION 2.11. INCREASED COSTS. (a) If, due to either (i) the
introduction of or any change (other than any change by way of imposition or
increase of reserve requirements, in the case of Eurodollar Rate Advances,
included in the Eurodollar Rate Reserve Percentage) in or in the interpretation
of any law or regulation or (ii) the compliance with any guideline or request
hereafter adopted, promulgated or made by any central bank or other governmental
authority (whether or not having the force of law), there shall be any increase
in the cost to any Lender of agreeing to make or making, funding or maintaining
Eurodollar Rate Advances, then the Borrower shall from time to time, upon demand
by such Lender (with a copy of such demand to the Agent), pay to the Agent for
the account of such Lender additional amounts sufficient to compensate such
Lender for such increased cost. A certificate as to the amount of such
increased cost, submitted to the Borrower and the Agent by such Lender, shall be
conclusive and binding for all purposes, absent manifest error.
(b) If any Lender determines that compliance with any law or
regulation or any guideline or request from any central bank or other
governmental authority (whether or not having the force of law, but in each case
promulgated or made after the date hereof) affects or would affect the amount of
capital required or expected to be maintained by such Lender or any corporation
controlling such Lender and that the amount of such capital is increased by or
based upon the existence of such Lender's commitment to lend hereunder and other
commitments of this type or upon the Advances, then, upon demand by such Lender
(with a copy of such demand to the Agent), the Borrower shall immediately pay to
the Agent for the account of such Lender, from time to time as specified by such
Lender, additional amounts sufficient to compensate such Lender or such
corporation in the light of such circumstances, to the extent that such Lender
reasonably determines such increase in capital to be allocable to the existence
of such Lender's commitment to lend hereunder or upon the Advances. A
certificate as to such amounts submitted to the Borrower and the Agent by such
Lender shall be conclusive and binding for all purposes, absent manifest error.
(c) Without affecting its rights under Section 2.11(a) or 2.11(b) or
any other provision of this Agreement, each Lender agrees that if there is any
increase in any cost to or reduction in any amount receivable by such Lender
with respect to which the Borrower would be obligated to compensate such Lender
pursuant to Sections 2.11(a) or 2.11(b), such Lender shall use reasonable
efforts to select an alternative Applicable Lending Office which would not
result in any such increase in any cost to or reduction in any amount receivable
by such Lender; PROVIDED, HOWEVER, that no Lender shall be obligated to select
an alternative Applicable Lending Office if such Lender determines that (i) as a
result of such selection such Lender would be in violation of any applicable
law, regulation, treaty, or guideline, or would incur additional costs or
expenses or (ii) such selection would be inadvisable for regulatory reasons or
inconsistent with the interests of such Lender.
SECTION 2.12. ILLEGALITY. Notwithstanding any other provision of
this Agreement, if any Lender shall notify the Agent that the introduction of or
any change in or in the interpretation of any law or regulation makes it
unlawful, or any central bank or other governmental authority asserts that it is
unlawful, for any Lender or its Eurodollar Lending Office to perform its
obligations hereunder to make Eurodollar Rate Advances or to fund or maintain
Eurodollar Rate Advances hereunder, (i) the obligation of the Lenders to make,
or to Convert Revolving Advances into, Eurodollar Rate Advances shall be
suspended until the
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Agent shall notify the Borrower and the Lenders that the circumstances
causing such suspension no longer exist and (ii) the Borrower shall forthwith
prepay in full all Eurodollar Rate Advances of all Lenders then outstanding,
together with interest accrued thereon, unless the Borrower, within five
Business Days of notice from the Agent, Converts all Eurodollar Rate Advances
of all Lenders then outstanding into Base Rate Advances in accordance with
Section 2.10.
SECTION 2.13. PAYMENTS AND COMPUTATIONS. (a) The Borrower shall
make each payment hereunder and under the Notes not later than 1:00 P.M. (New
York City time) on the day when due in U.S. dollars to the Agent at its
address referred to in Section 8.02 in same day funds. The Agent will
promptly thereafter cause to be distributed like funds relating to the
payment of principal or interest or facility fees ratably (other than amounts
payable pursuant to Sections 2.03(b), 2.07, 2.11, 2.14 and 8.04(c)) to the
Lenders for the account of their respective Applicable Lending Offices, and
like funds relating to the payment of any other amount payable to any Lender
to such Lender for the account of its Applicable Lending Office, in each case
to be applied in accordance with the terms of this Agreement. Upon its
acceptance of an Assignment and Acceptance and recording of the information
contained therein in the Register pursuant to Section 8.07(d), from and after
the effective date specified in such Assignment and Acceptance, the Agent
shall make all payments hereunder and under the Notes in respect of the
interest assigned thereby to the Lender assignee thereunder, and the parties
to such Assignment and Acceptance shall make all appropriate adjustments in
such payments for periods prior to such effective date directly between
themselves.
(b) The Borrower hereby authorizes each Lender, if and to the
extent payment owed to such Lender is not made when due hereunder or under
any Note held by such Lender and after expiration of any grace period
specified herein or therein, to charge from time to time against any or all
of the Borrower's accounts with such Lender any amount so due.
(c) All computations of interest based on the Base Rate shall be
made by the Agent on the basis of a year of 365 or 366 days, as the case may
be, and all computations of interest based on the Eurodollar Rate or the
Federal Funds rate and of facility fees shall be made by the Agent on the
basis of a year of 360 days, in each case for the actual number of days
(including the first day but excluding the last day) occurring in the period
for which such interest or facility fees are payable. Each determination by
the Agent of an interest rate hereunder shall be conclusive and binding for
all purposes, absent manifest error.
(d) Whenever any payment hereunder or under the Notes shall be
stated to be due on a day other than a Business Day, such payment shall be
made on the next succeeding Business Day, and such extension of time shall in
such case be included in the computation of payment of interest or facility
fee, as the case may be; PROVIDED, HOWEVER, that if such extension would
cause payment of interest on or principal of Eurodollar Rate Advances to be
made in the next following calendar month, such payment shall be made on the
next preceding Business Day.
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(e) Unless the Agent shall have received notice from the Borrower
prior to the date on which any payment is due to the Lenders hereunder that
the Borrower will not make such payment in full, the Agent may assume that
the Borrower has made such payment in full to the Agent on such date and the
Agent may, in reliance upon such assumption, cause to be distributed to each
Lender on such due date an amount equal to the amount then due such Lender.
If and to the extent that the Borrower shall not have so made such payment in
full to the Agent, each Lender shall repay to the Agent forthwith on demand
such amount distributed to such Lender together with interest thereon, for
each day from the date such amount is distributed to such Lender until the
date such Lender repays such amount to the Agent, at the Federal Funds Rate.
SECTION 2.14. TAXES. (a) Any and all payments by the Borrower
hereunder or under the Notes shall be made, in accordance with Section 2.13,
free and clear of and without deduction for any and all present or future
taxes, levies, imposts, deductions, charges or withholdings, and all
liabilities with respect thereto, EXCLUDING, in the case of each Lender and
the Agent, taxes imposed on its income, and franchise taxes imposed on it, as
a result of a former, present or future connection between the Lender or the
Agent (as the case may be) and the jurisdiction of the governmental authority
imposing such tax or any political subdivision or taxing authority thereof,
other than any such connection arising solely from such Lender or Agent
having executed, delivered, made Advances under or received a payment under,
or enforced, this Agreement or the Notes (all such non-excluded taxes,
levies, imposts, deductions, charges, withholdings and liabilities being
hereinafter referred to as "Taxes"). If the Borrower shall be required by
law to deduct any Taxes from or in respect of any sum payable hereunder or
under any Note to any Lender or the Agent, (i) the sum payable shall be
increased as may be necessary so that after making all required deductions
(including deductions applicable to additional sums payable under this
Section 2.15) such Lender or the Agent (as the case may be) receives an
amount equal to the sum it would have received had no such deductions been
made (and the receipt of such sum shall be deemed to satisfy the Borrower's
relevant principal, interest and other payment obligations subject to such
deductions), (ii) the Borrower shall make such deductions and (iii) the
Borrower shall pay the full amount deducted to the relevant taxation
authority or other authority in accordance with applicable law. Without
affecting its rights under this Section 2.15 or any other provision of this
Agreement, each Lender agrees that if the Borrower is making any increased
payment pursuant to subclause (i) of the preceding sentence, such Lender
shall use reasonable efforts to select an alternative Applicable Lending
Office which would not require the Borrower to make such increased payments;
PROVIDED, HOWEVER, that no Lender shall be obligated to select an alternative
Applicable Lending Office if such Lender determines that (i) as a result of
such selection such Lender would be in violation of any applicable law,
regulation, treaty, or guideline, or would incur additional out of pocket
costs or expenses or (ii) such selection would be inadvisable for regulatory
reasons or inconsistent with the interests of such Lender.
(b) In addition, the Borrower agrees to pay any present or future
stamp or documentary taxes or any other excise or property taxes, charges or
similar levies which arise from any payment made hereunder or under the Notes
or from the execution, delivery or registration of, or otherwise with respect
to, this Agreement or the Notes (hereinafter referred to as "Other Taxes").
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(c) The Borrower will indemnify each Lender and the Agent for the
full amount of Taxes or Other Taxes (including, without limitation, any Taxes
or Other Taxes imposed by any jurisdiction on amounts payable under this
Section 2.14) paid by such Lender or the Agent (as the case may be) and any
liability (including penalties, interest and expenses) arising therefrom or
with respect thereto, whether or not such Taxes or Other Taxes were correctly
or legally asserted.
(d) Within 30 days after request by the Agent, the Borrower will
furnish to the Agent, at its address referred to in Section 8.02, the
original or a certified copy of a receipt evidencing payment thereof.
(e) Each Lender organized under the laws of a jurisdiction outside
the United States, on or prior to the date of its execution and delivery of
this Agreement in the case of each initial Lender and on the date of the
Assignment and Acceptance pursuant to which it becomes a Lender in the case
of each other Lender, and from time to time thereafter if requested in
writing by the Borrower (but only so long as such Lender remains lawfully
able to do so), shall provide the Borrower with Internal Revenue Service form
1001 or 4224, as appropriate, or any successor form prescribed by the
Internal Revenue Service, certifying that such Lender is entitled to benefits
under an income tax treaty to which the United States is a party which
reduces the rate of withholding tax on payments of interest or certifying
that the income receivable pursuant to this Agreement is effectively
connected with the conduct of a trade or business in the United States. If
the form provided by a Lender at the time such Lender first becomes a party
to this Agreement indicates a United States interest withholding tax rate in
excess of zero, withholding tax at such rate shall be considered excluded
from "Taxes" as defined in Section 2.14(a). Any Lender who, after having
furnished either such Internal Revenue Service form to the Borrower,
thereafter cannot certify as provided in such form, shall promptly notify the
Borrower of such fact.
(f) Without prejudice to the survival of any other agreement of the
Borrower hereunder, the agreements and obligations of the Borrower contained
in this Section 2.14 shall survive the payment in full of the Obligations.
SECTION 2.15. SHARING OF PAYMENTS, ETC. If any Lender shall obtain
any payment (whether voluntary, involuntary, through the exercise of any
right of set-off, or otherwise) on account of the Advances owing to it (other
than pursuant to Section 2.03(d), 2.03(e), 2.07, 2.11, 2.14 and 8.04(c)) in
excess of its ratable share of payments on account of the Advances, such
Lender shall forthwith purchase from the other Lenders such participations in
the Advances owing to them, as shall be necessary to cause such purchasing
Lender to share the excess payment ratably with each of them; PROVIDED,
HOWEVER, that if all or any portion of such excess payment is thereafter
recovered from such purchasing Lender, such purchase from each Lender shall
be rescinded and such Lender shall repay to the purchasing Lender the
purchase price to the extent of such recovery together with an amount equal
to such Lender's ratable share (according to the proportion of (i) the amount
of such Lender's required repayment to (ii) the total amount so recovered
from the purchasing Lender) of any interest or other amount paid or payable
by the purchasing Lender in respect of the total amount so recovered. The
Borrower agrees that any Lender so purchasing a participation from another
Lender pursuant to this Section 2.15 may, to the fullest extent
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permitted by law, exercise all its rights of payment (including the right of
set-off) with respect to such participation as fully as if such Lender were
the direct creditor of the Borrower in the amount of such participation.
SECTION 2.16. USE OF PROCEEDS. The proceeds of the Advances shall
be used by the Borrower for general working capital and other corporate
purposes, including Permitted Acquisitions and the construction of healthcare
facilities.
ARTICLE III
CONDITIONS OF BORROWING
SECTION 3.01. CONDITIONS PRECEDENT TO THE INITIAL ADVANCES. The
obligation of each Lender to make its initial Advance is subject to the
condition precedent that the Agent shall have received on or before the day
of the initial Borrowing the following, each dated such day, in form and
substance satisfactory to the Agent and (except for the Notes) in sufficient
copies for each Lender:
(a) The Revolving Notes payable to the order of the Lenders,
respectively.
(b) Certified copies of the resolutions of the Board of Directors of
the Borrower approving this Agreement and the Notes, and of all documents
evidencing other necessary corporate action and governmental approvals, if
any, with respect to this Agreement and the Notes.
(c) A certificate of the Secretary or an Assistant Secretary of the
Borrower certifying the names and true signatures of the officers of the
Borrower authorized to sign this Agreement and the Notes and the other
documents to be delivered hereunder.
(d) A favorable opinion of Pillsbury Madison & Sutro, counsel for the
Borrower, substantially in the form of Exhibit E hereto and as to such
other matters as any Lender through the Agent may reasonably request.
(e) A favorable opinion of Shearman & Sterling, counsel for the
Agent, substantially in the form of Exhibit F hereto.
SECTION 3.02. CONDITIONS PRECEDENT TO EACH REVOLVING BORROWING.
The obligation of each Lender to make a Revolving Advance on the occasion of
each Revolving Borrowing (including the initial Revolving Borrowing) shall be
subject to the further conditions precedent that on the date of such
Revolving Borrowing (a) the following statements shall be true (and each of
the giving of the applicable Notice of Revolving Borrowing and the acceptance
by the Borrower of the proceeds of such Revolving Borrowing shall constitute
a representation and warranty by the Borrower that on the date of such
Revolving Borrowing such statements are true):
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(i) The representations and warranties contained in Section 4.01 are
correct on and as of the date of such Revolving Borrowing, before and after
giving effect to such Revolving Borrowing and to the application of the
proceeds therefrom, as though made on and as of such date, and
(ii) No event has occurred and is continuing, or would result from
such Revolving Borrowing or from the application of the proceeds therefrom,
which constitutes an Event of Default or Default;
and (b) the Agent shall have received such other approvals, opinions or
documents as any Lender through the Agent may reasonably request in
connection with the satisfaction of the conditions set forth in clauses (i)
and (ii) above.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
SECTION 4.01. REPRESENTATIONS AND WARRANTIES OF THE BORROWER. The
Borrower represents and warrants as follows:
(a) DUE INCORPORATION, ETC. Each of the Borrower and its Material
Subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation and has
all requisite corporate power and authority to own or lease and operate its
properties and to carry on its business as now conducted and as proposed to
be conducted. Each of the Borrower and its Material Subsidiaries is duly
qualified or licensed to do business as a foreign corporation in good
standing in all jurisdictions in which it owns or leases assets and
property or in which the conduct of its business requires it to so qualify
or be licensed, except where the failure to so qualify or be licensed would
not have a Material Adverse Effect.
(b) DUE AUTHORIZATION AND EXECUTION, ETC. The execution, delivery
and performance by the Borrower of each Loan Document to which it is or
will be a party, and the consummation of the transactions contemplated
thereby, are within the Borrower's corporate powers, have been duly
authorized by all necessary corporate action, do not contravene (i) the
Borrower's certificate of incorporation or by-laws, or (ii) any law, rule,
regulation (including, without limitation, Regulation G, T, W and X of the
Board of Governors of the Federal Reserve System and the HMO Regulations),
order, writ, judgment, injunction, decree, determination or award or any
material contractual restriction binding on or affecting the Borrower or
its Subsidiaries or any of their respective properties, and do not result
in or require the creation of any lien, security interest or other charge
or encumbrance upon or with respect to any of the Borrower's or its
Subsidiaries' properties. Neither the Borrower nor any of its Subsidiaries
is in default under any such law, rule, regulation, order, writ, judgment,
injunction, decree, determination, award or restriction, in any respect
which is likely to have a Material Adverse Effect.
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(c) GOVERNMENT CONSENTS. No authorization, consent, approval or
other action by, and no notice to or filing with, any governmental
authority or regulatory body (including, without limitation, HMO
Regulators) is required for the due execution, delivery or performance by
the Borrower of any Loan Document.
(d) LEGAL, VALID AND BINDING NATURE. Each of this Agreement and each
of the other Loan Documents when executed and delivered hereunder will be,
the legal, valid and binding obligations of the Borrower, enforceable
against the Borrower and in accordance with its terms, subject to the
effect of any applicable bankruptcy, insolvency, reorganization, moratorium
or similar laws affecting the enforcement of creditors' rights generally.
(e) SUBSIDIARIES. Set forth on Schedule 2 hereto, as supplemented in
writing to the Agent upon its request from time to time, is a complete and
accurate list of all Material Subsidiaries of the Borrower, indicating (as
to each such Subsidiary) the jurisdiction of its incorporation, the number
of shares of each class of capital stock outstanding on the date hereof
and, to the extent that such outstanding shares are not publicly owned, the
direct owner of the outstanding shares of each such class owned. Except as
set forth on Schedule 2 hereto, as supplemented in writing by the Borrower
from time to time, there are no outstanding options, warrants, rights of
conversion or purchase, or similar rights to acquire capital stock of any
Material Subsidiary that have been granted by the Borrower or one of its
Subsidiaries, and all of the outstanding capital stock of all Material
Subsidiaries owned by the Borrower or one of its Subsidiaries has been
validly issued, is fully paid and nonassessable and is owned by the
Borrower or its Subsidiaries free and clear of (i) all liens, security
interests and other charges or encumbrances and (ii) any restrictions on
the ability to vote or alienate such capital stock. Except for the effect
of any transaction permitted by Section 5.02(e), the Borrower or a wholly
owned subsidiary of the Borrower owns 100% of the issued and outstanding
capital stock of each of Foundation Health, a California Health Plan,
California Compensation Insurance Company and Intergroup Prepaid Health
Services of Arizona, in each case free and clear of (i) all liens, security
interests and other charges or encumbrances and (ii) any restrictions on
the ability to vote or alienate such capital stock,
(f) FINANCIAL STATEMENTS; NO MATERIAL ADVERSE CHANGE. The
Consolidated balance sheet of the Borrower and its Subsidiaries, dated as
of June 30, 1996, and the related Consolidated statements of operations,
stockholders' equity and cash flows of the Borrower and its Subsidiaries
for the fiscal period then ended, fairly present the Consolidated financial
condition of the Borrower and its Subsidiaries as at such date and the
Consolidated results of the operations of the Borrower and its Subsidiaries
for the periods ended on such date, all in accordance with generally
accepted accounting principles consistently applied, and since June 30,
1996, there has been no Material Adverse Change.
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(g) ABSENCE OF LITIGATION; LITIGATION DESCRIPTION. No judgment,
order, decree, injunction or other restraint affecting the Borrower or any
Subsidiary has been rendered or imposed by any court, governmental agency
or arbitrator, and no actions, suits, investigations, litigation or
proceedings are pending or, to the knowledge of the Borrower, threatened
against or affecting the Borrower or any of its Subsidiaries or the
properties of the Borrower or any of its Subsidiaries before any court,
arbitrator or governmental agency, department, commission, board, bureau or
instrumentality, domestic or foreign, in either case (i) that would have a
Material Adverse Effect or (ii) which purports to affect the legality,
validity or enforceability of this Agreement or any other Loan Document.
(h) ABSENCE OF LIENS AND ENCUMBRANCES. There are no mortgages, deeds
of trust, trust deeds, open-end mortgages, leasehold mortgages, leasehold
deeds of trust, open-end leasehold mortgages, pledges, liens, security
interests or other charges or encumbrances (including liens or retained
security titles of conditional vendors) of any nature whatsoever on any
properties or assets of the Borrower or its Subsidiaries (including,
without limitation, the Real Property and Leaseholds) other than Permitted
Liens.
(i) SOLVENCY. The Borrower is and after receipt and application of
the Advances in accordance with the terms of this Agreement, will be,
Solvent.
(j) PAYMENT OF TAXES. The Borrower and each of its Subsidiaries have
filed or caused to be filed, or obtained extensions for filing, all tax
returns (Federal, state, local and foreign) required to be filed and paid
all amounts of taxes shown thereon to be due, including interest and
penalties, except (i) for such taxes as are being contested in good faith
and by proper proceedings and with respect to which reserves, in accordance
with generally accepted accounting principles, are being maintained by the
Borrower or any such Subsidiary, as the case may be, or (ii) where the
failure to file such returns or pay such taxes would not have a Material
Adverse Effect.
(k) ACCURACY OF INFORMATION GIVEN TO LENDERS. No written
information, exhibit or report furnished by the Borrower or any of its
Subsidiaries to the Agent or any Lender, when taken as a whole with all
other written information, exhibits and reports furnished by the Borrower
or any of its Subsidiaries to the Agent or any Lender, contains any untrue
statement of a material fact or omits to state any material fact or any
fact necessary to make the statements contained therein, in light of the
circumstances under which such information, exhibit, report or other
written information is or is to be used, not misleading. It is understood
by the Agent and the Lenders that all of the estimates and assumptions on
which any projections and forecasts are based may not prove to be correct
and that actual future financial performance may vary from that projected.
(l) NOT A PURPOSE CREDIT. The Borrower is not engaged in the
business of extending credit for the purpose of purchasing or carrying
margin stock (within the meaning of Regulation U issued by the Board of
Governors of the Federal Reserve
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System), and no proceeds of any Revolving Advance will be used to purchase
or carry any margin stock or to extend credit to others for the purpose of
purchasing or carrying any margin stock.
(m) INVESTMENT COMPANY ACT. The Borrower is not an "investment
company", or a company "controlled" by an "investment company", within the
meaning of the Investment Company Act of 1940, as amended.
(n) PROHIBITED SECURITIES TRANSACTIONS. No proceeds of any Revolving
Advance will be used by the Borrower or any of its Subsidiaries to acquire
any equity security of a class which is registered pursuant to Section 12
of the Securities Exchange Act of 1934, as amended.
(o) CASUALTIES. Neither the businesses nor the properties of the
Borrower or any of its Subsidiaries are affected by any fire, explosion,
accident, strike, lockout or other material labor dispute, drought, storm,
hail, earthquake, embargo, act of God or of the public enemy or other
casualty (whether or not covered by insurance) that would have a Material
Adverse Effect.
(p) ERISA. (i) No ERISA Event has occurred or is reasonably
expected to occur with respect to any Plan.
(ii) Schedule B (Actuarial Information) to the most recent
annual report (Form 5500 Series) with respect to each Plan, copies of
which have been filed with the IRS and furnished to the Agent, is
complete and accurate and fairly presents the funding status of such
Plan, and since the date of such Schedule B there has been no material
adverse change in such funding status.
(iii) Neither the Borrower nor any ERISA Affiliate has
incurred, or is reasonably expected to incur, any Withdrawal Liability
to any Multiemployer Plan.
(iv) Neither the Borrower nor any ERISA Affiliate has been
notified by the sponsor of a Multiemployer Plan that such
Multiemployer Plan is in reorganization or has been terminated, within
the meaning of Title IV of ERISA, and no Multiemployer Plan is
reasonably expected to be in reorganization or to be terminated within
the meaning of Title IV of ERISA.
(q) ENVIRONMENTAL MATTERS. Except where the failure of any of the
following to be true and correct would not have a Material Adverse Effect
(i) the Real Property and the Leaseholds and the operations conducted
thereon do not violate any applicable Environmental Law or any restrictive
covenant or deed restriction (recorded or otherwise); (ii) without
limitation of clause (i) above, the Real Property and the Leaseholds and
the operations conducted thereon by the Borrower or any of its Subsidiaries
or, to the Borrower's knowledge, any current or prior owner, lessor or
operator of such Real Property, Leasehold or operation, are not in
violation of any Environmental Law, or subject to any existing, pending or
threatened investigation,
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inquiry or proceeding by any governmental authority or to any remedial
obligations under any Environmental Law; (iii) all notices, permits,
licenses or similar authorizations, if any, required to be obtained or
filed in connection with the use of the Real Property or the Leaseholds,
including, without limitation, past, to the best of Borrower's knowledge,
or present treatment, storage, disposal or release of any Hazardous
Materials or solid waste into the environment, have been obtained or
filed; (iv) to the Borrower's knowledge, all Hazardous Materials or solid
waste generated at the Real Property or the Leaseholds have in the past
been, and shall continue to be, transported, treated and disposed of only
by carriers maintaining valid permits under all applicable Environmental
Laws and only at treatment, storage and disposal facilities maintaining
valid permits under applicable Environmental Laws, which carriers and
facilities have been and are, to the Borrower's knowledge, operating in
compliance with such permits; (v) the Borrower and its Subsidiaries have
no material contingent liability in connection with any release of any
Hazardous Materials or solid waste into the environment; and (vi) the
use which the Borrower or any of its Subsidiaries makes or intends to
make of the Real Property and the Leaseholds will not result in the
unlawful or unauthorized disposal or other release of any Hazardous
Materials or solid waste on or to the Real Property or the Leaseholds.
ARTICLE V
COVENANTS OF THE BORROWER
SECTION 5.01. AFFIRMATIVE COVENANTS. So long as any obligation
hereunder or under any Loan Document shall remain unpaid or any Lender shall
have any Commitment hereunder, the Borrower will, unless the Majority Lenders
shall otherwise consent in writing:
(a) COMPLIANCE WITH LAWS. Perform and promptly comply and cause each
of its Subsidiaries to perform and promptly comply with, and cause all
property of the Borrower and each such Subsidiary to be maintained, used
and operated in accordance with, all present and future laws, ordinances,
rules, regulations, orders and requirements (including, without limitation,
the HMO Regulations, Insurance Regulations, and Environmental Law) of every
duly constituted governmental or quasi-governmental authority or agency
applicable to the Borrower, any such Subsidiary or any of their properties,
except where the failure to comply therewith would not have a Material
Adverse Effect.
(b) PRESERVATION OF CORPORATE EXISTENCE. Preserve and maintain, and
cause each of its Material Subsidiaries to preserve and maintain, its
corporate existence, corporate rights (charter and statutory), and
corporate franchises; PROVIDED, HOWEVER, that neither the Borrower nor any
of its Material Subsidiaries shall be required to preserve and maintain any
corporate franchise if the failure to preserve and maintain such franchise,
whether individually or together with all other franchises which have not
been preserved or maintained from and after the date hereof, would not have
a Material Adverse Effect.
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(c) ACCESS AND VISITATION RIGHTS. Upon reasonable notice and at any
reasonable time during normal business hours and from time to time, permit
the Agent or any of the Lenders or any agents or representatives thereof to
examine and make copies of and abstracts from the records and books of
account of, and visit the properties of, the Borrower and any of its
Subsidiaries, and to discuss the affairs, finances and accounts of the
Borrower and any of its Subsidiaries.
(d) KEEPING OF BOOKS. Keep proper books of record and account for
the Borrower and each of its Subsidiaries and such other proper books of
record and account for the Borrower and its Consolidated Subsidiaries as
are necessary in order to prepare the periodic financial statements of the
Borrower and its Consolidated Subsidiaries required by the terms hereof or
by any applicable law, all in accordance with generally accepted accounting
principles consistently applied.
(e) PAYMENT OF TAXES, ETC. Pay and discharge, and cause each of its
Subsidiaries to pay and discharge, before the same shall become delinquent,
all taxes, assessments and governmental charges or levies imposed upon it
or upon its property, except where the failure to pay and discharge such
amounts could not, in the aggregate, reasonably be expected to have a
Material Adverse Effect; PROVIDED, HOWEVER, that neither the Borrower nor
any such Subsidiary shall be required to pay or discharge any such tax,
assessment, charge or levy that is being contested in good faith and by
proper proceedings and with respect to which reserves, in accordance with
generally accepted accounting principles, are being maintained by the
Borrower or such Subsidiary, as the case may be.
(f) MAINTENANCE OF PROPERTIES, ETC. Maintain and preserve, and cause
each of its Material Subsidiaries to maintain and preserve, all of its
properties in accordance with good business practices and in good working
order and condition, ordinary wear and tear excepted, except where the
failure to so maintain and preserve would not have a Material Adverse
Effect.
(g) PLAN CONTRIBUTION. Make, and cause each Subsidiary to make, when
due, all contributions required by law to be made to all Plans, except
where the failure to make such contributions would not have a Material
Adverse Effect.
(h) MAINTENANCE OF INSURANCE. Maintain, and cause each of its
Subsidiaries to maintain, insurance (including, without limitation,
liability, hazard and casualty insurance) with responsible and reputable
insurance companies or associations having a rating of A or better from
Best's in such amounts and covering such risks as is then customarily
carried by similarly situated companies conducting business similar to that
conducted by the Borrower and its Subsidiaries. The Borrower shall be
deemed to be in compliance with the requirements of the foregoing if it
insures through a captive Insurance Subsidiary, PROVIDED, that each
re-insurer to which coverage is ceded by such captive Insurance Subsidiary
has the ratings specified above and the level of self-insurance retained by
the Borrower is substantially similar to the level the Borrower would have
maintained under the previous sentence. The Borrower may self insure
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for workers' compensation liabilities if such self-insurance is approved
by the Borrower's board of directors and is conducted in compliance with
all applicable law.
(i) EMPLOYMENT OF TECHNOLOGY, DISPOSAL OF HAZARDOUS WASTE, ETC.
Except where the failure to comply with any of the following would not have
a Material Adverse Effect (i) employ, and cause each of its Material
Subsidiaries to employ, in connection with its use of the Real Property and
Leaseholds, appropriate technology to maintain compliance with all material
Environmental Laws, (ii) obtain and maintain, and cause each of its
Material Subsidiaries to obtain and maintain, any and all material permits
required by applicable Environmental Law in connection with the operations
of the Borrower or any of its Material Subsidiaries, (iii) dispose of, and
cause each of its Material Subsidiaries to dispose of, any and all
Hazardous Materials (including infectious wastes) generated by the Borrower
or any Material Subsidiary only at facilities and with carriers maintaining
valid permits under RCRA and any applicable Environmental Law, (iv) use
best efforts to obtain, and cause each of its Material Subsidiaries to use
its best efforts to obtain, certificates of disposal from all contractors
employed by the Borrower or any of its Material Subsidiaries in connection
with the transport or disposal of any Hazardous Materials generated at the
Premises and (v) establish and maintain a system to assure and monitor
continued compliance with all applicable Environmental Law.
(j) MAINTENANCE OF ACCREDITATION, ETC. Preserve and maintain, and
cause each of its Material Subsidiaries to preserve and maintain, all
licenses, permits, authorizations and qualifications required under the HMO
Regulations or the Insurance Regulations in connection with the ownership
or operation of HMO's or Insurance Companies, as applicable, except where
the failure to do so would not have a Material Adverse Effect.
SECTION 5.02. NEGATIVE COVENANTS. So long as any obligation
hereunder or under any Loan Document shall remain unpaid or any Lender shall
have any Commitment hereunder, the Borrower will not, without the written
consent of the Majority Lenders:
(a) LIENS, ETC/NEGATIVE PLEDGE. (i) Create or suffer to exist, or
permit any of its Subsidiaries to create or suffer to exist, any lien,
security interest or other charge or encumbrance (including the lien or
retained security title of a conditional vendor) of any kind (including,
without limitation, any lien imposed pursuant to Section 107(f) of the
Superfund Reauthorization Act of 1986 or any similar Environmental Law), or
any other type of preferential arrangement, upon or with respect to any of
its properties of any character (including, without limitation, accounts),
whether now owned or hereafter acquired, or assign any right to receive
income, or sign or file, or permit any of its Subsidiaries to sign or file,
under the Uniform Commercial Code or any comparable statute of any
jurisdiction a financing statement which names the Borrower or any of its
Subsidiaries as debtor, or permit any of its Subsidiaries to sign any
security agreement authorizing any secured party thereunder to file such
financing statement (EXCLUDING, HOWEVER, Permitted Liens from the operation
of the foregoing restrictions).
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(ii) Agree, or permit any of its Subsidiaries to agree, with any
Person not to take any action prohibited by Section 5.02(a)(i), except with
respect to (A) such negative promises contained (on the date hereof) in any
document relating to existing Debt, leaseholds and material contracts of
the Borrower or any such Subsidiary and (B) such negative promises made by
a Subsidiary prior to the date on which such Subsidiary became a Subsidiary
of the Borrower; PROVIDED, that such promises were not made at the
instigation of the Borrower or such Subsidiary and PROVIDED, FURTHER, that
such promises were not made in anticipation of such Subsidiary becoming a
Subsidiary of the Borrower.
(b) DIVIDENDS, ETC. Declare or make, or permit any of its
Subsidiaries to declare or make, any dividend payment or other distribution
of assets, properties, cash, rights, obligations or securities on account
of any shares of any class of capital stock of the Borrower or any of its
Subsidiaries or purchase, redeem or otherwise acquire for value (or permit
any of its Subsidiaries to do so) any shares of any class of capital stock
of the Borrower or any of its Subsidiaries or any warrants, rights or
options to acquire any such shares, now or hereafter outstanding, except
that (i) the Borrower may pay dividends in the form of its capital stock,
(ii) any wholly owned Subsidiary may pay non-cash dividends or make non-
cash distributions to the Borrower or to another wholly owned Subsidiary
and (iii) the Borrower and its Subsidiaries may declare and make cash
dividend payments to their respective stockholders and purchase, redeem or
otherwise acquire shares of their capital stock or warrants, rights or
options to acquire such shares for cash PROVIDED, that the aggregate amount
of such dividends declared and paid and the aggregate purchase price paid
in connection with such purchases, redemptions or other acquisitions shall
not (excluding dividends paid pursuant to the immediately succeeding
PROVISO), in the case of the Borrower, exceed the sum of (a) 50% of the
cumulative Consolidated Net Income of the Borrower for all full Fiscal
Years of the Borrower, commencing with and including the Borrower's 1994
Fiscal Year (the amount of such consolidated Net Income to be calculated by
adding back thereto (to the extent deducted therefrom) up to $125,000,000
of any restructuring charges incurred by the Borrower in the Borrower's
1995 Fiscal Year) PLUS (b) on any date of determination after the end of
the Borrower's 1995 Fiscal Year, $25,000,000; PROVIDED, HOWEVER, that the
Borrower may in addition declare and make cash dividend payments to its
stockholders and purchase, redeem or otherwise acquire shares of its
capital stock or warrants, rights of options to acquire shares of its
capital stock for cash in an amount equal to 50% of the Net Cash Proceeds
received by the Borrower from the issuance of its Common Stock or in
connection with other capital contributions after the date hereof in each
case within the 180-day period preceding such date of determination; and
PROVIDED, FURTHER, that immediately before and after giving effect thereto,
no Default or Event of Default shall have occurred and be continuing or
exist.
(c) LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING
SUBSIDIARIES. Suffer to exist, or permit any Subsidiary to suffer to
exist, any encumbrance or restriction (other than pursuant to law,
regulation or order) on the ability of any Subsidiary (i) to pay, directly
or indirectly, dividends or make any other distributions in respect of its
capital stock or pay any Indebtedness or other
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obligation owed to the Borrower or any other Subsidiary; (ii) to
make loans or advances to the Borrower or any Subsidiary; or (iii) to
transfer any of its property or assets to the Borrower or any
Subsidiary, except any encumbrance or restriction (a) pursuant to any
agreement in effect on the date hereof, (b) pursuant to an agreement
entered into by such Subsidiary prior to the date on which such
Subsidiary was acquired by the Borrower and not entered into in
anticipation of becoming a Subsidiary, or (c) pursuant to an agreement
effecting a renewal, extension, refinancing or refunding of Indebtedness
incurred pursuant to an agreement referred to in clause (a) or (b)
above; PROVIDED, HOWEVER, that the provisions contained in such renewal,
extension, refinancing or refunding agreement relating to such
encumbrance or restriction are no more restrictive in any material
respect than the provisions contained in the agreement the subject
thereof.
(d) MERGERS, ETC. Merge or consolidate with or into, or convey,
transfer, lease or otherwise dispose of (whether in one transaction or in a
series of transactions) all or substantially all of its assets (whether now
owned or hereafter acquired) to, or acquire all or substantially all of the
assets of, any Person, or permit any of its Subsidiaries to do so, except
that (i) any Subsidiary of the Borrower may merge into the Borrower or
another Subsidiary of the Borrower PROVIDED, that (A) after giving effect
thereto, no Default shall exist and (B) immediately before and after giving
effect to such merger each party thereto is Solvent, and (ii) the Borrower
or any its Subsidiaries may make the Permitted Acquisitions.
(e) SALES, TRANSFERS, ETC. OF ASSETS. Sell, lease, transfer or
otherwise dispose of, or permit any of its Material Subsidiaries to sell,
lease, transfer or otherwise dispose of, any assets (including, without
limitation, any portion of assets constituting the business of a division,
branch or other unit operation), except for (A) sales in the ordinary
course of business consistent with past practices; (B) sales and
dispositions of worn out, surplus or obsolete assets; (C) sales or
transfers of property during any Fiscal Year of the Borrower the aggregate
value of which (determined by the greater of the book value thereof or the
sales or transfer price thereof) does not exceed 10% of the Borrower's
Consolidated Total Assets (determined as at the end of the Fiscal Quarter
of the Borrower immediately preceding such sale or transfer); (D) sales or
transfers of property from any Material Subsidiary to the Borrower or any
other Subsidiary of the Borrower PROVIDED, that in the case of any sale or
transfer from a Material Subsidiary to a Subsidiary of the Borrower, such
sale or transfer would not cause such transferring Material Subsidiary to
cease being a Material Subsidiary unless each transferee Subsidiary thereby
becomes (or is) a Material Subsidiary; and (E) the sale of Foundation
Health Medical Services, Thomas-Davis Medical Centers P.C., Foundation
Health Medical Group, Inc., surgery centers and related healthcare center
assets to FPA Medical Management, Inc. or to any other Person.
(f) INVESTMENTS IN OTHER PERSONS. After the date hereof, make, or
permit any of its Subsidiaries to make, any loan or advance or gift to, or
Investment in, any other Person, or purchase or otherwise acquire, or
permit any of its Subsidiaries to purchase or otherwise acquire, any shares
of capital stock, obligations or other
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securities, or make any capital contribution to, or otherwise Invest in
or acquire, any other Person (whether through merger, consolidation,
combination or otherwise), except for (i) Permitted Investments, (ii)
loans or advances by a Subsidiary of the Borrower to the Borrower, by
the Borrower to any Subsidiary of the Borrower or by any Subsidiary of
the Borrower to another Subsidiary of the Borrower, (iii) Permitted
Acquisitions, (iv) employee loans and advances, (v) capital
contributions by the Borrower to a Subsidiary of the Borrower or by any
Subsidiary of the Borrower; (vi) Investments in any Person whose
business is connected or related to the Borrower's (including its
Subsidiaries') existing or related line of business, PROVIDED, the
aggregate amount of Investments under this subclause (vi) made after the
date hereof does not exceed a sum equal to (1) $50,000,000 plus (2)
$50,000,000 multiplied by the number of the Borrower's Fiscal Years that
have commenced since the end of the Borrower's 1995 Fiscal Year; (vii)
tax-advantaged Investments (whether through debt, equity, partnership
interests or otherwise) in low-income housing not aggregating in excess
of $10,000,000 at any time; (viii) Investments not otherwise permitted
by clauses (i) through (vii) hereof not in excess of $10,000,000 at any
time; and (ix) loans, advances, guarantees or Investments which arise in
connection with the sale, transfer or other disposition of any business,
shares of capital stock or assets of any Subsidiary or affiliated
company or otherwise permitted by Section 5.02(e) hereof as part of the
consideration for such sale, transfer or disposition.
(g) CHANGE IN BUSINESS. Make, or permit any of its Material
Subsidiaries to make, any material change in the nature of their respective
businesses.
(h) ACCOUNTING CHANGES. Make or permit, or permit any of its
Subsidiaries to make or permit, any significant change in accounting
policies or reporting practices, except for any such change required or
permitted by generally accepted accounting principles.
(i) PLAN TERMINATIONS. Terminate, or permit any ERISA Affiliate to
terminate, any Plan so as to result in liability of the Borrower or any
ERISA Affiliate to the PBGC in excess of 5% of the Borrower's Consolidated
Net Worth, or permit to exist any event or condition which reasonably
presents a material risk of a termination by the PBGC of any Plan with
respect to which the Borrower or any ERISA Affiliate would, in the event of
such termination, incur liability to the PBGC in excess of 5% of the
Borrower's Consolidated Net Worth.
(j) EMPLOYEE BENEFIT COSTS AND LIABILITIES. Create or suffer to
exist, or permit any ERISA Affiliate to create or suffer to exist, (i) any
Insufficiency with respect to a Plan or any Withdrawal Liability with
respect to a Multiemployer Plan if, immediately after giving effect to such
Insufficiency or Withdrawal Liability, the aggregate amount of
Insufficiencies and Withdrawal Liabilities of all Plans and Multiemployer
Plans, respectively, of the Borrower and its ERISA Affiliates exceeds 5% of
the Borrower's Consolidated Net Worth or (ii) any liability with respect to
Welfare Plans if, immediately after giving effect to such liability, the
aggregate annualized cost (including, without limitation, the cost of
insurance premiums) with
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respect to such plans of the Borrower and its ERISA Affiliates in any
Fiscal Year of the Borrower would exceed 5% of the Borrower's
Consolidated Net Worth.
(k) PREPAYMENTS OF PUBLIC NOTES. Prepay, redeem, defease (whether
actually or in substance) or purchase in any manner (or deposit or set
aside funds for the purpose of any of the foregoing), make any payment in
respect of principal of or make any payment in respect of interest (other
than regularly scheduled interest payments) on, or permit any of its
Subsidiaries to prepay, redeem, defease or purchase in any manner, make any
payment in respect of principal of or make any payment in respect of
interest on, the Public Notes; PROVIDED, that the Borrower may prepay,
redeem, defease or purchase the Public Notes so long as (i) the aggregate
amount paid or (set aside) by the Borrower to so prepay, redeem, defease or
purchase the Public Notes does not exceed the lesser of the fair market
value and 102% of the face amount of such Public Notes to be prepaid,
redeemed, defeased or purchased, together with any unpaid interest thereon
accrued as of the date of such prepayment, redemption, defeasance or
purchase, and (ii) there shall be no Default or Event of Default before or
after giving effect to such prepayment, redemption, defeasance or purchase.
(l) LIMITATION ON SUBSIDIARY INDEBTEDNESS AND PREFERRED STOCK.
Permit any of its Subsidiaries to create or suffer to exist any Debt
(including any Guaranteed Debt) of such Subsidiary, or issue any Preferred
Stock of such Subsidiary, other than (i) Debt and Preferred Stock existing
on the date hereof or the date on which such Subsidiary becomes a
Subsidiary, (ii) Debt owed to the Borrower or any of its Subsidiaries and
(iii) other Debt of such Subsidiaries PROVIDED, that the aggregate
outstanding principal balance of Debt under this subclause (iii) does not,
at any time, exceed $65,000,000.
SECTION 5.03. FINANCIAL COVENANTS. So long as any obligation
hereunder or under any Loan Document shall remain unpaid or any Lender shall
have any Commitment hereunder, the Borrower will not, without the written
consent of the Majority Lenders:
(a) NET WORTH. Permit, at any time, its Consolidated Net Worth to be
below 90% of the Borrower's Consolidated Net Worth on December 31, 1994
PLUS 50% of its cumulative Consolidated Net Income for each Fiscal Quarter
ending after December 31, 1994 (the amount of such Net Income to be
computed without regard to any net loss in any Fiscal Quarter) PLUS 100% of
accumulated Net Cash Proceeds of issuances of the Borrower's Common Stock
after the date hereof.
(b) FIXED CHARGE COVERAGE RATIO. Permit, as at the end of any Fiscal
Quarter of the Borrower, the Consolidated Fixed Charge Coverage Ratio of
the Borrower and its Subsidiaries for the four-Fiscal Quarter period ending
on the last day of such Fiscal Quarter to be less than 3.75 to 1.0.
(c) TOTAL DEBT/TOTAL CAPITALIZATION RATIO. Permit, as of the end of
any Fiscal Quarter of the Borrower, the Borrower's Consolidated Total
Debt/Total Capitalization Ratio to be greater than 0.40 to 1:00.
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SECTION 5.04. REPORTING REQUIREMENTS. So long as any obligation
hereunder or under any Loan Document shall remain unpaid or any Lender shall
have any Commitment hereunder, the Borrower will furnish to each Lender the
following:
(a) As soon as available and in any event within 45 days after the
end of each Fiscal Quarter (except the last Fiscal Quarter in each Fiscal
Year), commencing with the Fiscal Quarter ending December 31, 1996,
Consolidated balance sheets of the Borrower and its Subsidiaries as of the
end of such Fiscal Quarter and Consolidated statements of operations,
stockholders' equity and cash flows of the Borrower and its Subsidiaries
for the period commencing at the end of the previous Fiscal Year and ending
with the end of such Fiscal Quarter, certified by the chief financial
officer of the Borrower, together with (i) a certificate of said officer
stating that, to his or her knowledge, no Default has occurred and is
continuing or, if a Default has occurred and is continuing, a statement as
to the nature thereof and the action that the Borrower has taken or
proposes to take with respect thereto, and (ii) a schedule in form
satisfactory to the Agent of the computations used by the Borrower in
determining compliance with the covenants contained in Section 5.03.
(b) As soon as available and in any event within 120 days after the
end of each Fiscal Year, a copy of the annual audit report for such year
for the Borrower, including therein a Consolidated balance sheet of the
Borrower and its Subsidiaries as of the end of such Fiscal Year and
Consolidated statements of operations, stockholders' equity and cash flows
of the Borrower and its Subsidiaries for such Fiscal Year certified by
nationally recognized public accountants, together with a certificate of
such accounting firm stating that in the course of the regular audit of the
business of the Borrower, which audit was conducted by such accounting firm
in accordance with generally accepted auditing standards, such accounting
firm has obtained no knowledge that a Default has occurred and is
continuing, or, if, in the opinion of such accounting firm, a Default has
occurred and is continuing, a statement as to the nature thereof.
(c) As soon as possible and in any event within five days after the
occurrence of each Default of which a Responsible Officer of the Borrower
or any of its Subsidiaries obtains knowledge, a statement of such
Responsible Officer setting forth details of such Default and the action
which the Borrower or such Subsidiary has taken and proposes to take with
respect thereto.
(d) Promptly after any material change in accounting policies or
reporting practices, notice and a description in reasonable detail of such
change.
(e) Promptly and in any event within 10 days after the commencement
thereof, notice of all actions, suits and proceedings before any court or
governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, affecting the Borrower or any of its
Subsidiaries, of the type described in Section 4.01(g).
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(f) Promptly and in any event within 10 days after the sending or
filing thereof, copies of all proxy statements, financial statements, and
reports that the Borrower sends to its stockholders generally or the
Borrower or any of its Subsidiaries files with the Securities and Exchange
Commission.
(g) Promptly following the receipt thereof, copies of each notice
regarding the loss or threatened loss by any Material Subsidiary or
Insurance Subsidiary of its accreditation, licensing or certification by
any HMO Regulator or any Insurance Regulator.
(h) Promptly and in any event within 10 days after the occurrence of
any event giving rise to a Material Adverse Effect.
(i) Such other information respecting the condition (financial or
otherwise), operations, business, assets and prospects of the Borrower or
any of its Subsidiaries as any Lender may from time to time reasonably
request.
SECTION 5.05. ACQUISITIONS. Prior to consummating any Permitted
Acquisition other than an Exempt Acquisition, the Borrower shall have delivered
to the Agent (in sufficient copies for each Lender) the following:
(i) At least 15 days' prior written notice of the Borrower's
intention to consummate or enter into a Permitted Acquisition, together
with a brief summary of the substantive terms thereof;
(ii) At least 10 days prior to the consummation of such Permitted
Acquisition, a certified copy of the executed purchase contract relating to
such Permitted Acquisition; and
(iii) An officer's certificate, executed by the president or chief
financial officer of the Borrower, dated the date of consummation of such
Permitted Acquisition, certifying that immediately before and after giving
effect to such Permitted Acquisition (A) no Default has occurred and is
continuing or will exist and (B) that the Borrower will be in compliance on
a pro forma basis with each of the financial ratios specified in Section
5.03 as of the end of the Fiscal Quarter immediately preceding such
Acquisition for the twelve-month period preceding such Fiscal Quarter end,
together with a reasonably detailed worksheet setting forth the calculation
of such ratios.
ARTICLE VI
EVENTS OF DEFAULT
SECTION 6.01. EVENTS OF DEFAULT. If any of the following events
(each an "Event of Default" and collectively "Events of Default") shall occur
and be continuing:
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(a) The Borrower shall fail to pay any principal of any Advance or
Note when the same becomes due and payable; or shall fail to pay any
interest on any Advance or Note or any fees or other amounts payable under
any Loan Document or hereunder (including, without limitation, amounts
payable to the Agent under the letter agreement referred to in
Section 2.03(b)) within two Business Days after the same becomes due and
payable; or
(b) Any representation or warranty made by the Borrower under or in
connection with any Loan Document shall prove to have been incorrect in any
material respect when made or deemed to have been made; or
(c) (i) The Borrower shall fail to perform or observe any term,
covenant or agreement contained in Section 5.03 or (ii) the Borrower shall
fail to perform or observe any other term, covenant or agreement contained
in this Agreement or in any other Loan Document on its part to be performed
or observed if such failure shall remain unremedied for 30 days after
written notice thereof shall have been given to the Borrower by the Agent
or any Lender; or
(d) The Borrower or any of its Subsidiaries shall fail to pay any
Debt in a principal payment amount (whether singly or in the aggregate)
equal to or in excess of $10,000,000 (but excluding Debt outstanding under
this Agreement or the Notes) of the Borrower or such Subsidiary, as the
case may be, when the same becomes due and payable (whether by scheduled
maturity, required prepayment, acceleration, demand or otherwise (and
inclusive of principal, interest, fees and penalties)), and such failure
shall continue after the applicable grace period, if any, specified in the
agreements or instruments relating to such Debt; or any other event shall
occur or condition shall exist under any agreements or instruments relating
to any such Debt and shall continue after the applicable grace period
(which grace period, if shorter than 30 days, shall be deemed extended to
30 days for purposes of this subsection (d) if (i) such Debt was assumed in
connection with an Acquisition and is in an aggregate principal amount of
not in excess of $20,000,000, (ii) not more than 90 days have elapsed since
the consummation of such Acquisition and (iii) the Borrower shall have
segregated cash in an amount sufficient to pay the principal amount of such
Debt plus interest and premium, if any, then due thereon within such 30 day
period), if any, specified in such agreements or instruments, if the effect
of such event or condition is to accelerate, or to permit the acceleration
of, the maturity of such Debt; or any such Debt shall be declared to be due
and payable, or required to be prepaid (other than by a regularly scheduled
required prepayment), prior to the stated maturity thereof; or
(e) The Borrower, any of its Material Subsidiaries or two or more of
the Borrower's Subsidiaries in any twelve-month period shall generally not
pay its debts as such debts become due, or shall admit in writing its
inability to pay its debts generally, or shall make a general assignment
for the benefit of creditors; or any proceeding shall be instituted by or
against the Borrower or any of its Subsidiaries seeking to adjudicate it a
bankrupt or insolvent, or seeking liquidation, winding up, reorganization,
arrangement, adjustment, protection, relief, or composition of it or its
debts under any law relating to bankruptcy, insolvency or reorganization or
relief of
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debtors, or seeking the entry of an order for relief or the appointment
of a receiver, trustee, or other similar official for it or for any
substantial part of its property, and, in the case of any such
proceeding instituted against it (but not instituted by it), either such
proceeding shall remain undismissed or unstayed for a period of 60 days,
or any of the actions sought in such proceeding (including, without
limitation, the entry of an order for relief against, or the appointment
of a receiver, trustee, custodian or similar official for, it or for any
substantial part of its property) shall occur; or the Borrower or any of
its Subsidiaries shall take any corporate action to authorize any of the
actions set forth above in this subsection (e); or
(f) Any judgment or order for the payment of money in an aggregate
amount in excess of $10,000,000 (less any payments made in respect thereof)
shall be rendered against the Borrower or any of its Subsidiaries, and
either (i) enforcement proceedings shall have been commenced by any
creditor upon such judgment or order or (ii) there shall be any period of
60 consecutive days during which a stay of enforcement of such judgment or
order, by reason of a pending appeal, statutory bond or otherwise, shall
not be in effect; or
(g) Any non-monetary judgment or order shall be rendered against the
Borrower or any of its Subsidiaries that has a Material Adverse Effect, and
either (i) enforcement proceedings shall have been commenced by any Person
upon such judgment or order or (ii) there shall be any period of 60
consecutive days during which a stay of enforcement of such judgment or
order, by reason of a pending appeal or otherwise, shall not be in effect;
or
(h) The obligation of the Borrower to repay the Advances or to pay
any interest, fee, expense, premium or other amount owing hereunder or
under any other Loan Document shall for any reason cease to be valid and
binding on the Borrower or the Borrower shall so state in writing; or
(i) Any ERISA Event with respect to a Plan shall have occurred and,
30 days after notice thereof shall have been given to the Borrower by the
Agent, (i) such ERISA Event shall still exist and (ii) the sum (determined
as of the date of occurrence of such ERISA Event) of the Insufficiency of
such Plan and the Insufficiency of any and all other Plans with respect to
which an ERISA Event shall have occurred and then exist (or in the case of
a Plan with respect to which an ERISA Event described in clause (iii)
through (vi) of the definition of ERISA Event shall have occurred and then
exist, the liability related thereto) is equal to or greater than 5% of the
Borrower's Consolidated Net Worth; or
(j) The Borrower or any ERISA Affiliate shall have been notified by
the sponsor of a Multiemployer Plan that it has incurred Withdrawal
Liability to such Multiemployer Plan in an amount that, when aggregated
with all other amounts required to be paid to Multiemployer Plans by the
Borrower and its ERISA Affiliates as Withdrawal Liability (determined as of
the date of such notification), exceeds 5% of the Borrower's Consolidated
Net Worth; or
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(k) The Borrower or any ERISA Affiliate shall have been notified by
the sponsor of a Multiemployer Plan that such Multiemployer Plan is in
reorganization or is being terminated, within the meaning of Title IV of
ERISA, if as a result of such reorganization or termination the aggregate
annual contributions of the Borrower and its ERISA Affiliates to all
Multiemployer Plans that are then in reorganization or being terminated
have been or will be increased over the amounts contributed to such
Multiemployer Plans for the respective plan year of each such Multiemployer
Plan immediately preceding the plan year in which the reorganization or
termination occurs by an amount exceeding 5% of the Borrower's Consolidated
Net Worth; or
(l) Any proceeding shall be instituted against the Borrower or any of
its Subsidiaries which is likely (taking into account the probability of an
adverse determination and the exhaustion of all appeals) to have a Material
Adverse Effect; or
(m) A Change in Control shall have occurred; or
(n) An HMO Event which, if unremedied, is reasonably likely to have a
Material Adverse Effect shall have occurred and remain unremedied for
thirty days after the occurrence thereof (or such lesser period of time, if
any, as the HMO Regulator administering the HMO Regulations shall have
imposed for the cure of such HMO Event; it being understood that if the
Borrower reaches a written agreement with such HMO Regulator during such
thirty-day (or shorter) period which cures (or provides a means for the
cure of) such HMO Event to such HMO Regulator's satisfaction, then no Event
of Default shall exist under this subsection (n));
then, and in any such event, the Agent (i) shall at the request, or may with the
consent, of the Majority Lenders by notice to the Borrower declare the
obligation of each Lender to make Advances to be terminated, whereupon the same
shall forthwith terminate, and (ii) shall at the request, or may with the
consent, of the Majority Lenders by notice to the Borrower declare the Notes,
the Advances, all interest thereon and all other amounts payable under this
Agreement to be forthwith due and payable, whereupon the Notes, the Advances,
all such interest and all such amounts shall become and be forthwith due and
payable, without presentment, demand, protest or further notice of any kind, all
of which are hereby expressly waived by the Borrower; PROVIDED, HOWEVER, that in
the case of any Event of Default referred to in subsection (e) above, the
obligation of each Lender to make Advances shall automatically terminate and the
Advances, all such interest and all such amounts shall automatically become, and
be, due and payable, without presentment, demand, protest or any notice of any
kind, all of which are hereby expressly waived by the Borrower.
ARTICLE VII
THE AGENT AND THE ARRANGER
SECTION 7.01. AUTHORIZATION AND ACTION. Each Lender hereby appoints
and authorizes the Agent to take such action as agent on its behalf and to
exercise such powers and discretion under the Loan Documents as are delegated to
the Agent by the terms thereof,
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together with such powers and discretion as are
reasonably incidental thereto. As to any matters not expressly provided for by
the Loan Documents (including, without limitation, enforcement or collection of
the Notes), the Agent shall not be required to exercise any discretion or take
any action, but shall be required to act or to refrain from acting (and shall be
fully protected in so acting or refraining from acting) upon the instructions of
the Majority Lenders, and such instructions shall be binding upon all Lenders
and all holders of Notes; PROVIDED, HOWEVER, that the Agent shall not be
required to take any action which exposes the Agent to personal liability or
which is contrary to any Loan Document or applicable law. The Agent agrees to
give to each Lender prompt notice of each notice given to it by the Borrower
pursuant to the terms of this Agreement.
SECTION 7.02. AGENT'S RELIANCE, ETC. Neither the Agent nor any of
its directors, officers, agents or employees shall be liable for any action
taken or omitted to be taken by it or them under or in connection with any Loan
Document, except for its or their own gross negligence or willful misconduct.
Without limitation of the generality of the foregoing, the Agent and its
Affiliates: (i) may treat the Lender which made any Advance or the holder of
any Note as the holder of the Debt resulting from such Advance or the holder of
such Note until the Agent receives and accepts an Assignment and Acceptance
entered into by a Lender, as assignor, and an Eligible Assignee, as assignee, as
provided in Section 8.07 or until the Agent receives written notice of the
assignment or transfer of such Note signed by the payee thereof and in form
satisfactory to the Agent; (ii) may consult with legal counsel (including
counsel for the Borrower), independent public accountants and other experts
selected by it and shall not be liable for any action taken or omitted to be
taken in good faith by it in accordance with the advice of such counsel,
accountants or experts; (iii) makes no warranty or representation (whether
written or oral) to any Lender and shall not be responsible to any Lender for
any statements, warranties or representations made in or in connection with any
Loan Document; (iv) shall not have any duty to ascertain or to inquire as to the
performance or observance of any of the terms, covenants or conditions of any
Loan Document on the part of the Borrower or to inspect the property (including
the books and records) of the Borrower or any of its Subsidiaries; (v) shall not
be responsible to any Lender for the due execution, legality, validity,
enforceability, genuineness, sufficiency or value of, or the perfection or
priority of any lien or security interest created or purported to be created
under or in connection with, any Loan Document or any other instrument or
document furnished pursuant thereto; and (vi) shall incur no liability under or
in respect of any Loan Document by acting upon any notice, consent, certificate
or other instrument or writing (which may be by telegram, cable, facsimile or
telex) believed by it to be genuine and signed or sent by the proper party or
parties.
SECTION 7.03. CITIBANK AND AFFILIATES. With respect to its
Commitment and the Advances made by it and the Notes issued to it, Citibank
shall have the same rights and powers under the Loan Documents as any other
Lender and may exercise the same as though it were not the Agent; and the term
"Lender" or "Lenders" shall, unless otherwise expressly indicated, include
Citibank in its individual capacity. Citibank and its Affiliates may accept
deposits from, lend money to, act as trustee under indentures of, and generally
engage in any kind of business with, the Borrower, any of its Subsidiaries and
any Person who may do business with or own securities of the Borrower or any
such Subsidiary, all as if Citibank were not the Agent and without any duty to
account therefor to the Lenders.
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SECTION 7.04. LENDER CREDIT DECISION. Each Lender acknowledges that
it has, independently and without reliance upon the Agent or any other Lender
and based on the financial statements referred to in Section 4.01(f) and such
other documents and information as it has deemed appropriate, made its own
credit analysis and decision to enter into this Agreement and the other Loan
Documents. Each Lender also acknowledges that it will, independently and
without reliance upon the Agent or any other Lender and based on such documents
and information as it shall deem appropriate at the time, continue to make its
own credit decisions in taking or not taking action under this Agreement and the
other Loan Documents.
SECTION 7.05. INDEMNIFICATION. The Lenders agree to indemnify the
Agent (to the extent not reimbursed by the Borrower), ratably according to the
respective principal amounts of the Revolving Advances then owing to each of
them (or if no Revolving Advances are at the time outstanding or if any
Revolving Advances are then owing to Persons which are not Lenders, ratably
according to the respective amounts of their Commitments), from and against any
and all liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements of any kind or nature
whatsoever which may be imposed on, incurred by, or asserted against the Agent
in any way relating to or arising out of the Loan Documents or any action taken
or omitted by the Agent under any Loan Document, PROVIDED that no Lender shall
be liable for any portion of such liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses or disbursements resulting
from the Agent's gross negligence or willful misconduct. Without limitation of
the foregoing, each Lender agrees to reimburse the Agent promptly upon demand
for its ratable share of any out-of-pocket expenses (including counsel fees)
incurred by the Agent in connection with the preparation, execution, delivery,
administration, modification, amendment or enforcement (whether through
negotiations, legal proceedings or otherwise) of, or legal advice in respect of
rights or responsibilities under, the Loan Documents, or any of them, to the
extent that the Agent is not reimbursed for such expenses by the Borrower.
SECTION 7.06. SUCCESSOR AGENT. The Agent may resign at any time as
Agent under the Loan Documents by giving not less than 30 days' written notice
thereof to the Lenders and the Borrower and may be removed as Agent under the
Loan Documents at any time with or without cause by the Majority Lenders. Upon
any such resignation or removal, the Majority Lenders shall have the right to
appoint a successor Agent under the Loan Documents; PROVIDED, HOWEVER, that such
successor Agent shall be reasonably acceptable to the Borrower. If no successor
Agent shall have been so appointed by the Majority Lenders, and shall have
accepted such appointment, within 45 days after the retiring Agent's giving of
notice of resignation or the Majority Lenders' removal of the retiring Agent,
then the retiring Agent may, on behalf of the Lenders, appoint a successor
Agent, which shall be a commercial bank organized under the laws of the United
States of America or of any State thereof and having a combined capital and
surplus of at least $50,000,000. Upon the acceptance of any appointment as
Agent under the Loan Documents by a successor Agent, such successor Agent shall
thereupon succeed to and become vested with all the rights, powers, privileges
and duties of the retiring Agent, and the retiring Agent shall be discharged
from its duties and obligations under the Loan Documents. After any retiring
Agent's resignation or removal as Agent under the Loan Documents, the provisions
of this
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Article VII shall inure to its benefit as to any actions taken or omitted to be
taken by it while it was Agent under the Loan Documents.
SECTION 7.07. THE ARRANGER. The Arranger shall have no duties or
responsibilities in such capacities under this Agreement and the other Loan
Documents and shall incur no liability hereunder or thereunder in such
capacities.
ARTICLE VIII
MISCELLANEOUS
SECTION 8.01. AMENDMENTS, ETC. No amendment or waiver of any
provision of this Agreement or any other Loan Document, nor consent to any
departure by the Borrower or any Subsidiary therefrom, shall in any event be
effective unless the same shall be in writing and signed by the Majority Lenders
(or, with respect to the other Loan Documents (unless otherwise provided for
therein) by the Agent with the written consent of the Majority Lenders), and
then such amendment, waiver or consent shall be effective only in the specific
instance and for the specific purpose for which given and shall bind all
Lenders; PROVIDED, HOWEVER, that no amendment, waiver or consent shall, unless
in writing and signed by all the Lenders, do any of the following: (a) waive
any of the conditions specified in Article III, (b) increase the Commitments of
the Lenders or subject the Lenders to any additional monetary obligations,
(c) reduce the principal of, or interest on, the Revolving Advances or the
Revolving Notes or any fees or other amounts payable hereunder, (d) postpone any
date fixed for any payment of principal of, or interest on, the Revolving
Advances or the Revolving Notes or any fees or other amounts payable hereunder,
(e) change the percentage of the Commitments or of the aggregate unpaid
principal amount of the Revolving Advances or the Revolving Notes, or the number
or percentage of Lenders which shall be required for the Lenders or any of them
to take any action hereunder, or (f) amend this Section 8.01; and PROVIDED,
FURTHER, that (g) no amendment, waiver or consent shall, unless in writing and
signed by the Agent in addition to the Lenders required above to take such
action, affect the rights or duties of the Agent under this Agreement.
SECTION 8.02. NOTICES, ETC. All notices and other communications
provided for hereunder shall be in writing (including facsimile communication)
and mailed, or delivered, if to the Borrower, at its address at 3400 Data
Drive, Rancho Cordova, California 95670, Attention: Chief Financial Officer; if
to any Bank, at its Lending Office specified on the signature pages hereto; if
to any other Lender, at its Lending Office specified in the Assignment and
Acceptance pursuant to which it became a Lender; and if to the Agent, at its
address at 399 Park Avenue, New York, New York 10043, Attention: Margaret A.
Brown; or, as to each party, at such other address as shall be designated by
such party in a written notice to the other parties. All such notices and
communications shall, when mailed or sent by facsimile be effective when
deposited in the mails or confirmed received, respectively, except that notices
and communications to the Agent pursuant to Article II or to the Agent pursuant
to Article VII shall not be effective until received by the Agent.
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<PAGE>
SECTION 8.03. NO WAIVER; REMEDIES. No failure on the part of any
Lender or the Agent to exercise, and no delay in exercising, any right hereunder
shall operate as a waiver thereof; nor shall any single or partial exercise of
any such right preclude any other or further exercise thereof or the exercise of
any other right. The remedies herein provided are cumulative and not exclusive
of any remedies provided by law.
SECTION 8.04. COSTS, EXPENSES AND INDEMNITIES. (a) The Borrower
agrees to pay on demand all costs and expenses in connection with the
preparation, execution, delivery, administration, modification and amendment of
the Loan Documents and the other documents to be delivered hereunder and
thereunder (excluding costs associated with an assignment pursuant to Section
8.07 hereof which are to be paid by the Assignor and Assignee as stated in such
Section 8.07), including, without limitation, the reasonable fees and out-of-
pocket expenses of counsel for the Agent (including local counsel, domestic or
foreign) with respect thereto and with respect to advising the Agent as to its
rights and responsibilities under the Loan Documents in response to a request by
the Borrower for any action to be taken by the Agent or any Lender thereunder,
and all costs and expenses, if any (including, without limitation, reasonable
counsel fees and expenses), of the Agent and any Lender in connection with the
enforcement (whether through negotiations, legal proceedings or otherwise) of
any Loan Document or any other document to be delivered hereunder or thereunder.
(b) The Borrower agrees to indemnify and hold harmless the Agent and
each Lender and each of their respective directors, officers, employees, agents
and affiliates (each being an "Indemnified Party") from and against any and all
claims, damages, losses, liabilities and expenses (including, without
limitation, reasonable fees and disbursements of counsel) that may be incurred
by or asserted against such Indemnified Party (i) in connection with the
investigation of, preparation for or defense of any pending or threatened claim
or any action or proceeding (A) arising out of or relating to the transactions
described in the Loan Documents or any transaction or proposed transaction in
which any proceeds of any Advances are applied or proposed to be applied,
directly or indirectly, by the Borrower, whether or not such Indemnified Party
is a party to such transaction and whether or not the transactions contemplated
herein are consummated, or (B) arising out of or relating to the Borrower's
entering into the Loan Documents, or to any actions or omissions of the Borrower
or any of its Subsidiaries or Affiliates or any of their respective directors,
officers, employees or agents in connection therewith, or (ii) as a result of
any compliance by the Borrower, or failure by the Borrower to comply, with the
HMO Regulations, the securities law of the United States and each state or any
Environmental Laws. The obligations of the Borrower under this Section 8.04(b)
shall survive repayment of the Advances.
(c) If any payment of principal, or conversion of, of any Eurodollar
Rate Advance is made to or for the account of a Lender other than on the last
day of the Interest Period for such Revolving Advance, as a result of a
prepayment pursuant to Section 2.09, acceleration of the maturity of the Notes
pursuant to Section 6.01 or for any other reason whatsoever, the Borrower shall,
upon demand by such Lender (with a copy of such demand to the Agent), pay to the
Agent for the account of such Lender any amounts required to compensate such
Lender for any additional losses, costs or expenses which it may reasonably
incur as a result of such payment, including, without limitation, any loss
(excluding loss of
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anticipated profits), cost or expense incurred by reason of the liquidation or
reemployment of deposits or other funds acquired by any Lender to fund or
maintain such Advance.
SECTION 8.05. RIGHT OF SET-OFF. Upon (i) the occurrence and during
the continuance of any Event of Default under this Agreement and (ii) the making
of the request or the granting of the consent specified by Section 6.01 to
authorize the Agent to declare the Notes and the Advances due and payable
pursuant to the provisions of Section 6.01, each Lender and each of its
Affiliates is hereby authorized at any time and from time to time, to the
fullest extent permitted by law, to set off and apply any and all deposits
(general or special, time or demand, provisional or final) at any time held and
other indebtedness at any time owing by such Lender or such Affiliate to or for
the credit or the account of the Borrower or any of its Subsidiaries against any
and all of the obligations of the Borrower now or hereafter existing under any
Loan Document, irrespective of whether or not such Lender shall have made any
demand under such Loan Document and although such obligations may be unmatured;
PROVIDED, HOWEVER, that the exercise of any such rights against an HMO
Subsidiary or Insurance Subsidiary (or their respective Subsidiaries) shall be
subject to compliance with applicable HMO Regulations and Insurance Regulations.
Each Lender agrees promptly to notify the Borrower after any such set-off and
application made by such Lender, PROVIDED that the failure to give such notice
shall not affect the validity of such set-off and application. The rights of
each Lender and its Affiliates under this Section are in addition to other
rights and remedies (including, without limitation, other rights of set-off)
which such Lender and its Affiliates may have.
SECTION 8.06. BINDING EFFECT. This Agreement shall become effective
when it shall have been executed by the Borrower, the Agent and each Bank, and
thereafter shall be binding upon and inure to the benefit of the Borrower, the
Agent, each Bank and each Lender and their respective successors and assigns,
except that the Borrower shall not have the right to assign its rights hereunder
or any interest herein without the prior written consent of the Lenders.
SECTION 8.07. ASSIGNMENTS AND PARTICIPATIONS. (a) Each Lender may,
and if demanded by the Borrower (following a demand by such Lender pursuant to
Section 2.11 or during a period when the Borrower is making the increased
payments contemplated by Section 2.14(a) or making indemnification for taxes
under Section 2.14(c), upon at least 20 Business Days' notice to such Lender and
the Agent) will, assign to one or more banks or other entities all or a portion
of its rights and obligations as a Lender under this Agreement and the Revolving
Notes (including, without limitation, all or a portion of its Commitment, the
Revolving Advances owing to it and the Revolving Note or Notes held by it in
respect of the Revolving Advances); PROVIDED, HOWEVER, that (i) each such
assignment shall be of a constant, and not a varying, percentage of all of the
assigning Lender's rights and obligations under this Agreement and the Revolving
Notes , (ii) the aggregate amount of the Commitment and/or Revolving Advances of
the assigning Lender being assigned pursuant to each such assignment (determined
as of the date of the Assignment and Acceptance with respect to such assignment)
shall in no event be less than $10,000,000 and shall be an integral multiple of
$1,000,000 in excess thereof, (iii) each such assignment shall be to an Eligible
Assignee approved by the Borrower (which approval shall not be unreasonably
withheld), (iv) each such assignment made as a result of a demand by the
Borrower pursuant
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to this Section 8.07(a) shall be arranged by the Borrower (at its expense,
including, without limitation, payment of the processing and recordation fee
referred to in subclause (vi) hereof) after consultation with the Agent, shall
be to an Eligible Assignee acceptable to the Majority Lenders and shall be
either an assignment of all of the rights and obligations of the assigning
Lender under this Agreement or an assignment of a portion of such rights and
obligations made concurrently with another such assignment or other such
assignments which together cover all of the rights and obligations of the
assigning Lender under this Agreement, (v) no Lender shall be obligated to make
any such assignment as a result of a demand made by the Borrower pursuant to
this Section 8.07(a) unless and until such Lender shall have received one or
more payments from either the Borrower or one or more Eligible Assignees in an
aggregate amount at least equal to the aggregate outstanding principal amount of
the Revolving Advances owing to such Lender, together with accrued interest
thereon to the date of payment of such principal amount and all other amounts
payable to such Lender under this Agreement and the Revolving Notes, (vi) the
parties to each such assignment shall execute and deliver to the Agent, for its
acceptance and recording in the Register, an Assignment and Acceptance, together
with any Revolving Note or Notes subject to such assignment and a processing and
recordation fee of $2,500 and (vii) all other costs and expenses relating to
each such assignment shall be borne by the parties thereto. Upon such
execution, delivery, acceptance and recording, from and after the effective date
specified in each Assignment and Acceptance, (x) the assignee thereunder shall
be a party hereto and, to the extent that rights and obligations under the Loan
Documents have been assigned to it pursuant to such Assignment and Acceptance,
have the rights and obligations of a Lender hereunder and thereunder and (y) the
Lender assignor thereunder shall, to the extent that rights and obligations
under the Loan Documents have been assigned by it pursuant to such Assignment
and Acceptance, relinquish its rights and be released from its obligations under
the Loan Documents (and, in the case of an Assignment and Acceptance covering
all or the remaining portion of an assigning Lender's rights and obligations
under this Agreement and Revolving Notes, such Lender shall cease to be a party
hereto).
(b) By executing and delivering an Assignment and Acceptance, the
Lender assignor thereunder and the assignee thereunder confirm to and agree with
each other and the other parties hereto as follows: (i) other than as provided
in such Assignment and Acceptance, such assigning Lender makes no representation
or warranty (whether written or oral) and assumes no responsibility with respect
to any statements, warranties or representations made in or in connection with
any Loan Document or the execution, legality, validity, enforceability,
genuineness, sufficiency or value of any Loan Document or any other instrument
or document furnished pursuant hereto or thereto; (ii) such assigning Lender
makes no representation or warranty and assumes no responsibility with respect
to the financial condition of the Borrower or the performance or observance by
the Borrower of any of its obligations under any Loan Document or any other
instrument or document furnished pursuant hereto or thereto; (iii) such assignee
confirms that it has received a copy of each of the Loan Documents, together
with copies of the financial statements referred to in Section 4.01(f) and such
other documents and information as it has deemed appropriate to make its own
credit analysis and decision to enter into such Assignment and Acceptance;
(iv) such assignee will, independently and without reliance upon the Agent, such
assigning Lender or any other Lender and based on such documents and information
as it shall deem appropriate at the time, continue to make its own credit
decisions in taking or not taking action under
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this Agreement or any other Loan Document; (v) such assignee confirms that it is
an Eligible Assignee; (vi) such assignee appoints and authorizes the Agent to
take such action as agent on its behalf and to exercise such powers under this
Agreement and the other Loan Documents as are delegated to the Agent by the
terms hereof and thereof, together with such powers as are reasonably incidental
thereto; and (vii) such assignee agrees that it will perform in accordance with
their terms all of the obligations which by the terms of this Agreement and the
Revolving Notes are required to be performed by it as a Lender.
(c) The Agent shall maintain at its address referred to in
Section 8.02 a copy of each Assignment and Acceptance delivered to and accepted
by it and a register for the recordation of the names and addresses of the
Lenders and the Commitment of, and principal amount of the Advances owing to,
each Lender from time to time (the "Register"). The entries in the Register
shall be conclusive and binding for all purposes, absent manifest error, and the
Borrower, the Agent and the Lenders may treat each Person whose name is recorded
in the Register as a Lender hereunder for all purposes of this Agreement. The
Register shall be available for inspection by the Borrower or any Lender at any
reasonable time and from time to time upon reasonable prior notice.
(d) Upon its receipt of an Assignment and Acceptance executed by an
assigning Lender and an assignee representing that it is an Eligible Assignee,
together with any Revolving Note or Notes subject to such assignment, the Agent
shall, if such Assignment and Acceptance has been completed and is in
substantially the form of Exhibit A hereto and the assignee has been approved by
the Borrower pursuant to Section 8.07(a), (i) accept such Assignment and
Acceptance, (ii) record the information contained therein in the Register, and
(iii) give prompt notice thereof to the Borrower. Within five Business Days
after its receipt of such notice, the Borrower, at its own expense, shall
execute and deliver to the Agent in exchange for the surrendered Revolving Note
or Notes, a new Revolving Note to the order of such Eligible Assignee in an
amount equal to the Commitment assumed by it pursuant to such Assignment and
Acceptance and, if the assigning Lender has retained a Commitment hereunder, a
new Revolving Note to the order of the assigning Lender in an amount equal to
the Commitment retained by it hereunder. Such new Revolving Note or Notes shall
be in an aggregate principal amount equal to the aggregate principal amount of
such surrendered Revolving Note or Notes, shall be dated the effective date of
such Assignment and Acceptance and shall otherwise be in substantially the form
of Exhibit C hereto.
(e) Each Lender may sell participations to one or more banks or other
entities in or to all or a portion of its rights and obligations under the Loan
Documents (including, without limitation, all or a portion of its Commitment,
the Advances owing to it and the Note or Notes held by it); PROVIDED, HOWEVER,
that (i) such Lender's obligations under the Loan Documents (including, without
limitation, its Commitment to the Borrower hereunder) shall remain unchanged,
(ii) such Lender shall remain solely responsible to the other parties hereto for
the performance of such obligations, (iii) such Lender shall remain the holder
of any such Note for all purposes of the Loan Documents, and (iv) the Borrower,
the Agent and the other Lenders shall continue to deal solely and directly with
such Lender in connection with such Lender's rights and obligations under the
Loan Documents, PROVIDED, FURTHER, that, to the extent of any such participation
(unless otherwise stated therein and subject to the preceding PROVISO), the
assignee or purchaser of such participation shall, to
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the fullest extent permitted by law, have the same rights and benefits hereunder
as it would have if it were a Lender hereunder; and PROVIDED, FURTHER, that
each such participation shall be granted pursuant to an agreement providing that
the purchaser thereof shall not have the right to consent or object to any
action by the selling Lender (who shall retain such right) other than an action
which would (i) reduce principal of or interest on any Advance or fees in which
such purchaser has an interest, or (ii) postpone any date fixed for payment of
principal of or interest on any such Advance or such fees.
(f) Notwithstanding any term or provision of this Section 8.07 or
this Agreement expressly or impliedly to the contrary, each Lender may assign,
as collateral or otherwise, any or all of its rights (including, without
limitation, rights to payments of principal and/or interest hereunder or under
the Notes) hereunder and the other Loan Documents to any Federal Reserve Bank or
any Affiliate of such Lender without notice to or the consent of the Borrower,
any other Lender or the Agent.
SECTION 8.08. SEVERABILITY OF PROVISIONS. Any provision of this
Agreement which is prohibited or unenforceable in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof or
affecting the validity or enforceability of such provision in any other
jurisdiction.
SECTION 8.09. INDEPENDENCE OF PROVISIONS. All agreements and
covenants hereunder and under the Loan Documents shall be given independent
effect such that if a particular action or condition is prohibited by the terms
of any such agreement or covenant, the fact that such action or condition would
be permitted within the limitations of another agreement or covenant shall not
be construed as allowing such action to be taken or condition to exist.
SECTION 8.10. HEADINGS. Article and Section headings in this
Agreement are included for convenience of reference only and shall not
constitute a part of this Agreement for any other purpose.
SECTION 8.11. EXECUTION IN COUNTERPARTS. This Agreement may be
executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed shall be deemed to be an
original and all of which taken together shall constitute one and the same
agreement.
SECTION 8.12. CONFIDENTIALITY. Each Lender and the Agent agrees that
it will not disclose to any third party any proprietary and confidential
information provided to it by the Borrower; PROVIDED, THAT, the foregoing will
not (i) restrict the ability of the Agent, the Lenders and any loan participants
from freely exchanging such information among themselves (and their respective
employees, attorneys, agents and advisors), (ii) restrict the ability to
disclose such information to a prospective Eligible Assignee or participant,
PROVIDED, THAT, such Eligible Assignee or participant executes a confidentiality
agreement with the selling Lender agreeing to be bound by the terms hereof prior
to disclosure of such information to such Eligible Assignee or participant or
(iii) prohibit the disclosure of such information to the extent such information
(a) is or becomes publicly available, (b) becomes
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available on a non-confidential basis from a Person who has no obligation to
keep such information confidential or (c) is required to be disclosed pursuant
to court order, subpoena, other legal process, regulatory request or otherwise
by law.
SECTION 8.13. CONSENT TO JURISDICTION. (a) The Borrower hereby
irrevocably submits to the jurisdiction of any New York State or Federal court
sitting in the City of New York, New York County, in any action or proceeding
arising out of or relating to this Agreement or any other Loan Document, and the
Borrower hereby irrevocably agrees that all claims in respect of such action or
proceeding may be heard and determined in such New York State court or such
Federal court. The Borrower hereby irrevocably waives, to the fullest extent it
may effectively do so, the defense of an inconvenient forum to the maintenance
of such action or proceeding. The Borrower hereby irrevocably consents to the
service of copies of the summons and complaint and any other process which may
be served in any such action or proceeding by certified mail, return receipt
requested, or by delivering of a copy of such process to the Borrower at its
address specified in Section 8.02 or by any other method permitted by law. The
Borrower agrees that a final judgment in any such action or proceeding shall be
conclusive and may be enforced in other jurisdictions by suit on the judgment or
by any other manner provided by law.
(b) Nothing in this Section 8.13 shall affect the right of any
Lender, the Agent or the Borrower to serve legal process in any other manner
permitted by law or affect the right of any Lender or the Agent to bring any
action or proceeding against the Borrower or its property in the courts of other
jurisdictions.
SECTION 8.14. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
SECTION 8.15. WAIVER OF JURY TRIAL. EACH OF THE BORROWER, THE AGENT
AND THE LENDERS HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY
LAW, ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM
(WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO
ANY OF THE LOAN DOCUMENTS, THE ADVANCES OR THE NOTES, OR THE ACTIONS OF THE
AGENT OR ANY LENDER IN CONNECTION WITH THE NEGOTIATION, ADMINISTRATION,
PERFORMANCE OR ENFORCEMENT THEREOF.
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IN WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized, as of the
date first above written.
THE BORROWER:
------------
FOUNDATION HEALTH CORPORATION
-----------------------------
By: _________________________
Name:
Title:
THE AGENT:
---------
CITIBANK, N.A.
--------------
By: _________________________
Name:
Title:
THE BANKS:
Commitment: $40,000,000 CITIBANK, N.A.
--------------
By: _________________________
Name:
Title:
Commitment: $35,000,000 BANK OF AMERICA, N.T. & S.A.
----------------------------
By: _________________________
Name:
Title:
Commitment: $25,000,000 THE SANWA BANK, LIMITED
-----------------------
By: _________________________
Name:
Title:
Commitment: $15,000,000 UNION BANK OF CALIFORNIA, N.A.
------------------------------
By: _________________________
Name:
Title:
55
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Commitment: $20,000,000 THE CHASE MANHATTAN BANK, N.A.
------------------------------
By: _________________________
Name:
Title:
Commitment: $20,000,000 NATIONSBANK OF TEXAS, N.A.
--------------------------
By: _________________________
Name:
Title:
Commitment: $15,000,000 CREDIT LYONNAIS NEW YORK BRANCH
-------------------------------
By: _________________________
Name:
Title:
Commitment: $15,000,000 THE SUMITOMO BANK, LIMITED,
--------------------------
By: _________________________
Name:
Title:
Commitment: $15,000,000 THE BANK OF NOVA SCOTIA
-----------------------
By: _________________________
Name:
Title:
_______________________
Total: $200,000,000
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SCHEDULE 1
----------
LENDING OFFICES, ADDRESSES, ETC.
--------------------------------
LENDER ADDRESS
- ------ -------
CITIBANK, N.A. 399 Park Avenue
New York, New York 10043
Attention: Margaret A. Brown
BANK OF AMERICA, N.T. & S.A. 555 South Flower Street
11th Floor, #5413
Los Angeles, California 90071
Attention: Susan Wegleitner
THE SANWA BANK, LIMITED 601 S. Figueroa Street
Los Angeles, California 90017
Attention: Karen Coleman
THE CHASE MANHATTAN BANK, N.A. 270 Park Avenue
New York, New York 10017
Attention: Dawn Leelum
NATIONSBANK OF TEXAS, N.A. 444 South Flower Street, Suite 4100
Los Angeles, California 90071
Attention: Elizabeth Gould
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<PAGE>
CREDIT LYONNAIS Healthcare Group
NEW YORK BRANCH 1301 Avenue of the Americas,
20th Floor
New York, New York 10019
Attention: Farboud Tavangar
THE SUMITOMO BANK, LIMITED 555 California Street, Suite 3350
SAN FRANCISCO BRANCH San Francisco, California 94104
Attention: Azar Shakeri
THE BANK OF NOVA SCOTIA 580 California Street Suite 2100
San Francisco, California 94104
Attention: Alan Pendergast
58
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SCHEDULE 2
----------
SUBSIDIARIES
------------
See Attached
59
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FIRST AMENDMENT AGREEMENT AND WAIVER
First Amendment Agreement and Waiver, dated as of January 28, 1997 (this
"Amendment"), among Foundation Health Corporation, a Delaware corporation
(the "Borrower"), the lenders (the "Lenders") listed on the signature pages
hereof and Citibank, N.A., as administrative agent (the "Agent") for the
Lenders.
1. The Borrower, the Lenders and the Agent have entered into a
Revolving Credit Agreement, dated as of December 17, 1996 (such credit
agreement as it may be amended and in effect from time to time, being
referred to herein as the "Credit Agreement"; terms defined therein and not
otherwise defined herein being used herein as therein defined).
2. The Borrower, Health Systems International, Inc. ("HSI") and FH
Acquisition Corp. on October 1, 1996 entered into an Agreement and Plan of
Merger ("Merger Agreement") pursuant to which the Borrower will become a
wholly owned subsidiary of HSI (the "Merger"). The Borrower has requested the
Lenders and the Agent to amend the Credit Agreement to permit the Credit
Agreement to survive the Merger and to grant a waiver thereunder in
connection therewith. The Lenders and the Agent have agreed to such request
on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises set forth above and
other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:
SECTION 1. AMENDMENTS TO CREDIT AGREEMENT. The Credit Agreement is,
effective as of the consummation of the Merger and subject to the
satisfaction of the conditions precedent set forth in Section 3 hereof,
hereby amended as follows:
(a) Section 1.01 is hereby amended by adding the following defined
term after the definition of "HMO SUBSIDIARY" therein:
"`HSI' means Health Systems International, Inc., a Delaware
corporation."
(b) Section 6.01 of the Credit Agreement is hereby amended by
deleting the semicolon at the end of Section 6.01 (n) and replacing it
with the word "; or" and adding the following subsection (o) after such
subsection (n):
"(o) HSI or any of its Subsidiaries (other than those
Subsidiaries subject to Section 6.01 (d) hereof) shall fail to pay
any Debt in a principal payment amount (whether singly or in the
aggregate) equal to or in excess of $15,000,000 of HSI or such
Subsidiary, as the case may be, when the same becomes due and
payable (whether by scheduled maturity, required prepayment,
acceleration,
<PAGE>
2
demand or otherwise (and inclusive of principal, interest,
fees and penalties)), and such failure shall continue after the
applicable grace period, if any, specified in the agreements or
instruments relating to such Debt; or any other event shall occur
or condition shall exist under any agreements or instruments
relating to such Debt and shall continue after the applicable
grace period, if any, specified in such agreements or instruments,
if the effect of such event or condition is to accelerate, or to
permit the acceleration of, the maturity of such Debt; or any such
Debt shall be declared to be due and payable, or required to be
prepaid (other than by a regularly scheduled required prepayment),
prior to the stated maturity thereof."
SECTION 2. WAIVERS TO CREDIT AGREEMENT. Subject to the satisfaction of
the conditions precedent set forth in Section 3 hereof, any Default or Event
of Default arising from the transactions contemplated by the Merger Agreement
is hereby waived from the date hereof to and including June 30, 1997.
SECTION 3. CONDITIONS OF EFFECTIVENESS. This Amendment shall become
effective if, on or prior to February 9, 1997, the Agent shall have received
(i) counterparts of this Amendment duly executed by the Borrower, the
Majority Lenders and the Agent, (ii) resolutions of the Board of Directors of
the Borrower approving this Amendment and the transactions contemplated
hereby, together with an incumbency certificate with respect to the officers
of the Borrower executing this Amendment and (iii) evidence that the Amended
and Restated Credit Agreement, dated as of April 26, 1996 among HSI, the
lenders thereto and Bank of America, N.T. & S.A., as agent, has been amended,
pursuant to an amendment in form and substance satisfactory to the Agent and
to the Borrower, to permit the Merger and to permit the indebtedness of the
Borrower under the Credit Agreement to continue after the effectiveness of
the Merger.
SECTION 4. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT. (a) Upon
the effectiveness of this Amendment, on and after the date hereof, each
reference in the Credit Agreement to "this Agreement," "hereunder," "hereof"
or words of like import referring to the Credit Agreement, shall mean and be
a reference to the Credit Agreement as amended hereby.
(b) Except as specifically amended above, the Credit Agreement is and
shall continue to be in full force and effect and is hereby ratified and
confirmed in all respects.
(c) The execution, delivery and effectiveness of this Amendment shall
not operate as a waiver of any right, power or remedy of any Lender or the
Agent under the Credit Agreement, nor constitute a waiver of any provision of
the Credit Agreement, except as specifically herein provided.
<PAGE>
3
SECTION 5. FEES, COSTS AND EXPENSES. The Borrower agrees to
pay on demand all reasonable costs and expenses of the Agent incurred in
connection with the preparation, execution, delivery, administration,
modification and amendment of this Amendment and the other documents to be
delivered hereunder, including, without limitation, the reasonable fees and
out-of-pocket expenses of the Agent's legal counsel. The Borrower further
agrees to pay on demand all costs and expenses of the Agent and the Lenders
(including, without limitation, reasonable fees and expenses of the Agent's
legal counsel) in connection with the enforcement (whether through
negotiations, legal proceedings or otherwise) of the Amendment and other
documents to be delivered under this Amendment.
SECTION 6. EXECUTION IN COUNTERPARTS. This Amendment may be
executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed and delivered shall be
deemed to be an original and all of which taken together shall constitute but
one and the same agreement.
SECTION 7. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED
BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed by their respective officers thereunto duly
authorized, as of the date first above written.
THE BORROWER:
-------------
FOUNDATION HEALTH CORPORATION
By:
--------------------------------
Name:
Title:
THE AGENT:
----------
CITIBANK, N.A.
By:
--------------------------------
Name:
Title:
<PAGE>
4
THE LENDERS:
-----------
CITIBANK, N.A.
By:
--------------------------------
Name:
Title:
NATIONSBANK OF TEXAS, N.A.
By:
--------------------------------
Name:
Title:
BANK OF AMERICA, N.T. & S.A.
By:
--------------------------------
Name:
Title:
THE CHASE MANHATTEN BANK, N.A.
By:
--------------------------------
Name:
Title:
UNION BANK OF CALIFORNIA, N.A.
By:
--------------------------------
Name:
Title:
<PAGE>
5
THE BANK OF NOVA SCOTIA
By:
--------------------------------
Name:
Title:
THE DAI-ICHI KANGYO BANK, LIMITED,
SAN FRANCISCO AGENCY
By:
--------------------------------
Name:
Title:
THE SUMITOMO BANK, LIMITED,
SAN FRANCISCO BRANCH
By:
--------------------------------
Name:
Title:
CREDIT LYONNAIS NEW YORK BRANCH
By:
--------------------------------
Name:
Title:
THE SANWA BANK, LIMITED
By:
--------------------------------
Name:
Title:
<PAGE>
SECOND AMENDMENT AGREEMENT
--------------------------
Second Amendment Agreement, dated as of April 1, 1997 (this "Waiver"),
among Foundation Health Corporation, a Delaware corporation (the "Borrower"),
the lenders (the "Lenders") listed on the signature pages hereof and
Citibank, N.A., as administrative agent (the "Agent") for the Lenders.
1. The Borrower, the Lenders and the Agent have entered into a
Revolving Credit Agreement, dated as of December 17, 1996, as amended by a
First Amendment and Waiver dated as of January 28, 1997 (such credit
agreement, as it may be amended and in effect from time to time, being
referred to herein as the "Credit Agreement"; terms defined therein and not
otherwise defined herein being used herein as therein defined).
2. The Borrower anticipates that it will not be in compliance with the
Fixed Charge Coverage Ratio set forth in Section 5.03(b) of the Credit
Agreement for the fiscal quarters ending December 31, 1996 and March 31, 1997
and that it will no longer prepare audited annual financial statements and
will therefore also not be in compliance with Section 5.04(b) of the Credit
Agreement and has requested the Lenders and the Agent to amend such
covenants. The Lenders and the Agent have agreed to such request on the terms
and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises set forth above and
other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:
SECTION 1. AMENDMENTS TO CREDIT AGREEMENT. (a) Subject to the
satisfaction of the condition precedent set forth in Section 2 hereof,
Section 5.03(b) of the Credit Agreement is hereby amended in full to read as
follows:
"(b) FIXED CHARGE COVERAGE RATIO. Permit, as at the end of any
Fiscal Quarter of the Borrower listed below, the Consolidated Fixed
Charge Coverage Ratio of the Borrower and its Subsidiaries for the
four-Fiscal Quarter period ending on the last day of such Fiscal
Quarter to be less than the minimum ratio set forth opposite such
Fiscal Quarter:
FISCAL QUARTER MINIMUM RATIO
----------------- -------------
December 31, 1996 1.5 to 1.0
March 31, 1997 1.5 to 1.0
Each Fiscal Quarter thereafter (if any) 3.75 to 1.0
<PAGE>
2
(b) Subject to the satisfaction of the condition precedent set forth
in Section 2 hereof, Section 5.04(b) of the Credit Agreement is hereby
amended in full to read as follows:
"(b) As soon as available and in any event within 120 days after
the end of each Fiscal Year, a Consolidated balance sheet of the
Borrower and its Subsidiaries as of the end of such Fiscal Year
and Consolidated statements of operations, stockholders' equity
and cash flows of the Borrower and its Subsidiaries for such
Fiscal Year, certified by the chief financial officer of the
Borrower, together with (i) a certificate of said officer stating
that, to his or her knowledge, no Default has occurred and is
continuing or, if a Default has occurred and is continuing, a
statement as to the nature thereof and the action the Borrower
has taken or proposes to take with respect thereto and (ii) a
schedule in form satisfactory to the Agent of the computations
used by the Borrower in determining compliance with the covenants
contained in Section 5.03 and in sufficient detail for determining
the Applicable Eurodollar Margin and Applicable Percentage in
accordance with the definition of such terms set forth in
Section 1.01."
SECTION 2. CONDITION OF EFFECTIVENESS. This Amendment shall
become effective if, on or prior to April 11, 1997, the Agent shall have
received counterparts of this Amendment duly executed by the Borrower, the
Majority Lenders and the Agent.
SECTION 3. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT.
(a) Except as specifically amended above, the Credit Agreement is and shall
continue to be in full force and effect and is hereby ratified and confirmed
in all respects.
(b) The execution, delivery and effectiveness of this Amendment
shall not operate as a waiver of any right, power or remedy of any Lender
or the Agent under the Credit Agreement, nor constitute a waiver of any
provision of the Credit Agreement, except as specifically herein
provided.
(c) Upon the effectiveness of this Amendment, on and after the
date hereof, each reference in the Credit Agreement to "this Agreement",
"hereunder", "hereof" or words of like import referring to the Credit
Agreement shall mean and be a reference to the Credit Agreement as amended
hereby.
SECTION 4. FEES, COSTS AND EXPENSES. The Borrower agrees to pay on
demand all reasonable costs and expenses of the Agent incurred in connection
with the preparation, execution and delivery of this Amendment, including,
without limitation, the reasonable fees and out-of-pocket expenses of the
Agent's legal counsel.
<PAGE>
3
SECTION 5. EXECUTION IN COUNTERPARTS. This Amendment may be
executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed and delivered shall be
deemed to be an original and all of which taken together shall constitute but
one and the same agreement.
SECTION 6. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
to be executed by their respective officers thereunto duly authorized, as of
the date first above written.
THE BORROWER:
------------
FOUNDATION HEALTH CORPORATION
By:
------------------------------
Name:
Title:
THE AGENT:
---------
CITIBANK, N.A.
By:
------------------------------
Name:
Title:
<PAGE>
4
THE LENDERS:
-----------
CITIBANK, N.A.
By:
------------------------------
Name:
Title:
NATIONSBANK OF TEXAS, N.A.
By:
------------------------------
Name:
Title:
BANK OF AMERICA, N.T. & S.A.
By:
------------------------------
Name:
Title:
THE CHASE MANHATTAN BANK,
By:
------------------------------
Name:
Title:
UNION BANK OF CALIFORNIA, N.A.
By:
------------------------------
Name:
Title:
<PAGE>
5
THE BANK OF NOVA SCOTIA
By:
------------------------------
Name:
Title:
THE DAI-ICHI KANGYO BANK, LIMITED
SAN FRANCISCO AGENCY
By:
------------------------------
Name:
Title:
THE SUMITOMO BANK, LIMITED
SAN FRANCISCO BRANCH
By:
------------------------------
Name:
Title:
CREDIT LYONNAIS NEW YORK BRANCH
By:
------------------------------
Name:
Title:
THE SANWA BANK, LIMITED
By:
------------------------------
Name:
Title:
<PAGE>
EXHIBIT 11.1
FOUNDATION HEALTH SYSTEMS, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three-Months Ended March 31,
---------------------------
1997 1996
------------- -----------
<S> <C> <C>
Primary:
Shares outstanding at beginning of period 48,433 48,327
Weighted average shares issued
(repurchased) during period 4 (449)
Dilutive shares contingently issuable
upon exercise of stock options, net of
shares assumed to have been purchased (at
average market price) for treasury with
assumed proceeds from exercise 63 257
---------- ----------
Total primary shares 48,500 48,135
---------- ----------
Net income $ 24,572 $ 26,040
---------- ----------
Net income per share $ 0.51 $ 0.54
---------- ----------
Fully diluted:
Shares outstanding at beginning of period 48,433 48,327
Weighted average shares issued (repurchased)
during period 4 (449)
Dilutive shares contingently issuable upon
exercise of stock options, net of shares
assumed to have been purchased (at the
greater of average or period-end market
price) for treasury with assumed proceeds
from exercise 69 299
---------- ----------
Total fully diluted shares 48,506 48,177
---------- ----------
Net income $ 24,572 $ 26,040
---------- ----------
Net income per share $ 0.51 $ 0.54
---------- ----------
---------- ----------
</TABLE>
<PAGE>
current as of 5/2/97
- --------------------------------------------------------------------------------
FOUNDATION HEALTH SYSTEMS, INC. (DE)
(ALL SUBSIDIARIES WHOLLY OWNED UNLESS OTHERWISE INDICATED)
- --------------------------------------------------------------------------------
HEALTH NET (CA)
- --------------------------------------------------------------------------------
-- HEALTH NET LIFE INSURANCE COMPANY (CA)
-- PCA OF CALIFORNIA INSURANCE AGENCY (CA)
- --------------------------------------------------------------------------------
QUALMED, INC. (DE)
- --------------------------------------------------------------------------------
-- PREFERRED HEALTH NETWORK, INC. (CA)
-- Midwest Business Medical Association, Ltd. (IL)
-- QUALMED PLANS FOR HEALTH OF COLORADO, INC. (CO)
-- San Luis Valley Physicians Service Corp., Limited (CO)*
-- QUALMED HEALTH & LIFE INSURANCE COMPANY (CO)
-- QUALMED PLANS FOR HEALTH, INC. (NM)
-- QUAL-MED OREGON HEALTH PLAN, INC. (OR)
-- QUALMED WASHINGTON HEALTH PLAN, INC. (WA)
- --------------------------------------------------------------------------------
HSI EASTERN HOLDINGS, INC. (PA)
- --------------------------------------------------------------------------------
-- GREATER ATLANTIC HEALTH SERVICE, INC. (DE)
-- QualMed Plans for Health, Inc. (PA)
-- Greater Atlantic Preferred Plus, Inc. (PA)
-- Employ Better Care, Inc. (PA)
- --------------------------------------------------------------------------------
HSI ADVANTAGE HEALTH HOLDINGS, INC. (DE)
- --------------------------------------------------------------------------------
-- QUALMED PLANS FOR HEALTH OF OHIO AND WEST VIRGINIA, INC. (OH)
-- QUALMED PLANS FOR HEALTH OF WESTERN PENNSYLVANIA, INC. (PA)
-- PENNSYLVANIA HEALTH CARE PLAN, INC. (PA)
- --------------------------------------------------------------------------------
FOUNDATION HEALTH CORPORATION (DE)
- --------------------------------------------------------------------------------
-- FOUNDATION HEALTH PREFERRED ADMINISTRATORS, (CA)
-- FOUNDATION HEALTH NATIONAL LIFE INSURANCE COMPANY (TX)
-- FH-ARIZONA SURGERY CENTERS, INC. (AZ)
-- FH SURGERY LIMITED, INC. (CA)
-- FH SURGERY CENTERS, INC. (CA)
-- FOUNDATION HEALTH FACILITIES, INC. (CA)
-- FH ASSURANCE COMPANY (CAYMAN ISLANDS)
-- FOUNDATION HEALTH WAREHOUSE COMPANY (CA)
-- MEMORIAL HOSPITAL OF GARDENA, INC. (CA)
-- EAST LOS ANGELES DOCTORS HOSPITAL, INC. (CA)
-- FOUNDATION HEALTH VISION SERVICES, DBA AVP VISION PLAN (CA)
-- DENTICARE OF CALIFORNIA, INC. (CA)
-- MANAGED ALTERNATIVE CARE, INC. (CA)
-- AMERICAN VITALCARE, INC. (CA)
-- FOUNDATION HEALTH FEDERAL SERVICES, INC. (DE)
-- Catalina Professional Recruiters, Inc. (AZ)
-- FHC INTERNATIONAL, INC. (DE)
-- Foundation Health (Unlimited) (United Kingdom)****
-- FOUNDATION HEALTH TRAVEL LTD. (UNITED KINGDOM)
-- MEDNET SERVICES LIMITED (UNITED KINGDOM)
-- Foundation Health Psychcare Limited (United Kingdom)
-- Mednet Europe (United Kingdom)****
-- FOUNDATION HEALTH INTERNATIONAL MANAGEMENT SERVICES (CA)
-- Foundation Health (Unlimited) (United Kingdom)+
-- Mednet Europe (United Kingdom)+
-- FOUNDATION HEALTH PHARMACEUTICAL SERVICES, INC., DBA APOLLO ENTERPRISES
(CA)
-- Integrated Pharmaceutical Services (CA)
-- FOUNDATION HEALTH, A FLORIDA HEALTH PLAN, INC. (FL)
-- CMP-Health Administrators, Inc. (FL)
-- Foundation Health Medical Group, Florida, Inc. (FL)
-- FOUNDATION HEALTH, A CALIFORNIA HEALTH PLAN (CA)
-- FOUNDATION HEALTH, A COLORADO HEALTH PLAN, INC. (CO)
-- FOUNDATION HEALTH, A LOUISIANA HEALTH PLAN, INC. (LA)
-- FOUNDATION HEALTH, A TEXAS HEALTH PLAN, INC. (TX)
-- FOUNDATION HEALTH, AN ALABAMA HEALTH PLAN, INC. (AL)
-- FOUNDATION HEALTH, AN OKLAHOMA HEALTH PLAN, INC. (OK)
-- PREFERRED HEALTH PROVIDERS, INC. (FL)
-- FOUNDATION HEALTH PSYCHCARE SERVICES, INC. (CA)
-- INTERCARE, INC. (AZ)
-- INTERGROUP HEALTH PLAN, INC., DBA INTERGROUP SELECT (AZ)
-- INTERGROUP PREPAID HEALTH SERVICES OF ARIZONA, INC. DBA INTERGROUP OF
ARIZONA, INC. (AZ)
-- INTERLEASE OF ARIZONA, INC. (AZ)
-- GEM HOLDING CORPORATION (UT)++
-- Gem Insurance Company (UT)
-- INTERGROUP HEALTHCARE CORPORATION OF UTAH (UT)
-- Intergroup of Utah, Inc. (UT)
-- BUSINESS INSURANCE GROUP, INC. (DE)
-- Business Insurance Company (DE)
-- California Compensation Insurance Company (CA)
-- Combined Benefits Life Insurance Company (CA)
-- Foundation Health Medical Resource Management, DBA Reviewco (CA)
-- Foundation Integrated Risk Management Solutions, Incorporated (CA)
-- CLAIMS TECHNICAL SERVICES, INC. (DE)
-- MANAGED HEALTH NETWORK, INC. (DE)
-- Health Management Center West, Inc. (MA)
-- Health Management Center, Inc. (MA)
-- Health Management Center, Inc. of Wisconsin (WI)
-- HMC PPO, Inc. (MA)
-- Managed Health Network (CA)
-- MHN Reinsurance Company of Arizona (AZ)
-- MHN Services (CA)
- --------------------------------------------------------------------------------
NATIONAL PHARMACY SERVICES, INC. (DE)
- --------------------------------------------------------------------------------
-- INTEGRATED PHARMACY SYSTEMS, INC. (PA)***
- --------------------------------------------------------------------------------
QUALMED PLANS FOR HEALTH OF PENNSYLVANIA, INC. (PA)**
- --------------------------------------------------------------------------------
M.D. HEALTH PLAN, INC. (CT)
- --------------------------------------------------------------------------------
HN REINSURANCE LIMITED (CAYMAN ISLANDS)
- --------------------------------------------------------------------------------
* A limited partnership in which QualMed Plans for Health of
Colorado, Inc. is an 83.4% limited partner.
** HSI owns approximately 83.0% of the outstanding common stock.
*** National Pharmacy Services, Inc. owns approximately 90% of the
outstanding common stock.
**** FHC International, Inc. owns 90% of the outstanding common stock.
+ Foundation Health International Management Services owns 10% of the
outstanding common stock.
++ Foundation Health Corporation owns approximately 99.9% of the
outstanding common stock.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF INCOME.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997<F1>
<CASH> 204,865
<SECURITIES> 377,819
<RECEIVABLES> 109,136
<ALLOWANCES> (10,313)
<INVENTORY> 0
<CURRENT-ASSETS> 769,655
<PP&E> 179,000
<DEPRECIATION> (106,783)
<TOTAL-ASSETS> 1,236,103
<CURRENT-LIABILITIES> 436,611
<BONDS> 409,800
0
0
<COMMON> 51
<OTHER-SE> 388,156
<TOTAL-LIABILITY-AND-EQUITY> 1,236,103
<SALES> 0
<TOTAL-REVENUES> 850,404<F2>
<CGS> 0
<TOTAL-COSTS> 704,071<F3>
<OTHER-EXPENSES> 98,854
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,316
<INCOME-PRETAX> 41,163
<INCOME-TAX> 16,589
<INCOME-CONTINUING> 24,572<F4>
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,572
<EPS-PRIMARY> .51
<EPS-DILUTED> .51
<FN>
<F1>INFORMATION PRESENTED IN THIS FINANCIAL DATA SCHEDULE DOES NOT INCLUDE THE
FINANCIAL POSITION OR RESULTS OF OPERATIONS OF FOUNDATION HEALTH CORPORATION, AS
THE COMPANIES WERE NOT MERGED AS OF MARCH 31, 1997.
<F2>INCLUDES $9,439 K INVESTMENT INCOME
<F3>INCLUDES HEALTH CARE EXPENSES ONLY
<F4>INCLUDES $2,000 OF MINORITY INTEREST IN GAIN OF SUBSIDIARY
</FN>
</TABLE>
<PAGE>
FOUNDATION HEALTH SYSTEMS
Pro Forma Unaudited Consolidated Balance Sheet
March 31, 1997
(In thousands)
ASSETS
Cash and cash equivalents $ 425,491
Investments 1,357,505
Premiums receivable, net 253,843
Amounts receivable under government contracts 239,334
Property and equipment, net 351,520
Reinsurance receivable 174,335
Goodwill and other intangible assets, net 716,350
Other assets 598,390
-----------
$ 4,116,768
-----------
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Reserves for claims, losses and loss adjustment expense $ 1,369,793
Notes payable and capital leases 967,102
Accounts payable under government contracts 38,965
Accounts payable and other liabilities 509,017
-----------
2,884,877
-----------
Common stock and additional paid-in-capital 727,209
Retained Earnings 616,097
Unrealized holding gains and losses, net of taxes (12,537)
Common stock held in treasury, at cost (98,878)
-----------
Total Stockholders' Equity 1,231,891
-----------
Total Liabilities and Stockholders' Equity $ 4,116,768
-----------
-----------
<PAGE>
FOUNDATION HEALTH SYSTEMS
Pro Forma Unaudited Consolidated Statement of Operations
(In thousands, except per share data)
Three-Months Ended March 31,
----------------------------
1996 1997
Revenues ----------- -----------
Health plan premiums $ 1,311,181 $ 1,420,096
Government contracts 147,347 246,034
Workers' compensation revenue 137,831 130,664
Specialty services revenue 56,011 63,823
Investment and other income 23,613 34,526
----------- -----------
1,675,983 1,895,143
----------- -----------
Expenses:
Health plan services 1,066,556 1,176,156
Government health care services 103,062 190,912
Workers' compensation costs 121,449 122,527
Specialty services costs 48,846 53,601
Selling, general and administrative 197,617 219,383
Amortization and depreciation 26,726 25,600
Interest expense 9,309 15,005
----------- -----------
1,573,565 1,803,184
----------- -----------
Income from operations before income taxes
and discontinued operations 102,418 91,959
Income tax provision 36,751 33,478
----------- -----------
Net income before discontinued operations 65,667 58,481
----------- -----------
Loss on discontinued operations, net of tax (3,390) 0
----------- -----------
Net Income $ 62,277 $ 58,481
----------- -----------
----------- -----------
Earnings per share primary and fully diluted $ 0.50 $ 0.47
----------- -----------
----------- -----------
Weighted average common shares outstanding
Primary 124,071 125,682
----------- -----------
----------- -----------
Fully diluted 124,113 125,738
----------- -----------
----------- -----------
<PAGE>
FOUNDATION HEALTH SYSTEMS, INC.
PRO FORMA MEDICAL COVERED LIVES AT MARCH 31,
(in thousands)
<TABLE>
<CAPTION>
Commercial HMO and Insured PPO Government
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Group and Medicare Medicaid Commercial CHAMPUS PPO/ CHAMPUS CHAMPUS
State Individual Risk Subtotal Indemnity HMO Subtotal
1997 1996 1997 1996 1997 1996 1997 1996 1997 1996 1997 1996 1997 1996
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Arizona 317 308 45 41 8 5 370 354 0 0 0 0 0 0
California 1,796 1,798 148 134 185 97 2,129 2,029 444 0 196 0 640 0
Colorado 101 86 10 9 0 0 111 95 0 0 0 0 0 0
Connecticut 143 120 0 0 23 15 166 135
Florida 78 69 25 27 22 20 125 116 0 0 0 0 0 0
Louisiana 23 21 0 0 0 0 23 21 53 51 28 30 81 81
Oklahoma 3 3 0 0 27 2 30 5 60 62 56 40 116 102
Oregon 59 46 0 0 3 3 62 49 24 28 9 5 33 33
Pennsylvania 39 47 14 13 0 27 53 87
New Mexico 28 26 2 2 0 0 30 28
Texas 36 30 0 0 5 0 41 30 235 337 180 65 415 402
Utah 66 85 0 0 0 0 66 85 0 0 0 0 0 0
Wash/Idaho 99 97 3 2 25 14 127 113 101 108 93 6 194 114
Other 53 65 0 0 0 0 53 65 38 43 12 7 50 50
------------- --------- --------- ------------- ----------- --------- -----------
Total 2,841 2,801 247 228 298 183 3,386 3,212 955 629 574 153 1,529 782
------------- --------- --------- ------------- ----------- --------- -----------
Change 1% 8% 63% 5% 52% 275% 96%
ASO Combined
<S> <C> <C> <C> <C>
Total
Medical
1997 1996 1997 1996
---- ---- ---- ----
Arizona 0 0 370 354
California 169 160 2,938 2,189
Colorado 18 9 129 104
Connecticut 21 21 187 156
Florida 0 0 125 116
Louisiana 0 0 104 102
Oklahoma 0 0 146 107
Oregon 0 0 95 82
Pennsylvania 16 79 69 166
New Mexico 0 0 30 28
Texas 0 0 456 432
Utah 0 0 66 85
Wash/Idaho 0 0 321 227
Other 0 0 103 115
------------- -------------
Total 224 269 5,139 4,263
------------- -------------
Change < 17% > 21%
</TABLE>
