<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 6, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
HEALTH SYSTEMS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 6719 95-42288333
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification No.) Identification No.)
21600 OXNARD STREET 225 NORTH MAIN STREET
WOODLAND HILLS, CA 91367 PUEBLO, CO 81003
(818) 719-6978 (719) 542-0500
</TABLE>
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
------------------------
B. CURTIS WESTEN
MICHAEL E. JANSEN
HEALTH SYSTEMS INTERNATIONAL, INC.
225 NORTH MAIN STREET
PUEBLO, CO 81003
(719) 542-0500
(Name, address, including zip code, and telephone number, including area code,
of agents for service)
------------------------
Copies to:
<TABLE>
<S> <C> <C> <C>
PETER C. KRUPP ALLEN J. MARABITO LINDA C. WILLIAMS ARTHUR FLEISCHER, JR.
SKADDEN, ARPS, SLATE, FOUNDATION HEALTH CORPORATION PILLSBURY MADISON & SUTRO LLP FRIED, FRANK, HARRIS, SHRIVER
MEAGHER & FLOM (ILLINOIS) 3400 DATA DRIVE 235 MONTGOMERY STREET & JACOBSON
333 W. WACKER RANCHO CORDOVA, SAN FRANCISCO, ONE NEW YORK PLAZA
CHICAGO, ILLINOIS 60806 CALIFORNIA 95670 CALIFORNIA 94104 NEW YORK, NEW YORK 10004
(812) 407-0700 (916) 631-5000 (415) 983-1000 (212) 859-4000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effectiveness of this Registration Statement and the
effective time ("Effective Time") of the merger (the "Merger") of a wholly-owned
subsidiary of Health Systems International, Inc. with and into Foundation Health
Corporation as described in the Agreement and Plan of Merger, dated as of
October 1, 1996.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
TITLE OF EACH CLASS PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
REGISTERED REGISTERED(1) PER UNIT(2) OFFERING PRICE(2) FEE
<S> <C> <C> <C> <C>
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Class A Common Stock, par value
$.001 per share........................ 78,617,961 $31.00 $1,874,735,974 $568,102(3)
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Series A Participating Preferred
Stock Purchase Rights.................. (4) (4) (4) (4)
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</TABLE>
(1) Consists of 78,617,961 shares of HSI Class A Common Stock issuable upon the
exchange pursuant to the Merger of 58,975,354 currently outstanding shares
of FHC Common Stock as of the date hereof, plus 1,500,000 additional shares
which may be issued pursuant to outstanding FHC stock options.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(f)(1) and Rule 457(c) of the Securities Act of 1933, as
amended (the "Securities Act"), based on the average of the high ($31.25)
and low ($30.75) prices of FHC Common Stock on January 3, 1997, on the New
York Stock Exchange multiplied by 60,475,354 (the number of FHC shares
currently outstanding, plus 1,500,000 FHC shares issuable pursuant to
outstanding options to purchase FHC Common Stock).
(3) The Registrant has previously paid a fee of $362,167 in connection with the
filing of the Joint Proxy Statement/Prospectus pursuant to Section 14(a) of
the Securities Exchange Act of 1934, as amended, such document filed with
the Commission on October 31, 1996. Therefore, the fee accompanying this
filing is $205,935.
(4) Such number of Rights as are associated from time to time with the shares of
HSI Class A Common Stock registered hereby pursuant to the terms of the
Registrant's Stockholder Rights Plan. Initially, the rights are attached to
and trade with the shares of Common Stock. Pursuant to Rule 457 of the
Securities Act, no additional registration fee is required for the Rights.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
[HSI LOGO] [FOUNDATION LOGO]
MERGER PROPOSED -- YOUR VOTE IS VERY IMPORTANT
The Boards of Directors of Health Systems International, Inc. ("HSI") and
Foundation Health Corporation ("FHC") have agreed to a merger of equals designed
to create one of the premier managed health care companies in the world. The
combined company will be named Foundation Health Systems, Inc. ("New FHS").
If the merger is completed, FHC stockholders will receive 1.3 shares of HSI
Class A Common Stock, par value $.001 per share (after the merger referred to as
"New FHS Common Stock") for each share of FHC common stock that they own. HSI
stockholders will continue to own their existing shares after the merger which
will represent an equivalent number of shares of New FHS Common Stock. We
estimate that the shares of New FHS Common Stock to be issued to FHC
stockholders will represent approximately 61% of all of the outstanding common
stock of New FHS after the merger. Likewise, the shares of HSI common stock held
by HSI stockholders prior to the merger will represent approximately 39% of all
of the outstanding common stock of New FHS after the merger.
The merger cannot be completed unless the stockholders of both companies
approve it. We have scheduled special meetings for our stockholders to vote on
the merger. YOUR VOTE IS VERY IMPORTANT.
Whether or not you plan to attend a meeting, please take the time to vote
by completing and mailing the enclosed proxy card to us. If you sign, date and
mail your proxy card without indicating how you want to vote, your proxy will be
counted as a vote in favor of the merger. If you fail to return your card, the
effect in most cases will be a vote against the merger.
The dates, times and places of the meetings are as follows:
FOR FHC STOCKHOLDERS:
February 7, 1997, 9:30 a.m. at FHC's headquarters, 3400 Data Drive, Rando
Cordova, California 95670.
FOR HSI STOCKHOLDERS:
February 7, 1997, 9:30 a.m. at Warner Center Marriott, 21850 Oxnard Street,
Woodland Hills, California, 91367.
The accompanying Joint Proxy Statement/Prospectus provides you with
detailed information about the proposed merger. In addition, you may obtain
information about our companies from documents that we have filed with the
Securities and Exchange Commission. We encourage you to read this entire
document carefully.
<TABLE>
<S> <C>
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Malik M. Hasan, M.D. ----------------------------------------------
Chairman of the Board of Directors and Daniel D. Crowley
Chief Executive Officer Chairman, President and Chief Executive
Health Systems International, Inc. Officer
Foundation Health Corporation
</TABLE>
January 6, 1997
<PAGE> 3
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
Health Systems International, Inc. ("HSI") will hold a special meeting of
its stockholders (the "Special Meeting") on February 7, 1997, at 9:30 a.m. at
Warner Center Marriott, 21850 Oxnard Street Woodland Hills, California, 91367,
for the following purposes:
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
Foundation Health Corporation ("FHC"), HSI and FH Acquisition Corp., a
wholly owned subsidiary of HSI ("Merger Subsidiary"), the merger of Merger
Subsidiary with and into FHC (the "Merger") and the transactions
contemplated thereby, including the issuance of shares of HSI Class A
Common Stock, par value $.001 per share ("HSI Common Stock").
2. To consider and vote upon a proposal to amend and restate HSI's
Certificate of Incorporation to (i) increase the number of authorized
shares of common stock of HSI 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 HSI to "Foundation Health
Systems, Inc."
3. To transact such other business as may properly come before the
Special Meeting or any adjournment or postponement thereof.
HSI has fixed the close of business on December 23, 1996 as the record date
for the determination of stockholders entitled to vote at the Special Meeting or
any adjournment thereof. A list of such stockholders will be available for
examination by stockholders of record during business hours at the offices of
HSI located at 225 North Main Street, Pueblo, Colorado, 81003 for ten days prior
to the Special Meeting and will also be available at the Special Meeting.
YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE TO APPROVE AND
ADOPT THE MERGER AGREEMENT, THE MERGER AND THE TRANSACTIONS CONTEMPLATED
THEREBY, WHICH ARE DESCRIBED IN DETAIL IN THE ACCOMPANYING JOINT PROXY
STATEMENT/PROSPECTUS. Adoption of the Merger Agreement, the Merger and the
transactions contemplated thereby require the affirmative vote of a majority of
the outstanding shares of HSI Common Stock entitled to vote at the Special
Meeting. Please sign and promptly return the proxy card in the enclosed
envelope, whether or not you expect to attend the Special Meeting. Failure to
return a properly executed proxy card or to vote at the Special Meeting will
have the same effect, in most cases, as a vote against the Merger.
B. Curtis Westen, Esq. January 6, 1997
Senior Vice President,
General Counsel and Secretary
<PAGE> 4
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
Foundation Health Corporation ("FHC") will hold a special meeting of its
stockholders (the "Special Meeting") on February 7, 1997, at 9:30 a.m. at FHC's
headquarters, 3400 Data Drive, Rancho Cordova, California, for the following
purposes:
1. To consider and vote upon a proposal to approve and adopt the
Agreement and Plan of Merger, dated as of October 1, 1996 (the "Merger
Agreement"), among FHC, Health Systems International, Inc. ("HSI") and FH
Acquisition Corp., a wholly owned subsidiary of HSI ("Merger Subsidiary"),
the merger of Merger Subsidiary with and into FHC (the "Merger") and the
transactions contemplated thereby. Pursuant to the Merger, FHC will survive
as a wholly owned subsidiary of HSI. The Merger Agreement provides, among
other things, for the issuance to FHC stockholders of 1.3 shares of HSI
Class A Common Stock, par value $.001 per share, for every share of FHC
Common Stock, par value $.01 per share ("FHC Common Stock"), held.
2. To transact such other business as may properly come before the
Special Meeting or any adjournment or postponement thereof.
FHC has fixed the close of business on December 23, 1996 as the record date
for the determination of stockholders entitled to vote at the Special Meeting or
any adjournment thereof. A list of such stockholders will be available for
examination by stockholders of record during business hours at the offices of
FHC, 3400 Data Drive, Rancho Cordova, California 95670 for ten days prior to the
Special Meeting and will also be available at the Special Meeting.
YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE TO APPROVE AND
ADOPT THE MERGER AGREEMENT, THE MERGER AND THE TRANSACTIONS CONTEMPLATED
THEREBY, WHICH ARE DESCRIBED IN DETAIL IN THE ACCOMPANYING JOINT PROXY
STATEMENT/PROSPECTUS. Adoption of the Merger Agreement, the Merger and the
transactions contemplated thereby require the affirmative vote of a majority of
the outstanding shares of FHC Common Stock entitled to vote at the Special
Meeting. Please sign and promptly return the proxy card in the enclosed
envelope, whether or not you expect to attend the Special Meeting. Failure to
return a properly executed proxy card or to vote at the Special Meeting will
have the same effect, in most cases, as a vote against the Merger.
Allen J. Marabito, Esq. January 6, 1997
Senior Vice President,
General Counsel and Secretary
<PAGE> 5
SUBJECT TO COMPLETION, DATED JANUARY 6, 1997
HEALTH SYSTEMS INTERNATIONAL, INC.
PROSPECTUS
---------------------
HEALTH SYSTEMS INTERNATIONAL, INC.
AND
FOUNDATION HEALTH CORPORATION
JOINT PROXY STATEMENT
FOR
SPECIAL MEETINGS OF STOCKHOLDERS
TO BE HELD FEBRUARY 7, 1997
---------------------
This Joint Proxy Statement/Prospectus constitutes the proxy statement of
each of Health Systems International, Inc., a Delaware corporation ("HSI"), and
Foundation Health Corporation, a Delaware corporation ("FHC"), relating to the
solicitation of proxies for use at the special meeting of stockholders of each
of HSI and FHC scheduled to be held on February 7, 1997, and at any adjournments
or postponements thereof (respectively, the "HSI Meeting" and the "FHC Meeting,"
and collectively, the "Special Meetings"). At each Special Meeting, the
stockholders of each of HSI and FHC will be asked to consider and vote upon an
Agreement and Plan of Merger (the "Merger Agreement"), dated as of October 1,
1996, among FHC, HSI and FH Acquisition Corp., a wholly owned subsidiary of HSI
("Merger Subsidiary"), pursuant to which Merger Subsidiary will merge with and
into FHC (the "Merger"), HSI will change its name to Foundation Health Systems,
Inc. (such combined company after the Merger is referred to herein as "New FHS")
and each FHC stockholder will receive 1.3 shares of Class A Common Stock, par
value $.001 per share, of New FHS ("HSI Common Stock" or, after the Merger, "New
FHS Common Stock") for each share of the Common Stock, $.01 par value per share,
of FHC ("FHC Common Stock") held by such FHC stockholder. HSI stockholders are
also asked to consider and vote upon an amendment to HSI's Certificate of
Incorporation to increase the number of authorized shares of common stock and
effect the name change to New FHS. The consummation of the Merger is conditioned
upon approval of the amendment.
This Joint Proxy Statement/Prospectus also constitutes the prospectus of
HSI with respect to the New FHS Common Stock to be issued to FHC stockholders
pursuant to the Merger. A registration statement has been filed with the
Securities and Exchange Commission (the "SEC") with respect to shares of New FHS
Common Stock to be so issued. Based on the current number of shares of FHC
Common Stock outstanding, HSI will issue approximately 76.7 million shares of
New FHS Common Stock in the aggregate to the FHC stockholders in connection with
the Merger which would have an aggregate market value of approximately $1.84
billion, based on the closing stock price of HSI Common Stock on January 3,
1997. As a result of the transaction, FHC stockholders will hold approximately
61%, and HSI stockholders will hold approximately 39%, of all of the outstanding
common stock of New FHS after the Merger.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS IN CONNECTION WITH THE SOLICITATION OF PROXIES OR THE
OFFERING OF SECURITIES MADE BY THIS JOINT PROXY STATEMENT/PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY HSI, FHC OR NEW FHS. NEITHER THE DELIVERY OF THIS
JOINT PROXY STATEMENT/ PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCE, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE INFORMATION SET FORTH HEREIN SINCE THE DATE OF THIS JOINT
PROXY STATEMENT/PROSPECTUS. THIS JOINT PROXY STATEMENT/PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES, OR THE SOLICITATION OF A PROXY, BY ANYONE IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING
SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS
UNLAWFUL TO MAKE SUCH SOLICITATION.
THIS JOINT PROXY STATEMENT/PROSPECTUS IS FIRST BEING MAILED TO STOCKHOLDERS
ON OR ABOUT JANUARY 8, 1997.
SEE "RISK FACTORS" BEGINNING ON PAGE 15 FOR A DISCUSSION OF CERTAIN MATTERS
THAT SHOULD BE CONSIDERED BY THE STOCKHOLDERS OF EACH OF HSI AND FHC WITH
RESPECT TO THE MERGER.
---------------------
THE SECURITIES TO BE ISSUED PURSUANT TO THIS JOINT PROXY STATEMENT/PROSPECTUS
HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SEC OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SEC OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS JOINT PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS JOINT PROXY STATEMENT/PROSPECTUS IS JANUARY 6, 1997
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
SUMMARY.......................................... 1
SELECTED FINANCIAL DATA AND
PRO FORMA SUMMARY COMBINED
FINANCIAL DATA................................. 10
HSI Selected Historical Consolidated
Financial Data............................... 11
FHC Selected Historical Consolidated
Financial Data............................... 12
New FHS Pro Forma Summary Combined
Financial Data............................... 13
HSI AND FHC COMPARATIVE PER SHARE DATA........... 14
RISK FACTORS..................................... 15
THE MERGER AND THE SPECIAL
MEETINGS....................................... 23
The Merger..................................... 23
The Special Meetings........................... 23
Times and Places; Purposes..................... 23
Voting Rights; Votes Required for Approval..... 24
Proxies........................................ 24
Background of the Merger....................... 25
Reasons for the Merger; Recommendations of the
Boards....................................... 30
Opinion of FHC's Financial Advisor............. 36
Opinions of HSI's Financial Advisors........... 40
Accounting Treatment........................... 45
Material Federal Income Tax Consequences....... 45
Regulatory Approvals........................... 47
No Appraisal Rights............................ 47
Certain Litigation Related to the Merger....... 47
COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND
INFORMATION.................................... 48
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
STATEMENTS..................................... 49
DIRECTORS AND MANAGEMENT OF NEW FHS FOLLOWING THE
MERGER......................................... 57
Directors...................................... 57
Committees of the Board of Directors........... 58
Compensation of Directors...................... 59
Executive Officers............................. 59
Executive Compensation......................... 59
STOCK OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS
AND FIVE-PERCENT STOCKHOLDERS.................. 60
Ownership of HSI Common Stock.................. 60
Ownership of FHC Common Stock.................. 62
THE MERGER AGREEMENT............................. 65
General........................................ 65
Consideration to Be Received in the Merger..... 65
Effective Time................................. 65
Exchange of Shares............................. 65
Corporate Organization and Governance.......... 66
Certain Conditions............................. 67
Representations and Warranties................. 69
<CAPTION>
PAGE
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<S> <C>
Certain Covenants.............................. 69
Assumption of Indenture........................ 71
No Solicitation of Transactions................ 71
Continuance of Existing Indemnification
Rights....................................... 72
Stock Option Plans and Benefit Plans........... 72
Termination.................................... 73
Termination Fees............................... 74
Expenses....................................... 75
CONFLICTS OF INTEREST AND INTERESTS OF CERTAIN
PERSONS IN THE MERGER.......................... 76
Employment and Consulting Agreements........... 76
Indemnification and Insurance.................. 77
CERTAIN OTHER AGREEMENTS......................... 78
Voting Agreement............................... 78
CWF Agreement.................................. 78
Amendments to the Rights Agreements............ 79
COMPARISON OF STOCKHOLDERS' RIGHTS............... 80
Capital Stock.................................. 80
Board of Directors............................. 80
Board Committees............................... 81
Voting Power................................... 82
Special Voting Requests........................ 82
Charter Amendments............................. 82
Amendment of Bylaws............................ 82
DESCRIPTION OF NEW FHS CAPITAL
STOCK FOLLOWING THE MERGER..................... 83
Authorized Capital Stock....................... 83
Common Stock................................... 83
Preferred Stock................................ 84
Preemptive Rights.............................. 85
Transfer Agent and Registrar................... 85
Stock Exchange Listing; Delisting and
Deregistration of FHC Common Stock........... 85
Federal Securities Laws Consequences; Stock
Transfer Restriction Agreements.............. 85
PROPOSED HSI CHARTER AMENDMENT................... 86
LEGAL MATTERS.................................... 87
EXPERTS.......................................... 87
FUTURE STOCKHOLDER PROPOSALS..................... 88
WHERE YOU CAN FIND MORE
INFORMATION.................................... 88
LIST OF DEFINED TERMS............................ 90
Appendix I: Agreement and Plan of Merger
Appendix II: Form of Restated Certificate of
Incorporation
Appendix III: Form of Restated Bylaws
Appendix IV: Opinion of Morgan Stanley & Co.
Incorporated
Appendix V: Opinion of Salomon Brothers Inc
Appendix VI: Opinion of Shattuck Hammond
Partners, Inc.
</TABLE>
i
<PAGE> 7
SUMMARY
This summary highlights selected information from this Joint Proxy
Statement/Prospectus and may not contain all of the information that is
important to you. This summary is qualified in its entirety by reference to more
detailed information appearing in this Joint Proxy Statement/Prospectus and the
Appendices. To understand the Merger fully and for a more complete description
of the legal terms of the Merger, you should read carefully this Joint Proxy
Statement/Prospectus and the documents we have referred you to, including the
Merger Agreement. See "Where You Can Find More Information." (Page 88)
THE COMPANIES
HEALTH SYSTEMS INTERNATIONAL, INC.
21600 Oxnard Street
Woodland Hills, California 91367
(818) 719-6978
225 North Main Street
Pueblo, Colorado 81003
(719) 542-0500
HSI is one of the largest managed health care organizations in the United
States. It serves more than 1.9 million members in nine states: California,
Colorado, Connecticut, Idaho, New Jersey, New Mexico, Pennsylvania, Oregon and
Washington. Health Net, HSI's health maintenance organization ("HMO") subsidiary
in California, is the second largest provider of managed health care services in
California with over 1.3 million members. HSI also owns Preferred Health
Network, Inc., a preferred provider organization ("PPO") network providing
access to more than 4.6 million individuals in 38 states, coordinates managed
health care products for multi-region employers and owns two health and life
insurance companies licensed to sell insurance in 33 states and the District of
Columbia.
FOUNDATION HEALTH CORPORATION
3400 Data Drive
Rancho Cordova, California 95670
(916) 631-5000
FHC is an integrated managed health care organization with headquarters in
Rancho Cordova, California. Through its HMO, insured PPO and government
contracts subsidiaries, FHC provides group, individual, Medicare, Medicaid and
CHAMPUS coverage for more than three million individuals. In addition, FHC's
subsidiaries offer managed health care products related to workers'
compensation, behavioral health, dental, vision and prescription drugs, and
administrative services for medical groups and self-funded benefit programs.
SPECIAL MEETINGS; VOTING RIGHTS; VOTES REQUIRED FOR APPROVAL (SEE PAGE 23)
HSI
The HSI Meeting is scheduled to be held on February 7, 1997, in order to
approve the issuance of New FHS Common Stock in the Merger pursuant to the
Merger Agreement and certain amendments to HSI's Third Amended and Restated
Certificate of Incorporation (the "HSI Charter"). Consummation of the Merger is
conditioned upon approval of the HSI Charter amendments.
Each holder of record of HSI Common Stock as of December 23, 1996 (the "HSI
Record Date") is entitled to cast one vote per share. The presence, in person or
by proxy, of the holders of a majority of the outstanding shares of HSI Common
Stock entitled to vote is necessary to constitute a quorum at the HSI Meeting
and the affirmative vote, in person or by proxy, of the holders of a majority of
the shares of HSI Common Stock outstanding on the HSI Record Date is required to
approve and adopt the HSI Proposals (defined below on page 23).
1
<PAGE> 8
At the close of business on the HSI Record Date, directors and executive
officers of HSI were the owners of an aggregate of 5,323,594 shares
(approximately 18%) of the HSI Common Stock entitled to vote. HSI believes that
all such shares will be voted in favor of the HSI Proposals.
FHC
The FHC Meeting is scheduled to be held on February 7, 1997, in order to
approve the Merger Agreement, the Merger and the transactions contemplated
thereby.
Each holder of record of FHC Common Stock as of December 23, 1996 (the "FHC
Record Date") is entitled to cast one vote per share. The presence, in person or
by proxy, of the holders of a majority of the outstanding shares of FHC Common
Stock entitled to vote is necessary to constitute a quorum at the FHC Meeting
and the affirmative vote, in person or by proxy, of the holders of a majority of
the shares of FHC Common Stock outstanding on the FHC Record Date is required to
approve and adopt the FHC Proposal (defined below on page 23).
At the close of business on the FHC Record Date, directors and executive
officers of FHC were the owners of an aggregate of 183,715 shares (less than 1%)
of the FHC Common Stock entitled to vote. FHC believes that all such shares will
be voted in favor of the FHC Proposal.
Proxies
An abstention with respect to either of the HSI Proposals or the FHC
Proposal will have the effect of a vote cast against the applicable proposal.
Brokers who hold shares of HSI Common Stock or FHC Common Stock as nominees will
not have discretionary authority to vote such shares on the applicable proposal
in the absence of instructions from the beneficial owners thereof. Any votes
which are not cast by the nominee-broker will have the effect of votes cast
against such proposal.
REASONS FOR THE MERGER AND RELATED MATTERS (SEE PAGES 30 THROUGH 36)
The FHC Board of Directors (the "FHC Board") and the HSI Board of Directors
(the "HSI Board") each have separately determined that the Merger, the Merger
Agreement and the transactions contemplated thereby are in the best interests of
their respective companies' stockholders. The Merger will provide each of the
companies with economies of scale needed to lower its costs and to compete more
effectively in the managed health care industry. The Merger will also create an
entity with enhanced geographic diversity, which each of the FHC Board and HSI
Board believes should improve New FHS's position with customers seeking health
care providers with broad national networks.
In order to complete the Merger, it is necessary for the HSI stockholders
to approve the amendment of the HSI Charter to increase the amount of authorized
shares of HSI Common Stock and to change the name of HSI to "Foundation Health
Systems, Inc." The HSI Board believes that it is in the best interests of the
HSI stockholders to approve the amendment to the HSI Charter to (i) change the
name of HSI to New FHS in order to better reflect the combined company on a
going forward basis and (ii) to increase the amount of authorized shares of New
FHS Common Stock in order to ensure that a sufficient amount of stock is
authorized after the issuance of the shares of New FHS Common Stock in the
Merger. See "Proposed HSI Charter Amendment."
In addition to factors set forth in the first paragraph of this section,
the material factors considered by the HSI Board and the FHC Board also include:
(i) FHC and HSI have complementary product offerings and membership composition,
(ii) each of the FHC Board and the HSI Board believes that FHC's and HSI's HMO
businesses in California and the West will enhance the other's operations and
that HSI's medical management expertise will facilitate the development of
commercial HMO services in markets where FHC has government contracts, and (iii)
each of the FHC Board and the HSI Board also believes, based upon the advice of
their management and the financial advisors of each of FHC and HSI, that the
Merger could generate at least $110 million of synergies and cost savings for
the combined company.
The HSI Board and the FHC Board also considered a number of potentially
negative material factors and information relating to the Merger which the HSI
Board and the FHC Board both determined were outweighed by the potential
benefits of the transaction including, among others, (i) the lack of assurance
that the combined entity would achieve the above mentioned synergies and cost
savings, (ii) the fact that a
2
<PAGE> 9
reduction in workforce of the combined entity would be necessary to achieve
those synergies and cost savings, (iii) the costs related to the compensation
and severance arrangements with FHC's senior management, and (iv) the
supermajority vote of the New FHS Board required with respect to certain
corporate governance matters which could adversely restrict the ability of the
New FHS Board to implement certain changes in management.
In reaching its opinion that the Merger was in the best interest of its
stockholders, each of the FHC Board and the HSI Board considered a number of
material factors in addition to those set forth above. See "Risk Factors" and
"The Merger and the Special Meetings -- Reasons for the Merger; Recommendations
of the Boards" for a discussion of the effects of the Merger on the
stockholders, as well as considerations relating to the disadvantages, adverse
consequences and material risks of the Merger.
RECOMMENDATIONS TO STOCKHOLDERS
To HSI Stockholders:
The HSI Board believes that the Merger is in your best interest and
unanimously recommends that you vote FOR the proposal to:
(a) approve and adopt the Merger Agreement, the Merger and the
transactions contemplated thereby, including the issuance of shares of New
FHS Common Stock to FHC stockholders in the Merger; and
(b) amend and restate the HSI Charter as required by the Merger
Agreement (the amendments are summarized on page 86).
To FHC Stockholders:
The FHC Board believes that the Merger is in your best interest and
unanimously recommends that you vote FOR the proposal to approve and adopt the
Merger Agreement, the Merger and the transactions contemplated thereby.
THE MERGER
The Merger Agreement is attached as Appendix I to this Joint Proxy
Statement/Prospectus. We encourage you to read the Merger Agreement as it is the
legal document that governs the Merger.
The Merger Agreement provides for a merger of equals transaction involving
the merger of Merger Subsidiary with and into FHC, with FHC surviving the Merger
as a wholly-owned subsidiary of HSI. In connection with the Merger, HSI will be
renamed Foundation Health Systems, Inc.
What FHC Stockholders Will Receive (see page 65)
As a result of the Merger, FHC stockholders will receive 1.3 shares (the
"Exchange Ratio") of New FHS Common Stock for each share of FHC Common Stock
that they own. No fractional shares will be issued. Instead, FHC stockholders
will receive a check in payment for any fractional shares based on the market
value of the New FHS Common Stock determined as the average closing price per
share of HSI Common Stock on the New York Stock Exchange, Inc. (the "NYSE")
during the three trading days immediately prior to the Effective Time (as
defined at page 23).
FHC stockholders should not send in their stock certificates until
instructed to do so after the Merger is completed. HSI stockholders do not need
to take any action with respect to their stock certificates, which will evidence
the equivalent number of shares of New FHS Common Stock following the Merger.
Ownership of New FHS Following the Merger
Holders of HSI Common Stock and Class B Common Stock, par value $.001 per
share, of HSI ("HSI Class B Common Stock" or, after the Merger, "New FHS Class B
Common Stock") will retain their shares after the Merger. The shares of New FHS
Common Stock issued to FHC stockholders in the Merger will constitute
approximately 61% of all of the outstanding common stock of New FHS after the
Merger and approximately 72% of the voting power of the New FHS Common Stock
prior to the conversion of the outstanding non-voting New FHS Class B Common
Stock into New FHS Common Stock. The HSI
3
<PAGE> 10
stockholders will hold approximately 39% of all of the outstanding common stock
of New FHS after the Merger and approximately 28% of the voting power of the New
FHS Common Stock prior to the conversion of the outstanding non-voting New FHS
Class B Common Stock into New FHS Common Stock. See "Description of New FHS
Capital Stock Following the Merger -- Common Stock" on page 83 for a description
of the voting rights and conversion rights of the holders of New FHS Common
Stock and New FHS Class B Common Stock.
Each outstanding and unexercised option to purchase shares of FHC Common
Stock will be assumed by New FHS in the Merger and converted into an option to
purchase shares of New FHS Common Stock. Approximately 4.9 million shares of New
FHS Common Stock will be subject to such converted options based on the number
of shares of FHC Common Stock subject to the existing FHC options multiplied by
the Exchange Ratio.
Board of Directors and Management of New FHS Following the Merger (see pages
57 through 59 and 66)
Daniel D. Crowley will serve as Chairman of New FHS for a one-year period
following the completion of the Merger. After the Merger, Malik M. Hasan, M.D.
will be President and Chief Executive Officer of New FHS and will succeed Mr.
Crowley in the office of Chairman.
The Board of Directors of New FHS (the "New FHS Board") initially will
consist of eleven members, five designated by HSI (including Dr. Hasan) and six
designated by FHC (including Mr. Crowley). The classes of the New FHS Board
shall consist of (a) for the 1997 class, four members including Mr. Crowley and
Dr. Hasan and one member designated by HSI and one member designated by FHC, (b)
for the 1998 class, three members including two members designated by FHC and
one member designated by HSI, and (c) for the 1999 class, four members including
two members designated by HSI and two members designated by FHC.
The committees of the New FHS Board will initially be comprised of an audit
committee, a nominating committee, a compensation and stock option committee and
an investment policy committee. Initially there will be no executive committee.
Each committee will consist of an equal number of directors designated by each
of HSI and FHC.
Conflicts of Interest and Interests of Certain Persons in the Merger (see
pages 76 and 77)
In considering the recommendations of the FHC Board and the HSI Board that
you vote in favor of the Merger Agreement, the Merger and the transactions
contemplated thereby, you should be aware that a number of officers of HSI and
FHC, including some officers who are also directors, have employment agreements,
consulting agreements, retention incentives or benefit plans that provide them
with interests in the Merger that are different from, or in addition to, yours.
Mr. Crowley and certain other executive officers of FHC have entered into
new employment agreements and consulting agreements as part of the proposed
transaction. These agreements provide, among other things, for $16.0 million in
aggregate severance payments to these executives upon termination (which amounts
are the same amounts payable under their current employment agreements), $6.9
million in aggregate bonuses if such executives remain employed by the combined
company for a certain period of time after the Merger and a $13.5 million
aggregate amount payable under certain of these executives' consulting and
non-compete agreements. In addition, certain provisions of Dr. Hasan's
employment agreement are expected to be amended as part of the proposed
transaction to, among other things, modify certain severance benefits and
provide for a three-year pay to stay bonus of up to $1.33 million per year upon
the attainment of certain performance criteria. Please refer to pages 76 and 77
for more information concerning employment arrangements, consulting agreements,
retention incentives and benefit plans of such officers.
New FHS is required by the Merger Agreement to provide indemnification and
liability insurance arrangements for officers and directors of HSI and FHC.
4
<PAGE> 11
Conditions to the Merger (see pages 67 and 68)
The completion of the Merger depends upon meeting a number of conditions,
including, but not limited to, the following:
(a) the approval of the holders of a majority of the stock entitled to
vote of each of HSI and FHC;
(b) there shall have been no law enacted or injunction entered which
effectively prohibits the Merger or which imposes material conditions with
respect thereto;
(c) the approval of certain governmental authorities;
(d) the receipt of letters from each of HSI's and FHC's independent
accountants stating that the Merger will qualify for pooling of interests
accounting treatment; and
(e) the receipt of an opinion from FHC's legal counsel that the
transaction shall be a tax-free reorganization.
The conditions to the Merger may be waived by the party entitled to assert
the condition. If any material condition to the Merger is waived, HSI and FHC
and their respective boards of directors will consult with legal counsel as to
the necessity of amending this Joint Proxy Statement/Prospectus and resoliciting
proxies for the Special Meetings. Notwithstanding the foregoing, it is the
intent of each company to amend this Joint Proxy Statement/Prospectus and
resolicit proxies in the event that the companies waive the condition relating
to pooling of interests accounting treatment or the requirement that the
transaction be a tax-free reorganization.
Termination of the Merger Agreement (see pages 73 and 74)
HSI and FHC can agree to terminate the Merger Agreement without completing
the Merger, and either of HSI or FHC can terminate the Merger Agreement if any
of the following occurs:
(a) the Merger is not completed by March 31, 1997, but this deadline
will be extended to April 30, 1997 if the completion of the Merger is
delayed only because one or more required governmental approvals have not
been received;
(b) a court or other governmental authority permanently prohibits the
Merger;
(c) the appropriate approvals of the holders of a majority of the
stock of either HSI or FHC are not received at the Special Meetings;
(d) the other party breaches in a manner which would result in a
material adverse effect on HSI and FHC, taken as a whole, or materially
fails to comply with any of its representations or warranties or
obligations under the Merger Agreement;
(e) the board of directors of the other party, (A) withdraws or
modifies in any adverse manner its approval or recommendation in favor of
the Merger, or (B) approves or recommends another transaction with a third
party;
(f) the board of directors of the other party determines, under
certain circumstances and before the approval of the Merger Agreement by
its stockholders, that the board's fiduciary obligations require acceptance
of an offer from a third party to enter into a superior transaction; or
(g) the other party receives another transaction proposal and such
proposal has not been withdrawn or rejected or negotiations with respect to
such proposal have not been terminated within 30 days.
Termination Fees (see pages 74 and 75)
The Merger Agreement requires HSI or FHC to pay the other a termination fee
of $40 million if (i) the Merger Agreement is terminated because its board of
directors withdraws or modifies in any adverse manner its approval or
recommendation in favor of the Merger or approves or recommends another
transaction with a
5
<PAGE> 12
third party or (ii) its board of directors terminates the Merger Agreement
because it determines that its fiduciary obligations require acceptance of an
offer from a third party to enter into a superior transaction.
The Merger Agreement further requires HSI or FHC to pay the other a
termination fee of $20 million if the Merger Agreement is terminated because it
receives another transaction proposal and such proposal has not been withdrawn
or rejected or negotiations have not been terminated by the other party within
30 days, and it agrees to enter into or completes another transaction within 12
months of such termination.
HSI or FHC is required to pay the other a termination fee of $20 million if
the Merger Agreement is terminated by the non-breaching party because it has
materially breached any covenant or agreement. Such termination fee is subject
to increase to $40 million if prior to or at the time of such termination,
another transaction proposal has been publicly announced or it agrees to enter
into or completes another transaction within 12 months of such termination.
The Merger Agreement further requires HSI or FHC to pay the other a
termination fee of $5 million, plus reimbursement of up to $5 million in
expenses, if the Merger Agreement is terminated because it does not receive the
appropriate stockholder approval of the Merger. Such termination fee is subject
to increase to $40 million, less the amounts previously paid, if prior to or at
the time of such termination, another transaction proposal has been publicly
announced or it agrees to enter into or completes another transaction within 12
months of such termination.
AMENDMENTS TO HSI CERTIFICATE OF INCORPORATION AND BYLAWS (SEE PAGES 82, 83 AND
86)
The Merger Agreement provides that, as part of the Merger, HSI will amend
and restate the HSI Charter and its Bylaws (the "HSI Bylaws") to, among other
things:
(a) change the name of HSI to Foundation Health Systems, Inc.;
(b) increase its authorized number of shares of common stock to 380
million consisting of 350 million shares of Class A Common Stock and 30
million shares of Class B Common Stock; and
(c) amend and restate the HSI Bylaws as part of the Merger to
implement certain governance arrangements as required by the Merger
Agreement, including provisions relating to composition of the New FHS
Board and management succession.
The proposed form of amended and restated certificate of incorporation of
New FHS (the "New Charter") is attached as Appendix II and the proposed form of
amended and restated bylaws of New FHS (the "New Bylaws") is attached as
Appendix III.
Approval of the proposed New Charter amendments requires the affirmative
vote of the holders of a majority of the HSI Common Stock. The HSI Board has the
power to adopt the New Bylaws and has approved the New Bylaws to be effective
upon the Merger.
REGULATORY APPROVALS (SEE PAGE 46)
The Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"HSR Act"), prohibits completion of the Merger until notifications have been
given and certain information has been furnished to the United States Federal
Trade Commission and the Antitrust Division of the United States Department of
Justice and the specified waiting period requirements of the HSR Act have been
satisfied. The statutory waiting period expired for FHC and HSI on November 28,
1996.
The Merger is also subject to review and approval by the various federal
and state agencies that regulate the operations of HMOs operated by the
subsidiaries of HSI and FHC, including the California Department of Corporations
(the "DOC"). In addition, the insurance regulatory authorities in certain states
and the United Kingdom that regulate the insurance subsidiaries of HSI and FHC
also must approve the Merger.
HSI and FHC believe that all filings have been made with the various
federal and state regulatory authorities pertaining to the Merger in accordance
with the legal requirements and they believe that all such
6
<PAGE> 13
federal and state approvals necessary to consummate the Merger will be received
on or before January 31, 1997.
NO APPRAISAL RIGHTS (SEE PAGE 47)
Under Delaware law, FHC stockholders have no right to an appraisal of the
value of their shares in connection with the Merger.
ACCOUNTING TREATMENT (SEE PAGE 45)
The Merger is intended to qualify as a pooling of interests, which means
that HSI and FHC will be treated as if they had always been combined for
accounting and financial reporting purposes.
OPINIONS OF FINANCIAL ADVISORS (SEE PAGES 36 THROUGH 45)
In deciding to approve the Merger, each of the HSI Board and the FHC Board
considered opinions from their respective financial advisors as to the fairness
of the Exchange Ratio from a financial point of view to their respective
stockholders. FHC received an opinion from its financial advisor, Morgan Stanley
& Co. Incorporated, and HSI received separate opinions from its financial
advisors, Salomon Brothers Inc and Shattuck Hammond Partners, Inc. to the effect
that, based upon and subject to certain matters stated therein, as of the date
of such opinions, the Exchange Ratio is fair to the FHC and HSI stockholders,
respectively, from a financial point of view. These opinions are attached as
Appendices IV, V and VI to this Joint Proxy Statement/Prospectus. Stockholders
are encouraged to read these opinions.
In connection with delivering these opinions, such financial advisors
performed a variety of analyses. While not uniformly performed or presented, the
analyses included comparing HSI and FHC historical stock prices and financial
multiples to each other and to those of other selected publicly traded
companies, comparing the financial terms of the Merger to those of other
publicly announced transactions and estimating the relative values and
contributions of HSI and FHC based on past and estimated future performance and
anticipated benefits of the Merger.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES (SEE PAGES 45 AND 46)
The Merger has been structured with the intent and is subject to the
condition that FHC receive an opinion from Pillsbury Madison & Sutro LLP,
outside legal counsel to FHC, to the effect that, among other things, the Merger
will constitute a "reorganization" within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"), and neither HSI nor
HSI's or FHC's respective stockholders will recognize any gain or loss for
federal income tax purposes as a result of the Merger except for tax payable
because of cash received instead of fractional shares by FHC stockholders.
COMPARATIVE PER SHARE MARKET PRICE INFORMATION (SEE PAGE 48)
Shares of HSI Common Stock and FHC Common Stock are listed on the NYSE. On
September 30, 1996, the last full trading day on the NYSE prior to the public
announcement of the proposed Merger, FHC Common Stock closed at $33 7/8 per
share and HSI Common Stock closed at $28 3/8 per share.
On January 3, 1997, FHC Common Stock closed at $31 per share and HSI Common
Stock closed at $24 per share.
LISTING OF NEW FHS COMMON STOCK (SEE PAGE 85)
New FHS will list the shares of New FHS Common Stock to be issued in
connection with the Merger on the NYSE and it is expected that the ticker symbol
will be FHS.
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<PAGE> 14
DIVIDENDS AFTER THE MERGER (SEE PAGES 14 AND 48)
There is no present intention of paying any cash dividends to New FHS
stockholders after completion of the Merger. No dividends have been paid by HSI
since 1992 on HSI Common Stock. FHC has never paid cash dividends on FHC Common
Stock. The payment of dividends by New FHS in the future, however, will depend
on regulatory requirements, business conditions, its financial position and
earnings, certain credit agreement restrictions and other factors.
CERTAIN RELATED AGREEMENTS (SEE PAGES 78 AND 79)
Voting Agreement
Dr. Hasan, the beneficial owner of 4,306,826 shares of HSI Common Stock and
options to purchase 710,000 shares of HSI Common Stock (approximately 16.9%),
has entered into a voting agreement with FHC with respect to such shares and
options.
Pursuant to the voting agreement, Dr. Hasan has agreed to vote all of such
shares in favor of the Merger, the Merger Agreement and the transactions
contemplated thereby. Dr. Hasan has further agreed not to sell, pledge or
otherwise dispose of any such shares of HSI Common Stock prior to the
termination of the voting agreement, without the prior written consent of FHC.
However, prior to the termination of the voting agreement Dr. Hasan may sell up
to 250,000 shares of HSI Common Stock in his sole discretion.
CWF Agreement
HSI and FHC entered into an agreement (the "CWF Agreement") with respect to
certain rights of The California Wellness Foundation ("CWF"), the holder of
19,297,642 shares of HSI Class B Common Stock, which constitutes all of the
outstanding shares of the HSI Class B Common Stock, under the HSI Charter and a
shareholder agreement and a registration rights agreement, each of which will
remain in effect following the Merger. Pursuant to the CWF Agreement, HSI has
agreed, among other things, to take all steps necessary to prevent the
occurrence of an Adjustment Event (as such term is defined in the HSI Charter),
including, without limitation, the payment in accordance with its terms of that
certain Senior Promissory Note by Health Net dated as of January 28, 1992 in
favor of CWF, with a principal balance as of December 1, 1996 of $19.4 million.
The occurrence of an Adjustment Event would give CWF the right to elect a
majority of the members to the HSI Board. In addition the HSI Board has agreed,
pursuant to the CWF Agreement, to use its best efforts to cause CWF to agree not
to exercise its registration rights until the Merger is closed in order to avoid
any delay in approval of the Merger.
Rights Plan Amendments
HSI and FHC have each amended their stockholders rights plans to exempt the
Merger Agreement and the related transactions from triggering the rights issued
under such plans. In addition, the HSI amendment modifies certain terms of the
HSI stockholders rights plan applicable to Dr. Hasan. The FHC amendment also
provides that the FHC stockholders rights plan will terminate following the
Merger.
COMPARISON OF STOCKHOLDERS' RIGHTS (SEE PAGES 80 THROUGH 83)
Both HSI and FHC are Delaware corporations and New FHS will continue to be
a Delaware corporation governed by Delaware General Corporate Law. However, upon
consummation of the Merger, FHC stockholders' present rights will be altered, as
they will be defined and governed by the New Charter and the New Bylaws. The
material differences in the New Charter as compared to the FHC Charter include a
provision for non-voting Class B Common Stock, a provision requiring the
affirmative vote of the holders of at least 80% of the voting stock for certain
business combinations, a provision for a staggered board consisting of three
classes of directors and the absence of a provision for cumulative voting.
Please refer to pages 80 through 83 for more information concerning the material
differences between the rights of the FHC stockholders and the rights of the
holders of New FHS Common Stock.
8
<PAGE> 15
RISK FACTORS (SEE PAGE 15)
Stockholders of HSI and FHC should carefully review the matters set forth
under "Risk Factors" before voting on the Merger and the transactions
contemplated thereby, including the potential effects of the following:
- The failure to successfully integrate the two companies that have
previously operated independently or the inability to achieve the
operating efficiencies contemplated by the HSI Board and the FHC Board
could have a material adverse effect on the business, results of
operations or financial condition of New FHS as well as the market value
of New FHS Common Stock. See "Risk Factors -- Uncertainties Related to
the Merger."
- A significant portion of FHC's and HSI's revenues relate to federal,
state and local government health care coverage programs, which can be
affected by statutory and regulatory changes, including a reduction in
reimbursement rates. See "Risk Factors -- Government Programs,
Regulations and Audits."
- Because the Exchange Ratio is fixed in the Merger Agreement and neither
HSI nor FHC has the right to terminate the Merger Agreement based on
changes in the market price of the HSI Common Stock or FHC Common Stock,
the market value of the shares of New FHS Common Stock may vary
significantly from the market value of the shares of HSI Common Stock or
FHC Common Stock as of the date of this Joint Proxy Statement/Prospectus.
See "Risk Factors -- Volatility of Stock Price; Fixed Exchange Ratio."
- Holders of FHC Common Stock will become holders of New FHS Common Stock
following the Merger and subject to the New Charter and New Bylaws. See
"Risk Factors -- Rights of Holders Following the Merger; Anti-Takeover
Provisions."
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This Joint Proxy Statement/Prospectus contains forward-looking statements
that are subject to risks and uncertainties. Forward-looking statements include
the information concerning possible or assumed future results of operations of
HSI, FHC and New FHS set forth under "Risk Factors"; "The Merger and the Special
Meetings -- Reasons for the Merger; Recommendations of the Boards"; and
"Opinions of Financial Advisors" and those preceded by, followed by or that
include the words "believes," "expects," "anticipates" or similar expressions.
For those statements, HSI and FHC claim the protection of the safe harbor
provisions for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995. You should understand that the following
important factors, in addition to those discussed elsewhere in this document and
in the documents which we incorporate by reference, could affect the future
results of HSI, FHC and New FHS, and could cause those results to differ
materially from those expressed in such forward-looking statements: materially
adverse changes in economic conditions in the markets served by either company;
a significant delay in the expected closing of the Merger; future regulatory
actions and conditions in the companies' operating areas; and competition from
others in the managed health care industry.
9
<PAGE> 16
SELECTED FINANCIAL DATA
AND PRO FORMA SUMMARY COMBINED FINANCIAL DATA
The following tables set forth (i) selected financial data for HSI as of
and for each of the five years in the period ended December 31, 1995 and the
nine month period ended September 30, 1996, (ii) selected financial data for FHC
as of and for each of the five years in the period ended June 30, 1996 and the
three month period ended September 30, 1996, and (iii) unaudited pro forma
summary combined financial data giving effect to the Merger using the pooling of
interests method of accounting for each of the three years in the period ended
December 31, 1995 and the nine month period ended September 30, 1996. The
selected financial data should be read in conjunction with the historical
financial statements of FHC and HSI and the notes thereto which are incorporated
by reference into this Joint Proxy Statement/Prospectus. The selected financial
data for HSI for each of the five years ended December 31, 1995 has been derived
from audited historical consolidated financial statements of HSI. The selected
financial data for HSI for the nine months ended September 30, 1996 has been
derived from unaudited consolidated financial statements and, in the opinion of
the management of HSI, includes all adjustments (consisting only of normal
recurring adjustments) that are considered necessary for a fair presentation of
the operating results for interim periods. Results for the interim period for
HSI are not necessarily indicative of results for the full fiscal year. The
selected financial data for FHC for each of the five years ended June 30, 1996
has been derived from audited historical consolidated financial statements of
FHC. The selected financial data for FHC for the three months ended September
30, 1996 has been derived from unaudited consolidated financial statements and,
in the opinion of the management of FHC, includes all adjustments (consisting
only of normal recurring adjustments) that are considered necessary for a fair
presentation of the operating results for interim periods. Results for the
interim period for FHC are not necessarily indicative of results for the full
fiscal year.
The unaudited pro forma summary combined financial data provides financial
information giving effect to the Merger using the pooling of interests method of
accounting. Such data is derived from the unaudited pro forma combined condensed
financial statements set forth elsewhere herein, and should be read in
conjunction therewith. The unaudited pro forma summary combined financial data
is provided for informational purposes only and is not necessarily indicative of
actual results that would have been achieved had the Merger been consummated at
the beginning of the periods presented or of future results. See "Unaudited Pro
Forma Combined Condensed Financial Statements."
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<PAGE> 17
HSI SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------------------------------------ SEPTEMBER 30,
1991 1992 1993 1994 1995 1996
-------- ---------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Income Statement Data(1):
Revenues:
Premium revenue.............................. $283,437 $1,528,500 $1,943,730 $2,290,601 $2,692,335 $ 2,345,207
Administrative services revenue.............. -- 9,642 13,530 15,561 39,717 56,919
-------- ---------- ---------- ---------- ---------- -------------
Total revenue.......................... 283,437 1,538,142 1,957,260 2,306,162 2,732,052 2,402,126
Operating Expenses:
Health care.................................. 220,368 1,245,780 1,567,232 1,838,235 2,180,277 1,951,954
Marketing, general and administrative........ 35,437 182,650 262,927 266,764 302,870 234,554
Depreciation and amortization................ 2,408 32,677 34,187 39,692 48,140 39,595
Administrative services...................... -- 8,327 10,837 15,623 37,453 50,771
Merger-related costs......................... -- -- 29,725 672 20,164 --
-------- ---------- ---------- ---------- ---------- -------------
Operating income............................... 25,224 68,708 52,352 145,176 143,148 125,252
Interest income (expense), net................. 2,248 (679) (114) 5,592 13,495 9,377
Income taxes................................... (9,659) (27,753) (28,438) (62,759) (67,307) (58,899)
Minority interest in loss of subsidiary........ -- -- -- 66 256 72
-------- ---------- ---------- ---------- ---------- -------------
Net income..................................... $ 17,813 $ 40,276 $ 23,800 $ 88,075 $ 89,592 $ 75,802
======== ========= ========= ========= ========= ============
Net income (before merger-related costs)....... $ 17,813 $ 40,276 $ 46,051 $ 88,467 $ 101,085 $ 75,802
======== ========= ========= ========= ========= ============
Primary earnings per share..................... $ 1.24 $ 0.81 $ 0.48 $ 1.77 $ 1.83 $ 1.57
======== ========= ========= ========= ========= ============
Primary earnings per share (before
merger-related costs)........................ $ 1.24 $ 0.81 $ 0.93 $ 1.78 $ 2.07 $ 1.57
======== ========= ========= ========= ========= ============
Weighted average common shares outstanding
(primary).................................... 14,337 49,456 49,517 49,691 48,831 48,301
======== ========= ========= ========= ========= ============
Balance Sheet Data(1):
Cash and equivalents and marketable
securities................................. $ 78,759 $ 351,268 $ 465,602 $ 512,372 $ 592,561 $ 527,218
Total assets................................. 125,262 771,679 822,221 894,397 1,213,711 1,151,521
Long-term debt............................... 4,541 224,493 219,922 158,340 354,080 362,618
Stockholders' equity......................... 81,122 127,316 154,352 223,605 285,527 368,799
</TABLE>
- ---------------
(1) All data prior to February 6, 1992 reflects only QualMed, Inc. ("QualMed")
operations since Health Net was not considered a predecessor company prior
to its conversion from a not-for-profit company to a for-profit company.
11
<PAGE> 18
FHC SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA (1)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED JUNE 30, ENDED
-------------------------------------------------------------- SEPTEMBER 30,
1992 1993 1994 1995 1996 1996
---------- ---------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Commercial premiums......................... $ 900,660 $1,102,392 $1,358,616 $1,664,509 $2,002,695 $ 566,912
Government contracts........................ 670,271 746,827 542,726 187,493 586,011 248,001
Specialty services.......................... 50,627 89,135 380,726 509,807 700,923 184,922
Patient service revenue, net................ 40,612 43,483 41,358 38,604 50,124 13,371
Investment and other income................. 21,603 20,519 37,273 59,010 67,875 18,851
---------- ---------- ---------- ---------- ----------
1,683,773 2,002,356 2,360,699 2,459,423 3,407,628 1,032,057
---------- ---------- ---------- ---------- ----------
Expenses:
Commercial health care services............. 711,735 862,602 1,067,027 1,290,367 1,607,073 475,700
Government contracts health care services... 171,983 188,139 152,185 67,508 375,480 180,927
Government contracts subcontractor costs.... 419,817 432,903 252,743 66,551 40,572 --
Specialty services costs.................... 47,950 79,366 355,208 438,124 616,537 162,945
Patient service costs....................... 40,973 38,156 37,599 33,561 36,216 12,889
Selling, general and administrative......... 165,259 227,611 282,318 304,850 448,322 131,467
Amortization and depreciation............... 17,079 19,197 25,162 34,831 52,184 14,553
Interest expense............................ 6,035 4,239 11,147 10,796 14,684 5,690
Acquisition and restructuring costs(2)...... -- 12,413 -- 124,822 -- --
---------- ---------- ---------- ---------- ----------
1,580,831 1,864,626 2,183,389 2,371,410 3,191,068 984,171
---------- ---------- ---------- ---------- ----------
Income from continuing operations before
income taxes and minority interest.......... 102,942 137,730 177,310 88,013 216,560 47,886
Provision for income taxes.................... 39,360 57,327 69,954 29,900 64,318 15,683
Minority interest............................. 4,042 6,636 7,398 2,262 -- --
---------- ---------- ---------- ---------- ----------
Income from continuing operations............. $ 59,540 $ 73,767 $ 99,958 $ 55,851 $ 152,242 $ 32,203
========== ========== ========== ========== ==========
Earnings per share from continuing
operations.................................. $ 1.49 $ 1.54 $ 2.05 $ 1.02 $ 2.61 $ .55
========== ========== ========== ========== ==========
Weighted average common and common stock
equivalent shares outstanding............... 40,022,322 47,870,576 48,688,221 54,780,162 58,292,971 59,077,144
========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
-------------------------------------------------------------- SEPTEMBER 30,
1992 1993 1994 1995 1996 1996
---------- ---------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and investments........................ $ 291,919 $ 481,840 $ 761,593 $ 794,551 $ 941,070 981,445
Total assets................................ 632,037 856,711 1,432,025 1,884,689 2,337,653 2,494,991
Long-term obligations....................... 51,688 150,369 149,335 167,483 309,136 391,644
Stockholders' equity........................ 263,427 342,398 416,377 707,394 866,926 906,000
</TABLE>
- ---------------
(1) FHC's consolidated financial statements have been restated to (a) reflect
the results of acquisitions accounted for in accordance with the pooling of
interests method of accounting and (b) reflect the results of operations and
financial position of FHC's affiliated physician-owned medical practices and
physician practice management subsidiary which have been treated as
discontinued operations for all periods reported. See Notes 1 and 12 to the
FHC Consolidated Financial Statements included in FHC's Form 10-K as
amended.
(2) In connection with certain acquisitions FHC recorded charges for acquisition
and restructuring costs.
12
<PAGE> 19
NEW FHS PRO FORMA SUMMARY COMBINED FINANCIAL DATA(1)
(IN MILLIONS, EXCEPT EARNINGS PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
-------------------------------------- SEPTEMBER 30,
1993 1994 1995 1996
-------- -------- ------------ -------------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues............................................................. $ 4,335 $ 4,622 $ 5,524 $ 5,376
Medical and specialty services expenses.............................. 3,448 3,637 4,292 4,309
Selling, general and administrative expenses......................... 616 629 793 750
Interest expense..................................................... 28 25 33 31
Acquisition and restructuring costs.................................. 30 126 20
-------- -------- -------- --------
Income from continuing operations before income taxes................ 213 205 386 286
Provision for income taxes........................................... 97 84 145 102
-------- -------- -------- --------
Income from continuing operations.................................... $ 116 $ 121 $ 241 $ 184
======== ======== ======== ========
Primary and fully diluted earnings per share from continuing
operations......................................................... $ 1.02 $ 1.05 $ 1.95 $ 1.47
======== ======== ======== ========
Weighted average common and common equivalent shares -- Primary and
fully diluted(2)................................................... 113.9 115.7 123.7 124.8
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and investments................................................. $ 1,393 $ 1,508
Total assets......................................................... 3,213 3,646
Long-term obligations................................................ 561 757
Stockholders' equity................................................. 1,068 1,255
</TABLE>
- ---------------
(1) Includes pro forma combined financial information of HSI and FHC. See notes
to Unaudited Pro Forma Combined Condensed Financial Statements included
elsewhere in this Joint Proxy Statement/Prospectus which includes a
reconciliation of the historical FHC financial statements to a fiscal year
end of December 31 to coincide with the fiscal year end of HSI.
(2) The assumed weighted average common and common equivalent shares reflects
the issuance of 1.3 shares of New FHS Common Stock for each share of FHC
Common Stock and equivalent shares.
13
<PAGE> 20
HSI AND FHC COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of HSI and
FHC and combined per share data on an unaudited pro forma basis, based on the
assumption that the Merger occurred at the beginning of the earliest period
presented and was accounted for as a pooling of interests.
Neither HSI nor FHC has paid cash dividends since inception other than a
one-time cash dividend by HSI in 1992. It is anticipated that New FHS will
retain all earnings for use in the expansion of its business and therefore does
not anticipate paying any cash dividends in the foreseeable future. The payment
of future dividends will be at the discretion of the New FHS Board and will
depend, among other things, upon New FHS's earnings, capital requirements,
financial condition and debt covenants.
The pro forma comparative per share data does not purport to represent what
New FHS's financial position or results of operations would actually have been
had the Merger occurred at the beginning of the earliest period presented or to
project New FHS's financial position or results of operations for any future
date or period. The information presented in the table should be read in
conjunction with the separate consolidated financial statements and accompanying
notes of HSI, and the separate consolidated financial statements and
accompanying notes of FHC incorporated by reference herein.
HISTORICAL EARNINGS AND BOOK VALUE PER SHARE DATA
HSI
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER
-------------------------- 30,
1993 1994 1995 1996
------ ------ ------ -----------
<S> <C> <C> <C> <C>
Earnings per share...................................... $ .48 $ 1.77 $ 1.83 $ 1.57
Book value per share.................................... $ 5.93 $ 7.62
</TABLE>
FHC
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED
YEAR ENDED JUNE 30, SEPTEMBER
-------------------------- 30,
1994 1995 1996 1996
------ ------ ------ -----------
<S> <C> <C> <C> <C>
Earnings per share from continuing operations........... $ 2.05 $ 1.02 $ 2.61 $ .55
Book value per share.................................... $14.76 15.39
</TABLE>
PRO FORMA COMBINED AND EQUIVALENT EARNINGS AND BOOK VALUE PER SHARE DATA(1)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER
-------------------------- 30,
1993 1994 1995 1996
------ ------ ------ -----------
<S> <C> <C> <C> <C>
Pro forma combined earnings per New FHS share........... $ 1.02 $ 1.05 $ 1.95 $ 1.47
Pro forma equivalent earnings per FHC share............. $ 1.32 $ 1.36 $ 2.53 $ 1.91
Pro forma combined book value per New FHS share......... $ 8.70 $ 10.05
Pro forma equivalent book value per FHC share........... $11.31 $ 13.06
</TABLE>
- ---------------
(1) Equivalent shares of FHC represent FHC weighted average and outstanding
shares adjusted for the Exchange Ratio. New FHS shares represent the sum of
FHC weighted average and outstanding shares adjusted for the Exchange Ratio
plus HSI weighted average and outstanding shares.
14
<PAGE> 21
RISK FACTORS
The following are certain factors that should be considered by the
stockholders of HSI and FHC in evaluating the Merger Agreement, the Merger and
the transactions contemplated thereby.
UNCERTAINTIES RELATED TO THE MERGER
The Merger involves the integration of two companies that have previously
operated independently. Among the factors considered by the HSI Board and the
FHC Board in connection with their approval of the Merger Agreement were the
opportunities for operating efficiencies that should result from the Merger.
While HSI and FHC expect to achieve savings in operating costs as a result of
the Merger of at least $110 million, no assurances can be given that
difficulties will not be encountered in integrating the operations of HSI and
FHC or that the benefits expected from such integration will be realized. Any
delays or unexpected costs incurred in connection with such integration could
have a material adverse effect on the business, results of operations or
financial condition of New FHS as well as the market value of New FHS.
Difficulties may relate to the combination of two separate different corporate
cultures, the drop in productivity which may result from the uncertainty of
employees during the period from the announcement of Merger through a transition
period and the potential loss of senior management as a result of the Merger
after an initial transition period. See "Conflicts of Interest and Interests of
Certain Persons in the Merger" for a description of the employment arrangements
of FHC senior management. These difficulties may be enhanced by the continuing
growth of the combined company through additional acquisitions. See
"-- Acquisitions and Dispositions" below.
Negotiation and consummation of the Merger as well as additional charges
associated with and related to integrating the operations of HSI and FHC will
result in material non-recurring costs and expenses to New FHS. 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 HSI and FHC to
be in the range of $175 million to $225 million. New FHS intends to expense
these costs in the quarter in which the Merger is consummated, which is
anticipated to be the first quarter of calendar 1997. In the event the Merger is
not approved and consummated, the risks to each of HSI and FHC include (i)
diminution of competitive advantages in the marketplace, due to consolidation of
competitors with enhanced buying power, particularly with respect to health care
providers (and the inability to obtain cost-competitive provider contracts),
(ii) inability to meet customers' requirements for lower premiums resulting in
reduced revenues and/or reduced margins, (iii) interruption of employee base
(and loss of senior management) during the pre-merger period, (iv) additional
costs associated with hiring and retaining employees if the Merger is not
consummated, (v) costs of the failed transaction (including legal, accounting
and investment banker fees), (vi) possible lack of financing capacity to expand
its business and (vii) possible decrease in HSI's or FHC's stock price and a
corresponding inability to use stock for future acquisitions. In addition, if
the Merger Agreement is terminated by FHC or HSI, either FHC or HSI may be
obligated to pay termination fees of $5 million, $20 million or $40 million
depending on the circumstances leading up to such termination. See "The Merger
Agreement -- Termination Fees."
FHC has a process in which it continually reviews its lines of business and
geographic coverage to evaluate their long-term profitability and strategic
potential. FHC believes that this type of general strategic review by managed
care companies has intensified in 1995 and 1996. Recent pressures on price and
profitability due primarily to increased competition and changes in the cost
structure of the industry, have caused managed care companies to focus more
specifically on their diversification into many related product lines in the
early 1990s. FHC has similarly been motivated to make strategic changes in 1995
and 1996, such as its discontinuation of its physician management business,
negotiation of transfer of the Alabama HMO license, sale of its pharmaceutical
review business and restructuring of its United Kingdom operations. As a result
of integration planning for the Merger, FHC is performing a strategic review of
its business, both from a product line and geographic perspective. The outcome
of this review, which would be subject to any necessary regulatory review and
approvals, is likely to result in a significant charge to FHC's income for the
quarter ended December 31, 1996.
15
<PAGE> 22
In its Form 10-Q for the quarter ended September 30, 1996, HSI reported
that on April 10, 1996 HSI announced its intention to take a pre-tax one-time
restructuring charge of approximately $34.2 million or $.41 per share of HSI
Common Stock after tax, during the quarter ended June 30, 1996. The charge was
to cover non-recurring costs of a comprehensive restructuring of HSI's Health
Net subsidiary, computer software and hardware write-offs, and the consolidation
of certain operational functions of other subsidiaries. Due to the proposed
Merger, HSI has postponed the restructuring charge to the quarter ended December
31, 1996, to allow HSI management to reevaluate the impact of the Merger on the
restructuring plan. The components and approximate amounts that HSI intends to
take as a restructuring charge in its quarter ended December 31, 1996 (which
charge has been increased to approximately $35.2 million) are: executive,
workforce and facilities consolidation costs of approximately $10.5 million;
software and hardware write-offs of approximately $15.9 million; and other
components which aggregate approximately $8.9 million.
On a pro forma basis, as of September 30, 1996, New FHS would have a ratio
of debt (notes payable) to total stockholders' equity of approximately 60%, as
compared to approximately 43% for FHC and approximately 99% for HSI as of that
date on a stand-alone basis. See "Unaudited Pro Forma Combined Condensed
Financial Statements." HSI and FHC do not believe that this pro forma debt to
equity ratio will have a material adverse effect on the future results of
operations or liquidity of New FHS. HSI and FHC intend to negotiate a combined
new credit facility for New FHS to replace the existing credit facilities of
each company; however, there can be no assurance that they will be able to
negotiate an acceptable amount of credit or terms for this facility.
CONTROL OVER AND PREDICTABILITY OF HEALTH CARE COSTS
The profitability of New FHS depends in large part upon its ability to
accurately predict and control health care costs through underwriting criteria,
utilization management and negotiation of favorable provider contracts. The
aging of the population and other demographic characteristics and advances in
medical technology continue to contribute to rising health care costs.
Government-imposed limitations on Medicare and Medicaid reimbursement have also
caused the private sector to bear a greater share of health care costs. In
addition, each of HSI and FHC has experienced in its commercial and government
business (and particularly in the case of FHC, its CHAMPUS business) pharmacy
costs which have increased at a rate greater than other health care costs due to
the availability of new drugs, higher pharmaceutical costs and excess
utilization; there can be no assurance that FHC, HSI or New FHS can control
these costs or increase premiums to cover these unexpected costs. Changes in
health care practices, inflation, new technologies, major epidemics, disasters
and catastrophes, clusters of high-cost cases, new mandated benefits or other
regulatory changes, and numerous other factors affecting the delivery and cost
of health care are beyond any health plan's control and may adversely affect New
FHS's ability to predict and control health care costs and claims. In addition,
there can be no assurance that provider agreements negotiated in the future will
not result in substantially higher health care costs.
ADEQUACY OF RESERVES
Each of HSI's and FHC's HMO and insurance subsidiaries, including FHC's
workers' compensation insurance subsidiaries, are required to maintain reserves
to cover their estimated ultimate liability with respect to reported and
unreported claims incurred. These reserves do not represent an exact calculation
of liabilities but rather are estimates involving judgment and actuarial
projections. The accuracy of these estimates may be affected by external forces
such as changes in the rate of inflation, the regulatory environment, medical
costs and other factors. In particular, because certain workers' compensation
claims may not be reported for several years, estimating reserves for such
claims can be more difficult and uncertain than estimating reserves in other
lines of insurance in which the period between the occurrence of the claim and
final determination of liability is shorter. Establishment of reserves is an
inherently uncertain process and there can be no certainty that currently
established reserves will prove to be adequate to cover actual ultimate
expenses. Subsequent actual experience could result in reserves being too low.
Higher than expected claim costs could require reserves for prior periods to be
increased, which could have an adverse impact on New FHS's earnings in future
periods.
16
<PAGE> 23
COMPETITION AND PREMIUM PRICING
The managed health care industry is highly competitive, with major
competitors including Blue Cross/ Blue Shield plans, other indemnity insurers
and other national and regional HMOs, PPOs and third party administrator
companies. A number of HSI's and FHC's competitors are more established in the
health care industry and will have substantially larger memberships and greater
financial resources than New FHS following the Merger. HSI and FHC anticipate
that premium pricing will continue to be highly competitive, in particular, due
to over-capacity of HMOs in the industry, and New FHS may not be able to secure
adequate rate increases due, in large part, to premium reduction initiatives
undertaken by large employer groups and government payors. HSI and FHC believe
that there will continue to be premium pressures on HMOs and PPOs from
increasingly sophisticated consumers, such as large employer groups and
government groups (particularly in California), small employer groups and
individuals. Both HSI and FHC have recently experienced significant price
pressures from large employer groups and adverse selection in their PPO
businesses. In addition, employers may choose to self-insure their health care
risk while seeking benefit administration and utilization review services from
third parties to assist them in controlling and reporting health care costs.
DEPENDENCE UPON HEALTH CARE PROVIDERS
New FHS's profitability and the success of its long-range business plans
will depend upon its ability to attract and retain qualified health care
providers. In particular, New FHS will be dependent upon maintaining a network
of qualified primary care physicians for the provision of general medical care,
who are primarily responsible for hospital and specialty referrals and
preventive care. Many providers are consolidating into organized groups or
larger bargaining units and asserting greater bargaining power, which will
likely result in increased health care costs. These providers are also
developing the capacity to take risk and are offering managed health care
programs directly to employer groups and others. In addition, there is
increasing competition from other HMOs, health care plans and hospitals to
retain the services of providers. The failure to retain key medical groups,
independent practice associations and hospitals could adversely affect New FHS's
operating results and future profitability. There can be no assurance that New
FHS will successfully maintain a cost effective, stable provider network.
GOVERNMENT PROGRAMS, REGULATION AND AUDITS
The health care industry in general, and HMOs and insurance companies in
particular, are subject to substantial federal and state regulation, including
but not limited to, regulations relating to cash reserves, adequacy of reserves,
minimum net worth, licensing requirements, approval of policy language and
benefits, mandatory products and benefits, provider compensation arrangements,
premium rates and periodic examinations by state and federal agencies. The laws
and rules governing the businesses of FHC and HSI and interpretations of those
laws and rules are subject to frequent change. Existing and future laws and
rules could force New FHS to change how it does business and may restrict New
FHS's revenue or enrollment growth or both and increase its health care and
administrative costs. In addition, the failure to comply with such laws and
regulations can result in substantial fines and penalties or in the imposition
of a "cease and desist" order which could prevent New FHS from offering a
product or service. Regulatory approvals must be obtained and maintained to
market many of FHC's and HSI's products and services. Delays in obtaining or
failure to obtain or maintain such approvals could adversely affect New FHS's
revenue or the number of its enrollees, or could increase costs.
FHC's and HSI's HMOs which have Medicare risk contracts are subject to
regulation by the Health Care Financing Administration ("HCFA"), a branch of the
United States Department of Health and Human Services. HCFA has the right to
audit HMOs operating under Medicare risk contracts to determine each HMO's
compliance with HCFA's contracts and regulations and the quality of care being
rendered to the HMO's enrollees. These Medicare contracts are renewed annually
unless FHC or HSI or HCFA elects to terminate the contracts. HCFA also may
unilaterally terminate FHC's and HSI's Medicare contracts if FHC or HSI fails to
continue to meet compliance and eligibility standards. While the federal
government may implement changes in the Medicare risk-based program, FHC and HSI
believe that HMOs will continue to be an important factor in the federal
government's overall efforts to control medical costs. However, the loss of
17
<PAGE> 24
Medicare contracts or termination or modification of the risk-based Medicare
programs could have an adverse effect on the revenue, profitability and business
prospects of FHC, HSI or New FHS. The services reimbursed by Medicare and
Medicaid are subject to various requirements and restrictions imposed by
contract, law and regulation. FHC's and HSI's HMOs which have Medicaid contracts
are subject to both federal and state regulation regarding services to be
provided to Medicaid enrollees, payment for those services and other aspects of
the Medicaid program. Both Medicare and Medicaid have in force or have proposed
regulations relating to fraud and abuse, physician incentive plans and provider
referrals which may have an adverse effect on the financial condition and
results of operations of New FHS.
Recently enacted HCFA rules relating to physician incentive plans and
applicable to the Medicare and Medicaid businesses of HMOs (the "New HCFA
Rules"), among other matters (i) prohibit the direct or indirect payment to
physicians as inducement to limit medically necessary covered services to
beneficiaries, (ii) allow the use of incentives to encourage authorization of
only medically necessary services, (iii) require that HMOs assure adequate
provision of stop-loss protection by physicians and (iv) require that HMOs
conduct periodic beneficiary surveys. Although the New HCFA Rules apply only to
members covered by Medicare and Medicaid contracts and not to private health
plan members, the policies addressed by the rules may influence the conduct of
the managed care industry in general. Compliance with the New HCFA Rules will
impose significant disclosure requirements and could be costly and time
consuming. Under the New HCFA Rules, HMOs must disclose information regarding
physician incentive plans to HCFA, state Medicaid agencies and, upon request, to
covered beneficiaries. Enforcement powers available to HCFA or the applicable
state Medicaid agencies for failure to make the appropriate disclosures include
intermediate sanctions (e.g., the freezing of enrollment or the cessation of
marketing) and civil monetary penalties of up to $25,000 per violation. FHC and
HSI are and New FHS will be, subject to the New HCFA Rules with respect to their
Medicare and Medicaid businesses effective January 1, 1997. Failure to comply
with the New HCFA Rules could have a material adverse effect on these components
of New FHS's operations.
A significant portion of FHC's and HSI's revenues relate to federal, state
and local government health care coverage programs. The following table
represents the proportion of revenue for FHC and HSI (for their most recent
fiscal years) and for New FHS (based on the pro forma annual period ended
December 31, 1995) attributable to federal, state and local government health
care coverage programs:
<TABLE>
<CAPTION>
FY 6/30/96 FY 12/31/95
FHC HSI NEW FHS
----------- ------------ -------
<S> <C> <C> <C>
Medicare................................................. 13.7% 18.2% 15.7%
Medicaid................................................. 6.2% 0.8% 3.8%
CHAMPUS.................................................. 16.7% -- 9.3%
</TABLE>
FHC and HSI also cover local, state and federal employees under their
standard commercial benefits products. These types of programs, such as the
federal CHAMPUS and Medicare program and the federal and state Medicaid
programs, are generally subject to frequent change including changes which may
reduce the number of persons enrolled or eligible, reduce the revenue received
by FHC or HSI or increase FHC's or HSI's administrative or health care costs
under such programs. Such changes have in the past and may in the future
adversely affect New FHS's financial results and its willingness to continue
participation in such programs. The effect of the Merger on the operations of
the government contracts of FHC and HSI has not been fully determined but such
contracts are operated by separate subsidiaries of FHC and HSI and are subject
to separate accounting and audit procedures. In addition, the contracts are
subject to specific operational requirements, modifications of which would
require the approval of the respective contracting entities.
Accreditation by the National Committee on Quality Assurance ("NCQA") is a
condition of doing business as an HMO in Florida and in the future may be a
condition to doing business in other states and New FHS may have to seek such
accreditation for its HMO subsidiaries. Employer groups are increasingly
requiring accreditation as a condition to contract with a managed care company;
failure to be accredited could therefore cause loss of business and inability to
bid on proposals. Accreditation was previously denied to one of FHC's two
Florida HMOs prior to its acquisition by FHC. FHC is currently in the process of
seeking accreditation by the NCQA of both of its Florida HMOs. Failure to obtain
any required accreditation within
18
<PAGE> 25
specific time frames could result in suspension of enrollment levels or
revocation of licensure, which could have an adverse effect on New FHS's future
operating results.
FHC and HSI are also subject to various governmental audits and
investigations. Adverse findings could result in the loss of licensure or the
right to participate in certain programs, or the imposition of fines, penalties
and other sanctions. In addition, disclosure of any adverse investigation or
audit results or sanctions could negatively affect New FHS's reputation in
various markets and make it more difficult for New FHS to sell its products and
services. New FHS's ability to declare and pay dividends will also be limited by
state regulations which restrict New FHS's subsidiaries' ability to distribute
funds to New FHS. In addition, many states in which New FHS will operate are
currently considering regulation relating to mandatory benefits, provider
compensation, any willing provider legislation and composition of physician
networks. Changes in federal and state laws or regulations, if enacted, could
increase health care costs and administrative expenses, and changes could be
made in Medicare or Medicaid reimbursement rates. In its operation of the
CHAMPUS contracts, FHC has experienced, and New FHS could expect to continue to
experience, ongoing governmental audits, a long tail of liability relating to
payment of claims and a history of making retrospective adjustments and
uncertainty in negotiating reimbursement of bid price adjustments, equitable
adjustments and change orders. There can be no assurance that any future
regulatory action by such governmental agencies will not have an adverse impact
on the profitability or marketability of New FHS's plans in their respective
jurisdictions.
WORKERS' COMPENSATION INSURANCE
FHC writes managed care workers' compensation business, primarily in
California but increasingly in other states. Workers' compensation premiums
represented 13.8%, 14.3% and 11.5% of FHC's consolidated revenue for the fiscal
years ending June 30, 1996, 1995 and 1994, respectively. Workers' compensation
premiums on a pro forma basis for New FHS would have represented approximately
7.5% of total combined revenue for the year ended December 31, 1995. For FHC's
fiscal year ended June 30, 1996, approximately 83% of FHC's direct written
workers' compensation premiums were generated from businesses in California.
Since January 1995, policies in California have been issued under "open rating"
rules instead of the "minimum rate" laws which had been in effect. The open
rating environment brings uncertainties to premium revenues and operating
profits due to increased price competition. Although FHC underwrites, and New
FHS, intends to continue to underwrite, each account taking into consideration
the insured's risk profile, prior loss experience, loss prevention plans and
other underwriting considerations, there can be no assurance that FHC or New FHS
will be able to continue to operate profitably in the workers' compensation
industry or that future workers' compensation legislation will not be adopted in
California or other states which may adversely affect the results of operations
of FHC or New FHS.
ACQUISITIONS AND DISPOSITIONS
A significant part of the business strategies of HSI and FHC has been to
diversify into new geographic markets and new product areas through
acquisitions. As a result, each of HSI and FHC is subject to the uncertainties
and risks associated with any business that has grown rapidly and has expanded
into new geographic and product areas. Identifying and pursuing acquisition
opportunities, integrating acquired businesses and managing growth requires a
significant amount of management time and skill. There can be no assurance that
New FHS will realize the full cost savings or revenue enhancements that HSI and
FHC expect to realize as a result of their recent acquisitions and the
consolidation of certain of the operations of the acquired companies or that
such savings or enhancements will be realized at the points in time currently
anticipated. In addition, although HSI and FHC are continuously reviewing and
contemplating the acquisition of HMOs and other health care-related entities,
there can be no assurance that New FHS will be able to (i) negotiate acceptable
terms with suitable acquisition candidates or that, if negotiated, such
acquisitions will be either approved by all relevant regulatory authorities or
consummated, (ii) assimilate such acquired companies or (iii) manage future
growth. Future acquisitions by New FHS may involve significant cash expenditures
and may result in increased indebtedness, interest and amortization expense or
decreased operating income, any of which could have a negative impact on New
FHS's operating results. Such acquisitions may also result in dilution to
earnings per share of the combined company and acquisitions
19
<PAGE> 26
involving consideration in the form of New FHS Common Stock may also dilute the
voting power of the New FHS stockholders.
Each of HSI and FHC has also actively sought to increase growth in its
existing markets by increasing penetration of its existing product lines through
continued investment in its sales and marketing capabilities and by introducing
new products that both increase plan flexibility and reach new potential
customers including Medicare and Medicaid recipients. There can be no assurance
that, following the Merger, New FHS will be able to successfully implement this
strategy as the introduction of new products may be subject to unforeseen costs
and regulatory delays.
Although their primary emphasis has been on acquisitions, both FHC and HSI
have been involved from time to time with dispositions of assets and businesses.
No assurance can be made that such divestitures will result in a gain to New FHS
and such divestitures by New FHS in the future could result in the incurrence of
restructuring charges. Most recently, HSI has sold certain hospital management
and related subsidiaries that it acquired in the Northeast. In November 1996,
FHC and its affiliates sold their California and Arizona medical groups and
physician management business to a physician management company, FPA Medical
Management Inc. ("FPA"), and entered into 30 year provider agreements with FPA's
affiliated medical groups to provide medical services to FHC's HMO enrollees.
The provider agreements provide for the payment by FHC and its affiliates to FPA
of Guaranteed Access Fund payments aggregating $55 million (including similar
payments being made to FPA in connection with its June 1996 acquisition of FHC-
affiliated IPAs) over the next two years to assure continued access to the
medical group providers by FHC's members. The Guaranteed Access Fund payments
for calendar year 1996, 1997 and 1998 are $16.5 million, $29.9 million and $8.6
million, respectively. New FHS will rely significantly on the operations and
management of this physician management company, which has been expanding
rapidly, to provide adequate access and manage the provision of care to a large
number of New FHS enrollees in California and Arizona. As consideration for this
transaction, FHC received from FPA and related parties promissory notes
representing approximately $22 million in short-term secured subordinated
indebtedness and approximately $98 million in secured subordinated indebtedness
payable over seven years, and received $75 million of FPA common stock and $2
million in cash. In December 1996, FPA repaid to FHC $30 million in short-term
indebtedness incurred in connection with FPA's acquisition of the IPAs and
medical groups. In March 1996, FHC adopted a plan to discontinue the physician
practice management segment of its business. The sale to FPA of the medical
groups and physician practice management business was a component of this plan.
FHC has deferred losses from that segment of its business from March 1996
through September 30, 1996 totalling approximately $37.5 million due to the
anticipated gain on the FPA transaction of approximately $30.6 million (net of
the Guaranteed Access Fund payments). These amounts are preliminary as this
transaction was recently concluded in November 1996. The value of these assets
to New FHS will be dependent upon FPA's future operations and financial
performance.
DEPENDENCE UPON KEY PERSONNEL; CONFLICTS OF INTEREST
The future success of New FHS depends in large part upon the continued
services of its senior management and other key personnel. Certain members of
FHC's senior management have entered into new employment agreements and
consulting agreements in order to facilitate an orderly transition of HSI's and
FHC's management during the first year following the Merger. These provisions
could provide such executives with an incentive to terminate their employment
following the Merger or the transition period. Therefore, those executives,
three of whom are also directors of FHC, may have a conflict of interest with
respect to the transaction. See "Conflicts of Interest and Interests of Certain
Persons in the Merger -- Employment and Consulting Agreements." New FHS's
success also depends upon its ability to recruit and retain other managerial
personnel. The loss of a significant group of senior management or key personnel
or the inability to attract and retain qualified employees could have a material
adverse effect on New FHS's results of operations or the ability to achieve
synergies and operating costs savings as a result of the Merger.
INFORMATION SYSTEMS
Each of HSI's and FHC's businesses are significantly dependent upon
effective information systems. HSI and FHC have many different information
systems for their various businesses. Each of FHC and HSI is in the process of
attempting to reduce the number of systems and also upgrade and expand its
information systems capabilities. Failure of either FHC or HSI, or of New FHS,
to maintain an effective and efficient information system, or to effectively and
timely integrate and consolidate the systems of FHC and HSI, could result in
loss of existing customers and difficulty in attracting new customers, customer
and provider disputes,
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regulatory problems, increases in administrative expenses or other adverse
consequences. The known obstacles to the effective integration and consolidation
of the systems of FHC and HSI include potential timing, cost, disruption,
compatibility and testing issues. In addition, New FHS may from time to time
obtain significant portions of its services or facilities from independent third
parties which may make New FHS's operations vulnerable to such third parties'
failure to perform adequately. HSI and FHC have made several large acquisitions
in recent years. Failure to effectively integrate acquired operations could
result in increased administrative costs and the deterioration of customer
relations.
HEALTH CARE REFORM
There have been numerous legislative and regulatory initiatives at both the
federal and state levels to address, among other aspects of the nation's health
care system, the continuing increases in health care costs and the lack of
health care coverage for a significant segment of the population. Certain of
such initiatives have also been a result of recent negative publicity regarding
the purported denial of care to enrollees by managed health care companies. The
Health Insurance Portability and Accountability Act of 1996 (the "1996 Act"),
which was adopted by Congress and signed by President Clinton in August 1996,
contains a number of provisions to reform the nation's health care system. These
provisions include guaranteed insurance coverage and "portability" of health
insurance when changing jobs; require plans to provide special enrollments to
certain late enrollees and dependents during the coverage year; limit use of
pre-existing conditions as the basis for exclusion from coverage; prohibit plans
from discriminating against any individual in eligibility to enroll or in
premium charges; allow establishment of medical savings accounts; allow
mandatory or voluntary regional health alliances or purchasing cooperatives;
increase the tax deductibility of premiums for the self employed; and contain
numerous fraud and abuse provisions containing significant criminal and civil
law enhancements (some of which will apply not only to federal health programs,
such as Medicare and Medicaid, but to private health plans as well). To varying
degrees, many of the provisions of the 1996 Act and other pending bills
contemplate the involvement of state governments in the regulation and
implementation of federal health care reform legislation. Although HSI and FHC
believe that many of the provisions of the 1996 Act will have an impact on their
current operations and those of New FHS, some of the provisions of the 1996 Act
were previously mandated by state law in California and other states and
therefore HSI and FHC were previously complying with certain of the provisions.
Due to the recent adoption of the 1996 Act, neither HSI nor FHC has been able to
quantify the impact of the 1996 Act on their respective operations.
Various states are considering forms of single-payor systems, restructuring
of Medicaid programs, "any willing provider" legislation that could require
managed care companies to contract with any medical provider who agrees to the
terms of the company's standard provider contract and payment schedule and
"patient care initiatives" which address consumer protection issues in the
managed care environment. All or any of these potential forms of legislation
could adversely affect New FHS's business. Neither HSI nor FHC is able to
evaluate whether any of such proposals or other proposals will be adopted and
implemented. However, certain of the proposals, if adopted, could have a
material adverse effect on New FHS's business. Continued negative publicity
regarding the managed care industry could also have a material adverse effect on
New FHS's business.
EXPOSURE TO EVOLVING THEORIES OF RECOVERY
Each of HSI and FHC, like HMOs and other health insurers generally,
excludes certain health care services from coverage under its plans. Each is, in
its ordinary course of business, subject to the claims of its enrollees arising
out of decisions to restrict treatment or to restrict reimbursement for certain
services. Several recent proceedings filed against managed care companies have
successfully challenged HMOs' decisions to deny coverage of treatment sought by
enrollees. Compensatory damages (including damages for emotional distress) and
punitive damages, which are generally not covered by insurance except in certain
states where such coverage is permitted, have been awarded. Punitive damages
have been awarded on the premise that the defendant HMOs have, in bad faith,
denied coverage of the treatment sought. Although each lawsuit must succeed or
fail on its own merits, HSI and FHC anticipate that claims alleging bad faith
may become more common in enrollees' actions against managed care companies. The
loss of any such claim, if it results in significant punitive or other damage
award or a directive that New FHS effect significant changes in its
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operations, could have a material adverse effect on New FHS. In addition, HMO
enrollees are challenging certain features of HMOs' financial arrangements with
their contracting providers, in particular, that these arrangements contain
certain financial incentives to control unnecessary referrals to specialists and
unnecessary hospitalizations. The enrollees contend that these financial
arrangements, and the capitation system for reimbursing providers as well,
provide participating providers with improper incentives to furnish less than
adequate medical care to enrollees. State legislatures are also considering
managed care reimbursement methodologies and their effect on access to, and
quality of, medical care. The financial and operational impact which such
evolving theories of recovery and legislation, if enacted, will have on the
managed care industry generally, and on New FHS in particular, is unknown. In
addition, the risk of potential liability under punitive damages theories may
increase significantly the difficulty of obtaining reasonable settlements of
such coverage claims.
VOLATILITY OF STOCK PRICE; FIXED EXCHANGE RATIO
The stock market, and the market for securities of health care companies in
particular, has from time to time experienced extreme price and volume
fluctuations which may be unrelated to the operating performance of particular
companies. From time to time analysts and others have issued reports and
articles which have had a negative impact on stock prices. In addition, various
factors and events, such as announcements by New FHS or its competitors
concerning operating results, loss of a major employer group contract or
provider contract, governmental approvals, regulations or audits, acquisitions,
new product introductions, competitive pricing pressures and rising costs of
health care may also contribute to the volatility of the trading price of New
FHS Common Stock.
No assurance can be given as to the market prices of HSI Common Stock or
FHC Common Stock at the Effective Time. Because the Exchange Ratio is fixed in
the Merger Agreement and neither HSI nor FHC has the right to terminate the
Merger Agreement based on changes in the market price of the HSI Common Stock or
FHC Common Stock, the market value of the shares of New FHS Common Stock that
holders of FHC Common Stock will receive in the Merger may vary significantly
from the market value of the shares as of the date of this Joint Proxy
Statement/Prospectus. See "Comparative Per Share Market Price and Dividend
Information."
RIGHTS OF HOLDERS FOLLOWING THE MERGER; ANTI-TAKEOVER PROVISIONS
Following the Merger, holders of FHC Common Stock will become holders of
New FHS Common Stock. Certain differences exist between the rights of
stockholders of FHC and the rights of the holders of New FHS Common Stock under
the New Charter and New Bylaws including provisions related to directors,
committee composition, and future amendments to the New Charter. The FHC Charter
provides for cumulative voting in the election of directors and the HSI Charter
and New Charter do not, which may limit the ability of FHC stockholders to elect
a director to the New FHS Board. The FHC Bylaws provide that all directors are
elected annually whereas the HSI Charter and the New Charter provide for a
classified board. In addition, the HSI Charter provides that upon the occurrence
of an Adjustment Event (as such term is defined in the HSI Charter), including
the failure to pay the principal or interest on that certain Senior Promissory
Note by Health Net dated as of January 28, 1992 in favor of CWF, CWF, as the
holder of all of the outstanding shares of the HSI Class B Common Stock, would
have the right to elect a majority of the members to the New FHS Board. The
principal balance of such Senior Promissory Note on December 1, 1996 was $19.4
million. Furthermore, the FHC Charter does not contain a provision with respect
to the voting requirements for certain business combinations whereas the HSI
Charter and the New Charter contain a provision requiring the affirmative vote
of holders of at least 80% of the outstanding voting stock for certain
combinations with an "interested stockholder." Although the intent of such a
provision is to provide an incentive to an "interested stockholder" to treat the
stockholders within a class equally and to discourage discriminatory two-tiered
transactions, the effect of such a provision may also be to discourage others
from making tender offers for New FHS Common Stock and, consequently, may also
inhibit fluctuations in the market price of New FHS Common Stock that could
result from actual or rumored takeover attempts. Such a
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provision, together with other provisions in the New Charter and New Bylaws, may
also have the effect of preventing changes in the management of New FHS. See
"Comparison of Stockholders' Rights."
ABSENCE OF DIVIDENDS
Neither HSI nor FHC has paid cash dividends since inception other than a
one-time cash dividend by HSI in 1992. It is anticipated that New FHS will
retain all earnings for use in the expansion of its business and therefore does
not anticipate paying any cash dividends in the foreseeable future. See "HSI and
FHC Comparative Per Share Data" and "Comparative Per Share Market Price and
Dividend Information."
THE MERGER AND THE SPECIAL MEETINGS
THE MERGER
HSI and FHC are furnishing this Joint Proxy Statement/Prospectus to holders
of HSI Common Stock and holders of FHC Common Stock in connection with the
solicitation of proxies by the respective boards of directors of HSI and FHC for
use at the Special Meetings.
At the FHC Meeting, holders of FHC Common Stock will be asked to vote upon
a proposal (the "FHC Proposal") to approve and adopt the Merger Agreement, the
Merger and the transactions contemplated thereby.
At the HSI Meeting, holders of HSI Common Stock will be asked to vote upon
the following proposals (the "HSI Proposals"): (i) to approve the Merger
Agreement, the Merger and the transactions contemplated thereby, including the
issuance of shares of HSI Common Stock to FHC stockholders in the Merger and
(ii) to approve the amendment and restatement of the HSI Charter at the time of
the Merger. The HSI Charter is being amended in order to (a) change the name of
HSI to Foundation Health Systems, Inc. and (b) increase the authorized shares of
HSI's common stock to 380 million consisting of 350 million shares of HSI Common
Stock and 30 million shares of HSI Class B Common Stock. Copies of the Merger
Agreement and the New Charter are attached hereto as Appendix I and Appendix II,
respectively. The Merger Agreement also provides for the HSI bylaws to be
amended and restated at the time of the Merger in the form attached hereto as
Appendix III. The holders of HSI Common Stock are not being asked to approve the
New Bylaws because the HSI Board has the power to adopt the New Bylaws and has
approved the New Bylaws to be effective upon the Merger.
The Merger Agreement provides, among other things, for a merger of equals
transaction involving the merger of Merger Subsidiary with and into FHC, with
FHC surviving the Merger as a wholly-owned subsidiary of HSI (the "Surviving
Corporation"). In the Merger, each share of FHC Common Stock issued and
outstanding immediately before the Effective Time (as defined herein) (excluding
those held in the treasury of FHC and those owned by HSI), without any action on
the part of the holder thereof, will be converted into the right to receive 1.3
shares of New FHS Common Stock. The Merger will become effective upon the filing
of a certificate of merger (the "Certificate of Merger") with the Secretary of
State of the State of Delaware (the time of such filing being herein referred to
as the "Effective Time," and the date of such filing being herein referred to as
the "Effective Date"), which is currently expected to occur after receipt of
requisite regulatory and stockholder approvals.
THE SPECIAL MEETINGS
This Joint Proxy Statement/Prospectus is furnished in connection with the
solicitation of proxies (i) from the holders of HSI Common Stock by the HSI
Board for use at the HSI Meeting and (ii) from the holders of FHC Common Stock
by the FHC Board for use at the FHC Meeting. This Joint Proxy
Statement/Prospectus and accompanying form of proxy are first being mailed to
the respective stockholders of HSI and FHC on or about January 8, 1997. It is
expected that representatives of Deloitte & Touche, LLP, each of HSI's and FHC's
independent auditors, will be present at the Special Meetings to respond to
appropriate questions of stockholders and to make a statement if they desire.
TIMES AND PLACES; PURPOSES
The HSI Meeting will be held at Warner Center Marriott, 21850 Oxnard
Street, Woodland Hills, California, 91367, on February 7, 1997, starting at 9:30
a.m. local time. At the HSI Meeting, the stockholders
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of HSI will be asked to consider and vote upon (i) the HSI Proposals and (ii)
such other matters as may properly come before the HSI Meeting.
The FHC Meeting will be held at FHC's headquarters, 3400 Data Drive, Rancho
Cordova, California, on February 7, 1997, starting at 9:30 a.m., local time. At
the FHC Meeting, the stockholders of FHC will be asked to consider and vote upon
(i) the FHC Proposal and (ii) such other matters as may properly come before the
FHC Meeting.
VOTING RIGHTS; VOTES REQUIRED FOR APPROVAL
HSI. The HSI Board has fixed the close of business on December 23, 1996, as
the HSI Record Date. Only holders of record of shares of HSI Common Stock on the
HSI Record Date are entitled to notice of and to vote at the HSI Meeting. On the
HSI Record Date, there were 29,136,310 shares of HSI Common Stock outstanding
and entitled to vote at the HSI Meeting, held by approximately 1,500
stockholders of record.
Each holder of record, as of the HSI Record Date, of HSI Common Stock is
entitled to cast one vote per share. The presence, in person or by proxy, of the
holders of a majority of the outstanding shares of HSI Common Stock entitled to
vote is necessary to constitute a quorum at the HSI Meeting. The affirmative
vote, in person or by proxy, of the holders of a majority of the shares of HSI
Common Stock outstanding on the HSI Record Date is required to approve and adopt
the HSI Proposal.
FHC. The FHC Board has fixed the close of business on December 23, 1996, as
the FHC Record Date. Only holders of record of shares of FHC Common Stock on the
FHC Record Date are entitled to notice of and to vote at the FHC Meeting. On the
FHC Record Date, there were 58,975,354 shares of FHC Common Stock outstanding
and entitled to vote at the FHC Meeting, held by approximately 700 stockholders
of record.
Each holder of record, as of the FHC Record Date, of FHC Common Stock is
entitled to cast one vote per share. The presence, in person or by proxy, of the
holders of a majority of the outstanding shares of FHC Common Stock entitled to
vote is necessary to constitute a quorum at the FHC Meeting. The affirmative
vote, in person or by proxy, of the holders of a majority of the shares of FHC
Common Stock outstanding on the FHC Record Date is required to approve and adopt
the FHC Proposal.
PROXIES
All shares of HSI Common Stock and FHC Common Stock represented by properly
executed proxies received prior to or at the respective HSI Meeting or FHC
Meeting, as the case may be, and not revoked, will be voted in accordance with
the instructions indicated in such proxies. If no instructions are indicated on
a properly executed returned proxy, such proxies will be voted FOR the approval
of the HSI Proposals or the FHC Proposal, as the case may be. A properly
executed proxy marked "ABSTAIN," although counted for purposes of determining
whether there is a quorum and for purposes of determining the aggregate voting
power and number of shares represented and entitled to vote at the applicable
Special Meeting, will not be voted. Accordingly, since the affirmative vote of a
majority of outstanding shares is required for approval of each of the HSI
Proposals and the FHC Proposal, a proxy marked "ABSTAIN" will have the effect of
a vote against such proposals. Shares represented by "broker non-votes" (i.e.,
shares held by brokers or nominees which are represented at a meeting but with
respect to which the broker or nominee is not empowered to vote on a particular
proposal) will be counted for purposes of determining whether there is a quorum
at the applicable Special Meeting. In accordance with NYSE rules, brokers and
nominees are precluded from exercising their voting discretion with respect to
the approval and adoption of either the HSI Proposals or the FHC Proposal and
thus, absent specific instructions from the beneficial owner of such shares, are
not empowered to vote such shares with respect to the approval and adoption of
such proposals. Therefore, since the affirmative vote of a majority of the
aggregate voting power is required for approval of the HSI Proposals and the FHC
Proposal, a "broker non-vote" with respect to either proposal will have the
effect of a vote against the Merger.
For a stockholder who is a participant in either the FHC Profit Sharing and
401(k) Plan (the "FHC PSP") or the profit sharing component of the HSI Associate
401(k) Savings Plan (the "HSI PSP"), the proxy card will similarly serve as
voting instructions for the trustee of the respective plan, if accounts are
registered in the same name. If proxy cards representing shares in the FHC PSP
or the HSI PSP are not
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executed and returned, those shares will be voted by the trustee in the same
proportion as the shares for which executed proxy cards are returned by other
participants in each of the plans, respectively.
The HSI Board and the FHC Board are not currently aware of any business to
be acted upon at their respective Special Meetings other than as described
herein. If, however, other matters are properly brought before either Special
Meeting, or any adjournments or postponements thereof, the persons appointed as
proxies will have discretion to vote or act thereon according to their judgment.
Such adjournments may be for the purpose of soliciting additional proxies.
Shares represented by proxies voting against the approval and adoption of the
HSI Proposals or the FHC Proposal will be voted against a proposal to adjourn
the respective Special Meeting for the purpose of soliciting additional proxies.
Neither HSI nor FHC currently intends to seek an adjournment of its Special
Meeting.
A stockholder may revoke his or her proxy at any time prior to its use by
delivering to the Secretary of HSI or FHC, as the case may be, a signed notice
of revocation or a later-dated signed proxy or by attending the applicable
Special Meeting and voting in person. Attendance at the HSI Meeting or the FHC
Meeting will not in itself constitute the revocation of a proxy.
It is the policy of HSI and FHC to keep confidential proxy cards, ballots
and voting tabulations that identify individual stockholders, except where
disclosure is mandated by law and in other limited circumstances.
The cost of solicitation of proxies will be paid by HSI for HSI proxies and
by FHC for FHC proxies. In addition to solicitation by mail, arrangements will
be made with brokerage houses and other custodians, nominees and fiduciaries to
send proxy material to beneficial owners; and HSI, or FHC, as the case may be,
will, upon request, reimburse them for their reasonable expenses. HSI and FHC
have retained Morrow & Co., Inc. to aid in the solicitation of proxies and to
verify certain records related to the solicitation at a maximum fee of $20,000
plus expenses. To the extent necessary in order to ensure sufficient
representation at its Special Meeting, HSI or FHC may request by telephone or
telegram the return of proxy cards. The extent to which this will be necessary
depends entirely upon how promptly proxy cards are returned. Stockholders are
urged to send in their proxies without delay.
STOCKHOLDERS SHOULD NOT SEND IN ANY STOCK CERTIFICATES WITH THEIR PROXY
CARDS. A TRANSMITTAL FORM WITH INSTRUCTIONS FOR THE SURRENDER OF STOCK
CERTIFICATES FOR FHC COMMON STOCK WILL BE MAILED BY NEW FHS TO FORMER FHC
STOCKHOLDERS AS SOON AS PRACTICABLE AFTER THE CONSUMMATION OF THE MERGER. HSI
STOCKHOLDERS DO NOT NEED TO TAKE ANY ACTION WITH RESPECT TO THEIR STOCK
CERTIFICATES, WHICH WILL EVIDENCE THE EQUIVALENT NUMBER OF SHARES OF NEW FHS
COMMON STOCK FOLLOWING THE MERGER.
BACKGROUND OF THE MERGER
The past several years have been a period of substantial and rapid change
in the managed health care industry, characterized by, among other things:
intensifying competition; premium reduction initiatives undertaken by large
employer groups; and increased governmental regulation of the health care
industry. During this period, the managements of both FHC and HSI have carefully
reviewed their strategic alternatives and taken various steps to maintain and
enhance their long term competitive position and profitability in the face of
these changing industry conditions.
In December 1994, members of senior management of FHC and HSI had
discussions regarding a possible transaction involving FHC and HSI, leading to a
preliminary proposal by FHC of a business combination of FHC and HSI. The FHC
preliminary proposal provided for HSI and FHC to be combined into a new company
in a tax free reorganization to be accounted for as a pooling of interests. The
proposal provided for a one-for-one fixed stock exchange ratio. Pursuant to its
terms, the proposal would be deemed withdrawn upon any unauthorized public
announcement or communication to any third party of the proposal. In January
1995, following the unauthorized public disclosure of FHC's preliminary
proposal, FHC withdrew its proposal and terminated discussions with HSI.
During October 1994 through December 1994 members of senior management of
HSI and FHP International Corporation ("FHP") had several discussions regarding
a possible business combination or strategic alliance between the two companies.
In December 1994, FHP proposed a business combination of FHP and HSI which,
among other things, contemplated that (i) each share of voting common stock of
HSI
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would be exchanged for $34 worth of FHP common stock based on the closing price
of FHP common stock on the date of the proposal, subject to a 10% collar and
(ii) each share of nonvoting common stock of HSI would be exchanged for $34
worth of nonvoting FHP common stock based on the closing price of FHP common
stock on the date of the proposal, subject to a 10% collar. In January 1995,
following the unauthorized public disclosure of FHP's proposal, FHP withdrew its
proposal and terminated discussions with HSI.
During 1995 and 1996, FHC continued to review its long term business goals
and explore means to maintain its competitiveness in the managed health care
industry and to enhance stockholder value. In this regard, in April 1995, the
FHC Board directed its financial advisor, Morgan Stanley & Co. Incorporated
("Morgan Stanley"), to explore strategic alternatives to strengthen FHC's
competitive position in California and other states. The FHC Board also
considered other strategic alternatives available to FHC, including maintaining
the status quo, a stock restructuring or repurchase program, the divestiture of
certain operations, the sale of a minority interest in certain of its
operations, the addition of a minority investment partner, possible acquisitions
and other business combinations. Throughout the remainder of 1995 and 1996, FHC
considered several possible acquisitions and consummated the acquisitions,
directly or indirectly, of London Guarantee & Accident Company of New York (a
licensed property and casualty company), Tucson Medical Associates (a physician
group in Arizona) and Managed Health Networks, Inc. (a behavioral health
company).
In June 1996, several members of FHC's senior management met with members
of the senior management of WellPoint Health Networks Inc. ("WellPoint" or the
"third party") relating to a proposal from this third party to acquire FHC.
Throughout the period of June through August 1996, senior management of FHC and
the third party held discussions relating to the proposed terms of a potential
combination including preliminary indications of interest by such party for an
acquisition of FHC at prices in the mid $40 range per share of FHC Common Stock.
After several months of due diligence and discussions, during the week of August
26, 1996, the third party made a proposal authorized by its board through Morgan
Stanley to acquire FHC at a price of $40.00 per share of FHC Common Stock, which
consideration would consist of 50% cash, 25% convertible preferred stock and 25%
registered common stock of the third party. The closing price of FHC Common
Stock on the NYSE on August 26, 1996 was $30 per share. Based on the
approximately 58.9 million outstanding shares of FHC Common Stock as of the time
of the third party proposal, the aggregate nominal value of the offer was
approximately $2.36 billion.
As described below, on August 28, 1996, the FHC Board considered the third
party proposal and the transaction with HSI. At the August 28 meeting, the FHC
Board unanimously rejected the third party proposal and determined that FHC's
management should continue exploring a transaction with HSI. The FHC Board
considered a number of factors in rejecting the third party proposal, including
the value offered, financing concerns, operating risks and leverage of the
proposed combined company, the advice of Morgan Stanley described below and the
concurrent discussions with HSI relating to a "merger of equals" transaction.
For purposes of its analysis, the FHC Board assumed that synergies ranging from
approximately $135 million to $185 million could be achieved by the combined
companies. At that meeting, Morgan Stanley advised the FHC Board that, based on
its preliminary financial analysis and its experience and knowledge, the third
party proposal was at the low end of the range of fairness, the proposal did not
represent an adequate offer and, while a transaction with the third party could
provide greater short term value to FHC's stockholders than the HSI transaction
(see "Opinion of FHC's Financial Advisor -- Pro Forma Share Price Analysis"),
greater value could be achieved in the long term through a strategic transaction
with HSI. The FHC Board, based in part on the advice of its financial advisor,
Morgan Stanley, and on the other considerations described above, rejected the
third party proposal and determined that FHC management should continue
exploring a transaction with HSI. In view of the HSI proposal and the
uncertainties relating to other strategic alternatives, including a sale of FHC,
the FHC Board determined to pursue the transaction with HSI and did not pursue
other alternatives.
During 1995 and 1996, HSI considered various strategic alternatives
available to it including maintaining the status quo, expanding business lines
through internal growth and acquisitions and potential business combinations
with other companies in the managed health care industry. In March 1995, HSI
entered into a Plan of Reorganization (the "WellPoint Agreement") with WellPoint
and Blue Cross of California ("BCC"). As a result of disagreements among HSI,
WellPoint and BCC arising out of the terms of the WellPoint
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Agreement, in December 1995, HSI, WellPoint and BCC announced the termination of
this proposed transaction.
On August 7, 1996, Jay M. Gellert, President and Chief Operating Officer of
HSI, called Daniel D. Crowley, Chairman of the Board, President and Chief
Executive Officer of FHC, to arrange a meeting. On August 19, 1996, Mr. Crowley
and Kirk A. Benson, Senior Vice President -- Corporate Development of FHC, met
with Mr. Gellert to discuss a possible business combination between FHC and HSI.
On August 21, 1996, members of senior management of FHC and HSI, together
with their respective legal counsel, continued discussions regarding the
possible combination of FHC and HSI. The structure discussed was based upon the
concept of a "merger of equals" (i.e., a strategic combination of two similarly-
sized companies in which neither company is acquiring the other and the ultimate
control of the combined entity remains in the hands of a large, fluid,
changeable and changing market). The parties discussed possible exchange ratios
as well as governance arrangements in respect of the combined entity during such
discussions.
On August 22, 1996, FHC and HSI entered into a confidentiality agreement
relating, among other things, to the information to be provided by each company
to the other and limiting the ability of each party for two years to acquire any
voting securities or assets of, or solicit proxies or make a public announcement
of a proposal for any extraordinary transaction with respect to, the other
party. Following the execution of such confidentiality agreement, the parties
began their mutual due diligence review.
On August 27, 1996, the investment policy committee of the FHC Board met
and considered the status of the third party proposal to acquire FHC referenced
above and also received a presentation from FHC senior management as to a
possible combination with HSI. The investment policy committee unanimously
determined to advise the FHC Board not to accept the third party proposal and
recommended that FHC senior management and representatives of Morgan Stanley
provide a full presentation to the FHC Board regarding the proposed combination
with HSI.
On August 28, 1996, the FHC Board held a special meeting to review the
status of the HSI discussions and the third party proposal. As described above,
at that meeting the FHC Board rejected the third party proposal. In addition,
after considering presentations by FHC senior management and FHC's legal and
financial advisors, the FHC Board authorized senior management to continue its
discussions with HSI and its advisors relating to a merger of equals
transaction, to continue to proceed with its due diligence review and to report
back to the FHC Board as discussions progressed.
On August 26, 1996, and again on September 2, 1996, Mr. Crowley and FHC's
legal and financial advisors met with Malik M. Hasan, M.D., Chairman of the
Board of Directors and Chief Executive Officer of HSI, and HSI's legal and
financial advisors to discuss the terms of a proposed merger of equals. At the
August 26, 1996 meeting, the parties made presentations to each other about
their respective company philosophies and prospects. In addition, at these
meetings, the parties discussed proposed exchange ratios, corporate governance
arrangements as well as potential synergies that could be achieved by the
combined company. Following negotiations between senior management of FHC and
HSI at the September 2, 1996 meeting, Mr. Crowley and Dr. Hasan agreed to
recommend to their respective Boards of Directors an exchange ratio of 1.3
shares of New FHS Common Stock per share of FHC Common Stock in the proposed
Merger. The Exchange Ratio was determined by the parties as a result of arm's
length negotiations between FHC and HSI with each party receiving financial
advice from its respective financial advisors in connection with negotiating the
Exchange Ratio.
On September 5, 1996, the FHC Board held a special meeting to consider the
status of the negotiations with HSI. Following presentations by FHC's management
and legal and financial advisors, the FHC Board requested senior management of
FHC to schedule a meeting with the directors and senior management of HSI so
that the directors of the two companies could meet each other.
On September 6, 1996, the HSI Board held a special meeting to consider the
status of the negotiations with FHC and to hear presentations from its financial
and legal advisors regarding the terms of the proposed transaction. Following
such presentations, the HSI Board determined that it would continue to evaluate
the
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proposed transaction and to proceed with the director and senior management
meeting proposed by the FHC Board.
On September 10, 1996, certain members of the FHC Board and the HSI Board
and senior management of both companies met informally and discussed the terms
of a merger of equals of FHC and HSI and the potential operating synergies which
might result from the proposed transaction.
On September 11, 1996, the FHC Board held a regularly scheduled meeting at
which it continued to consider the status of the HSI transaction. At that
meeting, in view of the significance of the corporate governance issues in the
transaction and the potential conflict of interest of FHC management with
respect to those matters, the FHC Board created an ad hoc committee consisting
of independent directors Earl B. Fowler, Richard W. Hanselman and Raymond S.
Troubh to review the corporate governance provisions relating to the proposed
transaction including the composition of the board of directors and committees
of directors of the combined entity and the requirement during a transition
period for a supermajority vote of directors for certain actions, including
termination of the Chairman of the Board and Chief Executive Officer of the
combined entity. The ad hoc committee made recommendations to the FHC Board
regarding corporate governance issues relating to the proposed transaction,
which recommendations were generally accepted by the FHC Board and which served
as the basis for negotiations with HSI. Additionally, the ad hoc committee also
served as a negotiating committee of the FHC Board to discuss various issues
relating to the transaction with FHC's legal and financial advisors as they
arose. The members of the committee met on several occasions to consider
corporate governance issues as well as other issues relating to the transaction.
The ad hoc committee members also met with Dr. Hasan and Mr. Gellert to discuss
the proposed integration, management and operation of New FHS if a merger of
equals transaction was consummated.
On September 11, 1996, the HSI Board held a special meeting at which it
continued to consider the status of the FHC transaction and received
presentations from HSI's senior management and legal and financial advisors. The
HSI Board authorized management to continue discussions with FHC and its
advisors relating to a merger of equals transaction.
On September 10, 1996, Frank A. Olson, a member of the FHC Board, expressed
his general dissatisfaction with elements of the proposed transaction with HSI
regarding certain compensation and governance issues as they were proposed at
that time as described by FHC's management and advisors. On September 12, 1996,
Mr. Olson submitted his letter of resignation from the Board which was announced
by FHC on September 18, 1996.
On September 16, 1996, as a result of unusual market activity in FHC Common
Stock, FHC announced that it was discussing a "merger of equals" combination
with an unidentified party which would result in a nominal value per share of
FHC Common Stock below the September 13, 1996 closing stock price per share of
FHC Common Stock of $36 1/8. In the two weeks preceding the above mentioned
announcement, (i) FHC Common Stock's daily trading volume and closing price on
the NYSE ranged from 167,500 shares traded and a closing price of $29 3/4 per
share on September 3, 1996 to 1,102,000 shares traded and a closing price of
$36 1/8 per share on September 13, 1996, the last business day before FHC's
September 16 announcement and (ii) HSI Common Stock's daily trading volume and
closing price on the NYSE ranged from 9,200 shares traded and a closing price of
$24 1/2 per share on September 3, 1996 to 120,200 shares traded and a closing
price of $26 per share on September 13, 1996. Additionally, while neither FHC
nor Morgan Stanley were aware of any unusual trading activity in FHC options
during the two week time period prior to the September 16 announcement,
subsequent to the announcement the financial press reported that trading of
FHC's $35 call options (expiring October 19, 1996) surged in the week preceding
the announcement. Subsequent to this announcement, the third party contacted
Morgan Stanley and inquired whether it could make a new proposal. At its
September 18, 1996 meeting and based on the advice of Morgan Stanley as
described below, the FHC Board confirmed its prior determination that a
transaction with HSI was expected to provide its stockholders with greater long
term value than a transaction with the third party in the same price range
previously offered. Accordingly, following that meeting and at the request of
the FHC Board, Morgan Stanley advised the third party that it was free to make a
new proposal, but that a proposal in the same price range as previously offered
by the third party would not be acceptable to the FHC Board. No new proposal was
made by the third party.
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During the last two weeks of August and throughout September 1996, senior
management and legal and financial advisors of FHC and HSI continued to conduct
their due diligence review and discuss the terms of a possible combination. In
addition, the compensation committees of HSI and FHC each met several times to
discuss the terms of the proposed merger of equals of FHC and HSI and
considered, in connection with the overall transaction, the proposed employment
arrangements relating to FHC's senior management. At its meetings, the members
of HSI's compensation committee considered presentations from HSI management and
its legal, compensation and financial advisors and discussions with members of
the compensation committee of the FHC Board. At its meetings, the members of
FHC's compensation committee conducted discussions with FHC management and its
legal and financial advisors, compensation consultants and members of HSI's
compensation committee.
At a special meeting of the FHC Board on September 18, 1996, Morgan Stanley
made a presentation to the FHC Board relating to the fairness of the HSI
transaction as more fully described in "-- Opinion of FHC's Financial Advisor."
As part of that presentation, Morgan Stanley provided the FHC Board with a
summary analysis of the strategic alternatives considered by FHC during 1995 and
1996, as discussed above, as well as a review of potential strategic partners.
In light of the fact that the third party had recently inquired whether it could
make a new proposal, Morgan Stanley also analyzed the potential value to FHC's
stockholders of a proposal with a nominal value of $40 per share (the price
offered by the third party in August 1996) and a nominal value of $42 per share,
consisting of 50% cash, 25% common stock and 25% convertible preferred stock of
the third party. At that meeting, the FHC Board, based on the advice of Morgan
Stanley, confirmed its prior determination that a transaction with HSI was
expected to provide its stockholders with greater long term value than a
transaction with the third party in the same price range previously offered. See
"-- Opinion of FHC's Financial Advisor" for a summary of the analysis of Morgan
Stanley comparing the short term and long term values of the HSI proposed
transaction and the third party proposal. Additionally, in view of the HSI
proposal and the uncertainties relating to other strategic alternatives,
including the sale of FHC, the FHC Board determined that FHC should continue to
pursue the transaction with HSI and did not pursue other alternatives. At the
September 18, 1996 FHC Board meeting, Dr. Hasan and Mr. Gellert also made a
presentation relating to the management and business strategies of the combined
entity.
On September 25, 1996, the FHC Board held another special meeting to review
the status of negotiations with HSI. At the September 25, 1996 FHC Board
meeting, as well as at the prior FHC Board meetings held on August 28, 1996 and
throughout September, the FHC Board received presentations from Morgan Stanley
as to the exchange ratio to be used in the transaction and also received
presentations from FHC's management and its legal advisors. At the September 25,
1996 meeting of the FHC Board, Morgan Stanley delivered its written opinion
that, as of such date, the Exchange Ratio was fair to the holders of FHC Common
Stock from a financial point of view.
On September 25, 1996, the HSI Board held a special meeting to review the
status of negotiations with FHC. At the September 25, 1996 meeting as well as
the prior HSI Board meeting held on September 11, 1996, the HSI Board received
presentations from Salomon Brothers Inc ("Salomon") and Shattuck Hammond
Partners, Inc. ("Shattuck Hammond") as to the exchange ratio to be used in the
transaction and the synergies and cost savings that could reasonably be expected
to be realized in the transaction and also received presentations from HSI's
senior management and its legal advisors. Subsequent to the September 25, 1996
meeting of the HSI Board, each of Salomon and Shattuck Hammond delivered its
written opinion that, as of such date, the Exchange Ratio was fair to the
holders of HSI Common Stock from a financial point of view. Throughout the month
of September 1996, HSI also received general financial advice relating to the
transaction from Volpe, Welty & Company ("Volpe Welty") and Smith Barney, Inc.
("Smith Barney").
On September 30, 1996, the FHC Board met to consider the approval of the
Merger Agreement, the related agreements and the transactions contemplated by
those agreements. Morgan Stanley orally confirmed its opinion that, as of such
date, the Exchange Ratio was fair to the holders of FHC Common Stock from a
financial point of view. After discussion and upon consideration of the factors
described below, the FHC Board concluded that the Merger Agreement and the
transactions contemplated thereby, including the related agreements, were in the
best interest of FHC stockholders and, by unanimous vote of the directors
present and
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with one director, Patrick Foley, absent, approved the Merger Agreement, the
related agreements and the transactions contemplated by those agreements.
On September 30, 1996, the HSI Board met to consider the approval of the
Merger Agreement, the related agreements and the transactions contemplated by
those agreements. Salomon and Shattuck Hammond each orally confirmed their
fairness opinions at the September 30 meeting of the HSI Board that, as of such
date, the Exchange Ratio was fair to the holders of HSI Common Stock from a
financial point of view. After discussion and upon consideration of the factors
described below, the HSI Board concluded that the Merger Agreement and the
transactions contemplated thereby, including the related agreements, were in the
best interest of HSI stockholders and, by unanimous vote of the directors
present and with two directors absent (Messrs. Austin and Gallagher), approved
the Merger Agreement, the related agreements and the transactions contemplated
by these agreements.
The Merger Agreement and the related agreements were executed by authorized
officers of FHC and HSI on October 1, 1996. The closing stock price of FHC
Common Stock and HSI Common Stock on September 30, 1996 was $33 7/8 per share
and $28 3/8 per share, respectively.
REASONS FOR THE MERGER; RECOMMENDATIONS OF THE BOARDS
Joint Reasons for the Merger
Each of the FHC Board and the HSI Board believes that the Merger offers FHC
and HSI a unique opportunity to create a premier managed health care company
that will be better positioned to compete effectively in the rapidly changing
managed health care industry than either company on a stand-alone basis.
The FHC Board and the HSI Board have each determined that the Merger, the
Merger Agreement and the transactions contemplated thereby are in the best
interests of their respective stockholders. In separately reaching their
determinations, the FHC Board and the HSI Board consulted with their respective
legal counsel with respect to the legal duties of the board of directors,
regulatory matters and the Merger Agreement and issues related thereto and with
their respective financial advisors, Morgan Stanley for FHC, and Salomon,
Shattuck Hammond, Volpe Welty and Smith Barney for HSI, with respect to the
financial aspects and fairness of the transaction, as well as with their
respective senior management. The FHC Board and the HSI Board considered the
following material information and factors in making their decision:
Economies of Scale. In considering the Merger, the HSI Board and the FHC
Board considered that the Merger will provide each company with the economies of
scale needed to lower its costs and to compete more effectively in the managed
health care industry. The HSI Board and the FHC Board believe that the Merger
will create a combined company that will be the third largest managed care
company in terms of membership (with approximately five million members in 16
states) and the fourth largest managed care company in terms of revenues (with
over $6.0 billion in annual revenues based on the 12 months ended June 30,
1996). Consequently, as one of the nation's largest managed health care
companies, in the view of the HSI Board and the FHC Board, New FHS will have the
critical mass necessary to lower its costs which will enable it to offer
products with lower premiums, to attain net growth and to realize appropriate
margins.
Geographic Diversity. The Merger of FHC and HSI will also create an entity
with enhanced geographic diversity. The Merger will establish the combined
entity with strong positions in the West, particularly in California, and
growing operations in Texas, Florida and the Northeast. In addition, the
combined entity will have HMO operations in four regions in which FHC currently
does not have an HMO presence: Connecticut, Idaho, New Mexico and Pennsylvania
and in six regions in which HSI currently does not have an HMO presence:
Arizona, Florida, Louisiana, Oklahoma, Texas and Utah. The HSI Board and the FHC
Board believe that enhanced geographic diversity should improve the combined
entity's position with buyers seeking health care providers with broad national
networks.
Complementary Product Offerings/Membership Composition. Additionally, FHC
and HSI have complementary product offerings and membership composition. The HSI
Board and the FHC Board believe that each of FHC's and HSI's HMO businesses in
California and the West will enhance the other's operations and that HSI's
medical management expertise will facilitate the development of commercial HMO
services in
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markets where FHC has government contracts. The HSI Board and the FHC Board also
believe that the combined entity will have the benefit of FHC's strength in the
government contracts market and HSI's strength in marketing to larger employer
groups. Moreover, the HSI Board and the FHC Board believe that FHC will have the
opportunity to cross-market and cross-sell its specialty products such as
behavioral health services to HSI's existing base of employers and members.
Potential Consolidation Cost Savings. The HSI Board and the FHC Board also
believe, based upon the advice of the respective management and financial
advisors of each of HSI and FHC, that the transaction could generate at least
$110 million of synergies and cost savings for the combined company after the
Merger, although there is no assurance that these synergies or savings would be
achieved. In the view of the HSI Board and the FHC Board, the combined company
should be able to reduce costs by consolidating corporate overhead and
administration, management information systems and administrative functions and
by applying each company's most successful health care delivery systems and
managed care techniques to the combined company's business.
Stockholder Long Term Value. Each of the HSI Board and the FHC Board
believes that the transaction is an excellent opportunity to provide its
stockholders with long term value. FHC's stockholders will own approximately 61%
of the combined entity and HSI's stockholders will own approximately 39% of the
combined entity after the Merger, and the Merger will provide HSI's and FHC's
stockholders the opportunity to continue sharing in the combined entity's long
term growth. In addition, the synergies and cost savings referred to above, if
achieved, would inure to the benefit of the stockholders of the combined
company, although there is no assurance that these synergies or savings will be
achieved.
Reasons for the Merger -- FHC
In approving the Merger, the FHC Board considered the following material
information and factors in addition to the considerations set forth above as
"Joint Reasons for the Merger":
- the strategic alternatives available to FHC, including maintaining
the status quo, a stock restructuring or repurchase program, the
divestiture of certain operations, the sale of a minority interest in
certain of its operations, a minority investment partner, possible
acquisitions and other possible business combinations and the FHC Board's
belief that the HSI transaction was the preferrable alternative for FHC's
stockholders;
- the status of the managed health care industry, including increasing
competition, limited pricing flexibility, anti-managed care initiatives and
the continuing need for mass and volume to obtain better health care costs
allowing lower premiums and appropriate operating and profit margins;
- the (i) continued consolidation within the managed health care
industry, including the combination of Aetna Life and Casualty Company and
U.S. Healthcare, and the recently announced acquisition of FHP
International Corporation by PacifiCare Health Systems, Inc. and its impact
on the managed health care market in California and (ii) the importance of
market position, significant scale and financial resources to a company's
ability to compete effectively in the changing environment in the managed
health care market and the FHC Board's belief that the transaction with HSI
would provide FHC with the economies of scale needed to lower its costs and
to compete more effectively in the managed health care industry;
- FHC announced that it was engaged in discussions for a business
combination more than two weeks prior to the execution of the Merger
Agreement and no other entity made any alternative proposal, which
indicated that it was unlikely that any sale transaction was available
which would provide FHC's stockholders with greater long term value than
the HSI transaction. In this regard, the FHC Board, in August 1996,
considered an acquisition proposal from a third party at a price of $40.00
per share of FHC Common Stock consisting of 50% cash, 25% convertible
preferred stock and 25% registered common stock of the third party. The FHC
Board, based in part on the advice of Morgan Stanley that the proposal was
at the low end of the range of fairness and was not an adequate offer for
FHC, rejected the proposal (see "-- Background of the Merger"). The third
party was subsequently advised by Morgan
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Stanley that it was free to make a new proposal, but that a proposal in the
same price range as previously indicated would not be acceptable to the FHC
Board. No new proposal was made by the third party;
- the financial performance and condition, results of operations,
market position, businesses, liabilities and prospects of each of FHC, HSI
and of New FHS;
- the results of the due diligence review of HSI conducted by FHC's
management and legal and financial advisors;
- the Merger's structure as a merger of equals which would result in a
capital structure for New FHS with essentially no additional leverage (as
compared to a cash acquisition, which could require significant additional
leverage) and increased cash flow potential which in turn would offer New
FHS the flexibility to pursue future opportunities;
- the FHC Board's belief that HSI's medical management system and its
medical management expertise in general could result in significant
benefits to New FHS's members and providers;
- the ability of the combined company to provide a broader range of
services to the customers of each company at a lower cost which reinforced
the FHC Board's belief that the transaction would provide FHC's
stockholders with the economies of scale needed to lower its costs and to
compete more effectively in the managed health care industry;
- the requirement of the Merger Agreement that employee reductions be
made on a fair and equitable basis;
- the recommendation of the Merger by FHC's management;
- the corporate governance issues relating to the transaction,
including the composition of the board of directors and committees of
directors of the combined entity, the arrangements with respect to the
senior management of the combined entity following the Merger and the
requirements for a supermajority vote of directors for certain actions,
including termination of the Chief Executive Officer of the combined entity
(see "The Merger Agreement -- Corporate Organization and Governance");
- the presentations made by Morgan Stanley at various FHC Board
meetings as to the relative expected earnings contribution of FHC and HSI
to the combined entity, the appropriate exchange ratio to be used in the
Merger and the pro forma impact of the Merger on FHC's stockholders (see
"-- Opinion of FHC's Financial Advisor");
- Additionally, the FHC Board relied on the written opinion of Morgan
Stanley dated September 25, 1996 (which was orally confirmed on September
30, 1996), to the effect that the Exchange Ratio is fair to the
stockholders of FHC from a financial point of view. (The full text of the
written opinion of Morgan Stanley, dated the date hereof, which sets forth
the procedures followed, the factors considered and the assumptions made by
Morgan Stanley, is attached as Appendix IV to this Joint Proxy
Statement/Prospectus and is incorporated by reference. You should read the
opinion of Morgan Stanley carefully and in its entirety.);
- the terms and conditions of the Merger Agreement, including the
Exchange Ratio, the parties' representations, warranties and covenants, the
conditions to their respective obligations, the amount of termination fees
payable under the Merger Agreement and the circumstances under which such
termination fees will be payable and the FHC Board's belief that such terms
and conditions were appropriate for the transaction with HSI (see "The
Merger Agreement");
- the fact that, in the view of Morgan Stanley, the termination fees
payable under the Merger Agreement should not inhibit a third party
desirous of making a financially superior offer for FHC;
- the terms and conditions of the Voting Agreement with Dr. Hasan (see
"Certain Other Agreements -- Voting Agreement");
- the terms and conditions of the senior management employment and
consulting agreements, including the overall costs of the management
packages, the terms of the non-competition and consulting
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provisions, and that the employment arrangements would make it more likely
that FHC senior management would continue their employment with New FHS for
at least a transitional period and, in certain instances, would not compete
with New FHS after termination of their employment;
- the regulatory approvals required to consummate the Merger,
including antitrust approvals, insurance and HMO regulatory approvals, and
the FHC Board's belief that it was likely that such approvals would be
obtained; and
- the fact that the Merger is expected to be treated as a tax-free
reorganization and is intended to be accounted for under the pooling of
interests method of accounting (see "-- Accounting Treatment" and
"-- Material Federal Income Tax Consequences").
In approving the Merger, the FHC Board also considered the following
potentially negative material information and factors relating to the
transaction which the FHC Board determined were outweighed by the benefits of
the transaction:
- the lack of assurance that the combined entity would achieve the
expected potential operational cost savings and efficiencies of at least
$110 million;
- the fact that a reduction in workforce would be necessary to achieve
the projected cost savings and efficiencies from the Merger;
- the amount of the management packages including an aggregate of
approximately $16.0 million of severance payments to certain executives of
FHC upon termination of their employment under certain circumstances
following the Merger (which aggregate amount is the same amount payable
under their current employment agreements); approximately $6.9 million in
aggregate bonuses (in lieu of participation in FHC's existing management
incentive plan) if those executives remain employed by the combined company
for certain periods of time after the Merger; and a maximum $13.5 million
aggregate amount payable under consulting and non-compete agreements to be
entered into by certain FHC senior management immediately following
termination of employment with New FHS;
- a sale of FHC could generate greater short term value to FHC's
stockholders;
- the possibility that the supermajority vote required with respect to
certain corporate governance matters could adversely restrict the ability
of the New FHS Board to implement certain changes in management;
- certain members of current FHC senior management, including FHC's
Chief Executive Officer, would not likely play a long term role in the
management of the combined entity; and
- the rights of CWF to obtain control of the HSI Board upon the
occurrence of an adjustment event which could arise as a result of HSI's
failure to pay certain indebtedness owed to CWF (however, this factor would
be mitigated by HSI's agreement to enter into the CWF Agreement in order to
minimize the risk of such a change in the control of the HSI Board and the
FHC Board's belief that New FHS would have the liquidity to repay the
indebtedness).
Following consideration of the information and factors described above
(including reliance on the opinion of Morgan Stanley that the Exchange Ratio is
fair to the stockholders of FHC from a financial point of view), the FHC Board
concluded that the Merger is in the best interest of its stockholders. In
reaching this conclusion, the FHC Board did not assign relative or specific
weights to the above information and factors or determine that any information
or factor was of particular importance. A determination of various weightings
would, in the view of the FHC Board, be impractical. Rather, the FHC Board
viewed its position and recommendations as being based on the totality of the
information and factors presented to and considered by it. In addition,
individual members of the FHC Board may have given different weight to different
information and factors.
FOR THE REASONS DESCRIBED ABOVE, THE FHC BOARD, BY A UNANIMOUS VOTE OF
THOSE DIRECTORS PRESENT AT A MEETING ON SEPTEMBER 30, 1996 AND WITH ONE DIRECTOR
ABSENT, APPROVED THE MERGER AGREEMENT, THE MERGER
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AND THE TRANSACTIONS CONTEMPLATED THEREBY AND UNANIMOUSLY RECOMMENDS THAT FHC
STOCKHOLDERS VOTE "FOR" APPROVAL AND ADOPTION OF THE MERGER AGREEMENT, THE
MERGER AND THE TRANSACTIONS CONTEMPLATED THEREBY. ON NOVEMBER 26, 1996, THE FHC
BOARD UNANIMOUSLY RATIFIED THE MERGER AGREEMENT, THE MERGER AND TRANSACTIONS
CONTEMPLATED THEREBY.
Reasons for the Merger -- HSI
In approving the Merger, the HSI Board considered the following material
information and factors in addition to the considerations set forth above as
"Joint Reasons for the Merger":
- current industry, economic and market conditions, including, without
limitation, the HSI Board's belief that, while the prospects for HSI are
good, the managed health care market is consolidating, which could
adversely affect HSI's competitive position and the HSI Board's belief that
the Merger would provide the HSI stockholders with greater long term value
than the company on a stand alone basis;
- the HSI Board's belief that New FHS would be better able to respond
to the needs of consumers and customers, the increased competitiveness of
the health care industry and the opportunities that changes in the health
care industry might bring;
- the present and anticipated environment in the managed health care
industry and the strategic options available to HSI and the HSI Board's
belief that the Merger would provide the HSI stockholders with greater long
term value than the company on a stand alone basis;
- information concerning the financial condition, results of
operations, prospects and businesses of each of HSI and FHC together with
the results of HSI's due diligence review of FHC conducted by HSI's senior
management, legal advisors and financial advisors;
- the financial and business prospects for New FHS, including
opportunities for realizing operating efficiencies and other synergies,
which are expected to result in a significant reduction in general and
administrative, medical management and certain other expenses;
- FHC's strong market position with its government contracts
(including CHAMPUS) and workers' compensation products which would provide
complementary sources of business to New FHS;
- the fact that HSI and FHC have businesses which are highly
complementary to the other in terms of product offerings and geographic
scope, which, among other things, offer potential cross-marketing and
cross-selling opportunities;
- the merger of equals with FHC would result in a capital structure
for New FHS with essentially no additional leverage (as compared to a cash
acquisition which could require significant additional leverage) and
increased cash flow potential which in turn would offer New FHS the
flexibility to pursue future opportunities;
- the terms and conditions of the Merger Agreement, including the
Exchange Ratio, the parties' representations and warranties, covenants and
agreements and the conditions to their respective obligations set forth in
the Merger Agreement and the HSI Board's belief that such terms and
conditions were appropriate for the transaction with FHC;
- the HSI Board's understanding, based upon the opinion of its outside
legal counsel, that the Merger is structured as a merger of equals and
could be accomplished on a tax-free basis;
- the HSI Board's understanding, after consultation with its outside
auditors and financial advisors' that the Merger would be accounted for as
a pooling of interests transaction;
- the fact that nine of the 11 members of the New FHS Board will be
independent directors;
- the fact that the New FHS Board will include five current HSI
directors and six current FHC directors and that HSI senior management will
continue to operate New FHS with the FHC senior management actively
involved in the oversight of New FHS as New FHS seeks to realize synergies
that were identified in connection with the Merger (see "The Merger
Agreement -- Corporate Organization and Governance");
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- the regulatory approvals required to consummate the Merger,
including antitrust approvals and insurance and HMO regulatory approvals,
and the HSI Board's belief that it was likely that such approvals would be
obtained;
- the terms and conditions of the new employment arrangements with
FHC's senior management make it more likely that the FHC senior management
would continue in their employment with New FHS for at least a transitional
period and, in certain instances, would not compete with the combined
entity (see "Conflicts of Interest and Interests of Certain Persons in the
Merger -- Employment and Consulting Agreements");
- presentations from, and discussions with, senior executives of HSI,
representatives of HSI's outside legal counsel and representatives of
Salomon, Shattuck Hammond, Volpe Welty and Smith Barney regarding the
business, financial, accounting and legal due diligence review with respect
to FHC and the terms and conditions of the Merger Agreement;
- the HSI Board's belief that New FHS will have the liquidity to repay
the indebtedness owed to CWF pursuant to the terms of the CWF Agreement;
- the HSI Board relied on the written opinions of Salomon and Shattuck
Hammond to the effect that the Exchange Ratio was fair to holders of HSI
Common Stock from a financial point of view. (The full text of the written
opinions, dated the date hereof, are attached as Appendix V and Appendix VI
to this Joint Proxy Statement/Prospectus. You are urged to read the
opinions of Salomon and Shattuck Hammond in their entirety.); and
- the fact that pursuant to the Merger Agreement, HSI or FHC would be
entitled to a termination fee under certain circumstances.
In approving the Merger, the HSI Board considered the following potentially
negative material information and factors relating to the transaction which the
HSI Board determined were outweighed by the benefits of the transaction:
- the lack of assurance that the combined entity would achieve the
expected potential operational cost savings and efficiencies of at least
$110 million;
- the fact that a reduction in workforce would be necessary to achieve
the projected cost savings and efficiencies from the Merger;
- the fact that a large percent of FHC's revenues, 37%, were derived
from government contracts, including CHAMPUS contracts and that such types
of contracts are generally subject to frequent change which could, among
other things, reduce the amount of revenue received under such contracts;
- the impact of FHC's proposed restatement of its financial statements
and HSI's financial advisors' views that such changes should not negatively
impact the value of New FHS;
- the risk that establishment of reserves, especially as it relates to
FHC's workers' compensation business, is inherently uncertain and that
established reserves could prove to be inadequate;
- the costs related to the new employment and consulting agreements
with FHC's senior management, including under certain circumstances, $16.0
million in aggregate severance payments to certain executives upon
termination, approximately $6.9 million in aggregate bonuses if such
executives remain employed by the combined company for a certain period of
time after the Merger and a maximum $13.5 million aggregate amount payable
under certain consulting and non-compete agreements;
- the fact that NCQA accreditation was denied to one of FHC's two
Florida HMOs prior to its acquisition by FHC, and that FHC is currently in
the process of seeking accreditation by the NCQA of both of its Florida
HMOs; and
- the possibility that the supermajority vote required with respect to
certain corporate governance matters could adversely restrict the ability
of the New FHS Board to implement certain changes in management.
Following consideration of the information and factors described above
(including reliance on the opinions of Salomon and Shattuck Hammond that the
Exchange Ratio is fair to the stockholders of HSI from
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a financial point of view), the HSI Board concluded that the Merger is in the
best interests of its stockholders. In reaching this conclusion, the HSI Board
did not assign relative or specific weights to the above information and factors
or determine that any information or factor was of particular importance. A
determination of various weightings would, in the view of the HSI Board, be
impractical. Rather, the HSI Board viewed its position and recommendations as
being based on the totality of the information and factors presented to and
considered by it. In addition, individual members of the HSI Board may have
given different weight to different information and factors.
FOR THE REASONS DESCRIBED ABOVE, THE HSI BOARD, BY A UNANIMOUS VOTE OF
THOSE DIRECTORS PRESENT AT A MEETING ON SEPTEMBER 30, 1996 AND WITH TWO
DIRECTORS ABSENT (MESSRS. AUSTIN AND GALLAGHER), APPROVED THE MERGER AGREEMENT,
THE MERGER AND THE TRANSACTIONS CONTEMPLATED THEREBY AND UNANIMOUSLY RECOMMENDS
THAT HSI STOCKHOLDERS VOTE "FOR" APPROVAL AND ADOPTION OF THE MERGER AGREEMENT,
THE MERGER AND THE TRANSACTIONS CONTEMPLATED THEREBY AND "FOR" THE AMENDMENT AND
RESTATEMENT OF THE HSI CHARTER AS REQUIRED BY THE MERGER AGREEMENT.
OPINION OF FHC'S FINANCIAL ADVISOR
On September 25, 1996 and on the date hereof, Morgan Stanley delivered its
written opinion (the "Morgan Stanley Opinion") to the FHC Board to the effect
that, as of September 25, 1996 and as of the date hereof, and based upon the
assumptions made, matters considered and limits of review as set forth in such
opinion, the Exchange Ratio is fair from a financial point of view to the
holders of FHC Common Stock.
A COPY OF THE MORGAN STANLEY OPINION, WHICH SETS FORTH THE ASSUMPTIONS
MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE SCOPE OF REVIEW UNDERTAKEN BY
MORGAN STANLEY, IS ATTACHED AS APPENDIX IV TO THIS JOINT PROXY
STATEMENT/PROSPECTUS. THE MORGAN STANLEY OPINION IS DIRECTED ONLY TO THE
FAIRNESS OF THE EXCHANGE RATIO FROM A FINANCIAL POINT OF VIEW AND DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY FHC STOCKHOLDER AS TO HOW SUCH STOCKHOLDER
SHOULD VOTE AT THE FHC SPECIAL MEETING. THE SUMMARY OF THE MORGAN STANLEY
OPINION SET FORTH IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE MORGAN STANLEY OPINION ATTACHED AS
APPENDIX IV HERETO. STOCKHOLDERS OF FHC SHOULD READ THE MORGAN STANLEY OPINION
CAREFULLY AND IN ITS ENTIRETY.
In arriving at the Morgan Stanley Opinion, Morgan Stanley: (i) reviewed
certain publicly available financial statements and other information of FHC and
HSI; (ii) reviewed certain internal financial statements and other financial and
operating data concerning FHC and HSI prepared by the management of FHC and HSI,
respectively; (iii) analyzed certain summary financial projections concerning
FHC prepared by the management of FHC; (iv) analyzed certain summary financial
projections concerning HSI prepared by the management of HSI; (v) reviewed and
discussed with senior executives of FHC the past and current operations and
financial condition and the prospects of FHC; (vi) reviewed and discussed with
senior executives of HSI the past and current operations and financial condition
and the prospects of HSI and analyzed the estimated pro forma impact of the
Merger, including on the combined company's earnings per share, consolidated
capitalization and financial ratios; (vii) reviewed and discussed with senior
executives of FHC and HSI the strategic objectives of the Merger and the
long-term benefits expected to result from the Merger, including without
limitation, certain estimates and timing of synergies and other cost savings for
the combined company; (viii) reviewed the reported prices and trading activity
for the FHC Common Stock and HSI Common Stock; (ix) compared the financial
performance of FHC and HSI and the prices and trading activity of FHC Common
Stock and HSI Common Stock with that of certain other comparable publicly traded
companies and their securities; (x) reviewed the financial terms, to the extent
publicly available, of certain comparable transactions; (xi) reviewed the Merger
Agreement and certain related documents; (xii) considered at the time it
rendered its fairness opinion and as of the date hereof, the fact that the
Exchange Ratio was fixed at the time of the Merger Agreement and would not be
changed for any reason, including any subsequent change in each company's stock
prices prior to the Effective Time; and (xiii) considered such other factors as
Morgan Stanley deemed appropriate.
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In arriving at the Morgan Stanley Opinion, Morgan Stanley assumed and
relied upon, without independent verification, the accuracy and completeness of
the information reviewed by it for the purpose of the Morgan Stanley Opinion.
With respect to the financial projections, including estimates of the long-term
benefits expected to result from the Merger, Morgan Stanley assumed that they
were reasonably prepared on bases reflecting the best currently available
estimates and judgments of the future financial performance of FHC and HSI.
Furthermore, Morgan Stanley did not assume responsibility for conducting a
physical inspection of the properties or facilities of FHC or HSI or for making
or obtaining any independent valuation or appraisal of the assets or liabilities
of FHC and HSI, nor was Morgan Stanley furnished with any such valuations or
appraisals. Morgan Stanley assumed, with FHC's consent, that the Merger will be
treated as a tax-free reorganization and/or exchange pursuant to the Code, and
that the Merger will be accounted for as a pooling of interests business
combination in accordance with United States generally accepted accounting
principles. Morgan Stanley also assumed that the transactions described in the
Merger Agreement will be consummated on the terms set forth therein. The Morgan
Stanley Opinion is necessarily based on economic, market and other conditions as
in effect on, and the information made available to Morgan Stanley as of, the
date hereof.
The following is a summary of the material financial analyses presented by
Morgan Stanley to the FHC Board during the various FHC Board meetings held
throughout September 1996. Except where indicated, the analysis set forth below
reflects Morgan Stanley's presentation to the FHC Board on September 18, 1996.
Comparative Stock Price Performance. As part of its analysis, Morgan
Stanley reviewed the recent stock market performance of FHC and HSI and compared
such performance to that of a group of other companies in the managed care
industry which group was comprised of FHP International, Inc., PacifiCare Health
Systems (Classes A and B), and WellPoint Health Networks, Inc. Morgan Stanley
also reviewed the ratio of FHC's to HSI's stock prices over various periods
ending September 10, 1996, and computed the premium of the Exchange Ratio in
relation to the aforementioned ratios. The ratio of closing stock prices of FHC
to HSI for the various periods ending September 10, 1996 were as follows: 1.251
for the previous 12 months; 1.231 for the previous 180 days; 1.274 for the
previous 90 days; and 1.223 for the previous 30 days.
Morgan Stanley observed that the Exchange Ratio represented a premium of
approximately 3.9%, 5.6%, 2.0%, and 6.3%, respectively, over the aforementioned
ratios of FHC's to HSI's stock prices.
Contribution Analysis. Morgan Stanley analyzed the pro forma contribution
of each of FHC and HSI to the combined company. Such analysis included, among
other things, relative contributions of revenues, membership, earnings before
interest and taxes ("EBIT"), net income, and equity value at or over various
time periods. All financial information relating to FHC was adjusted to reflect
FHC on a calendar year basis rather than a June 30 fiscal year basis. In
particular, such analysis showed that, based on management's estimates, FHC
would contribute approximately 55.4% of the projected revenues in 1996, 61.6% of
combined membership, 55.4% of the projected EBIT for 1996, 63.1% of projected
net income for 1996, 62.1% of projected net income for 1997, and 60.2% of equity
value as of September 13, 1996. These contribution percentages were computed
before taking into account any synergies or cost savings that may be realized if
the Merger were to be consummated. Morgan Stanley observed that the
aforementioned contribution ratios implied exchange ratios between FHC and HSI
in the range of 1.110 to 1.416. Morgan Stanley also observed that the
contribution analysis did not take into account the different valuation
multiples, such as price-earnings multiples, that the market ascribed to FHC and
HSI, and that HSI's 1996 and 1997 price-earnings multiples, based on research
analysts' estimates, were higher than FHC's corresponding price-earnings
multiples. Morgan Stanley also observed the implied exchange ratios between FHC
and HSI with respect to various estimated equity values, including equity market
trading, market for corporate control and discounted cash flow values, and
aggregate value for each company. Such implied exchange ratios were 1.352,
1.206, 1.083 and 1.137, respectively.
Pro Forma Analysis of the Merger. Morgan Stanley analyzed certain pro forma
effects of the Merger on the earnings and capitalization of the combined
company, as well as on FHC's earnings per share, after taking into account the
Exchange Ratio. These analyses were based on management's estimate of 1996, 1997
and 1998 net income for FHC and HSI, respectively. Based on such analysis,
Morgan Stanley observed that the Merger would result in a slight decrease in
FHC's earnings per share in 1996 and a slight increase in FHC's
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earnings per share in 1997 and 1998. For purposes of the above analysis, Morgan
Stanley did not attempt to identify or quantify synergies (through, for example,
cost reductions and rationalizations as described below) which might be achieved
in connection with the Merger. However, for illustrative purposes, and as a
hypothetical example, Morgan Stanley also analyzed, and presented to the FHC
Board on September 11, 1996, certain pro forma effects of the Merger on the
earnings of the combined company, as well as FHC's earnings per share, assuming
that various levels of pre-tax synergies, ranging from $0 to $175 million, would
be realized in each of 1997 and 1998 in connection with the Merger and after
taking into account the Exchange Ratio. While a level of synergy can be expected
to be achieved in a strategic business combination such as the Merger as a
result of rationalization (through elimination of duplicate facilities and
restructuring of medical service delivery networks) and cost reductions
(including savings realized through economies of scale), the various synergy
amounts were selected by Morgan Stanley in conjunction with management in order
to ascertain the arithmetic sensitivity of post-Merger earnings to the
achievement of synergies and Morgan Stanley expressed no view as to whether
these synergies would be obtained, or with respect to the reasonableness of the
amount or timing of such synergies. No assurances can be given that the
hypothetical amount of these synergies bears any relation to the synergies, if
any, which might be realized as a result of the Merger. Based on such
illustrative analysis, Morgan Stanley observed that, after taking into account
such hypothetical synergies, the Merger would result in an increase in FHC's
earnings per share of 5.8% to 31.9% in 1997 and 5.8% to 37.5% in 1998.
Pro Forma Share Price Analysis. Morgan Stanley performed an analysis of the
combined company's potential share price assuming the Merger were to be
consummated. Based on estimated multiples of 1997 and 1998 net income for the
combined company, ranging from 10.0 (FHC's current multiple of estimated 1997
earnings) to a hypothetical multiple of 14.0 (which is less than the net income
multiple of large capitalization managed care companies such as Humana and
United HealthCare), and based on management's estimates of 1997 and 1998 net
income for FHC and HSI, respectively, and after giving effect to the Exchange
Ratio of 1.3, Morgan Stanley calculated market values of New FHS Common Stock
attributable to one share of FHC Common Stock. For illustrative purposes, Morgan
Stanley performed such analysis assuming that 25% to 100% of the hypothetical
pre-tax synergies would be realized under various scenarios in connection with
the Merger. Morgan Stanley expressed no view as to whether these synergies would
actually be obtained or with respect to the reasonableness of the amount or
timing of such synergies. Such analysis resulted in pro forma market values of
New FHS Common Stock attributable to one share of FHC Common Stock ranging from
approximately $33.45 to $52.74 per share in 1997, and $41.78 to $70.32 per share
in 1998. These prices compared to FHC's closing price on the NYSE of $34 5/8 per
share on September 18, 1996, the date on which such analysis was presented to
the FHC Board.
In view of the fact that the third party offeror had inquired whether it
could make a new proposal for FHC at approximately the same time that Morgan
Stanley was making its presentation to the FHC Board relating to the transaction
with HSI on September 18, Morgan Stanley also analyzed the potential value to
FHC's stockholders of a third party offer with a nominal value of $40 per share
of FHC Common Stock, the price offered by the third party in August 1996, and a
nominal value of $42 per share. Morgan Stanley had previously advised the FHC
Board on August 28, 1996 that the third party offer with a nominal value of $40
per share of FHC Common Stock was at the low end of the range of fairness and
was not an adequate offer for FHC. With respect to a third party offer with a
nominal value of $40 per share of FHC Common Stock, consisting of 50% cash, 25%
common stock and 25% convertible preferred stock, Morgan Stanley calculated the
total potential value of the third party offer to range from $39.38 to $47.40 in
1997 and to range from $39.13 to $52.68 in 1998. In its analysis, Morgan Stanley
assumed for illustrative purposes that 25% to 100% of hypothetical pre-tax
synergies of $87.0 million in 1997 and $174.0 million in 1998 would be achieved
in such transaction and a 5.5% annual dividend on the convertible preferred
stock and utilized a multiple range of 10.0x to 14.0x next 12 months earnings
per share for 1997 and 1998, as estimated by such third party's management. As
Morgan Stanley was comparing the third party offer and the HSI transaction and
did not have sufficient information regarding the third party, it analyzed the
third party offer utilizing the hypothetical synergies which might be achieved
in a combination of FHC and HSI. Morgan Stanley expressed no view as to whether
the assumed synergies would actually be obtained or with respect to the
reasonableness of the amount of or the timing of such synergies. Morgan Stanley
also estimated the potential value to FHC
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stockholders of a third party offer assuming a nominal offer price of $42.00 per
share of FHC Common Stock based on the same structure as the third party offer
and utilizing the range of hypothetical synergies utilized in its preceding
analysis of the third party offer. Morgan Stanley calculated that the total
potential value of such a third party offer would range from $40.88 to $48.52 in
1997 and would range from $40.64 to $54.12 in 1998. This analysis indicated that
greater long term value could be achieved by FHC in a transaction with HSI
rather than a transaction with the third party.
Stand Alone Valuation Analyses. Morgan Stanley estimated a range of equity
values for each of FHC and HSI on the bases of equity market trading, market for
corporate control and discounted cash flow analyses. The equity market trading
valuation analysis for each company was based on projected next 12 months
earnings per share estimates provided by equity research analysts and
management. Morgan Stanley reviewed earnings estimates for FHC and HSI based on
First Call data as of September 6, 1996 and analyzed the low, mean and high
earnings estimates for each company. First Call is an on-line data service which
monitors and publishes a compilation of earnings estimates produced by selected
research analysts on certain public companies. With respect to FHC, Morgan
Stanley's analysis was based on estimates of 10 research analysts for each of
1996 and 1997. The mean estimate for 1998 was based on estimates of three
research analysts. With respect to HSI, Morgan Stanley's analysis was based on
estimates of 11 research analysts and the mean for 1998 was derived by
increasing the First Call mean for 1997 ($2.47) by 15%. Morgan Stanley was not
provided with the names of the individual research analysts for which it was
provided estimates by First Call. Morgan Stanley calculated ranges of per share
equity value of $22.72 to $29.82 for FHC and $18.56 to $24.36 for HSI based on
this analysis utilizing equity research analysts' estimates. Morgan Stanley
calculated ranges of per share equity value of $24.80 to $32.50 for FHC and
$18.08 to $23.73 for HSI based on this analysis utilizing management estimates.
The market for corporate control analysis for each company was based on
projected next 12 months earnings per share estimates provided by equity
research analysts and management. Morgan Stanley used a range of 12.0x to 17.0x
multiple of projected next 12 months earnings per share estimates for this
analysis. Morgan Stanley calculated ranges of per share equity value of $34.08
to $48.28 for FHC and $27.84 to $39.44 for HSI, based on this analysis utilizing
equity research analysts' estimates. Morgan Stanley calculated ranges of per
share equity value of $37.20 to $52.70 for FHC and $27.12 to $38.42 for HSI,
based on this analysis utilizing management estimates. The discounted cash flow
analysis for each company was based upon discussions with management of each of
FHC and HSI, as well as upon certain financial forecasts prepared by the
management of each company. Unlevered free cash flows of each company were
calculated as net income plus depreciation and amortization, deferred taxes,
minority interest, other non-cash expense and after-tax net interest expense,
less capital expenditures and investments in working capital. Morgan Stanley
calculated terminal values for each of FHC and HSI by applying a range of
multiples of estimated net income in 2000 from 9.0x to 11.0x, which range
represents estimated long-range trading multiples of net income. The unlevered
free cash flows and terminal values for each of FHC and HSI were then discounted
to their present values using a range of discount rates from 13.5% to 14.5%. The
discount rate ranges were selected based upon a weighted average cost of capital
analysis for each of FHC and HSI. Based upon this analysis, and utilizing (i)
unlevered free cash flow amounts for 1996 through 2000 for FHC, in millions, of
$32, $204, $162, $221 and $269, respectively, and terminal values based on 9x,
10x and 11x net income multiples, in millions, of $2,563, $2,848, and $3,133,
respectively, and (ii) unlevered free cash flow amounts for 1996 through 2000
for HSI, in millions, of $1, $150, $228, $210 and $233, respectively, and
terminal values based on 9x, 10x and 11x net income multiples, in millions, of
$1,663, $1,847 and $2,032, respectively, Morgan Stanley calculated per share
equity values of FHC ranging from $31.36 to $38.40 on a fully diluted basis. The
per share equity values calculated for HSI ranged from $29.37 to $34.92 on a
fully diluted basis.
Peer Group Comparison. Morgan Stanley compared certain financial
information of FHC and HSI with certain public financial information of selected
California-based managed care companies, which included FHP International, Inc.,
Maxicare Health Plans, PacifiCare Health Systems and WellPoint Health Networks.
Such comparison indicated, as of September 6, 1996, a median ratio of market
price to next 12 months net income of 11.3 for the group and 9.3 and 11.3 for
FHC and HSI, respectively.
Comparable Transaction Analysis. An analysis of the precedent transactions
in the HMO industry revealed no transactions which Morgan Stanley viewed as
comparable to the FHC/HSI merger of equals and
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therefore this type of analysis was not material to Morgan Stanley's fairness
analysis. Morgan Stanley did, however, present to the FHC Board its review of
the proposed acquisition of FHP by PacifiCare Health Systems that was announced
on August 5, 1996. Morgan Stanley analyzed the equity value and aggregate value
for FHP to be $2,024.7 million and $2,030.4 million, respectively. Morgan
Stanley analyzed that the equity value represented (i) a 19.9x multiple of FHP's
1996 estimated earnings per share, (ii) a 25.2x multiple of FHP's 1997 earnings
per share, and (iii) a 21.9x multiple of FHP's next twelve months earnings per
share. Morgan Stanley also analyzed that the aggregate value represented (i) a
.70x multiple of FHP's last twelve months revenue, (ii) a 8.3x multiple of FHP's
last twelve months EBIT and (iii) an 11.8x multiple of FHP's last twelve months
EBITDA.
Earnings Exchange Ratio Analysis. Morgan Stanley calculated implied
exchange ratios based on earnings per share estimates of equity research
analysts and management for each of FHC and HSI. As in the Stand Alone Valuation
Analysis, the earnings per share estimates of equity research analysts reviewed
by Morgan Stanley for FHC and HSI were based on First Call data as of September
6, 1996. The overall mean of such implied exchange ratios, reflecting low, mean
and high analysts' estimates and the managements' respective base case was 1.313
for 1996, 1.242 based on the next twelve months estimates and 1.274 for 1997.
The above summary of the presentations by Morgan Stanley to the FHC Board
does not purport to be a complete description of such presentations or of all
the advice rendered by Morgan Stanley, including advice with respect to the
structuring of, and issues relating to, the consummation of the Merger. In
arriving at its opinion, Morgan Stanley considered the results of all of its
analyses as a whole and did not attribute any particular weight to any
particular analysis or factor considered by it. Furthermore, selecting portions
of its analyses, or of the above summary, without considering all factors and
analyses, could create an incomplete view of the process underlying the opinion.
In performing its analyses, Morgan Stanley made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of FHC or HSI. The analyses
performed by Morgan Stanley are not necessarily indicative of actual values or
actual future results, which may be significantly more or less favorable than
suggested by such analyses. In addition, analyses relating to the value of
businesses do not purport to be appraisals or to reflect the prices at which
businesses actually may be valued in the marketplace.
FHC retained Morgan Stanley based upon its experience and expertise. Morgan
Stanley is an internationally recognized investment banking and advisory firm.
Morgan Stanley, as part of its investment banking business, is regularly engaged
in the valuation of businesses and their securities in connection with mergers
and acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. Morgan Stanley makes a market in
FHC Common Stock and HSI Common Stock and may continue to provide investment
banking services to the combined entity in the future. In the course of its
market-making and other trading activities, Morgan Stanley may, from time to
time, have a long or short position in, and buy and sell the securities of, FHC
and HSI. Morgan Stanley and its affiliates have, in the past, provided financial
advisory and financing services to FHC and have received customary fees for the
rendering of such services. Morgan Stanley and its affiliates have also provided
financial advisory and financing services to HSI and have received customary
fees for the rendering of such services.
Pursuant to a letter agreement dated July 23, 1996 between FHC and Morgan
Stanley, FHC paid Morgan Stanley a fee of $4.0 million in connection with
rendering their fairness opinion and has agreed to pay Morgan Stanley an
additional fee of $4.0 million upon the successful consummation of the Merger.
FHC has also agreed to reimburse Morgan Stanley for its out-of-pocket expenses.
In addition, FHC has agreed to indemnify Morgan Stanley and its affiliates,
their respective directors, officers, agents and employees and each person, if
any, controlling Morgan Stanley or any of its affiliates against certain
liabilities, including liabilities under federal securities laws, and expenses,
related to Morgan Stanley's engagement.
OPINIONS OF HSI'S FINANCIAL ADVISORS
The HSI Board retained Salomon pursuant to a letter agreement dated August
23, 1996 and Shattuck Hammond pursuant to a letter agreement dated September 16,
1996 to act as its financial advisors (collectively, the "HSI Financial
Advisors") in connection with the Merger and to render their separate opinions
to the HSI Board as to the fairness of the Exchange Ratio, from a financial
point of view, to the
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stockholders of HSI. On September 25, 1996, each of HSI Financial Advisors
expressed its separate opinion to the Board of Directors of HSI that the
Exchange Ratio was fair, from a financial point of view, to the stockholders of
HSI as of that date. The HSI Financial Advisors subsequently issued their
respective written opinions to the HSI Board that the Exchange Ratio was fair,
from a financial point of view, to the stockholders of HSI as of September 30,
1996 and as of the date of this Joint Proxy Statement/Prospectus (the "Salomon
Opinion" and the "Shattuck Hammond Opinion," respectively).
A COPY OF EACH OF THE SALOMON OPINION AND THE SHATTUCK HAMMOND OPINION,
WHICH SET FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE
SCOPE OF REVIEW UNDERTAKEN BY EACH OF SALOMON AND SHATTUCK HAMMOND ARE ATTACHED
AS APPENDIX V AND APPENDIX VI, RESPECTIVELY, TO THIS JOINT PROXY
STATEMENT/PROSPECTUS. THE SALOMON OPINION AND THE SHATTUCK HAMMOND OPINION ARE
EACH DIRECTED ONLY TO THE FAIRNESS OF THE EXCHANGE RATIO FROM A FINANCIAL POINT
OF VIEW AND DO NOT CONSTITUTE A RECOMMENDATION TO ANY HSI STOCKHOLDER AS TO HOW
SUCH STOCKHOLDER SHOULD VOTE AT THE HSI SPECIAL MEETING. THE SUMMARY OF EACH OF
THE SALOMON OPINION AND THE SHATTUCK HAMMOND OPINION SET FORTH IN THIS JOINT
PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL
TEXT OF THE SALOMON OPINION AND THE SHATTUCK HAMMOND OPINION ATTACHED AS
APPENDIX V HERETO AND APPENDIX VI HERETO, RESPECTIVELY. STOCKHOLDERS OF HSI
SHOULD READ EACH OF THE SALOMON OPINION AND THE SHATTUCK HAMMOND OPINION IN
THEIR ENTIRETY.
In rendering their opinions, the HSI Financial Advisors analyzed the Merger
as a strategic business combination not involving a sale of control of HSI, and
the HSI Financial Advisors did not solicit, and were not authorized to solicit,
third party acquisition interest in HSI. In addition, the HSI Financial Advisors
are not expressing any opinion as to the price or range of prices at which New
FHS Common Stock may trade subsequent to the completion of the Merger. The HSI
Financial Advisors' opinions are necessarily based upon economic, market and
other conditions, and the information made available to them, as of the
respective dates of such opinions.
Except as noted above, no limitations were imposed by HSI on the HSI
Financial Advisors with respect to the investigations made or procedures
followed by the HSI Financial Advisors in rendering their respective opinions.
In connection with rendering their respective opinions, each of the HSI
Financial Advisors, among other things: (1) reviewed the Merger Agreement and
its related exhibits; (2) reviewed certain publicly available business and
financial information, including financial projections, which HSI and FHC
provided to it; (3) discussed the past and current operations and financial
condition and prospects of HSI and FHC, including the possible benefits of
operational synergies following the completion of the Merger, with certain
members of their respective senior managements and independent outside auditors;
(4) considered, both at the time it rendered its fairness opinion and as of the
date hereof, the fact that the Exchange Ratio was fixed at the time of the
Merger Agreement and would not be changed for any reason, including any
subsequent change in each company's stock prices prior to the Effective Time;
and (5) considered such other information, financial studies and analyses,
investigations and financial, economic, market and trading criteria which it
deemed relevant, including its knowledge of the managed health care industry as
well as its experience in connection with similar transactions and securities
valuation generally.
Each of the HSI Financial Advisors assumed and relied upon the accuracy and
completeness of the information which it reviewed for the purpose of its opinion
and the HSI Financial Advisors did not assume any responsibility for the
independent verification of such information or for independent evaluation or
appraisal of the assets of HSI and FHC. With respect to the financial
projections for HSI and FHC, the HSI Financial Advisors assumed that they have
been prepared on a basis reflecting the best currently available estimates and
judgments of the managements of HSI and FHC, as the case may be, as to the
future performance of such entity, and neither of the HSI Financial Advisors
expressed an opinion with respect to
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such forecasts or the assumptions on which they were based. The HSI Financial
Advisors have assumed that the parties would complete the Merger in accordance
with the terms of the Merger Agreement.
In connection with their opinions, at the request of HSI in order to
prepare a joint presentation to the HSI Board, the HSI Financial Advisors worked
together on the following material analyses: (1) historical stock price
performance analyses including (a) relative stock price performances and (b)
stock price and trading volume profiles; (2) historical exchange ratio analysis;
(3) implied relative ownership analysis; (4) contribution analysis based upon
(a) a relative contribution analysis, and (b) a pro forma analysis to examine
the synergistic effects of the Merger on HSI's and FHC's earnings per share; and
(5) combined company comparative analysis which compared key financial
statistics of HSI, FHC and the combination of HSI and FHC on a pro forma basis
(the "Pro Forma Combined Entity") with the same data from selected publicly
traded companies.
The following is a brief summary of the material financial analyses, as of
the dates and periods reflected below, which each of the HSI Financial Advisors
used in providing its opinion to the HSI Board, and which they jointly presented
during the various HSI Board meetings held throughout September 1996.
Historical Stock Price Performance. The HSI Financial Advisors reviewed the
historical stock prices of HSI Common Stock and FHC Common Stock as compared to
a select index. This stock price performance was an element in arriving at the
fairness determination. The two stocks were evaluated based on their price as a
percent of a base period of time over various other periods of time, including
the daily figures from August 1, 1994 through September 25, 1996 and August 1,
1995 through September 25, 1996. These time periods were selected to reflect the
fact that HSI did not exist in its present form until the merger of QualMed and
Health Net in January of 1994. The stock prices were analyzed in relation to two
select indices of (1) the S&P Industrial average for 400 stocks and (2) a
Salomon Brothers Custom Index created from the stock prices of five publicly
traded companies engaged in the managed health care services that Salomon
believed were comparable in certain respects to HSI and FHC. These companies
included Humana Inc., Oxford Health Plans, Inc., PacifiCare/FHP International,
United HealthCare Corporation and WellPoint Health Networks (the "Comparable
Companies"). The Comparable Companies were selected based on market value,
membership, revenues, margins, location and growth rate.
The HSI Financial Advisors reviewed a variety of significant news events
which appeared to affect the respective stock prices and volume for HSI Common
Stock during the time period from September 6, 1995 through September 25, 1996,
including, among other events: (1) the announcement of a Medicare rate increases
of 5.7%, (2) the formal ending of the proposed merger of WellPoint Health
Networks and HSI, (3) the report of an increase in HSI's yearly earnings to
$2.07 per share from $1.78 per share, (4) the reduction in the HSI Common Stock
May 1996 public offering by 2.9 million shares and (5) the report of an increase
in HSI's earnings in the second quarter of 1996 to $.51 per share from $.47 a
share and the deferral of a $.41 per share charge until the third quarter of
1996.
The HSI Financial Advisors also reviewed a variety of significant news
events which appeared to affect the respective stock prices and volume for FHC
Common Stock during the time period from September 6, 1995 through September 25,
1996, including, among other events: (1) the selection of FHC for a California
Medicaid contract worth $600 million per year, (2) a downgrading of FHC by two
analysts, (3) FHC's acquisition of the remaining 40% of Intergroup HMO in Utah,
(4) a report of fourth quarter results which fell short of analyst expectations
and (5) Moody's upgrading of FHC's credit rating to Baa2 from Baa3.
Historical Exchange Ratio Analysis. The HSI Financial Advisors reviewed the
historical stock prices of HSI Common Stock and FHC Common Stock and the implied
historical exchange ratios determined by dividing the price per share of FHC
Common Stock by the price per share of HSI Common Stock (the "Historical
Exchange Ratio") over various periods of time including, among others, the
period from September 6, 1995 through September 25, 1996. The HSI Financial
Advisors calculated that during this period the Historical Exchange Ratio ranged
from a high of 1.45 to a low of 0.98, with an average of 1.25 and a value on
September 25, 1996 of 1.26.
Implied Relative Ownership Analysis. The HSI Financial Advisors analyzed
HSI's implied relative ownership of the Pro Forma Combined Entity during the
time period from September 6, 1995 through September 25, 1996. HSI's ownership
percentage was calculated as HSI's shares outstanding divided by pro
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forma combined shares outstanding calculated using the historical exchange
ratios during such time period. The HSI Financial Advisors determined that
during this period, HSI's implied ownership ranged from a high of 45.55% to a
low of 36.25% with an average of 39.78% and a value on September 25, 1996 of
39.49%. These ownership percentages are based on 58.826 million shares
outstanding for FHC and 48.388 million shares outstanding for HSI.
Contribution Analysis-Relative Contribution Analysis. The HSI Financial
Advisors reviewed and compared the relative contribution of HSI and FHC to the
Pro Forma Combined Entity based upon membership, revenues, EBITDA, EBIT, net
income, book value, equity value, net debt (cash) and firm value at and for the
years ending December 31, 1996 and 1997 and compared these ratios to the ratio
of the pro forma ownership of the stockholders of HSI and FHC of the Pro Forma
Combined Entity. All financial information relating to FHC was adjusted to
reflect FHC on a calendar year basis rather than a June 30 fiscal year basis.
According to this analysis HSI would contribute to the Pro Forma Combined Entity
the approximate following percentages: (1) 44.5% and 42.2% of projected 1996 and
1997 revenues, respectively, (2) 44.6% and 41.7% of projected 1996 and 1997
EBITDA, respectively, (3) 43.9% and 41.3% of projected 1996 and 1997 EBIT,
respectively, (4) 36.9% and 37.4% of projected 1996 and 1997 net income,
respectively, (5) 41.3% of projected equity value, and (6) 16.9% of net debt.
The above relative contribution analysis did not take into account any
transaction adjustments or proposed synergies.
The managements of HSI and FHC prepared their respective projected
financial results which the HSI Financial Advisors used in their analyses. The
pro forma analysis reflected certain assumptions which HSI and FHC made, some of
which may be beyond the control of HSI and FHC and which may not necessarily
reflect what will actually occur upon the completion of the Merger. Synergies
included in the analysis do not include any provision for the cost of achieving
the synergies nor any potential expense related to current FHC employees, such
as consulting or non-compete fees.
No Synergies Analysis. Based upon the Exchange Ratio of 1.3 shares of HSI
Common Stock, and in the absence of anticipated synergies, the HSI equivalent
pro forma earnings per share were $2.41 and $3.03 for the years ending December
31, 1997 and 1998, respectively, which compared with projected earnings per
share of $2.39 and $3.14 for the same years for HSI assuming it did not complete
the Merger. The HSI Financial Advisors calculated that the imputed
accretion/(dilution) to these HSI equivalent pro forma earnings per share
resulting from the Merger for the years ending December 31, 1997 and 1998 was
0.8% and (3.4%), respectively.
Anticipated Synergies Analysis. Based upon the Exchange Ratio of 1.3
shares of HSI Common Stock, and taking into account synergies anticipated from
the Merger, the HSI equivalent pro forma earnings per share were $2.92 and $3.82
for the years ending December 31, 1997 and 1998, respectively, which compared
with projected earnings per share of $2.39 and $3.14 for the same years for HSI
assuming it did not complete the Merger. The HSI Financial Advisors calculated
that the imputed accretion to these HSI equivalent pro forma earnings per share
resulting from the Merger for the years ending December 31, 1997 and 1998 was
22.1% and 21.7%, respectively. The HSI Financial Advisors noted, based upon the
pro forma analysis, that the Merger could potentially have a substantial
positive impact on the HSI equivalent pro forma earnings per share.
Combined Company Comparative Analysis. The HSI Financial Advisors analyzed
key financial data and statistics for HSI, FHC and the Pro Forma Combined
Entity. This information was compared with the same data from the Comparable
Companies as well as median values created from the Comparable Companies
returns. For each of the Comparable Companies, the HSI Financial Advisors
examined certain publicly available financial data including sales, EBITDA,
EBIT, net income, earnings per share, profit and expense margins and membership.
The HSI Financial Advisors examined balance sheet items, published earnings
forecasts and the trading performance of the common stock of each of the
Comparable Companies. In addition, the HSI Financial Advisors calculated the
ratio of the closing ratio of the closing price (as of September 25, 1996) of
HSI, FHC, the Pro Forma Combined Entity and of each of the Comparable Companies'
stock in relation to each company's earnings per share and the ratio of the firm
value of each company in relation to each company's sales, EBITDA, EBIT and
total membership.
The ratios of the stock prices of the Comparable Companies to projected
1996 earnings per share ranged from 11.5x to 39.2x and had a median of 16.8x.
HSI, FHC and the Pro Forma Combined Entity had ratios of
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stock price to 1996 earnings of 12.9x, 11.5x and 12.1x, respectively. The ratios
of the stock prices of the Comparable Companies to projected 1997 earnings per
share ranged from 10.3x to 28.0x and had a median of 11.2x. HSI, FHC and the Pro
Forma Combined Entity had ratios of stock price to 1997 earnings of 11.2x, 10.3x
and 10.7x, respectively. The ratio of firm value to last twelve months ("LTM")
sales of the Comparable Companies ranged from 28.9% to 134.8% and had a median
of 40.0%. HSI, FHC and the Pro Forma Combined Entity had ratios of firm value to
LTM sales of 38.6%, 41.5% and 40.1%, respectively. The ratios of firm value to
LTM EBITDA of the Comparable Companies ranged from 3.7x to 24.0x and had a
median of 6.4x. HSI, FHC and the Pro Forma Combined Entity had ratios of firm
value to LTM EBITDA of 5.4x, 5.8x and 5.6x, respectively. The ratios of firm
value to LTM EBIT of the Comparable Companies ranged from 4.2x to 32.3x and had
a median of 8.6x. HSI, FHC and the Pro Forma Combined Entity had ratios of firm
value to LTM EBIT of 7.1x, 7.8x and 7.4x, respectively. The ratios of firm value
to total membership of the Comparable Companies ranged from $50.2 to $2,421.1
and had a median of $482.2. HSI, FHC and the Pro Forma Combined Entity had
ratios of firm value to total membership of $612.4, $451.2 and $513.2,
respectively.
An analysis of the precedent transactions in the HMO industry revealed no
transactions which the HSI Financial Advisors viewed as comparable to the
FHC/HSI merger of equals and therefore this type of analysis was not material to
either of the HSI Financial Advisors' fairness analysis. The HSI Financial
Advisors did, however, include in the materials presented to the HSI Board as
background information a review of various transactions in the HMO industry
announced between July 1993 and August 1996.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without considering
the analysis as a whole, could create an incomplete view of the processes
underlying each of the Salomon Opinion and the Shattuck Hammond Opinion. In
arriving at their opinions, the HSI Financial Advisors each considered
independently the results of all such analyses as a whole and did not attribute
any particular weight to any analysis or factor considered by them. The analyses
were prepared solely for purposes of providing their opinion as to the fairness
of the Exchange Ratio, from a financial point of view, to the stockholders of
HSI and do not purport to be appraisals or necessarily reflect the prices at
which businesses or securities actually may be sold. Analyses based upon
forecasts of future results are not necessarily indicative of actual future
results, which may be significantly more or less favorable than suggested by
such analyses. As described above, the HSI Financial Advisors' opinions and
presentations to the HSI Board were one of many factors taken into consideration
by the HSI Board in making its determination to approve the Merger Agreement.
The foregoing summary does not purport to be a complete description of the
analyses performed by the HSI Financial Advisors.
The HSI Financial Advisors were retained based on their experience as
financial advisors in connection with mergers and acquisitions as well as each
of Salomon's and Shattuck Hammond's familiarity with HSI. In addition, HSI
retained Smith Barney and Volpe Welty to provide general advisory services based
on their experience as financial advisors and their past relationship and
familiarity with HSI. Neither Smith Barney nor Volpe Welty provided reports or
opinions to HSI in connection with the Merger.
Salomon is an internationally recognized investment banking firm that
provides financial services in connection with a wide range of business
transactions. As part of its business, Salomon regularly engages in the
valuation of companies and their securities in connection with mergers and
acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and for
other purposes.
Shattuck Hammond is a nationally recognized investment banking firm. As
part of its investment banking business, Shattuck Hammond is frequently engaged
in the valuation of businesses and their securities in connection with mergers
and acquisitions, negotiated underwritings, secondary distributions of
securities, private placements and for other purposes.
Pursuant to a letter agreement, dated as of August 23, 1996, HSI agreed to
pay Salomon a fee of $100,000 upon the execution of said letter. HSI also agreed
to pay Salomon a fee of $1,000,000 upon the rendering of its fairness opinion
relating to the Exchange Ratio. HSI also agreed to pay Salomon a fee of
$2,650,000, such fee being payable upon consummation of the Merger. HSI also
agreed to reimburse Salomon
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for its reasonable out-of-pocket expenses up to $150,000 and to indemnify
Salomon and certain related persons against certain liabilities in connection
with the engagement of Salomon, including certain liabilities under federal
securities laws.
Salomon has been engaged previously by each of HSI and FHC to provide
certain investment banking and financial advisory services and has received
customary compensation for such services. Salomon served as managing underwriter
in connection with HSI's equity offering in 1995. Salomon represented FHC by (i)
acting as FHC's financial advisor in connection with its acquisition in 1994 of
Thomas-Davis Medical Centers, P.C. and related affiliate, Intergroup Health Care
Corporation and (ii) acting as FHC's lead manager in connection with its $125
million note offering in 1993. In addition, in the ordinary course of its
business, Salomon actively trades the equity securities of HSI and FHC for its
own account and for the accounts of customers and, accordingly, may, at any
time, hold a long or short position in such securities.
Pursuant to a letter agreement, dated as of September 16, 1996, HSI agreed
to pay Shattuck Hammond a fee of $1,750,000, such fee being payable upon
consummation of the Merger, to provide financial advisory services and render a
fairness opinion. HSI also agreed to reimburse Shattuck Hammond for its
reasonable out-of-pocket expenses up to $100,000 and to indemnify Shattuck
Hammond and certain related persons against certain liabilities in connection
with the engagement of Shattuck Hammond, including certain liabilities under
federal securities laws. Shattuck Hammond has been engaged previously by HSI to
provide certain investment banking and financial advisory services and has
received customary compensation for such services.
Pursuant to a letter agreement, dated as of September 1996, HSI agreed to
pay Smith Barney a fee of up to $450,000, such fee being payable upon
consummation of the Merger, to provide financial advisory services to HSI in
connection with the Merger. In addition, pursuant to a letter agreement dated as
of October 30, 1996, HSI agreed to pay Volpe Welty a fee of $250,000 upon the
execution of said letter and a fee of $250,000, payable upon consummation of the
Merger, to provide financial advisory services in connection with the Merger.
ACCOUNTING TREATMENT
It is a condition to the consummation of the Merger that HSI and FHC each
receive from Deloitte & Touche LLP a letter dated the closing date of the Merger
opining to the effect that the transactions contemplated by the Merger
Agreement, if consummated, will qualify as a transaction to be accounted for in
accordance with the pooling of interests method of accounting under Opinion No.
16, Business Combinations, of the Accounting Principles Board of the American
Institute of Certified Public Accountants. Under this accounting method, the
assets and liabilities of each of FHC and HSI will be carried forward to New FHS
at their historical recorded bases. Results of operations of New FHS will
include the results of both HSI and FHC for the entire fiscal year in which the
Merger occurs. The reported balance sheet amounts and results of operations of
the separate corporations for prior periods will be combined, reclassified and
conformed, as appropriate, to reflect the combined financial position and
results of operations for New FHS. See "Unaudited Pro Forma Combined Condensed
Financial Statements."
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following discussion addresses the material United States federal
income tax considerations of the Merger. FHC has received an opinion from its
outside legal counsel, Pillsbury Madison & Sutro LLP, to the effect that, based
upon the assumptions and understandings and subject to the limitations contained
in the opinion, the Merger will constitute a reorganization within the meaning
of section 368(a)(1) of the Code. The opinion of Pillsbury Madison & Sutro LLP
(the "Filing Opinion") is filed as Exhibit 8.1 to the Registration Statement of
which this Joint Proxy Statement/Prospectus is a part. As a condition to FHC's
obligation to consummate the Merger, the Filing Opinion will be confirmed as of
the Effective Time.
The Filing Opinion is subject to the limitation, among others, that it is
based upon laws, judicial decisions and administrative regulations, rulings and
practice, all as in effect on its date and all of which could change prior to
the Effective Time so as to render the conclusions reached in the opinion
inaccurate or incorrect. Further, both the Filing Opinion and confirming opinion
will rely on certain assumptions and on representations of officers of HSI and
FHC, and if any such assumption or representation relied upon in the Filing
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Opinion or confirming opinion does not conform to the facts surrounding the
Merger, the validity of the conclusions reached in that opinion could be
adversely affected. Neither the Filing Opinion nor the confirming opinion binds
the Internal Revenue Service ("IRS") or precludes the IRS from adopting a
contrary position. An opinion of counsel sets forth such counsel's legal
judgment and has no binding effect or official status of any kind, and no
assurance can be given that contrary positions would not be successfully
asserted by the IRS or adopted by a court if the issues were litigated.
Based on the conclusion in its opinion that the Merger will constitute a
reorganization within the meaning of Section 368(a)(1) of the Code, Pillsbury
Madison & Sutro LLP is of the further opinion that for United States federal
income tax purposes:
(i) no gain or loss will be recognized by HSI, FHC or Merger
Subsidiary as a result of the formation of Merger Subsidiary or the Merger;
(ii) no gain or loss will be recognized as a result of the Merger by
holders of HSI Common Stock or by holders of unexercised options to acquire
HSI Common Stock;
(iii) no gain or loss will be recognized by holders of FHC Common
Stock who exchange their FHC Common Stock for New FHS Common Stock pursuant
to the Merger, except with respect to cash received in lieu of fractional
shares;
(iv) the aggregate tax basis of New FHS Common Stock received as a
result of the Merger will be the same as the stockholder's aggregate tax
basis in the FHC Common Stock surrendered in the exchange (reduced by any
basis allocable to fractional shares for which cash is received);
(v) the holding period of New FHS Common Stock received in exchange
for FHC Common Stock in the Merger will include the holding period of such
FHC Common Stock, provided the shares of FHC Common Stock are capital
assets in the hands of the holder thereof at the Effective Time;
(vi) a holder of FHC Common Stock receiving cash in the Merger in lieu
of a fractional interest in New FHS Common Stock will be treated as if such
holder actually received such fractional share interest which was
subsequently redeemed by HSI, resulting in the recognition of gain or loss
(capital gain or loss if the FHC Common Stock giving rise to such
fractional interest is held as a capital asset within the meaning of
Section 1221 of the Code, and in that event, long term capital gain or loss
if such FHC Common Stock has been held for more than one year at the
Effective Time), measured by the difference between the amount of cash
received and the basis of the FHC Common Stock allocable to such fractional
interest;
(vii) no gain or loss will be recognized by a holder of an unexercised
option to acquire FHC Common Stock (an "FHC Option") solely as a result of
the conversion of the FHC Option into options to purchase shares of New FHS
Common Stock provided that, as to any such FHC Option that is not an
incentive stock option within the meaning of Section 422(b) of the Code (an
"ISO"), such FHC Option (a) was issued in connection with the performance
of services and (b) did not when issued and does not at the Effective Time
have a readily ascertainable fair market value (within the meaning of
Income Tax Regulations Section 1.83-7(b)); and
(viii) to the extent any such unexercised FHC Option is an ISO prior
to the Merger, such FHC Option will remain an incentive stock option after
its conversion into an option to purchase shares of New FHS Common Stock.
THE FOREGOING IS NOT INTENDED TO BE A COMPREHENSIVE DISCUSSION OF ALL
POSSIBLE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER.
FURTHERMORE, THIS JOINT PROXY STATEMENT/PROSPECTUS DOES NOT PROVIDE INFORMATION
REGARDING THE TAX CONSEQUENCES OF THE MERGER UNDER THE TAX LAWS OF ANY STATE OR
OF ANY LOCAL OR FOREIGN JURISDICTION. FHC STOCKHOLDERS ARE URGED TO CONSULT
THEIR OWN TAX ADVISORS WITH RESPECT TO SPECIFIC TAX CONSEQUENCES OF THE MERGER.
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REGULATORY APPROVALS
Under the HSR Act, and the rules promulgated thereunder by the United
States Federal Trade Commission (the "FTC"), the Merger may not be consummated
until notifications have been given and certain information has been furnished
to the FTC or the Antitrust Division of the United States Department of Justice
(the "Antitrust Division") and specified waiting period requirements have been
satisfied. The statutory waiting period expired for FHC and HSI on November 28,
1996.
Federal and state antitrust enforcement authorities frequently scrutinize
the legality under the antitrust laws of mergers such as the Merger. At any time
before or after the Effective Time, and notwithstanding that the HSR Act waiting
period has expired, any such agency could take any action under antitrust laws
that it deems necessary or desirable in the public interest. Such action could
include seeking to enjoin the consummation of the Merger or seeking divestiture
of businesses of HSI and FHC acquired as a result of the Merger. Private parties
may also bring legal actions under the antitrust laws under certain
circumstances.
The Merger is subject to review and approval by the DOC which has regulated
California health care service plans and certain other managed health care
activities since 1975 under the Knox-Keene Health Care Service Plan Act of 1975,
as amended (the "Knox-Keene Act"). The Merger is also subject to review and
approval by the various state agencies that regulate the operations of the
non-California HMOs operated by the subsidiaries of HSI and FHC. In addition,
the insurance regulatory authorities in certain states and the United Kingdom
that regulate the insurance subsidiaries of HSI and FHC also must approve the
Merger.
HSI and FHC believe that all filings have been made with the DOC and
various state regulatory authorities pertaining to the Merger in accordance with
the legal requirements and they believe that all such state approvals necessary
to consummate the Merger will be received on or before January 31, 1997.
NO APPRAISAL RIGHTS
Appraisal rights are not available under Section 262 of the Delaware
General Corporation Law ("DGCL") in a merger transaction in which the shares of
a company listed on a national securities exchange are to be issued in exchange
for shares of a company that are also listed on a national securities exchange.
Holders of FHC Common Stock, therefore, will not have any statutory right to
have the value of their FHC Common Stock determined judicially or to receive
cash in connection with the Merger regardless of how they vote on the Merger
because both shares of FHC Common Stock and shares of New FHS Common Stock
issuable in exchange therefor will be listed on a national securities exchange
as of the Effective Time.
CERTAIN LITIGATION RELATED TO THE MERGER
On October 16, 1996, an alleged stockholder of FHC filed a suit in the
Superior Court in Sacramento, California entitled "Smilow vs. Crowley, et al"
(Case No. 96A505745), against FHC and individual members of the FHC Board. The
plaintiff, who purports to represent a class of all FHC stockholders, alleges
that the consideration which FHC stockholders would receive pursuant to the
Merger is inadequate and that the directors of FHC have therefore breached their
fiduciary duties to the FHC stockholders. The complaint alleges that the Merger
consideration is below the fair or intrinsic value of FHC and that the
defendants have not considered other potential purchasers of FHC or explored
other strategic alternatives to maximize stockholder value. The suit seeks an
injunction against the Merger, rescission of the Merger if consummated,
unspecified damages, attorneys' fees and other relief. The defendants were
served on November 20, 1996 and have until January 23, 1997 to answer the
complaint. The defendants have denied the allegations in the complaint. The
parties have agreed on a proposed settlement of the suit pursuant to which
plaintiff's counsel has reviewed and commented on this Joint Proxy
Statement/Prospectus, the suit will be dismissed with prejudice and FHC will pay
plaintiff's attorney fees as awarded by the court in an amount not to exceed
$300,000. The proposed settlement is subject to the approval of the court.
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COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND INFORMATION
HSI Common Stock and FHC Common Stock are listed on the NYSE. The HSI
ticker symbol on the NYSE is HQ. The FHC ticker symbol on the NYSE is FH.
Following the Merger, it is expected that the ticker symbol for New FHS will be
FHS.
The tables below set forth, for the calendar quarters indicated, the
reported high and low sale prices of HSI Common Stock and FHC Common Stock as
reported on the NYSE Composite Transaction Tape, in each case based on published
financial sources.
<TABLE>
<CAPTION>
HSI COMMON STOCK FHC COMMON STOCK
----------------- -----------------
MARKET PRICE MARKET PRICE
----------------- -----------------
HIGH LOW HIGH LOW
------ ------ ------ ------
<S> <C> <C> <C> <C>
1994
First Quarter....................................... $29 7/8 $ 20 $41 1/2 $29 3/4
Second Quarter...................................... 36 3/4 24 1/2 46 33 1/4
Third Quarter....................................... 29 1/4 21 7/8 39 5/8 31 1/4
Fourth Quarter...................................... 30 5/8 20 3/4 37 1/2 29 3/4
1995
First Quarter....................................... $33 7/8 $24 7/8 $34 7/8 $26 3/8
Second Quarter...................................... 34 1/8 25 32 3/4 26 7/8
Third Quarter....................................... 30 3/8 27 7/8 39 1/8 26 5/8
Fourth Quarter...................................... 34 1/4 29 1/4 46 3/4 36 1/2
1996
First Quarter....................................... $37 1/8 $30 3/8 $43 7/8 $35 5/8
Second Quarter...................................... 37 1/8 26 7/8 41 35
Third Quarter....................................... 28 3/8 19 3/8 36 1/8 24 1/4
Fourth Quarter...................................... 29 1/8 22 5/8 37 28 1/4
1997
First Quarter (through January 3, 1997)............. $24 3/4 $ 24 $31 3/4 $30 3/4
</TABLE>
On September 30, 1996, the last full trading day prior to the public
announcement of the proposed Merger, the closing price on the NYSE Composite
Transaction Tape was $28 3/8 per share of HSI Common Stock and $33 7/8 per share
of FHC Common Stock. Certain of the prices set forth on the above table may
reflect the impact of FHC's press release of September 16, 1996 stating that it
was negotiating with a third party and of several news articles that speculated
about the merger discussions between FHC and HSI. See "The Merger and The
Special Meetings -- Background of the Merger" and "The Merger and the Special
Meetings -- Opinion of FHC's Financial Advisor." On January 3, 1997, the most
recent practicable date prior to the printing of this Joint Proxy
Statement/Prospectus, the closing price on the NYSE Composite Transaction Tape
was $24 per share of HSI Common Stock and $31 per share of FHC Common Stock.
Stockholders are urged to obtain current market quotations prior to making any
decision with respect to the Merger.
No dividends have been paid by HSI since 1992 on HSI Common Stock, and HSI
has no present intention of paying any dividends on the HSI Common Stock. HSI
is, and New FHS will be, a holding company and therefore its ability to pay
dividends depends on distributions received from its subsidiaries, which are
subject to regulatory net worth requirements and certain additional state
regulations which may restrict the declaration of dividends by HMOs and
insurance companies. FHC has never paid cash dividends on the FHC Common Stock,
except that CareFlorida Health Systems, Inc., which was acquired by FHC and
became its wholly-owned subsidiary in October 1994, paid cash dividends to its
shareholders prior to the acquisition. The payment of any cash dividends or any
dividends of shares of New FHS Common Stock, if any, by New FHS in the future
will rest solely within the discretion of the New FHS Board and will depend
upon, among other things, New FHS's earnings, capital requirements and financial
condition, as well as other factors deemed relevant by the New FHS Board. Each
of HSI's and FHC's credit facilities restrict payment of cash dividends on HSI's
and FHC's Common Stock, respectively, and it is expected that any credit
facilities entered into by New FHS will restrict payment of cash dividends on
New FHS Common Stock.
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UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
Following is an unaudited pro forma combined condensed balance sheet for
New FHS as of September 30, 1996, and unaudited pro forma combined condensed
income statements for New FHS for the nine months ended September 30, 1996 and
the three years ended December 31, 1995. The historical FHC financial statements
have been conformed to a fiscal year end of December 31 to coincide with the
fiscal year end of HSI. Such unaudited pro forma combined condensed financial
statements include historical amounts for FHC and HSI adjusted to reflect the
Merger. The pro forma income statements were prepared assuming the Merger was
consummated at the beginning of the earliest fiscal year presented. The pro
forma balance sheet was prepared assuming the Merger was consummated at
September 30, 1996. Reference is made to the notes to the unaudited pro forma
combined condensed financial statements.
As further discussed in the notes to the unaudited pro forma combined
condensed financial statements, the Merger will be accounted for using the
pooling of interests method of accounting. For a description of the pooling of
interests method of accounting with respect to the Merger, see "The Merger and
The Special Meetings -- Accounting Treatment."
Certain data and notes normally included in financial statements prepared
in accordance with generally accepted accounting principles have been condensed
or omitted. The unaudited pro forma combined condensed financial statements
provide information about the impact of the Merger by showing how it might have
affected the financial condition and results of operations of New FHS had the
Merger actually been completed as of the dates indicated. The unaudited pro
forma combined condensed financial statements are provided for informational
purposes only and are not necessarily indicative of actual results that would
have been achieved had the Merger been consummated at the beginning of the
periods presented or of future results and should be read in conjunction with
the historical financial statements of FHC and HSI and notes thereto
incorporated herein by reference.
49
<PAGE> 56
NEW FHS PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 1996
(UNAUDITED)
(IN MILLIONS)
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
FHC HSI ADJUSTMENTS NEW FHS
------ ------ ----------- ---------
<S> <C> <C> <C> <C>
Cash and investments............................... $ 981 $ 527 $ $ 1,508
Receivables........................................ 457 95 552
Property and equipment............................. 260 85 345
Intangible assets.................................. 401 334 735
Other assets....................................... 396 110 506
------ ------ ------ ------
Total assets............................. $2,495 $1,151 $ $ 3,646
====== ====== ====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Reserve for claims, loss and loss adjustment
expenses......................................... $ 942 $ 250 $ $ 1,192
Notes payable...................................... 392 365 757
Other liabilities.................................. 255 167 20 442
------ ------ ------ ------
Total liabilities........................ 1,589 782 20 2,391
------ ------ ------ ------
Total stockholders' equity......................... 906 369 (20) 1,255
------ ------ ------ ------
Total liabilities and stockholders'
equity................................. $2,495 $1,151 $ $ 3,646
====== ====== ====== ======
</TABLE>
See Notes to Unaudited Pro Forma Combined Condensed Financial Statements
50
<PAGE> 57
NEW FHS PRO FORMA COMBINED CONDENSED INCOME STATEMENT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
(IN MILLIONS, EXCEPT EARNINGS PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
FHC HSI ADJUSTMENTS NEW FHS
------ ------ ----------- ---------
<S> <C> <C> <C> <C>
Revenues........................................... $2,946 $2,430 $ $ 5,376
Medical and specialty services expenses............ 2,357 1,952 4,309
Selling, general and administrative expenses....... 425 325 750
Interest expense................................... 13 18 31
------ ------ ----------- ---------
Income from continuing operations before income
taxes............................................ 151 135 286
Provision for income taxes......................... 43 59 102
------ ------ ----------- ---------
Income from continuing operations.................. $ 108 $ 76 $ $ 184
====== ====== ========= ========
Primary and fully diluted earnings per share from continuing operations............... $ 1.47
---------
Weighted average common and common stock equivalent shares --
Primary and fully diluted........................................................... 124.8
---------
</TABLE>
See Notes to Unaudited Pro Forma Combined Condensed Financial Statements
51
<PAGE> 58
NEW FHS PRO FORMA COMBINED CONDENSED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
(IN MILLIONS, EXCEPT EARNINGS PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
FHC HSI ADJUSTMENTS NEW FHS
-------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues..................................... $ 2,759 $ 2,765 $ $ 5,524
Medical and specialty services expenses...... 2,112 2,180 4,292
Selling, general and administrative
expenses................................... 405 388 793
Interest expense............................. 13 20 33
Acquisition and restructuring costs.......... 20 20
-------- ---------- ----------- ---------
Income from continuing operations before
income taxes............................... 229 157 386
Provision for income taxes................... 78 67 145
-------- ---------- ----------- ---------
Income from continuing operations............ $ 151 $ 90 $ $ 241
======== ========= ========= ========
Primary and fully diluted earnings per share from continuing operations............... $ 1.95
---------
Weighted average common and common stock equivalent shares --
Primary and fully diluted........................................................... 123.7
---------
</TABLE>
See Notes to Unaudited Pro Forma Combined Condensed Financial Statements
52
<PAGE> 59
NEW FHS PRO FORMA COMBINED CONDENSED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1994
(UNAUDITED)
(IN MILLIONS, EXCEPT EARNINGS PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
FHC HSI ADJUSTMENTS NEW FHS
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Revenues................................... $ 2,295 $ 2,327 $ $ 4,622
Medical and specialty services expenses.... 1,799 1,838 3,637
Selling, general and administrative
expenses................................. 307 322 629
Interest expense........................... 10 15 25
Acquisition and restructuring costs........ 125 1 126
-------- ---------- -------- --------
Income from continuing operations before
income taxes............................. 54 151 205
Provision for income taxes................. 21 63 84
-------- ---------- -------- --------
Income from continuing operations.......... $ 33 $ 88 $ $ 121
======== ========== ======== ========
Primary and fully diluted earnings per share from continuing operations................... $ 1.05
--------
Weighted average common and common stock equivalent shares --
Primary and fully diluted............................................................... 115.7
--------
</TABLE>
See Notes to Unaudited Pro Forma Combined Condensed Financial Statements
53
<PAGE> 60
NEW FHS PRO FORMA COMBINED CONDENSED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1993
(UNAUDITED)
(IN MILLIONS, EXCEPT EARNINGS PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
FHC HSI ADJUSTMENTS NEW FHS
-------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues..................................... $ 2,359 $ 1,976 $ $ 4,335
Medical and specialty services expenses...... 1,881 1,567 3,448
Selling, general and administrative
expenses................................... 308 308 616
Interest expense............................. 9 19 28
Acquisition and restructuring costs.......... 30 30
-------- ---------- -------- --------
Income from continuing operations before
income taxes............................... 161 52 213
Provision for income taxes................... 69 28 97
-------- ---------- -------- --------
Income from continuing operations............ $ 92 $ 24 $ $ 116
======== ========== ======== ========
Primary and fully diluted earnings per share from continuing operations............... $ 1.02
--------
Weighted average common and common stock equivalent shares --
Primary and fully diluted........................................................... 113.9
--------
</TABLE>
See Notes to Unaudited Pro Forma Combined Condensed Financial Statements
54
<PAGE> 61
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The Merger has been accounted for in the Unaudited Pro Forma Combined
Condensed Financial Statements using the pooling of interests method of
accounting (see "The Merger and Special Meetings -- Accounting Treatment"). The
accompanying unaudited pro forma combined condensed financial statements do not
give effect to cost savings resulting from any synergies which are expected to
occur due to the integration of HSI's and FHC's operations. Additionally, the
unaudited pro forma combined condensed financial statements do not reflect the
non-recurring costs and expenses associated with integrating the operations of
the two companies. Certain costs of integration could result in a significant,
non-recurring charge to the combined results of operations after consummation of
the Merger; however, the actual amount of such charge cannot be determined until
the transition plan relating to the integration of operations is completed. No
material adjustments were required to conform the accounting policies of HSI and
FHC.
2. STOCKHOLDERS' EQUITY
The common stockholders' equity account of New FHS as of September 30, 1996
has been adjusted to reflect the assumed issuance of approximately 76.7 million
shares of New FHS Common Stock in exchange for all the issued and outstanding
FHC Common Stock based upon the Exchange Ratio of 1.3 shares of New FHS Common
Stock for each share of FHC Common Stock.
Pro forma earnings per primary and fully diluted share for each period are
based on the combined weighted average number of shares of common stock
outstanding, after adjusting New FHS's historical amounts for the conversion of
outstanding shares of FHC Common Stock into New FHS Common Stock at the Exchange
Ratio.
3. RECONCILIATION TO HISTORICAL FHC CONSOLIDATED FINANCIAL STATEMENTS
The historical FHC financial statements have been conformed to a fiscal
year end of December 31 to coincide with the fiscal year of HSI. The following
reconciles the historical FHC financial statements to the pro forma FHC income
statements (in millions).
<TABLE>
<CAPTION>
AUDITED UNAUDITED
------------------- -------------------------------------------------------------------
YEAR LESS: SIX MONTHS ADD: SIX MONTHS PRO FORMA YEAR
ENDED JUNE 30, 1994 ENDED JUNE 30, 1994 ENDED JUNE 30, 1993 ENDED DECEMBER 31, 1993
------------------- ------------------- ------------------- -----------------------
<S> <C> <C> <C> <C>
Fiscal Year Ended June 30, 1994
Revenues.............................. $ 2,361 $ 1,101 $ 1,099 $ 2,359
Medical and specialty services
expenses............................ 1,865 864 880 1,881
Selling, general and administrative
expenses............................ 315 148 141 308
Interest expense...................... 11 5 3 9
------ ------ ------ ------
Income from continuing operations
before income taxes................. 170 84 75 161
Provision for income taxes............ 70 32 31 69
------ ------ ------ ------
Income from continuing operations..... $ 100 $ 52 $ 44 $ 92
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
YEAR LESS: SIX MONTHS ADD: SIX MONTHS PRO FORMA YEAR
ENDED JUNE 30, 1994 ENDED JUNE 30, 1995 ENDED JUNE 30, 1994 ENDED DECEMBER 31, 1994
------------------- ------------------- ------------------- -----------------------
<S> <C> <C> <C> <C>
Fiscal Year Ended June 30, 1995
Revenues.............................. $ 2,459 $ 1,265 $ 1,101 $ 2,295
Medical and specialty services
expenses............................ 1,896 961 864 1,799
Selling, general and administrative
expenses............................ 342 183 148 307
Interest expense...................... 10 5 5 10
Acquisition and restructuring costs... 125 -- -- 125
------ ------ ------ ------
Income from continuing operations
before income taxes................. 86 116 84 54
Provision for income taxes............ 30 41 32 21
------ ------ ------ ------
Income from continuing operations..... $ 56 $ 75 $ 52 $ 33
====== ====== ====== ======
</TABLE>
55
<PAGE> 62
<TABLE>
<CAPTION>
AUDITED UNAUDITED
------------------- -------------------------------------------------------------------
YEAR LESS: SIX MONTHS ADD: SIX MONTHS PRO FORMA YEAR
ENDED JUNE 30, 1996 ENDED JUNE 30, 1996 ENDED JUNE 30, 1995 ENDED DECEMBER 31, 1995
------------------- ------------------- ------------------- -----------------------
<S> <C> <C> <C> <C>
Fiscal Year Ended June 30, 1996
Revenues.............................. $ 3,408 $ 1,914 $ 1,265 $ 2,759
Medical and specialty services
expenses............................ 2,676 1,525 961 2,112
Selling, general and administrative
expenses............................ 501 279 183 405
Interest expense...................... 15 7 5 13
------ ------ ------ ------
Income from continuing operations
before income taxes................. 216 103 116 229
Provision for income taxes............ 64 27 41 78
------ ------ ------ ------
Income from continuing operations..... $ 152 $ 76 $ 75 $ 151
====== ====== ====== ======
</TABLE>
4. TRANSACTION COSTS
Transaction costs of $20 million, net of taxes related to investment
banking, financial advisory, legal and other Merger costs have been accrued as a
liability on the New FHS Pro Forma Combined Condensed Balance Sheet.
5. HSI RESTRUCTURING CHARGE
In its Form 10-Q for the quarter ended September 30, 1996, HSI reported its
previously announced intention to take a pre-tax one-time restructuring charge
of approximately $34.2 million during the quarter ended June 30, 1996. The
charge was to cover non-recurring costs of a comprehensive restructuring of
HSI's Health Net subsidiary, anticipated computer software and hardware
write-offs, and the consolidation of certain operational functions of other
subsidiaries. Due to the proposed Merger, HSI has postponed the restructuring
charge to the quarter ended December 31, 1996, to allow HSI management to
reevaluate the impact of the Merger on the restructuring plan. The components
and approximate amounts that HSI intends to take as a restructuring charge in
its quarter ended December 31, 1996 (which charge has been increased to
approximately $35.2 million) are: executive, workforce and facilities
consolidation costs of approximately $10.5 million; software and hardware
write-offs of approximately $15.8 million; and other components which aggregate
approximately $8.9 million.
56
<PAGE> 63
DIRECTORS AND MANAGEMENT OF NEW FHS
FOLLOWING THE MERGER
DIRECTORS
The Merger Agreement provides that, immediately following the consummation
of the Merger and for five years thereafter, the New FHS Board will consist of
11 members, five of whom will be designated by HSI and six of whom will be
designated by FHC. In addition to Daniel D. Crowley, the following current
directors of FHC will be appointed to serve as directors of New FHS: Patrick
Foley, Earl B. Fowler, Richard W. Hanselman, Richard J. Stegemeier, and Raymond
S. Troubh. In addition to Malik M. Hasan M.D., the following current directors
of HSI will be appointed to serve as directors of New FHS: J. Thomas Bouchard,
George Deukmejian, Thomas T. Farley and Roger F. Greaves. The current FHC
directors and HSI directors not appointed to serve as directors of New FHS have
agreed to resign from the FHC Board and the HSI Board, respectively, effective
upon consummation of the Merger. The New Bylaws provide that, except under
certain conditions, the number of directors may be increased or reduced during
the period beginning on the Effective Date and up to, but not including, the
election of directors at the May 2000 annual meeting of New FHS stockholders
(the "Transition Period"), only by the affirmative vote of eight members of the
entire New FHS Board and thereafter by the majority of the New FHS Board. See
"The Merger Agreement -- Corporate Organization and Governance -- Board" and
"Comparison of Stockholders Rights -- Board of Directors."
Certain biographical information about the directors appointed to serve on
the New FHS Board is set forth below:
Mr. Bouchard, age 56, became a director of HSI in January 1994 (upon
consummation of the merger transaction involving Health Net and QualMed which
created HSI (the "HSI Combination")). Mr. Bouchard served as a director of
QualMed from May 1991 until February 1995. Since October 1994, Mr. Bouchard has
served as Senior Vice President, Human Resources of International Business
Machines Corporation. From June 1989 until October 1994, Mr. Bouchard served as
Senior Vice President & Chief Human Resources Officer of U.S. West, Inc., a
diversified global communications company, and prior to that time he was Senior
Vice President -- Human Resources and Organization for United Technologies Corp.
Mr. Bouchard has served on the Board of Directors of the Labor Policy
Association since March 1991 and Nordstrom National Credit Bank since April
1991.
Mr. Crowley, age 49, has been a director and the President and Chief
Executive Officer of FHC since May 1989. In May 1990, Mr. Crowley was appointed
Chairman of the Board of Directors of FHC.
Mr. Deukmejian, age 68, became a director of HSI in January 1994 (upon
consummation of the HSI Combination). Mr. Deukmejian served as a director of
QualMed from April 1992 until February 1995 and, since February 1991, has been a
partner in the law firm of Sidley & Austin, Los Angeles, California. Mr.
Deukmejian served as Governor of the State of California for two terms, from
January 1983 to January 1991. Mr. Deukmejian also served the State of California
as Attorney General from 1979 to 1982, as a State Senator from 1967 to 1978 and
as a State Assemblyman from 1963 to 1966. Mr. Deukmejian has been a director of
Burlington Northern Santa Fe Pacific Corporation, a railroad company, since
September 1995, and was a director of one of its predecessors, Santa Fe
Corporation, from January 1991 until September 1995.
Mr. Farley, age 62, became a director of HSI in January 1994 (upon
consummation of the HSI Combination). Mr. Farley served as a director of QualMed
from February 1991 until February 1995, and is a senior partner in the law firm
of Petersen, Fonda, Farley, Mattoon, Crockenberg and Garcia, P.C., Pueblo,
Colorado. Mr. Farley was formerly President of the governing board of Colorado
State University, the University of Southern Colorado and Ft. Lewis College and
Chairman of the Colorado Wildlife Commission. He served as Minority Leader of
the Colorado House of Representatives from 1967 to 1975. Mr. Farley has been a
director of the Public Service Company of Colorado, a public gas and electric
company, since 1983 and a director/advisor of Norwest Banks of Pueblo and Sunset
since 1985. Mr. Farley has been a member of the Board of Regents of Santa Clara
University, a Jesuit institution, since 1987.
57
<PAGE> 64
Mr. Foley, age 64, has been Chairman, President and Chief Executive Officer
of DHL Airways, Inc. since 1988. Mr. Foley is also a director of Continental
Airlines and Glenborough Realty Trust. He has served as a director of FHC since
1996.
Mr. Fowler, age 71, is President and owner of Fowler International
Corporation, an international consulting firm, and Chairman of the Board of SPD
Technologies, Inc., an electrical equipment manufacturer. Prior thereto, Mr.
Fowler served in the United States Navy and retired as Vice Admiral, U.S. Navy,
and Commander of the Naval Sea Systems Command. He has served as a director of
FHC since 1988.
Mr. Greaves, age 59, who serves as a consultant to HSI, served as
Co-Chairman of the Board of Directors, Co-President and Co-Chief Executive
Officer of the Company from January 1994 (upon consummation of the HSI
Combination) until March 31, 1995. Prior to January 1994, Mr. Greaves served as
Chairman of the Board of Directors, President and Chief Executive Officer of
H.N. Management Holdings, Inc. (a predecessor to HSI) since its incorporation in
June 1990. Mr. Greaves is the former Chairman of the Board of Directors,
President and Chief Executive Officer of Health Net. Prior to joining Health
Net, Mr. Greaves held various management roles at Blue Cross of Southern
California, including Vice President of Human Resources and Assistant to the
President, and held various management positions at Allstate Insurance Company
from 1962 until 1968. Mr. Greaves currently serves as a Commissioner on the
California Senate Advisory Commission on Life and Health Insurance and as a
member of the Board of Directors of the Group Health Association of America.
Mr. Hanselman, age 68, has been a corporate director of and consultant to
various companies since 1986. Mr. Hanselman is also a director of Arvin
Industries, Becton, Dickinson and Company, BEC Group, Inc., the Bradford Funds,
Gryphon Holdings Inc. and IMCO Recycling, Inc. He has served as a director of
FHC since 1990.
Dr. Hasan, age 58, became Chairman of the Board of Directors, President and
Chief Executive Officer of HSI on March 31, 1995. Dr. Hasan was the Co-Chairman,
Co-President and Co-Chief Executive Officer of HSI from January 1994 (upon
consummation of the HSI Combination) until March 31, 1995. Dr. Hasan has served
as Chairman of the Board of Directors of QualMed since its formation in 1985.
Dr. Hasan assumed the additional position of Chief Executive Officer of QualMed
in June 1990. Effective March 2, 1991, Dr. Hasan also became President of
QualMed, an office he held until February 1995. A board-certified neurologist in
Pueblo, Colorado since June 1975, Dr. Hasan maintained a limited practice until
July 1992. From 1980 to 1984, Dr. Hasan was a director of the Colorado Medical
Society and Parkview Episcopal Medical Center. In 1989, he was appointed by the
Governor of Colorado to the Colorado Health Data Commission, on which he
continued to serve until 1993. Dr. Hasan served as a Clinical Assistant
Professor of Neurology at the University of Colorado from 1976 until 1990 and
has been a member of the London Royal College of Physicians since 1964.
Mr. Stegemeier, age 68, is Chairman Emeritus of the Board of Directors of
Unocal Corporation and served as Chairman and Chief Executive Officer of Unocal
Corporation from July 1988 until his retirement in May 1994. Mr. Stegemeier is
also a director of Wells Fargo Bank, Halliburton Company, Northrop Grumman
Corporation, Outboard Marine Corporation and Pacific Enterprises. He has served
as a director of FHC since 1993.
Mr. Troubh, age 70, is a financial consultant in New York City. Mr. Troubh
is also a director of ADT Limited, America West Airlines, Inc., Applied Power,
Inc., ARIAD Pharmaceuticals, Inc., Becton, Dickinson and Company, Diamond
Offshore Drilling, Inc., General American Investors Company, Olsten Corporation,
Petrie Stores Corporation, Time Warner Inc., Triarc Companies, Inc. and WHX
Corporation. He has served as a director of FHC since 1991.
COMMITTEES OF THE BOARD OF DIRECTORS
Pursuant to the Merger Agreement, each of the committees of the New FHS
Board will initially consist of four members made up of an equal number of
designees of each of FHC and HSI. Committee membership will be determined by the
New FHS Board shortly after the completion of the Merger. Following the Merger,
58
<PAGE> 65
the committees of the New FHS Board will consist of an audit committee, a
compensation and stock option committee, an investment policy committee and a
nominating committee, all of which will be initially comprised entirely of
independent directors, except the investment policy committee, which will
initially consist of Mr. Crowley, Dr. Hasan and two independent directors.
Initially there will be no executive committee of the New FHS Board.
COMPENSATION OF DIRECTORS
Directors who are employees of New FHS will not receive any compensation
for service on the New FHS Board. The specific terms of the compensation to be
paid to non-employee directors of New FHS have not yet been determined.
EXECUTIVE OFFICERS
The executive officers for New FHS following the Merger are expected to
include the following individuals from HSI and FHC:
<TABLE>
<S> <C>
Daniel D. Crowley....... Chairman
Malik M. Hasan, M.D..... President and Chief Executive Officer
Jay M. Gellert.......... Executive Vice President and Chief Operating Officer
Jeffrey L. Elder........ Senior Vice President and Chief Financial Officer
Kirk A. Benson.......... Senior Vice President
Dale T. Berkbigler, Chief Medical Officer
M.D...................
Allen J. Marabito, Senior Vice President and General Counsel
Esq...................
B. Curtis Westen, Senior Vice President, General Counsel and Secretary
Esq. .................
President and Chief Operating Officer -- Government
Steven D. Tough......... Programs
</TABLE>
EXECUTIVE COMPENSATION
The New FHS Board will rely on its compensation and stock option committee,
which will be composed of non-employee directors, to recommend the form and
amount of compensation to be paid to New FHS's executive officers. For
information regarding employment agreements with certain of the above
individuals, see "Conflicts of Interest and Interests of Certain Persons in the
Merger."
For information regarding employment arrangements of, and compensation
earned in 1995 by, executive officers of HSI see the HSI Form 10-K for the year
ended December 31, 1995, the HSI Form 10-Q for the quarter ended September 30,
1995 and the 1996 Notice of Annual Meeting and Proxy Statement of HSI, the
relevant portions of which are incorporated by reference into the HSI Form 10-K
for the year ended December 31, 1995 and for information regarding compensation
earned in the fiscal year ended June 30, 1996 by executive officers of FHC see
the FHC Form 10-K for the year ended June 30, 1996, as amended.
59
<PAGE> 66
STOCK OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS AND
FIVE-PERCENT STOCKHOLDERS
Ownership of HSI Common Stock. The following table sets forth the
beneficial ownership of HSI Common Stock as of January 1, 1997, by (a) each
person known by HSI to own beneficially more than 5% of the outstanding shares
of HSI Class A Common Stock, (b) each director of HSI and (c) all directors and
executive officers as a group. The following table also sets forth the expected
beneficial ownership of New FHS Common Stock by such individuals and entities as
of the Effective Time.
<TABLE>
<CAPTION>
NEW FHS COMMON STOCK
HSI COMMON STOCK(1) AT THE EFFECTIVE TIME(1)
NAME OF INDIVIDUAL OR NUMBER OF ------------------------- -------------------------
PERSONS IN GROUP AND GREATER THAN 5% PERCENTAGE PERCENTAGE
HOLDERS SHARES OF CLASS(2) SHARES OF CLASS(2)
- ---------------------------------------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Malik M. Hasan, M.D.(3)................. 5,016,826 16.9% 5,016,826 4.7%
Dale T. Berkbigler, M.D.(4)............. 512,843 1.8% 512,843 *
Lawrence E. Austin, M.D.(5)............. 421,615 1.4% 421,615 *
J. Thomas Bouchard(6)................... 25,000 * 25,000 *
Charles T. Braden(7).................... 108,550 * 108,550 *
George Deukmejian(8).................... 26,399 * 26,399 *
Thomas T. Farley(9)..................... 63,000 * 63,000 *
Michael E. Gallagher(10)................ 12,603 * 12,603 *
Jay M. Gellert(11)...................... 100,000 * 100,000 *
Roger F. Greaves(12).................... 38,943 * 38,943 *
Kenneth M. Kizer, M.D.(13).............. 15,500 * 15,500 *
Douglas M. Mancino(14).................. 20,781 * 20,781 *
Robert L. Montgomery(15)................ 22,056 * 22,056 *
J. Kevin Murphy(16)..................... 35,500 * 35,500 *
All executive officers and directors as
a group (22 persons)(17).............. 6,736,458 22.1% 6,736,458 6.3%
FMR Corp.(18)........................... 2,316,715 8.0% 2,316,715 2.2%
Heine Securities Corporation(19)........ 3,438,100 11.8% 8,545,800(20) 8.1%
</TABLE>
- ---------------
* Represents less than 1% of the outstanding shares in the class.
(1) The information contained in this table is based upon information furnished
to HSI by the persons named above or obtained from records of HSI. The
nature of beneficial ownership for shares shown in this column is sole
voting and investment power unless otherwise indicated herein, subject to
community property laws where applicable. For purposes of this table, a
person or group of persons is deemed to have "beneficial ownership" of any
shares as of January 1, 1997 that such person or group of persons has the
right to acquire within 60 days after such date.
(2) For purposes of computing the percentage of outstanding shares held by each
person or group of persons named above on a given date, shares which such
person or group has the right to acquire within 60 days after such date are
deemed to be outstanding, but are not deemed to be outstanding for the
purpose of computing the percentage ownership of any other person.
(3) Includes 710,000 shares with respect to which Dr. Hasan has the right to
acquire beneficial ownership by virtue of outstanding vested options, and
an aggregate of 84,042 shares owned by Dr. Hasan's wife (2,209 shares) or
held by the Hasan Family Foundation (a private charitable foundation of
which Mrs. Hasan is the chairperson) (81,833 shares), as to which shares
Dr. Hasan disclaims beneficial ownership. This number of shares does not
include 135,582 shares held by three trusts, the beneficiaries of which are
the three children of Dr. and Mrs. Hasan and the sole trustee of which is
an unrelated third party.
(4) Includes 137,000 shares with respect to which Dr. Berkbigler has the right
to acquire beneficial ownership by virtue of outstanding vested options and
373,586 shares held by Berkbigler Family Partners, Ltd., of which Dr.
Berkbigler is the general partner.
(5) Includes 20,000 shares with respect to which Dr. Austin has the right to
acquire beneficial ownership by virtue of outstanding vested options and
50,632 shares owned by Dr. Austin's wife, as to which shares Dr. Austin
disclaims beneficial ownership.
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<PAGE> 67
(6) Includes 25,000 shares with respect to which Mr. Bouchard has the right to
acquire beneficial ownership by virtue of outstanding vested options.
(7) Includes 90,769 shares beneficially owned by Mr. Braden and held under the
Health Net Associate Trust Agreement (the "Trust Agreement") among Mr.
Braden and other current and former employees, directors and officers of
HSI and Health Net and 17,781 shares with respect to which Mr. Braden has
the right to acquire beneficial ownership by virtue of outstanding vested
options.
(8) Includes 25,699 shares with respect to which Mr. Deukmejian has the right
to acquire beneficial ownership by virtue of outstanding vested options.
Such amount also includes 700 shares held in the C. George Deukmejian
Defined Benefit Pension Plan, of which Mr. Deukmejian is a trustee.
(9) Includes 30,000 shares with respect to which Mr. Farley has the right to
acquire beneficial ownership by virtue of outstanding vested options. Such
amount also includes 10,500 shares which are held in the Petersen & Fonda,
P.C. Profit Sharing Trust FBO Thomas T. Farley and 10,000 shares held by
the Farley Family Trust over which trust Mr. Farley has investment power.
Mr. Farley disclaims beneficial ownership of the shares held by the Farley
Family Trust.
(10) Includes 8,603 shares with respect to which Mr. Gallagher has the right to
acquire beneficial ownership by virtue of outstanding vested options. This
number does not include 50,000 cash-only SARs held by Mr. Gallagher which
were granted to Mr. Gallagher during his service as President and Chief
Executive Officer of Health Net.
(11) Includes 100,000 shares with respect to which Mr. Gellert has the right to
acquire beneficial ownership by virtue of outstanding vested options.
(12) Includes 28,843 shares beneficially owned by Mr. Greaves under a certain
trust agreement, pursuant to which trust Mr. Greaves is a Trustee. Such
amount also includes 10,000 shares with respect to which Mr. Greaves has
the right to acquire beneficial ownership by virtue of outstanding vested
options. Such number does not include 1,338,095 other shares held under the
trust agreement, the beneficial owners of which shares are other
individuals and of which shares Mr. Greaves disclaims beneficial ownership.
(13) Excludes all of the 19,297,642 shares of HSI Class B Common Stock held by
CWF of which Dr. Kizer is a director. Dr. Kizer disclaims any beneficial
interest in such HSI Class B Common Stock. Includes 15,000 shares with
respect to which Dr. Kizer has the right to acquire beneficial ownership by
virtue of outstanding vested options.
(14) Includes 2,700 shares held by the McDermott, Will & Emery Profit Sharing
Trust, of which trust Mr. Macino is a beneficiary, and 17,781 shares with
respect to which Mr. Mancino has the right to acquire beneficial ownership
by virtue of outstanding vested options.
(15) Includes 20,000 shares with respect to which Mr. Montgomery has the right
to acquire beneficial ownership by virtue of outstanding vested options.
(16) Includes 30,000 shares with respect to which Mr. Murphy has the right to
acquire beneficial ownership by virtue of outstanding vested options.
(17) Includes an aggregate of 1,412,864 shares with respect to which all
executive officers and directors as a group have the right to acquire
beneficial ownership by virtue of outstanding vested options.
(18) HSI has been advised by FMR Corp. as follows: FMR Corp. owns and controls
Fidelity Management and Research Company, an investment company, which
directly owns 2,120,375 shares of HSI Common Stock. FMR Corp. has sole
power to dispose of all such shares. The sole power to vote or direct the
voting of these 2,120,375 shares resides with the Board of Trustees of
Fidelity Management and Research Company. Also includes 195,800 shares
owned by Fidelity Management Trust Company, a subsidiary of FMR Corp. The
address of FMR Corp. is: 82 Devonshire Street, Boston, Massachusetts 02109.
(19) HSI has been advised by Heine Securities Corporation ("HSC") as follows:
HSC is an investment adviser registered under the Investment Advisers Act
of 1940. One or more of HSC's advisory clients is the legal owner of an
aggregate of 3,438,100 shares of HSI Common Stock. Pursuant to investment
advisory agreements with its advisory clients, HSC has sole investment
discretion and voting authority with respect to such shares. Michael F.
Price is President of HSC, in which capacity he exercises voting control
and dispositive power over the securities reported herein by HSC. Mr.
Price, therefore, may be deemed to have indirect beneficial ownership over
such shares. Neither Mr. Price nor HSC has any interest in dividends or
proceeds from the sale of such shares, owns any such shares for his or its
own account, and disclaims beneficial ownership of all the shares owned by
HSC's advisory clients reported herein by HSC. The address of each of HSC
and Mr. Price is: 51 John F. Kennedy Parkway, Short Hills, NJ 07078.
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(20) This figure includes the 5,107,700 shares of New FHS Common Stock held by
Franklin Mutual Advisers, Inc. ("FMAI") as indicated in the table on Page
62. Heine Securities Corporation is an advisory client of FMAI and is the
beneficial owner of the New FHS stock held by FMAI.
The California Wellness Foundation ("CWF"), an independent, private
foundation created to improve the health of the people of California, owns
19,297,642 shares of HSI Class B Common Stock, which constitutes all of the
outstanding shares of such HSI Class B Common Stock. CWF received all of such
shares as a charitable recipient in connection with the conversion of Health Net
(now a subsidiary of HSI) from not-for-profit to for profit status. The address
of CWF is: 6320 Canoga Avenue, #1700, Woodland Hills, California 91367.
Ownership of FHC Common Stock. The following table sets forth the
beneficial ownership of FHC Common Stock as of January 1, 1997, by (a) each
person known by FHC to own beneficially more than 5% of the outstanding shares
of FHC Common Stock, (b) each director of FHC and (c) all directors and
executive officers of FHC as a group. The following table also sets forth the
expected beneficial ownership of New FHS Common Stock by such individuals and
entities as of the Effective Time.
<TABLE>
<CAPTION>
NEW FHS COMMON STOCK
FHC COMMON STOCK(1) AT THE EFFECTIVE TIME(1)
------------------------ -------------------------
NAME OF INDIVIDUAL OR NUMBER OF PERCENTAGE PERCENTAGE
PERSONS IN GROUP AND GREATER THAN 5% HOLDERS SHARES OF CLASS(2) SHARES OF CLASS(2)
- ------------------------------------------------ --------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Daniel D. Crowley(3)............................ 941,200 1.6% 1,223,560 1.1%
David A. Boggs(4)............................... 14,000 * 18,200 *
Jeffrey L. Elder(5)............................. 140,000 * 182,000 *
Patrick Foley................................... 0 * 0 *
Earl B. Fowler(6)............................... 27,424 * 35,651 *
Richard W. Hanselman(7)......................... 18,099 * 23,528 *
Ross D. Henderson, M.D.(8)...................... 84,440 * 109,772 *
Richard J. Stegemeier(9)........................ 15,000 * 19,500 *
Steven D. Tough(10)............................. 147,500 * 191,750 *
Raymond S. Troubh(11)........................... 30,349 * 39,453 *
All directors and executive officers as a group
(12 persons)(12).............................. 1,219,677 2.0% 1,585,580 1.5%
Sanford C. Bernstein & Co., Inc.(13)............ 5,358,361 9.1% 6,965,869 6.6%
Neuberger & Berman L.P.(14)..................... 5,796,900 9.8% 7,535,970 7.2%
Franklin Mutual Advisers, Inc.(15).............. 3,929,000 6.7% 8,545,800(16) 8.1%
Harris Associates L.P.(17)...................... 3,630,250 6.2% 4,719,325 3.8%
</TABLE>
- ---------------
* Represents less than 1% of the outstanding shares in the class.
(1) The information contained in this table is based upon information furnished
to FHC by the persons named above or obtained from records of FHC. The
nature of beneficial ownership for shares shown in this column is sole
voting and investment power unless otherwise indicated herein, subject to
community property laws where applicable. For purposes of this table, a
person or group of persons is deemed to have "beneficial ownership" of any
shares as of January 1, 1997 that such person or group of persons has the
right to acquire within 60 days after such date.
(2) For purposes of computing the percentage of outstanding shares held by each
person or group of persons named above on a given date, shares which such
person or group has the right to acquire within 60 days after such date are
deemed to be outstanding, but are not deemed to be outstanding for the
purpose of computing the percentage ownership of any other person.
(3) Includes 870,000 shares (1,131,000 New FHS shares as adjusted to reflect
the Exchange Ratio) with respect to which Mr. Crowley has the right to
acquire beneficial ownership by virtue of outstanding vested options.
(4) Includes 14,000 shares (18,200 New FHS shares as adjusted to reflect the
Exchange Ratio) with respect to which Mr. Boggs has the right to acquire
beneficial ownership by virtue of outstanding vested options and/or
outstanding options that vest within 60 days of January 1, 1997.
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(5) Includes 140,000 shares (182,000 New FHS shares as adjusted to reflect the
Exchange Ratio) with respect to which Mr. Elder has the right to acquire
beneficial ownership by virtue of outstanding vested options.
(6) Includes 17,099 shares (22,228 New FHS shares as adjusted to reflect the
Exchange Ratio) with respect to which Mr. Fowler has the right to acquire
beneficial ownership by virtue of outstanding vested options and/or options
that vest within 60 days of January 1, 1997.
(7) Includes 17,099 shares (22,228 New FHS shares as adjusted to reflect the
Exchange Ratio) with respect to which Mr. Hanselman has the right to
acquire beneficial ownership by virtue of outstanding vested options and/or
options that vest within 60 days of January 1, 1997.
(8) Includes 1,500 shares (1,950 New FHS shares as adjusted to reflect the
Exchange Ratio) with respect to which Dr. Henderson has the right to
acquire beneficial ownership by virtue of outstanding vested options and/or
options that vest within 60 days of January 1, 1997.
(9) Includes 15,000 shares (19,500 New FHS shares as adjusted to reflect the
Exchange Ratio) with respect to which Mr. Stegemeier has the right to
acquire beneficial ownership by virtue of outstanding vested options and/or
options that vest within 60 days of January 1, 1997.
(10) Includes 89,166 shares (115,915 New FHS shares as adjusted to reflect the
Exchange Ratio) with respect to which Mr. Tough has the right to acquire
beneficial ownership by virtue of outstanding vested options.
(11) Includes 17,099 shares (22,228 New FHS shares as adjusted to reflect the
Exchange Ratio) with respect to which Mr. Troubh has the right to acquire
beneficial ownership by virtue of outstanding vested options and/or options
that vest within 60 days of January 1, 1997.
(12) Includes an aggregate of 1,035,962 shares (1,346,750 New FHS shares as
adjusted to reflect the Exchange Ratio) with respect to which all executive
officers and directors as a group (12 persons) have the right to acquire
beneficial ownership by virtue of outstanding vested options and/or options
that vest within 60 days of January 1, 1997.
(13) FHC has been advised that Sanford C. Bernstein & Co., Inc. is the holder of
these shares as beneficial owner on behalf of its clients. The address of
Sanford C. Bernstein & Co., Inc. is 767 Fifth Avenue, New York, New York
10153-0185.
(14) FHC has been advised by Neuberger & Berman L.P. as follows: Neuberger &
Berman L.P. is deemed to be a beneficial owner for purposes of Rule 13(d)
of the Securities and Exchange Act of 1934, as amended, since it has shared
power to make decisions whether to retain or dispose of the securities of
many unrelated clients. Neuberger & Berman L.P. does not, however, have any
economic interest in the securities of those clients. The clients are the
actual owners of the securities and have the sole right to receive and the
power to direct the receipt of dividends from or proceeds from the sale of
such securities. Partner(s) of Neuberger & Berman L.P. own 29,300 shares
(38,090 New FHS shares as adjusted to reflect the Exchange Ratio).
Partner(s) own these shares in their own personal securities account.
Neuberger & Berman L.P. disclaims beneficial ownership of these shares
since these shares were purchased with each partner(s)' personal funds and
each partner has exclusive dispositive and voting power over the shares
held in their respective accounts. With regard to 3,025,000 shares
(3,932,500 New FHS shares as adjusted to reflect the Exchange Ratio),
Neuberger & Berman L.P. and Neuberger & Berman Management Inc. are deemed
to be beneficial owners for purposes of Rule 13(d) since they both have
shared power to make decisions whether to retain or dispose of the
securities. Neuberger & Berman L.P. and Neuberger & Berman Management Inc.
serve as sub-adviser and investment manager, respectively, of Neuberger &
Berman's various Funds which hold such shares in the ordinary course of
their business and not with the purpose nor with the effect of changing or
influencing the control of the issuer. No other Neuberger & Berman L.P.
advisory client has an interest of more than 5% of the outstanding FHC
Common Stock. The address of Neuberger & Berman L.P. is 605 Third Avenue,
40th Floor, New York, New York 10158.
(15) FHC has been advised by Franklin Mutual Advisers, Inc. as follows: Franklin
Mutual Advisers, Inc. ("FMAI") is an investment adviser registered under
the Investment Advisers Act of 1940. One or more of FMAI's advisory clients
are the beneficial owners of 3,929,000 shares (5,107,700 new FHS shares as
adjusted to reflect the Exchange Ratio). Pursuant to investment advisory
agreements with its advisory clients, FMAI has sole investment discretion
and voting authority with respect to such securities. FMAI has no interest
in dividends or proceeds from the sale of such securities and disclaims
beneficial ownership of all the securities owned by FMAI's advisory
clients. The address of FMAI is 51 John F. Kennedy Parkway, Short Hills,
New Jersey 07078.
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(16) This figure includes the 3,438,100 shares of New FHS Common Stock held by
Heine Securities Corporation ("Heine") as indicated in the table on Page
60. Heine is an advisory client of FMAI, and is the beneficial owner of the
New FHS stock held by FMAI.
(17) FHC has been advised by Harris Associates L.P. ("Harris") as follows:
Harris has been granted the power to vote shares in circumstances it
determines to be appropriate in connection with assisting its clients to
whom it renders financial advice in the ordinary course of its business,
either by providing information or advice to the persons having such power,
or by exercising the power to vote when it determines such action
appropriate in connection with matters which are submitted to a security
holders' vote. In addition, Harris serves as investment advisor to Harris
Associates Investment Trust (the "Trust"), and various officers and
directors of Harris are also officers and directors of the Trust. Harris
does not consider the Trust to be controlled by such persons. The series of
the Trust designated The Oakmark Fund beneficially owns 2,000,000 shares
(2,600,000 New FHS shares as adjusted to reflect the Exchange Ratio) which
are included as shares beneficially owned by Harris, because of Harris'
power to manage the Trust's investments. In addition, other Harris
customers may own shares which are not included in the aggregate number of
shares reported herein, because Harris is not deemed the beneficial owner
(as defined in Rule 13d-3) of such shares. The address of Harris Associates
L.P. is Two North LaSalle Street, Suite 500, Chicago, Illinois 60602-3790.
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<PAGE> 71
THE MERGER AGREEMENT
GENERAL
The Merger Agreement contemplates the Merger of Merger Subsidiary with and
into FHC with FHC surviving the Merger as a wholly-owned subsidiary of HSI. In
connection with the Merger, HSI will be renamed Foundation Health Systems, Inc.
The Merger will become effective in accordance with the Certificate of Merger to
be filed with the Secretary of State of the State of Delaware. It is anticipated
that such filing will be made immediately after the closing under the Merger
Agreement, which closing, in turn, should occur as soon as practicable after the
last of the conditions precedent to the Merger set forth in the Merger Agreement
has been satisfied or waived. The Merger Agreement obligates HSI to have the
shares of New FHS Common Stock to be issued in connection with the Merger
approved for listing on the NYSE, subject to official notice of issuance, prior
to the Effective Time. The following is a description of all the material terms
of the Merger Agreement and is qualified by reference to the complete text of
the Merger Agreement, which is incorporated by reference herein and attached
hereto as Appendix I.
CONSIDERATION TO BE RECEIVED IN THE MERGER
At the Effective Time, (a) each issued and outstanding share of FHC Common
Stock (excluding shares held in the treasury of FHC or owned by HSI, Merger
Subsidiary or any other wholly-owned subsidiary of HSI or FHC) will be converted
into the right to receive 1.3 shares of New FHS Common Stock, (b) each share of
FHC Common Stock owned by HSI, Merger Subsidiary or any other wholly owned
subsidiary of HSI or FHC or held in the treasury of FHC will be canceled and
retired, (c) each issued and outstanding share of the capital stock of Merger
Subsidiary shall be converted into and become one fully paid and nonassessable
share of FHC Common Stock, (d) each HSI stockholder will continue to own their
existing shares following the Merger and (e) each outstanding and unexercised
option to purchase shares of FHC Common Stock will be assumed by HSI and
converted into an option to purchase shares of New FHS Common Stock. The number
of shares of New FHS Common Stock to be subject to such new option will be
determined by multiplying the number of shares of FHC Common Stock subject to
the original option by the Exchange Ratio, and the exercise price with respect
thereto will equal the exercise price under the original option divided by the
Exchange Ratio. Such new option will have substantially similar terms and
conditions as in effect immediately prior to the Effective Time except to the
extent that such terms or conditions change in accordance with their terms, or
terms of employment agreements, if applicable, as a result of the transactions
relating to the Merger.
For a further discussion of the treatment of FHC stock options and other
employee benefit plans under the Merger Agreement, see "-- Stock Option Plans
and Benefit Plans" and "Conflicts of Interest and Interests of Certain Persons
in the Merger".
EFFECTIVE TIME
Subject to the terms and conditions of the Merger Agreement, as soon as
reasonably practicable (and in any event within two business days) after all of
the conditions to each party's obligations under the Merger Agreement have been
satisfied or waived, an appropriate Certificate of Merger will be executed and
filed in accordance with the relevant provisions of the DGCL, and the Merger
Agreement will be effective at the Effective Time.
EXCHANGE OF SHARES
Subject to the terms and conditions of the Merger Agreement, at the
Effective Time HSI will deposit certificates representing shares of New FHS
Common Stock with Harris Trust and Savings Bank, or such other bank or trust
company designated by HSI and reasonably acceptable to FHC (the "Exchange
Agent") for conversion of shares as described above under "-- Consideration to
be Received in the Merger." As soon as reasonably practicable after the
Effective Time, the Exchange Agent shall mail to each holder of record of FHC
Common Stock (i) a letter of transmittal specifying the terms of the exchange,
and (ii) instructions for
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surrendering FHC certificates in exchange for New FHS certificates. In exchange
for such share certificates, holders will receive New FHS Common Stock
certificates representing such number of shares as described under
"-- Consideration to be Received in the Merger." Holders of unexchanged shares
of FHC Common Stock will not be entitled to receive any dividends or other
distributions payable by New FHS until their certificates are surrendered. Upon
surrender, however, subject to applicable laws, such holders will receive
accumulated dividends and distributions, without interest, together with cash in
lieu of fractional shares.
No fractional shares of New FHS Common Stock will be issued to holders of
FHC Common Stock. For each fractional share that would otherwise be issued, the
Exchange Agent will pay a cash payment (without interest) in an amount equal to
such fraction multiplied by the average closing price per share of HSI Common
Stock on the NYSE or on such exchange as HSI Common Stock shall be listed during
the three trading days immediately prior to the Effective Time.
CORPORATE ORGANIZATION AND GOVERNANCE
Certificate of Incorporation and Bylaws. Pursuant to the Merger Agreement,
at or prior to the Effective Time, the Certificate of Incorporation of HSI will
be amended to change the name of HSI to Foundation Health Systems, Inc. and to
increase the number of authorized shares of New FHS Common Stock to 380 million
consisting of 350 million shares of New FHS Common Stock and 30 million shares
of New FHS Class B Common Stock. In addition, the Merger Agreement provides that
the HSI Bylaws will be amended and restated in the form of Appendix III. The
Merger Agreement also provides that, following the Effective Date (subject to
appropriate regulatory approvals), the California HMO operations of FHC will be
consolidated and operated as part of Health Net and the headquarters of all the
California HMO operations will be located in Woodland Hills, California.
Board. The Merger Agreement provides that, at the Effective Time, and for
five years thereafter, the New FHS Board will consist of 11 members, six of whom
(Daniel D. Crowley and five other independent directors) initially will be
designated by the FHC Board (such individuals and their replacements are
referred to as the "FHC Designees") and five of whom (Malik M. Hasan, M.D. and
four other independent directors) initially will be designated by the HSI Board
(such individuals and their replacements are referred to as the "HSI
Designees"); provided that, if at any time during the Transition Period, Dr.
Hasan is not Chief Executive Officer of New FHS and a member of the New FHS
Board, then prior to the next meeting of the New FHS Board following such
occurrence, the other HSI Designees will select another director to replace Dr.
Hasan, and either (i) an FHC Designee will resign so that the New FHS Board will
consist of 10 directors, of whom five will be HSI Designees and five will be FHC
Designees or (ii) the directors will take action to increase the New FHS Board
size to 12, and the HSI Designees will select a director to fill the vacancy
created by such increase in the New FHS Board size. Following any date that the
New FHS Board consists of 10 or 12 directors, as the case may be, such New FHS
Board of Directors will be entitled to increase the size of the New FHS Board by
one in order to fill the new directorship with the new Chief Executive Officer
of New FHS.
The Merger Agreement provides further that, as of the Effective Date, the
designees for the classes of the New FHS Board expiring in 1997, 1998 and 1999
shall consist of: (i) for the 1997 class, four members, consisting of Mr.
Crowley, Dr. Hasan (or their respective replacements, if applicable), one
independent director appointed from the HSI Designees and one independent
director appointed from the FHC Designees; (ii) for the 1998 class, three
members, consisting of two independent directors appointed from the FHC
Designees and one independent director appointed from the HSI Designees; and
(iii) for the 1999 class, four members, consisting of two independent directors
appointed from the FHC Designees and two independent directors appointed from
the HSI Designees.
The Merger Agreement defines an "independent director" as (i) any
individual who is not a past or present employee or officer of HSI, FHC or their
affiliates or any affiliate of such an employee or officer and (ii)
notwithstanding clause (i), any of the existing directors of FHC and HSI (other
than such individuals who are officers or employees of HSI or FHC as of October
1, 1996); provided that after the Effective Date, each independent director
shall have no financial relationship with FHC (other than employment or
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retirement or awards granted prior to the Effective Date and benefits and future
director compensation and benefits) and provided that with respect to such
independent directors whose law firms are providing legal services to HSI, such
law firms may complete work under existing assignments that, in the judgment of
HSI, cannot be reasonably terminated; provided further that such financial
relationship restriction will not apply to New FHS director George Deukmejian
with respect to his current law firm.
As of the Effective Date, and during the Transition Period, the audit,
nominating and compensation and stock option committees of the New FHS Board
will consist of four independent directors, two of whom will be HSI Designees
and two of whom will be FHC Designees. The investment policy committee will
consist of an equal number of HSI Designees and FHC Designees, including
initially Dr. Hasan and Mr. Crowley. There will be no executive committee during
the Transition Period. During the Transition Period, the Chairmen of each of the
nominating committee and the audit committee will be selected from the FHC
Designees, and the Chairmen of each of the compensation and stock option
committee and the investment policy committee will be selected from the HSI
Designees. Following the Transition Period, a majority of the New FHS Board will
select the directors (which do not have to be independent directors unless
required by law or applicable stock exchange regulation) to serve on the
committees of the New FHS Board. See "Directors and Management of New FHS
Following the Merger -- Directors" and "Directors and Management of New FHS
Following the Merger -- Committees of the Board of Directors."
Super-Majority Protection. The Merger Agreement provides that as of the
Effective Date, and during the Transition Period, the affirmative vote of at
least eight of the members of the New FHS Board shall be required for it to
approve, authorize or otherwise take any action pursuant to certain sections of
the New Bylaws, including (i) the sections with respect to annual meetings and
special meetings of stockholders (in each case only with respect to the
applicable portion of meetings for the election or removal of directors,
amendment of the New Bylaws or other actions inconsistent with the terms of the
Merger Agreement), (ii) the section with respect to the number, qualification
and election of members of the New FHS Board, (iii) the section with respect to
other committees of the New FHS Board, and (iv) the article with respect to
amending the New Bylaws. In addition, the Merger Agreement provides that until
the date two years after Mr. Crowley is no longer employed by New FHS as an
employee or officer, the employment agreements entered into between the HSI or
FHC on the one hand and Mr. Crowley on the other hand shall not be renewed,
extended or amended, nor may Mr. Crowley be rehired without the affirmative vote
of at least eight of the members of the New FHS Board. The Merger Agreement also
provides that, until the earlier of the date: (i) 18 months after the Effective
Date or (ii) six months following the date of Mr. Crowley's death, resignation
or removal as Chairman of the New FHS Board, Dr. Hasan shall not be removed or
otherwise replaced as the Chief Executive Officer of New FHS without the
affirmative vote of at least eight of the members of the New FHS Board.
CERTAIN CONDITIONS
Conditions of Each Party's Obligations to Effect the Merger. The obligation
of each party to the Merger Agreement to consummate the Merger is subject to the
following: (a) the Merger Agreement and the transactions contemplated thereby
have been duly approved by HSI's and FHC's stockholders and the amendment to the
HSI Charter has been duly approved by HSI's stockholders; (b) the Registration
Statement of which this Joint Proxy Statement/Prospectus is a part shall have
become effective under the Securities Act of 1933, as amended (the "Securities
Act") and is not the subject of any stop order or proceedings seeking a stop
order, and this Joint Proxy Statement/Prospectus as of the Effective Time is not
subject to any proceedings commenced or overtly threatened by the SEC; (c) no
statute, rule, regulation, executive order, decree or injunction shall have been
enacted, entered, promulgated or enforced by any court or governmental authority
which makes the Merger illegal or otherwise prohibits consummation of the
Merger, or which imposes material conditions with respect thereto; (d) any
waiting period applicable to the Merger under the HSR Act shall have expired or
been terminated; (e) all requisite filings with all governmental entities as are
required pursuant to applicable laws, rules, regulations and such governmental
entities, to the extent required by applicable law, have approved the
transactions contemplated by the Merger Agreement, except where the failure to
obtain any such approval would not, individually or in the aggregate,
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have a Material Adverse Effect (as hereinafter defined) on HSI or the Surviving
Corporation, taken as a whole, or upon the consummation of the transactions
contemplated by the Merger Agreement ("Requisite Government Approvals"); (f)
listing on the NYSE of shares of New FHS Common Stock to be issued in the Merger
has been approved on notice of issuance thereof; and (g) each of FHC and HSI
shall have received a letter from Deloitte & Touche LLP to the effect that the
transactions contemplated by the Merger Agreement qualify for pooling of
interests accounting treatment. The conditions to a party's obligations to
effect the Merger may be waived by the party entitled to assert the condition.
If any material condition to the Merger is waived, HSI and FHC and their
respective boards of directors will consult with legal counsel as to the
necessity of amending this Joint Proxy Statement/Prospectus and resoliciting
proxies for the Special Meetings. Notwithstanding the foregoing, it is the
intent of each company to amend this Joint Proxy Statement/Prospectus and
resolicit proxies in the event that the companies waive the conditions relating
to pooling of interests accounting treatment or the requirement that the
transaction be a tax-free reorganization.
Conditions to the Obligations of FHC. The obligation of FHC to consummate
the Merger is further subject to each of the following conditions, among others:
(a) HSI has performed in all material respects its agreements contained in the
Merger Agreement required to be performed at or prior to the Effective Time and
the representations and warranties of HSI contained in the Merger Agreement are
true and accurate in all material respects at and as of the Effective Time with
the same force and effect as if they had been made as of such date, except as
contemplated by the Merger Agreement, and FHC has been provided with an
officers' certificate of HSI to such effect; (b) HSI shall have obtained all
written consents, assignments, waivers and authorizations (other than the
Requisite Governmental Approvals contemplated above) that are required to be
obtained as a result of the Merger, except those for which failure to obtain
such consents, assignments, waivers or authorizations would not have a Material
Adverse Effect on HSI and the Surviving Corporation, taken as a whole or upon
the consummation of the transactions contemplated thereby; (c) FHC shall have
received a letter from HSI's independent auditors as to certain accounting
matters related to HSI's financial statements; and (d) FHC shall have received
an opinion from its tax counsel substantially to the effect that the Merger
shall be treated as a reorganization within the meaning of Section 368(a) of the
Code.
Conditions to the Obligations of HSI and Merger Subsidiary. The obligation
of HSI and Merger Subsidiary to consummate the Merger is further subject to each
of the following conditions, among others: (a) FHC has performed in all material
respects its agreements contained in the Merger Agreement required to be
performed at or prior to the Effective Time and the representations and
warranties of FHC contained therein are true and accurate in all material
respects at and as of the Effective Time with the same force and effect as if
they had been made as of such date, except as contemplated by the Merger
Agreement, and HSI has received an officers' certificate of FHC to such effect;
(b) FHC shall have obtained all written consents, assignments, waivers and
authorizations (other than the Requisite Governmental Approvals contemplated
above) that are required to be obtained as a result of the Merger, except those
for which failure to obtain such consents, assignments, waivers or
authorizations would not have a Material Adverse Effect on HSI and the Surviving
Corporation, taken as a whole, or upon the consummation of the transactions
contemplated thereby; (c) HSI shall have received an opinion from FHC's
independent auditors as to certain accounting matters related to FHC's financial
statements; and (d) any Care Center Operations subject to the Stock and Note
Purchase Agreement (the "FPA Agreement"), dated June 28 1996 between FPA Medical
Management, Inc., FHC and certain other parties thereto which are not sold by
FHC in accordance with the FPA Agreement shall have, under a budget prepared by
FHC and delivered to HSI no later than the Effective Time, projected pre-tax
operating losses for the 12-month period ended December 31, 1997 of less than
$15 million; provided that a Care Center Operation that is to be sold pursuant
to a binding agreement subject to only customary closing conditions that are
reasonably expected to be satisfied, shall not be deemed to be retained for
purposes of this condition. However, with respect to subsection (d) above, all
of the Care Center Operations were sold to FPA as of November 29, 1996 pursuant
to the FPA Agreement.
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"Material Adverse Effect" means, with respect to any person or entity, a
material adverse effect on the financial condition, business, properties,
assets, liabilities (including contingent liabilities), results of operations of
such person or entity and its subsidiaries, taken as a whole, other than any
such adverse effects relating to general economic, market-wide or general
industry conditions.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various customary representations and
warranties of FHC relating to, among other things: (a) FHC's and its
subsidiaries' organization, good standing and similar corporate matters; (b)
authorization, execution, delivery, performance and enforceability of the Merger
Agreement; (c) certain consents and approvals; (d) non-contravention of the
Merger Agreement with governing documents of FHC, laws or regulations, court
orders and material agreements and licenses; (e) the absence of material liens
arising from the Merger Agreement; (f) capital structure; (g) documents filed by
FHC with the SEC and the accuracy of information supplied in connection with the
Registration Statement and this Joint Proxy Statement/Prospectus; (h) the
absence of certain changes or events (including any Material Adverse Change in
FHC); (i) the absence of material litigation; (j) certain tax matters; (k)
certain matters relating to employment agreements and employee benefit plans;
(l) certain environmental matters; (m) certain labor matters; (n) compliance
with laws; (o) the absence of brokers or finders entitled to a commission as a
result of the Merger other than the financial advisor of FHC; (p) opinions of
financial advisors; (q) certain accounting matters; and (r) the cancellation of
the FHC rights agreement.
The Merger Agreement also contains various customary representations and
warranties of HSI relating to, among other things: (a) HSI's, its subsidiaries'
and Merger Subsidiary's organization, good standing and similar corporate
matters; (b) authorization, execution, delivery, performance and enforceability
of the Merger Agreement; (c) certain consents and approvals; (d)
non-contravention of the Merger Agreement with governing documents of HSI and
Merger Subsidiary, laws or regulations, court orders and material agreements and
licenses; (e) the absence of material liens arising from the Merger Agreement;
(f) capital structure; (g) organization of the Merger Subsidiary and no prior
activities of the Merger Subsidiary; (h) documents filed by HSI with the SEC and
the accuracy of information supplied in connection with the Registration
Statement and this Joint Proxy Statement/Prospectus; (i) the absence of certain
changes or events (including any Material Adverse Change in HSI); (j) the
absence of material litigation; (k) certain tax matters; (l) certain matters
relating to employment agreements and employee benefit plans; (m) certain
environmental matters; (n) certain labor matters; (o) compliance with laws; (p)
the absence of brokers or finders entitled to a commission as a result of the
Merger other than the financial advisors of HSI; (q) opinions of financial
advisors; (r) certain accounting matters; and (s) the HSI rights agreement not
being triggered by the Merger Agreement.
CERTAIN COVENANTS
The Merger Agreement provides that, prior to the Effective Time, FHC, HSI,
or their respective subsidiaries will each conduct its operations in the
ordinary and usual course consistent with past practices or will use its best
efforts to preserve intact their respective business organizations' goodwill, to
keep available the services of their respective present officers and key
employees and to preserve the goodwill and business relationships with
suppliers, distributors, customers and others having business relationships with
them. In addition, without limiting the generality of the foregoing, each of FHC
and HSI has agreed that prior to the Effective Time, it and each of its
subsidiaries will not, except as otherwise permitted by the Merger Agreement (a)
amend or propose to amend their respective charters or bylaws (other than as
contemplated by the Merger Agreement); or split, combine or reclassify their
outstanding capital stock or declare, set aside or pay any dividend or
distribution in respect of any capital stock or issue or authorize or propose
the issuance of any other securities in respect of, in lieu of or in
substitution for shares of its capital stock; (b)(i) issue or authorize or
propose the issuance of, sell, pledge or dispose of, any additional shares of,
or any options of, warrants or rights of any kind to acquire any shares of,
their capital stock of any class or any debt or equity securities convertible
into or exchangeable for such capital stock, other than any such issuance
pursuant to options, warrants, rights or convertible securities outstanding as
of October 1, 1996; (ii) acquire or agree to
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acquire by merging or consolidating with, or by purchasing a substantial equity
interest in or a substantial portion of the assets of, or by any other manner,
any business or otherwise acquire or agree to acquire any assets in each case
which are material, individually or in the aggregate, to it and its subsidiaries
taken as a whole; provided, however, that the foregoing shall not restrict HSI
or FHC from entering into any such acquisition transaction in which the
aggregate value of the consideration paid therein shall be less than
$10,000,000, provided that the aggregate value of all acquisition transactions
entered into by HSI or FHC pursuant to the preceding proviso shall not exceed
$10,000,000, and provided further, with respect to FHC only, that FHC shall be
permitted to consummate those acquisition transactions pending as of the date of
the Merger Agreement which have previously been disclosed to HSI; (iii) sell
(including by sale-leaseback), lease, pledge, dispose of or encumber any
material assets or interests therein other than in the ordinary course of
business and consistent with past practice or necessary to fulfill any of the
conditions set forth in the Merger Agreement provided that the party taking the
action consults with the other party prior to taking any such action; (iv)
subject to certain exceptions, incur or become contingently liable with respect
to any material indebtedness for borrowed money or guarantee any such
indebtedness or issue any debt securities or otherwise incur any material
obligation or liability (absolute or contingent) other than short-term
indebtedness in the ordinary course of business and consistent with past
practice; (v) subject to certain exceptions, redeem, purchase, acquire or offer
to purchase or acquire any shares of its capital stock or long-term debt, other
than as required by the governing instruments relating thereto; or (vi) enter
into any contract, agreement, commitment or arrangement with respect to any of
the foregoing; (c) enter into or amend any employment, severance, special pay
arrangement with respect to termination of employment or other arrangements or
agreements with any directors, officers or key employees, except for (i) normal
salary increases and merit bonuses, (ii) arrangements in connection with
employee transfers or (iii) agreements with new employees, in each case, in the
ordinary course of business consistent with past practice; (d) adopt, enter into
or amend any, or become obligated under any new, bonus, profit sharing,
compensation, stock option, pension, retirement, deferred compensation, health
care, employment or other employee benefit plan, agreement, trust, fund or
arrangement for the benefit or welfare of any employee or retiree, except as
required to comply with changes in applicable law occurring after October 1,
1996; (e) waive, amend or otherwise alter their respective rights agreements;
(f) make any material commitment or enter into any material contract or
agreement except in the ordinary course of business consistent with past
practice; (g) alter through merger, liquidation, reorganization, restructuring
or in any other fashion the corporate structures or ownership of any of its
subsidiaries; (h) except as 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; (i) revalue any of its assets, including,
without limitation, writing down the value of its inventory or writing off notes
or accounts receivable, other than in the ordinary course of business; (j) make
any material tax election or settle or compromise any material tax election or
settle or compromise any material income tax liability; (k) settle or compromise
any pending or threatened law suit, action or claim relating to the transactions
contemplated by the Merger Agreement; (l) subject to certain exemptions, pay,
discharge or satisfy any material claims, liabilities or obligations (absolute,
accrued, asserted or unasserted, contingent or otherwise); (m) except in
connection with the exercise of its fiduciary duties by its board of directors
as set forth in the Merger Agreement, waive, amend or allow to lapse any
material term or condition in its rights agreement or any confidentiality or
"standstill" agreement to which it is a party; or (n) take any action that
would, or is reasonably likely to, result in any of its representations and
warranties set forth in the Merger Agreement becoming untrue, or in any of the
conditions to the Merger set forth in the Merger Agreement not being satisfied
or adversely affect the ability of New FHS to account for the Merger as a
pooling of interests.
Access to Information and Confidentiality. The Merger Agreement provides
that, subject to compliance with applicable law, upon reasonable notice, each of
FHC and HSI and its respective subsidiaries will give to each other and the
representatives of the other, reasonable access during normal business hours to
their respective offices, properties, books and records, will furnish to each
other and the representatives of the other such financial and operating data as
such persons may reasonably request and will instruct their respective
employees, counsel and financial advisors to cooperate with the other in the
other's investigation of the business of the other and its subsidiaries and in
the planning for the combination of the businesses of FHC and HSI following the
consummation of the Merger. The Merger Agreement further provides that, unless
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otherwise required by law, the parties will hold any such information that is
nonpublic in confidence until such time as such information otherwise becomes
publicly available through no wrongful act of either party. In the event of
termination of the Merger Agreement for any reason, each party agrees to
promptly return all nonpublic documents obtained from any other party, and any
copies made of such documents, to such other party. In addition, in the event of
such termination, all documents, memoranda, notes and other writing whatsoever
prepared by each party based on the information in such material are required to
be destroyed and each party agrees to use its best efforts to cause its advisors
and their representatives to similarly destroy their respective documents,
memoranda and notes, and such destruction (and best efforts) are required to be
certified in writing to the other party by an authorized officer supervising
such destruction.
Notices of Certain Events. The Merger Agreement also provides that each of
FHC and HSI will, upon obtaining knowledge of any of the following, promptly
notify the other of (i) any material notice or other material communication from
any governmental entity in connection with the Merger and (ii) any actions,
suits, claims, investigations or other judicial proceedings commenced or
threatened against itself or any of its subsidiaries which, if pending on
October 1, 1996, would have been required to have been disclosed pursuant to the
Merger Agreement or which relate to the consummation of the Merger.
Agreement to Cooperate; Further Assurances. The Merger Agreement provides
that, subject to the terms and conditions thereof, each of FHC and HSI will use
all reasonable efforts to take, or cause to be taken, all action and to do, or
cause to be done, all things necessary, proper or advisable under applicable
laws and regulations to consummate and make effective the transactions
contemplated by the Merger Agreement, subject to the requisite vote of
stockholders of FHC and HSI including providing information and using all
reasonable efforts to (i) promptly obtain all necessary or appropriate waivers,
consents and approvals, and promptly effect all necessary registrations and
filings (including filings under the HSR Act and with the agencies governing
insurance, health maintenance organizations or other managed health care
organizations of the various states), (ii) promptly effect, if necessary, the
sale of assets or modification of contracts by either party so long as such
sales of assets or modification of contracts by either party would not
constitute a Material Adverse Effect on New FHS and the Surviving Corporation,
taken as a whole, or adversely affect the ability of New FHS to account for the
Merger as a pooling of interests, (iii) promptly obtain necessary consents from
both parties' bank lenders or mutually or separately restructure their credit
agreements so that obtaining such consents shall not delay or prevent
consummation of the transactions contemplated by the Merger Agreement and (iv)
promptly take all actions necessary or desirable to ensure that the Merger will
be accounted for as a pooling of interests. FHC further agrees that it will not
waive, amend or otherwise alter any provision under the FPA Agreement without
the prior written consent of HSI. The Merger Agreement also provides that, in
case at any time after the Effective Time any further action is necessary or
desirable to carry out the purposes of the Merger Agreement, the proper officers
and directors of each party will take all necessary actions to the extent not
inconsistent with their other duties and obligations or applicable law.
ASSUMPTION OF INDENTURE
As of the Effective Time, New FHS will take all actions necessary to assume
the existing obligations of FHC under that certain Indenture related to FHC's
7 3/4% Senior Notes due June 1, 2003.
NO SOLICITATION OF TRANSACTIONS
Pursuant to the Merger Agreement, each of FHC and HSI has agreed that it
will not, directly or indirectly, through any of its officers, directors,
employees, representatives, agents or subsidiaries, (i) solicit, initiate, or
encourage any inquiries or proposals that constitute, or could reasonably be
expected to lead to, a proposal or offer for a merger, consolidation, business
combination, sale of substantial assets, sale of shares of capital stock
(including without limitation by way of tender offer) or similar transactions
involving such party or any of its subsidiaries, other than the transactions
contemplated by the Merger Agreement (each, an "Acquisition Proposal"), (ii)
engage in negotiations or discussions concerning, or provide any nonpublic
information 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.
Nothing contained in the Merger Agreement, however, prevents FHC or HSI or their
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respective boards of directors from (A) furnishing nonpublic information to, or
entering into discussion or negotiations with, any person or entity in
connection with an unsolicited bona fide written Acquisition Proposal to such
party or the stockholders of such party, if and only to the extent that (1) the
board of directors of such party determines in good faith (after consultation
with its financial advisor) that such Acquisition Proposal would, if
consummated, result in a transaction more favorable to such party's stockholders
from a financial point of view than the transaction contemplated by the Merger
Agreement (any such more favorable Acquisition Proposal, a "Superior Proposal")
and the board of directors of such party determines in good faith, based upon
the written opinion of its outside legal counsel, that such action is necessary
for such party to comply with its fiduciary duties to stockholders under
applicable law and (2) prior to furnishing such nonpublic information to, or
entering into discussion or negotiations with, such person or entity, such Board
of Directors receives from such person or entity an executed confidentiality
agreement on terms specified in the Merger Agreement; or (B) complying with Rule
14e-2 promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") with regard to an Acquisition Proposal. Each of FHC and HSI has
agreed further to (i) promptly notify the other party 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 the other party 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 the other party with any nonpublic information which is given
to such person pursuant to this paragraph, and (iii) keep the other party
advised of the status and principal financial terms of any such Acquisition
Proposal, indication or request unless the board of directors believes in good
faith that a Superior Proposal has been made and shall have determined in good
faith, based upon the written opinion of its outside legal counsel, that the
nondisclosure of the information required pursuant to this clause (iii) to the
other party is necessary for such board of directors to comply with its
fiduciary duties to its stockholders under applicable law.
CONTINUANCE OF EXISTING INDEMNIFICATION RIGHTS
Pursuant to the Merger Agreement, from and after the Effective Time, and
for a period of six years thereafter, (i) New FHS will continue and guarantee
the performance of the indemnification rights of present and former directors
and officers of HSI and FHC provided for in the Certificate of Incorporation,
Bylaws and certain indemnification agreements of HSI and FHC as in effect on
October 1, 1996, with respect to indemnification for acts and omissions
occurring prior to the Effective Time, and (ii) for six years after the
Effective Time, New FHS will cause to be maintained the current policies of the
officers' and directors' liability insurance maintained by HSI and FHC covering
persons who are presently covered by each company's officers' and directors'
liability insurance policies with respect to acts and omissions occurring prior
to the Effective Time; provided that policies with third party insurers of
similar or better A.M. Best rating whose terms, conditions and coverage are no
less advantageous may be substituted therefor, and provided further that in no
event shall New FHS be required to expend to maintain or procure insurance
coverage an amount in excess of 150% of the current annual premiums for the
twelve-month period ended June 30, 1997.
STOCK OPTION PLANS AND BENEFIT PLANS
The Merger Agreement provides that each of FHC and HSI will take such
action as may be necessary to cause each unexpired and unexercised option to
purchase shares of FHC Common Stock (an "FHC Option") granted under any of FHC's
stock option plans (the "FHC Stock Option Plans") to be automatically converted
at the Effective Time into an option (a "New FHS Option") to purchase a number
of shares of New FHS Common Stock equal to the number of shares of FHC Common
Stock that could have been purchased under the FHC Option multiplied by the
Exchange Ratio (with the resulting number of shares rounded down to the nearest
whole share), at a price per share of New FHS Common Stock equal to the option
exercise price determined pursuant to the FHC Option divided by the Exchange
Ratio (with the resulting exercise price rounded up to the nearest whole cent).
Such New FHS Option will otherwise be subject to substantially similar terms and
conditions as the FHC Option. The Merger Agreement also provides that New FHS
will (i) as of the Effective Time, assume all of FHC's obligations with respect
to FHC Options
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as so converted, (ii) on or prior to the Effective Time, reserve for issuance
the number of shares of HSI Common Stock that will become subject to New FHS
Options pursuant to the Merger Agreement, (iii) from and after the Effective
Time, upon exercise of the New FHS Options in accordance with the terms thereof,
make available for issuance all shares of New FHS Common Stock covered thereby
and (iv) at the Effective Time, issue to each holder of an outstanding FHC
Option a document evidencing the foregoing assumption by New FHS.
HSI has agreed to file as soon as practicable, but in no event later than
30 days after the Effective Time, a Registration Statement on Form S-8, or Form
S-3 as required, under the Securities Act covering the shares of New FHS Common
Stock issuable upon the exercise of the New FHS Options created upon the
assumption by New FHS of FHC Options. HSI has also agreed to use its best
efforts to cause such registration statements to become effective on or about
the Effective Time or as soon thereafter as practicable and to maintain such
registrations in effect until the exercise or expiration of such New FHS
Options.
TERMINATION
The Merger Agreement may be terminated at any time prior to the Effective
Time whether before or after the approval by the stockholders of HSI or FHC: (a)
by mutual consent of the HSI Board and the FHC Board; (b) by HSI or FHC, if (i)
the Effective Date has not occurred on or before March 31, 1997 (or April 30,
1997 if the only condition remaining unfulfilled at March 31, 1997 is approval
by any required governmental entity), except that this right to terminate the
Merger Agreement will not be available to any party whose failure to fulfill any
obligation thereunder has been the cause of, or resulted in, the failure of the
Effective Date to occur on or before such date, (ii) any governmental entity,
the consent of which is a condition to the obligations of HSI and FHC to
consummate the transactions contemplated by the Merger Agreement, has determined
not to grant its consent and all appeals of such determination have been taken
and have been unsuccessful or (iii) any court of competent jurisdiction has
issued an order, judgment or decree (other than a temporary restraining order)
restraining, enjoining or otherwise prohibiting the Merger and such order,
judgment of decree has become final and nonappealable; (c) by HSI or FHC, if, at
the FHC Special Meeting (including any adjournment or postponement thereof), the
requisite vote of the stockholders of FHC has not been obtained (see "The Merger
and The Special Meetings -- Voting Rights; Votes Required for Approval"); (d) by
HSI or FHC, if, at the HSI Special Meeting (including any adjournment or
postponement thereof), the requisite vote of the stockholders of HSI has not
been obtained (see "The Merger and The Special Meetings -- Voting Rights; Votes
Required for Approval"); (e) by HSI, if (i) there has been a breach by FHC of
any representation, warranty, covenant or agreement set forth in the Merger
Agreement, which breach would result in a Material Adverse Effect to HSI and the
Surviving Corporation, taken as a whole, or upon the consummation of the
transactions contemplated thereby; which has not been cured within 10 business
days following receipt by the breaching party of notice of such breach, except
that the right to terminate the Merger Agreement pursuant to this clause will
not be available to HSI if it, at such time, is in material breach of any
representation, warranty, covenant or agreement set forth in the Merger
Agreement, (ii) the FHC Board has withdrawn or modified in a manner adverse to
HSI its approval or recommendation of the transactions contemplated by the
Merger Agreement or recommended another Acquisition Proposal or (iii) subject to
the following paragraph, the HSI Board has withdrawn or modified in a manner
adverse to FHC its approval or recommendation of the transactions contemplated
by the Merger Agreement to permit HSI to execute a definitive agreement
providing for the transaction or transactions contemplated by a Superior
Proposal; (f) by FHC, if (i) there has been a breach by HSI of any
representation, warranty, covenant or agreement set forth in the Merger
Agreement, which breach would result in a Material Adverse Effect to HSI and the
Surviving Corporation, taken as a whole, or upon consummation of the
transactions contemplated thereby which has not been cured within ten business
days following receipt by the breaching party of notice of such breach, except
that the right to terminate the Merger Agreement pursuant to this clause will
not be available if it, at such time, is in material breach of any
representation, warranty, covenant or agreement set forth in the Merger
Agreement, (ii) the HSI Board has withdrawn or modified in a manner adverse to
FHC its approval or recommendation of the transactions contemplated by the
Merger Agreement or recommended another Acquisition Proposal, or (iii) subject
to the following paragraph, the FHC Board has withdrawn or modified in a manner
adverse to HSI its approval or
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recommendation of the transactions contemplated by the Merger Agreement to
permit FHC to execute a definitive agreement providing for the transaction or
transactions contemplated by a Superior Proposal; or (g) by HSI or FHC at any
time following the date 30 days after the required notice is delivered by the
other party concerning the receipt of an Acquisition Proposal unless, prior to
termination under this clause, the party which gave such notice provides written
notice to the other party that such Acquisition Proposal has been rejected or
withdrawn or the party 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 clause to a number of days equal to 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).
The Merger Agreement also provides that each of HSI and FHC will provide to
the other written notice prior to any termination of the Merger Agreement
described in clause (e)(iii) or clause (f)(iii) of the preceding paragraph,
respectively, advising the other that its board of directors has received a
Superior Proposal. At any time after the fourth business day following such
notice, the notifying party may terminate the Merger Agreement as described in
clause (e)(iii) or clause (f)(iii) of the preceding paragraph, as the case may
be, only if (a) the FHC Board or the HSI Board determines that such Superior
Proposal remains more favorable to its respective stockholders than the
transactions contemplated by the Merger Agreement by HSI or FHC, and (b) the
requisite termination fee shall have been paid to the other. The Merger
Agreement will become void (except with respect to certain provisions thereof
regarding confidentiality (see "-- Certain Covenants -- Access to Information
and Confidentiality" above) and expenses and fees (including termination fees)
(see "-- Expenses" and "-- Termination Fees")) and there will be no liability on
the part of HSI, Merger Subsidiary or FHC or their respective officers or
directors, except for any breach of a party's obligations with respect to
certain provisions of the Merger Agreement regarding the effect of termination,
confidentiality, expenses and fees (including termination fees). No party to the
Merger Agreement will, however, be relieved from liability for any willful or
intentional breach thereof.
TERMINATION FEES
Termination Fees Payable by FHC. The Merger Agreement obligates FHC to pay
to HSI a termination fee, so long as FHC is not entitled to terminate the Merger
Agreement due to a material uncured breach of the Merger Agreement by HSI, in
the amount of (a) $40 million (less amounts previously paid, if applicable) if
(i) the FHC Board withdraws or adversely modifies its approval or recommendation
of the Merger or recommends another Acquisition Proposal (whether or not to
permit FHC to execute a definitive agreement providing for the transaction or
transactions contemplated by a Superior Proposal), (ii) prior to termination of
the Merger Agreement resulting from failure to obtain the requisite stockholder
vote or from the commission of a material uncured breach by FHC of any covenant
or agreement set forth in the Merger Agreement, a Transaction Proposal (as
defined below) has been publicly announced, or (iii) within one year of
termination of the Merger Agreement resulting from failure to obtain the
requisite stockholder vote or from the commission of a material uncured breach
by FHC of any covenant or agreement set forth in the Merger Agreement, FHC (or
any of its significant subsidiaries) consummates or enters into an agreement to
consummate a Transaction Proposal with another person, (b) $20 million if (i)
the Merger Agreement is terminated as a result of FHC materially breaching any
covenant or agreement set forth in the Merger Agreement, which breach has not
been cured within 10 business days following receipt by FHC of notice of such
breach, or (ii) the Merger Agreement is terminated as a result of FHC receiving
a Transaction Proposal and such Transaction Proposal was not withdrawn or
rejected or negotiations or discussions with such other person had not been
terminated within 30 days of notice of such Transaction Proposal being provided
to HSI and, within one year of such termination of the Merger Agreement, FHC (or
any of its significant subsidiaries) consummates or enters into an agreement to
consummate a Transaction Proposal with another person, or (c) $5 million if, at
FHC's stockholders meeting, the requisite vote of the stockholders of FHC in
favor of the Merger shall not have been obtained. In addition, FHC must
reimburse HSI for all costs and expenses incurred in connection with the Merger
Agreement up to $5 million if (a) the agreement is terminated because the
requisite vote of the stockholders of FHC in favor of the Merger has not been
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obtained, (b) FHC is not obligated to pay a termination fee because no
Transaction Proposal has been publicly announced prior to termination of the
Merger Agreement resulting from failure to obtain the requisite stockholder vote
and (c) FHC is not entitled to terminate the Merger Agreement due to a material
uncured breach of the Merger Agreement by HSI.
"Transaction Proposal" means a proposal or offer (other than by HSI or FHC)
(i) to acquire beneficial ownership (as defined under Rule 13(d) of the Exchange
Act) of a 20% or greater equity interest in either HSI or FHC or their
respective Significant Subsidiaries (as defined in the Merger Agreement) holding
substantially all of the assets of HSI or FHC and their respective 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 a 20% or greater equity interest in either HSI or FHC or
their respective Significant Subsidiaries holding substantially all of the
assets of HSI or FHC and their respective subsidiaries, (ii) to purchase all or
substantially all of the business or assets of HSI and FHC or their respective
subsidiaries or (iii) to otherwise effect a business combination involving HSI
or FHC or any of their respective Significant Subsidiaries holding substantially
all of the assets of HSI or FHC and their respective subsidiaries.
Termination Fees Payable by HSI. The Merger Agreement obligates HSI to pay
to FHC a termination fee, so long as HSI is not entitled to terminate the Merger
Agreement due to a material uncured breach of the Merger Agreement by FHC, in
the amount of (a) $40 million (less amounts previously paid, if applicable) if
(i) the HSI Board withdraws or adversely modifies its approval or recommendation
of the Merger or recommends another Acquisition Proposal (whether or not to
permit HSI to execute a definitive agreement providing for the transaction or
transactions contemplated by a Superior Proposal), (ii) prior to termination of
the Merger Agreement resulting from failure to obtain the requisite stockholder
vote or from the commission of a material uncured breach by HSI of any covenant
or agreement set forth in the Merger Agreement, a Transaction Proposal has been
publicly announced, or (iii) within one year of termination of the Merger
Agreement resulting from failure to obtain the requisite stockholder vote or
from the commission of a material uncured breach by HSI of any covenant or
agreement set forth in the Merger Agreement, HSI (or any of its significant
subsidiaries) consummates or enters into an agreement to consummate a
Transaction Proposal with another person, (b) $20 million if (i) the Merger
Agreement is terminated as a result of HSI materially breaching any covenant or
agreement set forth in the Merger Agreement, which breach has not been cured
within 10 business days following receipt by HSI of notice of such breach, or
(ii) the Merger Agreement is terminated as a result of HSI receiving a
Transaction Proposal and such Transaction Proposal was not withdrawn or rejected
or negotiations or discussions with such other person had not been terminated,
within 30 days of notice of such Transaction Proposal being provided to FHC and,
within one year of such termination of the Merger Agreement, HSI (or any of its
significant subsidiaries) consummates or enters into an agreement to consummate
a Transaction Proposal with another person, or (c) $5 million if, at HSI's
stockholders meeting, the requisite vote of the stockholders of HSI in favor of
the Merger shall not have been obtained. In addition, HSI must reimburse FHC for
all costs and expenses incurred in connection with the Merger Agreement up to $5
million if (a) the agreement is terminated because the requisite vote of the
stockholders of HSI in favor of the Merger has not been obtained, (b) HSI is not
obligated to pay a termination fee because no Transaction Proposal has been
publicly announced prior to termination of the Merger Agreement resulting from
failure to obtain the requisite stockholder vote and (c) HSI is not entitled to
terminate the Merger Agreement due to a material uncured breach of the Merger
Agreement by FHC.
EXPENSES
Except as set forth above, each of FHC and HSI will bear its own costs and
expenses incurred in connection with the Merger Agreement and the transactions
contemplated thereby, except that the expenses (excluding fees of counsel and
accountants) incurred in connection with the printing and mailing of this Joint
Proxy Statement/Prospectus, as well as the filing fees related thereto and any
filing fee required in connection with the filing of premerger notifications
under the HSR Act, will be shared equally by FHC and HSI.
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CONFLICTS OF INTEREST AND INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the respective recommendations of the HSI Board and the FHC
Board with respect to the Merger, stockholders of HSI and stockholders of FHC
should be aware that certain officers of HSI and FHC, including some officers
who are also directors, have certain interests in the Merger that are different
from, or in addition to, the interests of stockholders of HSI and stockholders
of FHC generally. Three executive officers of HSI, Malik M. Hasan, M.D., Dale T.
Berkbigler, M.D. and Jay M. Gellert, were also members of the HSI 14-person
Board of Directors when the HSI Board approved the Merger. Three executive
officers of FHC, Daniel D. Crowley, Jeffrey L. Elder and Steven D. Tough, were
also members of FHC's 10-person Board of Directors when the FHC Board approved
the Merger.
EMPLOYMENT AND CONSULTING AGREEMENTS
In consideration for amending and waiving certain terms of their existing
employment agreements, on October 1, 1996, HSI and FHC entered into new
employment agreements with each of Daniel D. Crowley, Kirk A. Benson, Steven D.
Tough, Jeffrey L. Elder and Allen J. Marabito, which were further amended on
December 16, 1996 and which will become effective upon the consummation of the
Merger and which supersede their prior employment agreements with FHC. Pursuant
to the employment agreements, Mr. Crowley will serve as the Chairman of the New
FHS Board, Mr. Benson will serve as a Senior Vice President, Mr. Tough will
serve as President and Chief Operating Officer of government operations, Mr.
Elder will serve as Senior Vice President and Chief Financial Officer and Mr.
Marabito will serve as Senior Vice President and General Counsel.
Pursuant to Mr. Crowley's employment agreement, Mr. Crowley will serve as
Chairman of the New FHS Board for one year. He will receive a base salary of
$825,000 per annum and will be entitled to participate in all employee benefit
programs. However, in lieu of participating in FHC's existing management
incentive plan, he will receive a bonus of $3,500,000 if he remains employed as
Chairman for one full year after the Merger or if his employment is terminated
earlier by New FHS without "Cause" or by Mr. Crowley for "Good Reason" (as
defined below).
Pursuant to their two-year employment agreements, Messrs. Benson and Tough
will receive base salaries of $400,000 and $350,000 per annum, respectively, and
will be entitled to participate in all employee benefit programs. In lieu of
participating in FHC's existing management incentive plan, Messrs. Benson and
Tough will receive bonuses of $1,120,000 and $1,000,000, respectively, if they
remain employed by FHS for one full year after the Merger or if their employment
is terminated earlier by New FHS without "Cause" or by the executive for "Good
Reason." Mr. Tough's bonus will be payable at an earlier date if he remains
employed by New FHS for three months after a full-time replacement for his
position has commenced employment with New FHS.
Pursuant to their two-year employment agreements, Messrs. Elder and
Marabito will receive base salaries of $315,000 and $265,000 per annum,
respectively, and will be entitled to participate in all employee benefit
programs. In lieu of participating in FHC's existing management incentive plan,
Messrs. Elder and Marabito will each receive bonuses of (i) $250,000, if they
remain employed by New FHS for six months after the Merger, and an additional
(ii) $441,000 and $371,000, respectively, if they remain employed by New FHS for
one full year after the Merger; provided, however, that both bonuses will be
payable earlier if the executive's employment is terminated by New FHS without
"Cause" or by the executive for "Good Reason."
Each of the employment agreements contains severance provisions which are
substantially equivalent in amount to those contained in the executives' prior
employment agreements with FHC. Under their new employment agreements, Messrs.
Crowley and Benson are entitled to receive severance payments (equal to
approximately 2.99 times base salary and bonus) of $8,372,000 and $2,208,488,
respectively, upon their termination of employment for any reason other than for
"Cause." Under his new employment agreement, Mr. Tough is entitled to receive a
severance payment (equal to approximately 2.99 times base salary and bonus) of
$1,985,733 upon termination of his employment (i) during the term of his
agreement by New FHS without "Cause" or by Mr. Tough for "Good Reason," (ii) by
Mr. Tough for any reason three months after a full time replacement for his
position has commenced employment, or (iii) by Mr. Tough for any reason
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during the 90 day period commencing on the first anniversary of the Merger.
Under their new employment agreements, Messrs. Elder and Marabito are entitled
to receive severance payments (equal to approximately 2.99 times base salary and
bonus) of $1,847,421 and $1,601,643, respectively, upon termination of their
employment (i) during the term of their agreements by New FHS without "Cause" or
by the executive for "Good Reason" or (ii) by the executive for any reason
during the period commencing 90 days after and ending 450 days after the Merger.
Each of the five executives and their dependents will receive health insurance
coverage for the lifetime of the executive following termination of employment.
For purposes of the employment agreements, "Cause" means a willful act by
the executive which constitutes gross misconduct or fraud and which is
materially injurious to New FHS or conviction of, or a plea of guilty or no
contest to, a felony. "Good Reason" is defined as a reduction in base salary, a
substantial reduction in authority or responsibility or relocation of 100 miles
or more.
Immediately following termination of employment (other than by the
executive's death or by New FHS's termination for "Cause"), each of Messrs.
Crowley, Benson and Tough have agreed to enter into consulting and non-compete
agreements with New FHS. Messrs. Crowley's and Benson's agreements will each
have a three-year term. In consideration of their agreements, Messrs. Crowley
and Benson will receive $6 million and $2 million, respectively, during the
first 12 months of the consulting and non-compete agreements, $2 million and
$750,000, respectively, during the second 12 months and $1 million and $750,000,
respectively, during the third 12 months. Mr. Tough's consulting and non-compete
agreement will have a one-year term during which he will receive $1 million in
consideration of his agreements. Payments under the consulting and non-compete
agreements are required to be made only if the executive remains employed by New
FHS for one year after the Merger (unless earlier terminated by New FHS without
"Cause" or by the executive for "Good Reason," or in the case of Mr. Tough,
three months after his replacement has commenced employment). Messrs. Crowley
and Benson may voluntarily terminate their consulting and non-compete agreements
after one year, after which payments thereunder shall cease. Mr. Tough has
expressed his intention to terminate employment with New FHS approximately three
months after consummation of the Merger.
Upon consummation of the Merger, all amounts which may be due the
executives under the terms of the employment agreements and the consulting and
non-compete agreements will be placed in rabbi trusts for the benefit of each
executive.
In consideration for Dr. Hasan's waiver of certain terms of his employment
agreement with HSI dated August 28, 1993, as amended on April 25, 1994, Dr.
Hasan's employment agreement is expected to be amended in order to (i) add a
provision providing for a three year pay to stay bonus of up to $1.33 million
per year which will be subject to certain performance objectives to be
determined by the HSI Board and (ii) to increase the base amount of Dr. Hasan's
36 month severance benefit to include an amount equal to the average of the
annual bonus paid to Dr. Hasan (excluding the pay to stay bonus referred to in
clause (i) above) for the three fiscal years ending before the date of his
resignation or termination.
For information regarding employment arrangements of Dr. Berkbigler and
Messrs. Gellert and Westen see the HSI Form 10-K for the year ended December 31,
1995, the HSI Form 10-Q for the quarter ended September 30, 1995 and the 1996
Notice of Annual Meeting and Proxy Statement of HSI, the relevant portions of
which are incorporated by reference into the HSI Form 10-K for the year ended
December 31, 1995.
INDEMNIFICATION AND INSURANCE
New FHS is required by the Merger Agreement to provide indemnification and
liability insurance arrangements for officers and directors of FHC and HSI. See
"The Merger Agreement -- Continuance of Existing Indemnification Rights."
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CERTAIN OTHER AGREEMENTS
VOTING AGREEMENT
Dr. Hasan, the beneficial owner of 4,306,826 shares of HSI Common Stock
(the "Shares") and options to purchase 710,000 shares of the HSI Common Stock,
has entered into a voting agreement with FHC with respect to such Shares and
Options, dated October 1, 1996 (the "Voting Agreement"). Pursuant to the Voting
Agreement, Dr. Hasan has agreed, among other things, (i) to appear or cause the
holder of record (the "Record Holder") to appear, at any annual or special
meeting of the stockholders of HSI for the purpose of obtaining a quorum, (ii)
to vote, or cause the Record Holder to vote, all of the Shares in favor of the
Merger, the Merger Agreement and the transactions contemplated thereby, (iii) to
vote or cause the Record Holder to vote the Shares against any action, proposal
or agreement that could reasonably be expected to result in a breach in any
material respect of any covenant, representation or warranty or any other
obligation of HSI under the Merger Agreement, or which could reasonably be
expected to result in any of the conditions of HSI's obligations under the
Merger Agreement not being fulfilled and (iv) to vote or cause the Record Holder
to vote, such Shares against (a) any extraordinary corporate transaction (other
than the Merger), such as a merger, consolidation, business combination,
reorganization, recapitalization or liquidation involving HSI or any of its
subsidiaries, and (b) a sale or transfer of a material amount of the assets of
HSI or any of its subsidiaries. Notwithstanding the foregoing, the Voting
Agreement shall not prohibit or restrain Dr. Hasan from complying with his
fiduciary obligations as a director or officer of HSI.
Dr. Hasan has further agreed, pursuant to the Voting Agreement, that he
will not, prior to the termination of the Voting Agreement, either directly or
indirectly, offer, agree or otherwise sell, assign, pledge, hypothecate,
transfer, exchange or dispose of any Shares, any options or warrants to purchase
any shares of HSI Common Stock, or any securities or rights convertible into or
exchangeable for shares of HSI Common Stock, owned either directly or indirectly
by Dr. Hasan or with respect to which Dr. Hasan has the power of disposition,
whether now or hereafter acquired, other than pursuant to the Merger without the
prior written consent of FHC; provided, however, that prior to the termination
of the Voting Agreement Dr. Hasan may dispose of up to 250,000 of the Shares at
his sole discretion.
CWF AGREEMENT
HSI entered into an agreement with FHC, dated October 1, 1996 (the "CWF
Agreement") with respect to certain rights of CWF, the holder of 19,297,642
shares of non-voting HSI Class B Common Stock which constitutes all of the
outstanding shares of such HSI Class B Common Stock, under the HSI Charter, that
certain Shareholder Agreement, dated January 28, 1992 (the "Shareholder
Agreement") and that certain Registration Rights Agreement, dated March 2, 1995
(the "Registration Rights Agreement"). Pursuant to the CWF Agreement, HSI has
agreed (i) to take all steps necessary to prevent the occurrence of an
Adjustment Event (as such term is defined in the HSI Charter), including,
without limitation, the payment in accordance with its terms of that certain
Senior Secured Promissory Note by Health Net dated as of January 28, 1992 in
favor of CWF (the "Note") with a principal balance of $19.4 million as of
December 1, 1996 and, upon the occurrence of a Default or an Event of Default
(as defined in the Note), HSI will, or will cause Health Net to, either pre-pay
the Note in full, including all accrued and unpaid interest, or obtain a waiver
of the applicable Default and/or Event of Default from CWF and an agreement of
CWF that CWF will not be entitled to elect a majority of the members to the HSI
Board as a result of such Default and/or Event of Default (notwithstanding the
provisions of the HSI Charter), (ii) to take all necessary actions to ensure
that an Adjustment Event does not occur including, without limitation, insuring
that an Event of Default does not occur under the Note and (iii) to maintain at
all times cash or borrowing capacity in an amount required to repay the Note in
full, including all accrued and unpaid interest.
HSI has further agreed pursuant to the CWF Agreement that without the prior
written consent of FHC, HSI will not (i) waive any provisions of the Shareholder
Agreement restricting CWF's ability to transfer or otherwise dispose of its
shares of HSI Class B Common Stock or (ii) otherwise amend or modify any terms
of the Shareholder Agreement or the Registration Rights Agreement. In addition,
HSI will request an agreement from CWF in order to prevent CWF from demanding
the registration of its shares of HSI Class B Common
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Stock under the Shareholder Agreement or the Registration Rights Agreement prior
to the Effective Date. HSI will take all necessary actions in accordance with
the terms of the Shareholder Agreement to postpone for as long as possible the
registration of HSI Class B Common Stock held by CWF under the Shareholder
Agreement if a demand for registration is made by CWF pursuant to Article IV of
such Shareholder Agreement. In addition, HSI will take all necessary actions
under the Registration Rights Agreement to postpone for as long as possible the
registration of HSI Class B Common Stock held by CWF pursuant thereto,
including, without limitation, exercising its right to delay such registration
for 60 days.
AMENDMENTS TO THE RIGHTS AGREEMENTS
HSI Amendment. HSI entered into an amendment on October 1, 1996 (the "HSI
Amendment") with Harris Trust and Savings Bank (the "HSI Rights Agent") to the
Rights Agreement dated as of June 1, 1996 (the "HSI Rights Agreement"), by and
between HSI and the HSI Rights Agent. Pursuant to the HSI Amendment, the Merger
Agreement and the issuance of New FHS Common Stock to the stockholders of FHC in
connection with the transactions contemplated by the Merger Agreement are exempt
from the triggering events which would cause the occurrence of Distribution Date
(as defined in the HSI Rights Agreement).
The HSI Amendment further provides that (i) until the Effective Time, Dr.
Hasan will be exempt from the definition of an Acquiring Person (as defined in
the HSI Rights Agreement) so long as he is the beneficial owner of less than 20%
of the shares of HSI Common Stock and that after the Effective Time, Dr. Hasan
is only exempt from the definition of an Acquiring Person so long as he is the
beneficial owner of less than 15% of the HSI Common Stock; and (ii) for the
period of two years following the Effective Time, so long as Dr. Hasan is the
Chief Executive Officer and a director of New FHS, Dr. Hasan may not be declared
an Adverse Person (as defined in the HSI Rights Agreement) unless such
determination is made by the vote of at least eight members of the New FHS
Board.
FHC Amendment. FHC entered into an Amendment on October 1, 1996 (the "FHC
Amendment") with ChaseMellon Shareholder Services, L.L.C. (the "FHC Rights
Agent") to the Rights Agreement, dated September 27, 1991 (the "FHC Rights
Agreement"), by and between FHC and the FHC Rights Agent. Pursuant to the FHC
Amendment, HSI and Merger Subsidiary are exempt from the definition of Acquiring
Person (as defined under the FHC Rights Agreement) to the extent HSI or Merger
Subsidiary acquires any FHC Common Stock in connection with the transactions
contemplated by the Merger Agreement, so that the Merger Agreement or the
transactions contemplated thereby will not cause a Distribution Date (as defined
under the FHC Rights Agreement). The FHC Amendment also modifies the
circumstances under which the FHC Board of Directors may terminate the FHC
Rights Agreement and further provides that the Rights (as defined in the FHC
Rights Agreement) will terminate without any payment or notice to any holder
thereof immediately prior to the Effective Time.
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COMPARISON OF STOCKHOLDERS' RIGHTS
Upon consummation of the Merger, the stockholders of FHC will become
stockholders of New FHS and their rights will cease to be defined and governed
by the Restated Certificate of Incorporation of FHC (the "FHC Charter") and the
Bylaws of FHC (the "FHC Bylaws") and will be defined and governed by the New
Charter and the New Bylaws which will be in effect as of the Effective Time.
Provisions of the New Charter and the New Bylaws will alter the present rights
of the FHC stockholders and certain of these provisions are summarized below.
Also see "Directors and Management of New FHS Following the Merger" and "The
Merger Agreement -- Corporate Organization and Governance." These summaries are
qualified in their entirety by reference to the New Charter, the New Bylaws
(which are included as Appendices II and III, respectively, to this Joint Proxy
Statement/Prospectus), the FHC Charter and the FHC Bylaws.
CAPITAL STOCK
FHC. The FHC Charter authorizes 100,000,000 shares of FHC Common Stock and
1,000,000 shares of Preferred Stock.
New FHS. The New Charter authorizes 350,000,000 shares of New FHS Class A
Common Stock, 30,000,000 shares of New FHS Class B Common Stock and 10,000,000
shares of Preferred Stock, $.001 par value per share, of New FHS ("New FHS
Preferred Stock").
BOARD OF DIRECTORS
FHC. The FHC Bylaws provide that the number of directors shall be
established from time to time by resolution of the FHC Board. The current number
of directors is fixed at 11 with one vacancy on the FHC Board. The FHC Charter
provides that the FHC Board shall be composed of at least nine directors,
one-third of the authorized number of directors must be persons who are not
officers of FHC, are not related to FHC, do not represent concentrated or family
holdings of FHC Common Stock and, in the view of FHC Board, are free of any
relationship that would interfere with the exercise of independent judgment. All
of the directors stand for reelection at each annual meeting of stockholders.
The FHC Charter provides for cumulative voting. In an election of directors
under cumulative voting, each share of stock normally having one vote is
entitled to a number of votes equal to the number of directors to be elected. A
stockholder may then cast all such votes for a single candidate or may allocate
them among as many candidates as a stockholder may choose. Without cumulative
voting, absent any other special provision, the holders of a majority of the
shares present at an annual meeting or any special meeting held to elect
directors would have the power to elect all the directors to be elected at that
meeting, and no person could be elected without the support of holders of a
majority of the shares voting at such meeting. Cumulative voting may permit the
election to the FHC Board of a candidate who does not have the support of the
holders of a majority of the outstanding shares but who does have the support of
a significant number of shares of FHC Common Stock. Since the FHC Charter
permits cumulative voting, if less than the entire board is to be removed, no
director of FHC may be removed without cause if the number of shares voted
against such a removal would be sufficient to elect the director under
cumulative voting.
New FHS. The New Charter and the New Bylaws provide that the New FHS Board
will consist of not less than three nor more than 20 directors, the exact number
of which shall be fixed from time to time by the New FHS Board. The New Bylaws
and the Merger Agreement provide that at the Effective Time, and for five years
thereafter, the New FHS Board will consist of 11 members, six of whom initially
will be FHC Designees and five of whom initially will be HSI Designees; provided
that if at any time during the Transition Period, Dr. Hasan is not the Chief
Executive Officer of New FHS and a member of the New FHS Board, then prior to
the next meeting of the New FHS Board following such occurrence, the other HSI
Designees will select another to replace Dr. Hasan, and either (i) an FHC
Designee will resign so that the New FHS Board will consist of 10 directors, of
whom five will be HSI Designees and five will be FHC Designees, or (ii) the
directors will take action to increase the size of the New FHS Board to 12 and
the HSI Designees will select a director to fill the vacancy created by such
increase in the New FHS Board size. Following any date that the New FHS Board
consists of 10 or 12 directors, as the case may be, such New FHS Board will be
entitled to
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increase the size of the New FHS Board by one in order to fill the new
directorship with the new Chief Executive Officer of New FHS.
The New Charter does not provide for cumulative voting. The Merger
Agreement provides further that, as of the Effective Date, the designees for the
classes of New FHS Board expiring in 1997, 1998 and 1999 shall consist of: (i)
for the 1997 class, four members, consisting of Mr. Crowley, Dr. Hasan (or their
respective replacements, if applicable), one independent director appointed from
the HSI Designees and one independent director appointed from the FHC Designees;
(ii) for the 1998 class, three members, consisting of two independent directors
appointed from the FHC Designees and one independent director appointed from the
HSI Designees; and (iii) for the 1999 class, four members, consisting of two
independent directors appointed from the HSI Designees and two independent
directors appointed from the FHC Designees. Each director of New FHS is elected
for a three-year term.
The New Charter provides that subject to any rights of holders of
outstanding preferred stock, any director or the entire New FHS Board may be
removed only for cause by an affirmative vote of 66 2/3% of the then outstanding
shares of Voting Stock (as defined in the New Charter); provided that if a
proposal to remove a director for cause is made by or on behalf of an Interested
Stockholder (as defined in the New Charter) or a director affiliated with an
Interested Stockholder, then such removal shall require the affirmative vote of
a majority of shares of Voting Stock held by stockholders other than the
Interested Stockholder (the "Disinterested Shares").
The New Bylaws and the Merger Agreement define an "independent director" as
(i) any individual who is not a past or present employee or officer of HSI, FHC
or their affiliates or any affiliate of such an employee or officer and (ii)
notwithstanding clause (i), any of the existing directors of the FHC and HSI
(other than such individuals who are officers or employees of HSI or FHC as of
October 1, 1996); provided that after the Effective Date, each independent
director shall have no financial relationship with FHC (other than employment or
retirement or awards granted prior to the Effective Date and benefits and future
director compensation and benefits) and provided that with respect to such
independent directors whose law firms are providing legal services to HSI, such
law firms may complete work under existing assignments that, in the judgment of
HSI, cannot be reasonably terminated; provided further that such financial
relationship restriction will not apply to New FHS director George Deukmejian
with respect to his current law firm.
In the event of death, resignation, removal or failure to stand for
reelection of any of the directors originally designated by FHC or HSI, the
vacancy on the New FHS Board and any committee will be filled with a replacement
FHC Designee or HSI Designee, as the case may be. The New Bylaws provide that
the New FHS Board will waive all age limitations related to a person's ability
to serve as a director on the New FHS Board.
BOARD COMMITTEES
FHC. The FHC Charter requires the FHC Board to designate an audit committee
of at least three independent directors, a compensation committee of at least
three non-employee directors (a majority of which are independent directors as
defined in "-- Board of Directors -- FHC" above) and a nominating committee of
at least five members, a majority of which is to be comprised of FHC's Chief
Executive Officer and independent directors. The FHC Board may designate other
board committees as desired.
New FHS. The New Bylaws provide that as of the Effective Date and during
the Transition Period, the audit, nominating and compensation and stock option
committees of the New FHS Board will consist of four independent directors, two
of whom shall be HSI Designees and two of whom shall be FHC Designees. The
investment policy committee shall consist of an equal number of HSI Designees
and FHC Designees, including initially Dr. Hasan and Mr. Crowley. There shall be
no executive committee during the Transition Period. During the Transition
Period, the Chairman of each of the nominating committee and the audit committee
will be selected from the FHC Designees and the Chairman of each of the
compensation and stock option committee and the investment policy committee will
be selected from the HSI Designees. Following the Transition Period, a majority
of the New FHS Board may select the directors (who do not have to be
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independent directors unless required by law or applicable stock exchange
regulations) to serve on the committees of the New FHS Board.
VOTING POWER
Upon consummation of the Merger, based upon the capitalization of HSI and
FHC on January 1, 1996: (a) holders of FHC Common Stock will hold approximately
76.7 million shares of New FHS Common Stock, constituting approximately 61% of
all of the outstanding common stock of New FHS (including the non-voting New FHS
Class B Common Stock held by CWF) and 72% of the voting power of New FHS, and
(b) holders of HSI Common Stock will hold approximately 29.2 million shares of
New FHS Common Stock, constituting approximately 39% of all of the outstanding
common stock of New FHS (including New FHS Class B Common Stock held by CWF) and
28% of the voting power of New FHS. Following the Merger, neither the holders of
HSI Common Stock nor FHC Common Stock will possess the same relative voting
power in matters put to a vote of holders of voting stock of New FHS as they
possessed prior to the Merger with respect to voting power in their respective
companies. See "Stock Ownership of Directors, Executive Officers and Five
Percent Stockholders -- Ownership of HSI Common Stock" and "Stock Ownership of
Directors, Executive Officers and Five Percent Stockholders -- Ownership of FHC
Common Stock."
SPECIAL VOTING REQUIREMENTS
FHC. The FHC Charter does not contain a provision with respect to voting
requirements for certain business combinations. Therefore, approval of business
combinations involving FHC is controlled by the DGCL which generally requires
the vote of the holders of a majority of shares entitled to vote for the mergers
of FHC or sale of substantially all of its assets.
New FHS. The New Charter provides that Business Combinations with an
Interested Stockholder require, with certain exceptions, the affirmative vote of
the holders of at least 80% of the outstanding Voting Stock. This provision is
designed to provide an incentive to an Interested Stockholder to treat the
stockholders within a class equally and to discourage discriminatory two-tiered
transactions and to encourage an Interested Stockholder to furnish timely
information regarding Business Combinations.
CHARTER AMENDMENTS
FHC. The FHC Charter provides that the approval of the holders of at least
80% of the shares of FHC Common Stock then outstanding is required to amend,
alter, change or repeal certain provisions of the FHC Charter. These provisions
include elimination of cumulative voting rights, the number of directors and the
independent director requirements discussed above, filling vacancies of the
board and committees and this supermajority vote requirement.
New FHS. The New Charter requires the affirmative vote of the holders of at
least 80% of the outstanding Voting Stock in order to amend certain of its
provisions relating to composition of the HSI Board and stockholder meetings,
indemnification by HSI, liability of directors and Business Combinations. These
voting requirements make it more difficult for stockholders to make changes in
the New Charter that would be designed to facilitate the exercise of control
over New FHS. In addition, the requirement for approval by at least an 80%
stockholder vote will enable the holders of a minority of the voting securities
of New FHS to prevent the holders of a majority or more of such securities from
amending such provisions of the New Charter.
AMENDMENT OF BYLAWS
FHC. The FHC Charter and Bylaws provide that any bylaw may be adopted,
amended or repealed by the vote of the holders of a majority of the shares of
common stock then entitled to vote at an election of directors. In addition, the
FHC Charter and the FHC Bylaws expressly grant to its directors the power to
make, alter, amend or repeal any bylaws, except as described above, without any
action on the part of the stockholders, by the affirmative vote of a majority of
the entire FHC Board.
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New FHS. The New Charter provides that the New Bylaws are subject to
adoption, amendment, repeal or recession either by (i) 75% of the authorized
number of directors and, if one or more Interested Stockholders exists, by a
majority of the directors who are Continuing Directors (as defined in the New
Charter) or (ii) the affirmative vote of the holders of not less than 80% of the
outstanding shares of Voting Stock and, if such adoption, amendment, repeal or
rescission is proposed by or on behalf of an Interested Stockholder or a
director affiliated with an Interested Stockholder, by the affirmative vote of
the holders of a majority of the Disinterested Shares. In addition, during the
Transition Period, the affirmative vote of at least eight of the directors will
be required by the New FHS Board to approve, authorize or take any action with
respect to calling special meetings of stockholders or presenting matters to the
stockholders at an annual meeting with respect to the applicable portion of
meetings for election or removal of directors, amendment of the New Bylaws or
other actions inconsistent with the terms of the Merger Agreement. These
provisions will make it more difficult for New FHS's stockholders to make
changes to the New Bylaws.
DESCRIPTION OF NEW FHS
CAPITAL STOCK FOLLOWING THE MERGER
In connection with the Merger, HSI will be renamed Foundation Health
Systems Inc. The summary of the terms of the capital stock of New FHS set forth
below does not purport to be complete and is qualified in its entirety by
reference to the New Charter and New Bylaws. Copies of the New Charter and New
Bylaws, in substantially the forms to be adopted immediately prior to the
Effective Time, are attached as Appendices II and III. See "Comparison of
Stockholders' Rights."
AUTHORIZED CAPITAL STOCK
Under the New Charter, the total number of shares of all classes of stock
that New FHS has authority to issue is 390,000,000 shares, par value $.001 per
share, of which 350,000,000 are shares of New FHS Common Stock, 30,000,000 are
shares of New FHS Class B Common Stock and 10,000,000 are shares of New FHS
Preferred Stock.
COMMON STOCK
Class A Common Stock. Holders of shares of New FHS Common Stock are
entitled to one vote per share on all matters to be voted upon by the
stockholders. Subject to the prior rights of the holders of New FHS Preferred
Stock, holders of New FHS Common Stock are entitled to receive dividends when,
as and if declared by the New FHS Board out of funds legally available therefor,
and to share ratably in the assets of New FHS legally available for distribution
to the stockholders in the event of liquidation or dissolution. The New FHS
Common Stock has no preemptive rights and no subscription or redemption
privileges. The New FHS Common Stock does not have cumulative voting rights,
which means the holder or holders of more than half of the shares voting for the
election of directors can elect all the directors then being elected. All the
outstanding shares of the New FHS Common Stock are fully paid and not liable for
further call or assessment.
The New FHS Common Stock is more fully described in HSI's Registration
Statement on Form 8-A, dated January 21, 1994, which is incorporated by
reference into this Joint Proxy Statement/Prospectus.
Class B Common Stock. The holder of New FHS Class B Common Stock shall have
no right to vote on any matters to be voted on by the stockholders of New FHS
(including, without limitation, any election or removal of the directors of New
FHS), and the New FHS Class B Common Stock shall not be included in determining
the number of shares voting or entitled to vote on such matters. No amendment,
modification or waiver of any provision of the portion of Article IV of the New
Charter entitled "Class B Common Stock" or any provision of the New Charter
applicable to or affecting the rights of the New FHS Class B Common Stock (or
the number required to approve such amendment, modification or waiver) will be
effective without the prior written consent of the holders of a majority of
shares of New FHS Class B Common Stock at the time outstanding.
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Subject to the prior rights of the holders of New FHS Preferred Stock, a
holder of New FHS Class B Common Stock is entitled to receive dividends and
other distributions in cash, common stock or property of New FHS as may be
declared by the New FHS Board on New FHS Common Stock out of the assets or funds
of New FHS legally available therefor. The New FHS Class B Common Stock has no
preemptive rights and no subscription or redemption privileges. All the
outstanding shares of New FHS Class B Common Stock are fully paid and not liable
for further call or assessment.
Upon the occurrence of an Adjustment Event (as defined below), the holders
of New FHS Class B Common Stock, voting as a class, are entitled to elect a
number of members of the New FHS Board equal to the number of members of the New
FHS Board then serving plus one. The remaining members of the New FHS Board
shall be elected separately by the holders of New FHS Common Stock. At such time
as all Adjustment Events which gave rise to the exercise of voting rights shall
have been cured and no other Adjustment Event shall have occurred and remain
uncured, the contingent rights of the holder of the New FHS Class B Common Stock
shall cease, subject to renewal from time to time upon the same terms and
conditions. When the limited rights of the holder of the New FHS Class B Common
Stock to vote have ceased, the term of office of the persons elected by it as
directors pursuant thereto as a result of an Adjustment Event shall terminate
and the vacancies may (but need not) be filled by the remaining members of the
New FHS Board.
The term "Adjustment Event" means any one or more Events of Default (each
as defined in the instrument listed in (i) through (vi) below) occurring under
(i) a certain Senior Note; (ii) a certain Subordinated Note; (iii) a certain
Senior Security Agreement; (iv) a certain Subordinated Security Agreement; (v) a
certain Cash Pledge Agreement; and (vi) a certain Sinking Fund Agreement.
Upon transfer of any whole number or all of the shares of New FHS Class B
Common Stock to a third party unaffiliated with CWF, the transferred shares of
New FHS Class B Common Stock will be converted into fully paid and nonassessable
shares of New FHS Common Stock at the rate of one share of New FHS Common Stock
for each share of New FHS Class B Common Stock so converted. Such conversion
shall be effected at the time the holder of New FHS Class B Common Stock
surrenders such holder's certificate or certificates for New FHS Class B Common
Stock to be transferred, duly endorsed, at the office of HSI or any transfer
agent for New FHS Class B Common Stock. Promptly thereafter, New FHS shall issue
and deliver to the assignee a certificate or certificates for the number of
shares of New FHS Common Stock for which such assignee shall be entitled, as
described above. Such conversion shall be deemed to have been made at the close
of business on the date of such surrender and the person or persons entitled to
receive shares of New FHS Common Stock issuable on such conversion shall be
treated for all purposes as the record holder or holders of such shares of New
FHS Common Stock on that date.
HSI is required, pursuant to the HSI Charter, and New FHS will be required,
pursuant to the New Charter, to, at all times, reserve and keep available out of
the authorized and unissued shares of New FHS Common Stock, solely for the
purpose of effecting the conversion of the outstanding New FHS Class B Common
Stock, such number of shares of New FHS Common Stock as shall from time to time
be sufficient to effect a conversion of all shares of New FHS Class B Common
Stock, and if, at any time, the number of authorized and unissued shares of New
FHS Common Stock shall not be sufficient to effect conversion of the then
outstanding New FHS Class B Common Stock, HSI is required pursuant to the HSI
Charter (and New FHS will be required pursuant to the New Charter) to take such
corporate action as may be necessary to increase the number of authorized and
unissued shares of New FHS Common Stock to such number as shall be sufficient
for such purposes.
PREFERRED STOCK
No shares of New FHS Preferred Stock will be issued or outstanding
immediately following the Effective Time. New FHS is authorized to issue from
time to time in one or more series, and the New FHS Board is authorized to fix
the dividend rights, dividend rates, any conversion rights or rights of
exchange, any voting rights, rights and terms of redemption (including sinking
fund provisions), the redemption price or prices, the liquidation preferences
and any other rights, preferences, privileges and restrictions of any series of
Preferred
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Stock and the number of shares constituting such series and the designation
thereof. HSI has no present plans to issue any shares of HSI Preferred Stock.
Depending upon the rights of New FHS Preferred Stock, the issuance of New
FHS Preferred Stock could have an adverse effect on holders of New FHS Common
Stock by delaying or preventing a change in control of New FHS following the
Merger, making removal of the management of New FHS following the Merger more
difficult or resulting in restrictions upon the payment of dividends and other
distributions to the holders of New FHS Common Stock.
PREEMPTIVE RIGHTS
No holder of any shares of any class of stock of New FHS will have any
preemptive or preferential right to acquire or subscribe for any unissued shares
of any class of stock or any authorized securities convertible into or carrying
any right, option or warrant to subscribe for or acquire shares of any class of
stock.
TRANSFER AGENT AND REGISTRAR
The principal transfer agent and registrar for New FHS Common Stock after
the Merger will be designated by HSI and FHC prior to the completion of the
Merger.
STOCK EXCHANGE LISTING; DELISTING AND DEREGISTRATION OF FHC COMMON STOCK
It is a condition to the Merger that the shares of New FHS Common Stock
issuable in connection with the Merger be approved for listing on the NYSE upon
official notice of issuance. If the Merger is consummated, FHC Common Stock will
cease to be listed on the NYSE.
FEDERAL SECURITIES LAWS CONSEQUENCES; STOCK TRANSFER RESTRICTION AGREEMENTS
This Joint Proxy Statement/Prospectus does not cover any resales of the New
FHS Common Stock to be received by the stockholders of FHC upon consummation of
the Merger, and no person is authorized to make any use of this Joint Proxy
Statement/Prospectus in connection with any such resale.
All shares of New FHS Common Stock received by FHC stockholders in the
Merger will be freely transferable, except that shares of New FHS Common Stock
received by persons who are deemed to be "affiliates" (as such term is defined
under the Securities Act) of FHC prior to the Merger may be sold by them only in
transactions permitted by the resale provisions of Rule 144 and 145 promulgated
under the Securities Act or as otherwise permitted under the Securities Act.
Persons who may be deemed to be affiliates of FHC generally include individuals
or entities that control, are controlled by, or are under common control with,
FHC and may include certain officers, directors and principal stockholders of
New FHS. The Merger Agreement requires FHC to use reasonable efforts to cause
its affiliates to execute a written agreement to the effect that such persons
will not offer or sell or otherwise dispose of any of the shares of New FHS
Common Stock issued to such persons in the Merger in violation of the Securities
Act or the rules and regulations promulgated by the SEC thereunder.
In addition, pursuant to the Merger Agreement, HSI and FHC each have agreed
to use reasonable efforts to cause their affiliates to execute written
agreements prohibiting such affiliates from transferring their HSI Common Stock
or FHC Common Stock, respectively, during the period commencing 30 days prior to
the Effective Time and ending at such time as financial results covering at
least 30 days of combined operations of FHC and HSI have been published within
the meaning of Section 201.01 of the SEC's Codification of Financial Reporting
Policies; provided that such agreements will not prohibit Dr. Hasan from
transferring up to 250,000 shares of HSI Common Stock.
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PROPOSED HSI CHARTER AMENDMENT
At the HSI Special Meeting, the HSI stockholders will be asked to consider
and vote upon an amendment to the HSI Charter (the "Charter Amendment"), which
would (i) change the name of HSI to Foundation Health Systems, Inc. and (ii)
increase the number of authorized shares of HSI Common Stock to 380,000,000,
consisting of 350,000,000 shares of HSI Common Stock and 30,000,000 shares of
HSI Class B Common Stock.
At the close of business on the HSI Record Date, there were 29,136,310
shares of HSI Common Stock outstanding. It is expected that after consummation
of the Merger there will be approximately 105.8 million shares of New FHS Common
Stock outstanding. Following the Merger, without an increase in the number of
authorized shares of New FHS Common Stock, New FHS would only have approximately
2.9 million shares of New FHS Common Stock available for future issuances
(assuming conversion of all New FHS Class B Common Stock and the exercise of all
oustanding options). Although there are no present plans or commitments for
their use, such shares would be available for issuance without further action by
stockholders except as required by law or applicable stock exchange
requirements.
HSI believes it is desirable to authorize additional shares of New FHS
Common Stock so that there will be sufficient shares available for issuance for
purposes that the New FHS Board may hereafter determine to be in the best
interests of New FHS and its stockholders. Such purposes could include the offer
of shares for cash, the declaration of stock splits and stock dividends, mergers
and acquisitions and other general corporate purposes. In many situations,
prompt action may be required which would not permit seeking stockholder
approval to authorize additional shares for the specific transaction on a timely
basis. However, the current rules of the NYSE would require stockholder approval
if the number of shares of New FHS Common Stock to be issued in any given
transaction or series of transactions would equal or exceed 20% of the number of
shares of New FHS Common Stock outstanding immediately prior to such issuance.
The terms of any future issuance of shares of New FHS Common Stock will be
dependent largely on market and financial conditions and other factors existing
at the time of issuance.
Although there is no current intention to issue any additional shares of
New FHS Common Stock as an anti-takeover defense, the issuance of additional
shares could be used to create impediments to or otherwise discourage persons
attempting to gain control of New FHS. For example, the issuance of additional
shares could be used to dilute the voting power of shares then outstanding.
Shares of New FHS Common Stock could also be issued to persons or entities who
would support the New FHS Board in opposing a takeover bid which the New FHS
Board determines to not be in the best interests of New FHS and its
stockholders. There is no present intention to propose any anti-takeover
measures in future proxy solicitations.
If the Charter Amendment is approved, Article IV, Section 1 of the New
Charter would read in its entirety as follows:
"The total number of shares of all classes of stock which the
Corporation shall have authority to issue is Three Hundred Ninety Million
(390,000,000) shares as follows: (a) Three Hundred Fifty Million
(350,000,000) shares of Class A Common Stock, $.001 par value per share
("Class A Common Stock"), (b) Thirty Million (30,000,000) shares of Class B
Convertible Common Stock, $.001 par value per share ("Class B Common
Stock") and (c) Ten Million (10,000,000) shares of Preferred Stock, $.001
par value per share ("Preferred Stock")."
Approval of the Charter Amendment will require the affirmative vote of a
majority of the outstanding shares of HSI Common Stock entitled to vote thereon.
A vote in favor of the Merger will automatically constitute a vote in favor of
the Charter Amendment.
The HSI Board has unanimously determined that the Charter Amendment is
advisable and fair to and in the best interests of the HSI stockholders. THE HSI
BOARD UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF HSI VOTE IN FAVOR OF THE
CHARTER AMENDMENT.
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LEGAL MATTERS
The validity of the New FHS Common Stock to be issued in connection with
the Merger will be passed upon by Skadden, Arps, Slate, Meagher & Flom
(Illinois). Pillsbury Madison & Sutro LLP has rendered the opinion referred to
under the caption "The Merger and the Special Meetings -- Material Federal
Income Tax Consequences."
EXPERTS
The consolidated financial statements and the related financial statement
schedule incorporated in this Joint Proxy Statement/Prospectus by reference from
FHC's Annual Report on Form 10-K, as amended, for the year ended June 30, 1996,
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their report which is incorporated herein by reference (which report expresses
an unqualified opinion and includes an explanatory paragraph referring to FHC's
restatement of its financial statements to consolidate its affiliated
physician-owned medical practices), and have been so incorporated in reliance
upon the report of such firm given upon their authority as experts in accounting
and auditing.
The consolidated statements of income, changes in stockholders' equity and
cash flows of CareFlorida Health Systems, Inc. and its subsidiaries for the year
ended December 31, 1993 incorporated by reference herein from FHC's Annual
Report on Form 10-K, as amended, for the year ended June 30, 1996, have been
incorporated in reliance on the report of Coopers & Lybrand L.L.P., independent
accountants, given upon authority of that firm as experts in accounting and
auditing.
The consolidated financial statements of Thomas-Davis Medical Centers, P.C.
and subsidiaries for the year ended December 31, 1993 and for the year then
ended have been audited by Stevenson, Jones & Holmaas, P.C., independent
auditors, as stated in their report which is incorporated by reference herein
from FHC's Annual Report on Form 10-K, as amended, for the year ended June 30,
1996, and have been so incorporated in reliance upon the report of such firm
given upon their authority as experts in accounting and auditing.
The consolidated financial statements of Intergroup Healthcare Corporation
as of December 31, 1993 and for the year then ended have been audited by Ernst &
Young LLP, independent auditors, as stated in their report which is incorporated
by reference herein from FHC's Annual Report on Form 10-K, as amended, for the
year ended June 30, 1996, and have been so incorporated in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
The consolidated financial statements and the related financial statement
schedules incorporated into this Joint Proxy Statement/Prospectus by reference
from HSI's Annual Report on Form 10-K for the year ended December 31, 1995 have
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
report which is incorporated herein by reference, and have been so incorporated
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing.
The consolidated financial statements and the related financial statement
schedules of HSI, except for the financial statements and related financial
statement schedules of QualMed for the year ended December 31, 1993 appearing in
HSI's 1995 Annual Report on Form 10-K have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report therein and incorporated
herein by reference. Such consolidated financial statements, except with respect
to QualMed information included therein, are incorporated herein by reference in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
The consolidated financial statements of QualMed consolidated with those of
HSI for the year ended December 31, 1993 (not separately included in HSI's 1995
Annual Report on Form 10-K) have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report which is incorporated herein by
reference, and have been so incorporated in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
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FUTURE STOCKHOLDER PROPOSALS
Any HSI stockholder who intends to submit a proposal for inclusion in the
proxy materials for the 1997 annual meeting of HSI must submit such proposal to
the Secretary of HSI by December 1, 1996. In addition, the current HSI Bylaws
provide that any stockholder wishing to make a nomination for director, or
wishing to introduce a proposal or other business, at the 1997 annual meeting of
HSI must give at least 60 days' advance notice, subject to certain exceptions,
and that notice must meet certain other requirements set forth in the HSI
Bylaws. A copy of the applicable current HSI Bylaws may be obtained from the
Secretary of HSI. The provisions in the HSI Bylaws relevant to the foregoing
will be continued unchanged in the New Bylaws.
FHC expects to hold an annual meeting of stockholders in the fourth
calendar quarter of 1997 unless the Merger is completed. SEC rules set forth
standards as to what stockholder proposals are required to be included in a
proxy statement. Any FHC stockholder who intends to submit a proposal for
inclusion in the proxy materials for the 1997 annual meeting of FHC must submit
such proposal to the Secretary of FHC by July 1, 1997. In addition, the FHC
Bylaws provide that any FHC stockholder wishing to make a nomination for
director, or wishing to introduce a proposal on other business, at the 1997
annual meeting of FHC must notify the Secretary of FHC of such stockholder's
intentions and provide certain other information in advance of such meeting, in
accordance with the procedures detailed in the FHC Bylaws. A copy of the FHC
Bylaws may be obtained from the Secretary of FHC.
WHERE YOU CAN FIND MORE INFORMATION
HSI and FHC file annual, quarterly and special reports, proxy statements
and other information with the SEC. You may read and copy any such reports,
statements or other information filed at the SEC's public reference rooms in
Washington, D.C., New York, New York, and Chicago, Illinois. Please call the SEC
at 1-800-SEC-0330 for further information on the public reference rooms. HSI's
and FHC's SEC filings are also available to the public from commercial document
retrieval services and at the web site maintained by the SEC at
"http://www.sec.gov."
HSI filed a Registration Statement on Form S-4 to register with the SEC the
New FHS Common Stock to be issued to FHC stockholders in the Merger. This Joint
Proxy Statement/Prospectus is a part of that Registration Statement and
constitutes a prospectus of HSI in addition to being a joint proxy statement of
HSI and FHC for the Special Meetings. As allowed by SEC rules, this Joint Proxy
Statement/Prospectus does not contain all the information you can find in the
Registration Statement or the exhibits to the Registration Statement.
The SEC allows HSI and FHC to "incorporate by reference" information into
this Joint Proxy Statement/Prospectus, which means that HSI and FHC can disclose
important information to you by referring you to another document filed
separately with the SEC. The information incorporated by reference is deemed to
be part of this Joint Proxy Statement/Prospectus, except for any information
superseded by information in this Joint Proxy Statement/Prospectus. This Joint
Proxy Statement/Prospectus incorporates by reference the documents set forth
below that have been previously filed with the SEC. These documents contain
important information about each of HSI and FHC and its finances.
<TABLE>
<CAPTION>
HSI
- -----------------------------------
SEC FILINGS (FILE NO. 1-12718) PERIOD
- ----------------------------------- ------------------------------------------------
<S> <C>
Annual Report on Form 10-K......... Year ended December 31, 1995
Quarterly Reports on Form 10-Q..... Quarters ended March 31, 1996, June 30, 1996 and
September 30, 1996
Current Reports on Form 8-K........ Dated April 10, 1996, April 26, 1996 and October
1, 1996
Registration Statement on Form Dated January 21, 1994
8-A..............................
</TABLE>
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<TABLE>
<CAPTION>
FHC
- -----------------------------------
SEC FILINGS (FILE NO. 1-10540) PERIOD
- ----------------------------------- ------------------------------------------------
<S> <C>
Annual Report on Form 10-K,
as amended....................... Year ended June 30, 1996
Quarterly Report on Form 10-Q...... Quarter ended September 30, 1996
Current Report on Form 8-K......... Dated October 1, 1996
</TABLE>
All reports and other documents filed by either HSI or FHC pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of
this Joint Proxy Statement/Prospectus and prior to the date of its Special
Meeting shall be deemed to be incorporated by reference herein and to be a part
hereof from the dates of filing of such reports and documents. Any statement
contained in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this Joint
Proxy Statement/Prospectus to the extent that a statement contained herein, or
in any other subsequently filed document which also is incorporated or deemed to
be incorporated by reference herein, modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Joint Proxy Statement/Prospectus.
HSI has supplied all information contained or incorporated by reference in
this Joint Proxy Statement/Prospectus relating to HSI, and FHC has supplied all
such information relating to FHC.
If you are a stockholder, HSI and FHC may have sent you some of the
documents incorporated by reference, but you can obtain any of them through HSI
and FHC or the SEC. Documents incorporated by reference are available from the
companies without charge, excluding all exhibits unless specifically
incorporated by reference in this Joint Proxy Statement/Prospectus. Stockholders
may obtain documents incorporated by reference in this Joint Proxy
Statement/Prospectus by requesting them in writing or by telephone from the
appropriate party at the following address:
<TABLE>
<S> <C>
Health Systems International, Inc. Foundation Health Corporation
Investor Relations Department Director of Investor Relations
21600 Oxnard Street 3400 Data Drive
Woodland Hills, California 91367 Rancho Cordova, California 95670
Tel: (818) 719-6978 Tel: (916) 631-5000
</TABLE>
If you would like to request documents from either HSI or FHC, please do so
by February 3, 1997 to receive them before the Special Meetings.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS JOINT PROXY STATEMENT/PROSPECTUS TO VOTE ON THE MERGER.
NEITHER HSI NOR FHC HAS AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT
IS DIFFERENT FROM WHAT IS CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS.
THIS JOINT PROXY STATEMENT/PROSPECTUS IS DATED JANUARY 6, 1997. YOU SHOULD NOT
ASSUME THAT THE INFORMATION CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS
IS ACCURATE AS OF ANY DATE OTHER THAN SUCH DATE, AND NEITHER THE MAILING OF THIS
JOINT PROXY STATEMENT/PROSPECTUS TO STOCKHOLDERS NOR THE ISSUANCE OF THE NEW FHS
COMMON STOCK IN THE MERGER SHALL CREATE ANY IMPLICATION TO THE CONTRARY.
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LIST OF DEFINED TERMS
<TABLE>
<CAPTION>
DEFINED TERM PAGE
- -------------------------------------------------------------------------------- ----------
<S> <C>
Acquisition Proposal............................................................ 71
Adjustment Event................................................................ 84
Antitrust Division.............................................................. 47
BCC............................................................................. 26
Cause........................................................................... 77
Certificate of Merger........................................................... 23
Charter Amendment............................................................... 86
Code............................................................................ 7
Comparable Companies............................................................ 42
CWF............................................................................. 8
CWF Agreement................................................................... 8
DGCL............................................................................ 47
Disinterested Shares............................................................ 81
DOC............................................................................. 6
Effective Date.................................................................. 23
Effective Time.................................................................. 23
Exchange Act.................................................................... 72
Exchange Ratio.................................................................. 3
FHC............................................................................. Cover Page
FHC Amendment................................................................... 79
FHC Board....................................................................... 2
FHC Bylaws...................................................................... 80
FHC Charter..................................................................... 80
FHC Common Stock................................................................ Cover Page
FHC Designees................................................................... 66
FHC Meeting..................................................................... Cover Page
FHC Option...................................................................... 72
FHC Proposal.................................................................... 23
FHC PSP......................................................................... 24
FHC Record Date................................................................. 2
FHC Rights Agent................................................................ 79
FHC Rights Agreement............................................................ 79
FHC Stock Option Plans.......................................................... 72
FPA............................................................................. 20
FPA Agreement................................................................... 68
FTC............................................................................. 47
Good Reason..................................................................... 77
Historical Exchange Ratio....................................................... 42
HMO............................................................................. 1
HSI............................................................................. Cover Page
HSI Amendment................................................................... 79
HSI Board....................................................................... 2
HSI Charter..................................................................... 1
HSI Combination................................................................. 57
HSI Common Stock................................................................ Cover Page
HSI Designees................................................................... 66
HSI Financial Advisors.......................................................... 40
HSI Meeting..................................................................... Cover Page
HSI Proposals................................................................... 23
HSI Record Date................................................................. 1
HSI Rights Agent................................................................ 79
</TABLE>
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<TABLE>
<CAPTION>
DEFINED TERM PAGE
- -------------------------------------------------------------------------------- ----------
<S> <C>
HSI Rights Agreement............................................................ 79
HSI PSP......................................................................... 24
HSR Act......................................................................... 6
Independent director............................................................ 66
IRS............................................................................. 46
Knox-Keene Act.................................................................. 47
LTM............................................................................. 44
Material Adverse Effect......................................................... 69
Merger.......................................................................... Cover Page
Merger Agreement................................................................ Cover Page
Merger Subsidiary............................................................... Cover Page
Morgan Stanley.................................................................. 26
Morgan Stanley Opinion.......................................................... 36
NCQA............................................................................ 18
New Bylaws...................................................................... 6
New Charter..................................................................... 6
New FHS......................................................................... Cover Page
New FHS Board................................................................... 4
New FHS Class B Common Stock.................................................... 3
New FHS Common Stock............................................................ Cover Page
New FHS Option.................................................................. 72
New FHS Preferred Stock......................................................... 80
Note............................................................................ 78
NYSE............................................................................ 3
PPO............................................................................. 1
Pro Forma Combined Entity....................................................... 42
Record Holder................................................................... 78
Registration Rights Agreement................................................... 78
Requisite Government Approvals.................................................. 68
Salomon......................................................................... 29
Salomon Opinion................................................................. 41
SEC............................................................................. Cover Page
Securities Act.................................................................. 67
Shareholder Agreement........................................................... 78
Shares.......................................................................... 78
Shattuck Hammond................................................................ 29
Shattuck Hammond Opinion........................................................ 41
Smith Barney.................................................................... 29
Special Meetings................................................................ Cover Page
Superior Proposal............................................................... 72
Surviving Corporation........................................................... 23
Transaction Proposal............................................................ 75
Transition Period............................................................... 57
Volpe Welty..................................................................... 29
Voting Agreement................................................................ 78
WellPoint....................................................................... 26
</TABLE>
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APPENDIX I
================================================================================
AGREEMENT AND PLAN OF MERGER
dated
October 1, 1996
by and among
HEALTH SYSTEMS INTERNATIONAL, INC.
FH ACQUISITION CORP.
and
FOUNDATION HEALTH CORPORATION
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TABLE OF CONTENTS
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ARTICLE I
THE MERGER
1.01. The Merger..................................................................... 1
1.02. Conversion of Capital Stock.................................................... 2
1.03. Exchange of Certificates....................................................... 2
1.04. Time and Place of Closing...................................................... 4
ARTICLE II
OTHER MATTERS RELATING
TO CORPORATE ORGANIZATION AND GOVERNANCE
2.01. Actions to Be Taken............................................................ 4
2.02. HMO Operations................................................................. 6
2.03. The Surviving Corporation...................................................... 6
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
3.01. Corporate Existence and Power.................................................. 7
3.02. Corporate Authorization........................................................ 7
3.03. Governmental Authorization..................................................... 7
3.04. Non-Contravention.............................................................. 8
3.05. Capitalization................................................................. 8
3.06. SEC Reports and Financial Statements........................................... 9
3.07. Absence of Certain Changes or Events........................................... 10
3.08. Disclosure Documents........................................................... 10
3.09. Litigation..................................................................... 10
3.10. Taxes.......................................................................... 10
3.11. Employee Benefit Plans; ERISA.................................................. 11
3.12. Environmental Matters.......................................................... 12
3.13. Labor Matters.................................................................. 13
3.14. Compliance with Laws........................................................... 13
3.15. Finders' Fees.................................................................. 13
3.16. Opinions of Financial Advisor.................................................. 13
3.17. Accounting Matters............................................................. 13
3.18. Company Rights Plan............................................................ 13
3.19. Takeover Status................................................................ 13
3.20. Directors' Resignation......................................................... 13
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT
4.01. Corporate Existence and Power.................................................. 14
4.02. Corporate Authorization........................................................ 14
4.03. Governmental Authorization..................................................... 14
4.04. Non-Contravention.............................................................. 15
4.05. Capitalization................................................................. 15
4.06. Organization of Merger Sub..................................................... 16
4.07. No Prior Activities............................................................ 16
4.08. SEC Reports and Financial Statements........................................... 16
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4.09. Absence of Certain Changes or Events........................................... 16
4.10. Disclosure Documents........................................................... 17
4.11. Litigation..................................................................... 17
4.12. Taxes.......................................................................... 17
4.13. Employee Benefit Plans; ERISA.................................................. 17
4.14. Environmental Matters.......................................................... 19
4.15. Labor Matters.................................................................. 19
4.16. Compliance with Laws........................................................... 19
4.17. Finders' Fees.................................................................. 19
4.18. Opinions of Financial Advisors................................................. 19
4.19. Accounting Matters............................................................. 19
4.20. Parent Rights Plan............................................................. 19
4.21. Takeover Status................................................................ 19
4.22. CWF Agreements................................................................. 19
4.23. Directors' Resignation......................................................... 20
ARTICLE V
COVENANTS OF THE COMPANY
5.01. Conduct of Business of the Company Pending the Effective Time.................. 20
5.02. Access to Financial and Operational Information................................ 21
5.03. Notices of Certain Events...................................................... 22
5.04. Letter of Company's Accountants................................................ 22
5.05. Opinions of Financial Advisor.................................................. 22
ARTICLE VI
COVENANTS OF PARENT
6.01. Conduct of Business of Parent Pending the Effective Time....................... 23
6.02. Access to Financial and Operational Information................................ 24
6.03. Notices of Certain Events...................................................... 25
6.04. Letter of Parent's Accountants................................................. 25
6.05. Opinion of Financial Advisors.................................................. 25
6.06. Assumption of Indenture........................................................ 25
ARTICLE VII
COVENANTS OF PARENT AND THE COMPANY
7.01. Advice of Certain Changes...................................................... 25
7.02. Agreement to Cooperate; Further Assurances..................................... 25
7.03. No Solicitation................................................................ 26
7.04. Joint Proxy Statement; Registration Statement.................................. 27
7.05. Stockholders' Meetings......................................................... 27
7.06. Confidential Information....................................................... 27
7.07. Communications................................................................. 27
7.08. Stock Option Plans and Benefit Plans........................................... 27
7.09. Registration of Company Stock Option Plans..................................... 28
7.10. Obligations of Merger Sub...................................................... 28
7.11. Expenses....................................................................... 28
7.12. Continuance of Existing Indemnification Rights................................. 28
7.13. Affiliate Agreements........................................................... 29
7.14. Annual Meeting of Stockholders................................................. 29
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ARTICLE VIII
CONDITIONS TO THE MERGER
8.01. Conditions to Obligations of Parent and Merger Sub............................. 29
8.02. Conditions to Obligations of the Company....................................... 30
8.03. Conditions to Obligations of Each Party........................................ 30
ARTICLE IX
TERMINATION OF AGREEMENT
9.01. Termination.................................................................... 31
9.02. Certain Actions Prior to Termination........................................... 32
9.03. Effect of Termination.......................................................... 33
9.04. Termination Fee................................................................ 33
ARTICLE X
MISCELLANEOUS
10.01. Further Assurances............................................................. 35
10.02. Survival....................................................................... 35
10.03. Notices........................................................................ 35
10.04. Governing Laws and Consent to Jurisdiction..................................... 36
10.05. Binding upon Successors and Assigns; Assignment................................ 36
10.06. Severability................................................................... 36
10.07. Entire Agreement; No Third Party Beneficiaries................................. 36
10.08. Other Remedies................................................................. 36
10.09. Amendment and Waivers.......................................................... 36
10.10. No Waiver...................................................................... 36
10.11. Construction of Agreement...................................................... 36
10.12. Counterparts................................................................... 37
10.13. Treatment Under Section 280G of the Code....................................... 37
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EXHIBITS
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Exhibit A Form of Voting Agreement
Exhibit B Form of CWF Agreement
Exhibit C Form of Health Systems' Amended Bylaws
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AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") is entered into the
1st day of October, 1996, by and among Health Systems International, Inc., a
Delaware corporation ("Parent"), FH Acquisition Corp., a Delaware corporation
and a wholly owned subsidiary of Parent ("Merger Sub"), and Foundation Health
Corporation, a Delaware corporation (the "Company").
RECITALS
WHEREAS, the Boards of Directors of Parent, Merger Sub and the Company deem
it advisable and in the best interests of their respective stockholders to
consummate, and have approved, as a merger of equals, the business combination
transaction provided for herein in which Merger Sub would merge with and into
the Company and the Company would become a wholly owned subsidiary of Parent
(the "Merger");
WHEREAS, concurrently with the execution and delivery of this Agreement and
as a condition and inducement to the parties' willingness to enter into this
Agreement, (i) Malik M. Hasan, M.D. has entered into a Voting Agreement
substantially in the form of Exhibit A and (ii) the Parent and the Company have
entered into an agreement with respect to certain contractual agreements between
Parent and the California Wellness Foundation, a California nonprofit public
benefit corporation ("CWF"), substantially in the form of Exhibit B;
WHEREAS, for Federal income tax purposes, it is intended that the Merger
shall qualify as a tax free reorganization within the meaning of the Internal
Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, for accounting purposes, it is intended that the Merger shall be
accounted for as a pooling-of-interests.
NOW, THEREFORE, in consideration of the foregoing and the mutual
representations, warranties, covenants and agreements set forth herein, the
parties agree as follows:
ARTICLE I
THE MERGER
SECTION 1.01. THE MERGER.
(a) At the Effective Time (as defined below) and subject to the terms and
conditions hereof and the provisions of the Delaware General Corporation Law
("Delaware Law"), Merger Sub will be merged with and into the Company in
accordance with Delaware Law, the separate existence of Merger Sub shall
thereupon 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."
(b) Subject to the terms and conditions hereof, 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 VIII, 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 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.
(c) The separate corporate existence of the Company, as the Surviving
Corporation, with all its purposes, objects, rights, privileges, powers,
certificates and franchises, shall continue unimpaired by the Merger. The
Surviving Corporation shall succeed to all the properties and assets of the
Constituent
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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.
SECTION 1.02. CONVERSION OF CAPITAL STOCK. As of the Effective Time, by
virtue of the Merger and without any action on the part of the holder of any
shares of Common Stock, par value $.01 per share, of the Company (the "Company
Common Stock") or capital stock of Merger Sub:
(a) Capital Stock of Merger Sub. Each issued and outstanding share of
the capital stock of Merger Sub shall be converted into and become one
fully paid and nonassessable share of Common Stock, par value $.01 per
share, of the Surviving Corporation.
(b) Cancellation of Treasury Stock and Parent-Owned Stock. All shares
of Company Common Stock that are owned by the Company as treasury stock and
any shares of Company Common Stock owned by Parent, Merger Sub or any other
wholly owned Subsidiary (as hereinafter defined) of Parent or the Company
shall be cancelled and retired and shall cease to exist and no stock of
Parent or other consideration shall be delivered in exchange therefor. All
shares of Class A Common Stock, par value $.001 per share, of Parent (the
"Parent Common Stock") owned by the Company shall remain unaffected by the
Merger.
(c) Exchange Ratio for Company Common Stock. Subject to Section
1.03(e), each issued and outstanding share of Company Common Stock (other
than shares to be cancelled in accordance with Section 1.02(b)) shall be
converted into the right to receive 1.3 (the "Exchange Ratio") fully paid
and nonassessable shares of Parent Common Stock, including the
corresponding number of rights (the "Parent Rights") to purchase shares of
Series A Participating Preferred Stock of Parent (the "Parent Series A
Preferred Stock") pursuant to the Rights Agreement dated as of June 1,
1996, between Parent and Harris Trust and Savings Bank as Rights Agent (the
"Parent Rights Agreement"). Each Company Right (as defined in Section 3.05)
shall terminate without any payment or notice to any holder thereof
immediately prior to the Effective Time. All references in this Agreement
to the Parent Common Stock to be received pursuant to the Merger shall be
deemed to include the Parent Rights. All such shares of Company Common
Stock, together with the associated Company Rights, if any, when so
converted, shall no longer be outstanding and shall automatically be
cancelled and retired and shall cease to exist, and each holder of a
certificate representing any such shares and/or Company Rights, if any,
shall cease to have any rights with respect thereto, except the right to
receive the shares of Parent Common Stock and any cash in lieu of
fractional shares of Parent Common Stock to be issued or paid in
consideration therefor upon the surrender of such certificate in accordance
with Section 1.03, without interest.
SECTION 1.03. EXCHANGE OF CERTIFICATES.
(a) Exchange Agent. As of the Effective Time, Parent shall deposit with
Harris Trust and Savings Bank or such other bank or trust company designated by
Parent (and reasonably acceptable to the Company) (the "Exchange Agent"), for
the benefit of the holders of shares of Company Common Stock, for exchange in
accordance with this Article I, through the Exchange Agent, certificates
representing the shares of Parent Common Stock (such shares of Parent Common
Stock, together with any dividends or distributions with respect thereto, being
hereinafter referred to as the "Exchange Fund") issuable pursuant to Section
1.02 in exchange for outstanding shares of Company Common Stock.
(b) Exchange Procedures. As soon as reasonably practicable after the
Effective Time, the Exchange Agent shall mail to each holder of record of a
certificate or certificates which immediately prior to the Effective Time
represented outstanding shares of Company Common Stock (the "Certificates")
whose shares were converted pursuant to Section 1.02 into the right to receive
shares of Parent Common Stock (i) a letter of transmittal (which shall specify
that delivery shall be effected, and risk of loss and title to the Certificates
shall pass, only upon delivery of the Certificates to the Exchange Agent and
shall be in such form and have such other provisions as Parent and the Company
may reasonably specify) and (ii) instructions for use in effecting the surrender
of the Certificates in exchange for certificates representing shares of Parent
Common Stock. Upon surrender of a Certificate for cancellation to the Exchange
Agent or to such other agent or agents
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as may be appointed by Parent and Merger Sub, together with such letter of
transmittal, duly executed, the holder of such Certificate shall be entitled to
receive in exchange therefor a certificate representing that number of whole
shares of Parent Common Stock which such holder has the right to receive
pursuant to the provisions of this Article I, and the Certificate so surrendered
shall forthwith be cancelled. In the event of a transfer of ownership of Company
Common Stock which is not registered in the transfer records of the Company, a
certificate representing the proper number of shares of Parent Common Stock may
be issued to a transferee if the Certificate representing such Company Common
Stock is presented to the Exchange Agent, accompanied by all documents required
to evidence and effect such transfer and by evidence that any applicable stock
transfer taxes have been paid. Until surrendered as contemplated by this Section
1.03, each Certificate shall be deemed at any time after the Effective Time to
represent only the right to receive upon such surrender the certificate
representing shares of Parent Common Stock and cash in lieu of any fractional
shares of Parent Common Stock as contemplated by this Section 1.03. Lost and
mutilated shares of Company Common Stock shall be treated in the same manner as
they are currently treated by the Company.
(c) Distributions with Respect to Unexchanged Shares. No dividends or
other distributions declared or made after the Effective Time with respect to
Parent Common Stock with a record date after the Effective Time shall be paid to
the holder of any unsurrendered Certificate with respect to the shares of Parent
Common Stock represented thereby and no cash payment in lieu of fractional
shares shall be paid to any such holder pursuant to Section 1.03(e) until the
holder of record of such Certificate shall surrender such Certificate. Subject
to the effect of applicable laws, following surrender of any such Certificate,
there shall be paid to the record holder of the certificates representing whole
shares of Parent Common Stock issued in exchange therefor, without interest, (i)
at the time of such surrender, the amount of any cash payable in lieu of a
fractional share of Parent Common Stock to which such holder is entitled
pursuant to Section 1.03(e) and the amount of dividends or other distributions
with a record date after the Effective Time theretofore paid with respect to
such whole shares of Parent Common Stock, and (ii) at the appropriate payment
date, the amount of dividends or other distributions with a record date after
the Effective Time but prior to surrender and a payment date subsequent to
surrender payable with respect to such whole shares of Parent Common Stock.
(d) No Further Ownership Rights in Company Common Stock. All shares of
Parent Common Stock issued upon the surrender for exchange of shares of Company
Common Stock in accordance with the terms hereof (including any cash paid
pursuant to Section 1.03(c) or 1.03(e)) shall be deemed to have been issued in
full satisfaction of all rights pertaining to such shares of Company Common
Stock, subject, however, to the Surviving Corporation's obligation to pay any
dividends or make any other distributions with a record date prior to the
Effective Time which may have been declared or made by the Company on such
shares of Company Common Stock in accordance with the terms of this Agreement or
prior to the date hereof and which remain unpaid at the Effective Time, and
there shall be no further registration of transfers on the stock transfer books
of the Surviving Corporation of the shares of Company Common Stock which were
outstanding immediately prior to the Effective Time. If, after the Effective
Time, Certificates are presented to the Surviving Corporation for any reason,
they shall be cancelled and exchanged as provided in this Article I.
(e) Fractional Shares. Notwithstanding any other provision of this
Agreement to the contrary, no certificates or scrip for fractional shares of
Parent Common Stock shall be issued in connection with the Merger. All shares of
Parent Common Stock to which a holder of shares of Company Common Stock is
entitled in connection with the Merger shall be aggregated. If a fractional
share results from such aggregation, in lieu of any such fractional share, each
holder of shares of Company Common Stock who would otherwise have been entitled
to receive a fraction of a share of Parent Common Stock upon surrender of
Certificates for exchange pursuant to Article I shall be entitled to receive
from the Exchange Agent a cash payment (without interest) equal to such fraction
multiplied by the average closing price per share of Parent Common Stock on the
New York Stock Exchange, Inc. ("NYSE") or on such exchange as Parent Common
Stock shall be listed during the three trading days immediately prior to the
Effective Time.
(f) Termination of Exchange Fund. Any portion of the Exchange Fund which
remains undistributed to the stockholders of the Company for one year after the
Effective Time shall be delivered to Parent, upon demand, and any stockholders
of the Company who have not theretofore complied with this Article I shall
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thereafter look only to Parent for payment of their claim for Parent Common
Stock, any cash in lieu of fractional shares of Parent Common Stock and any
dividends or distributions with respect to Parent Common Stock.
(g) No Liability. Neither Parent nor the Company shall be liable to any
holder of shares of Company Common Stock or Parent Common Stock, as the case may
be, for such shares (or dividends or distributions with respect thereto)
delivered to a public official pursuant to any applicable abandoned property,
escheat or similar law.
SECTION 1.04. TIME AND PLACE OF CLOSING. The closing of the Merger shall
take place at the offices of Skadden, Arps, Slate, Meagher & Flom, Four
Embarcadero Center, San Francisco, California, 94111, 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 VIII, or at such other place or
time as the Parent and the Company may agree.
ARTICLE II
OTHER MATTERS RELATING
TO CORPORATE ORGANIZATION AND GOVERNANCE
SECTION 2.01. ACTIONS TO BE TAKEN.
The following actions shall be taken:
(a) The Certificate of Incorporation of Parent shall be amended, as of
the Effective Time, to (i) change the name of Parent to Foundation Health
Systems, Inc. and (ii) to increase the number of authorized Shares of
Parent Common Stock to 350,000,000 (as so amended the "Parent Amended
Certificate").
(b) As of the Effective Time, the Third Amended and Restated Bylaws of
Parent shall be amended and restated to read in their entirety as set forth
in Exhibit C hereto (the "Parent Amended Bylaws"). As of the Effective
Time, in the event of a conflict the terms and provisions of the Parent
Amended Bylaws shall supersede those found herein.
(c) Except as hereinafter provided, the number of directors comprising
the full board of directors of Parent as of the Effective Time and for five
years thereafter shall be 11 directors. Initially, six of such directors
(Daniel D. Crowley and five other Independent Directors) shall be
designated by the Company (such individuals and their replacements are
referred to as the "Company Designees") and five of such directors (Dr.
Hasan and four other Independent Directors) shall be designated by Parent
(such individuals and their replacements are referred to as the "Parent
Designees"); provided that for a period beginning on the Effective Date and
up to, but not including, the election of directors at the May, 2000 annual
meeting of Parent's stockholders (the "Transition Period"), if Dr. Hasan,
at any time, is not the Chief Executive Officer of Parent and not on the
Parent board of directors, then prior to the next meeting of the board of
directors following such occurrence, the other Parent Designees will select
a Parent Replacement Designee to replace Dr. Hasan as director, and either
(i) a Company Designee will resign so that the board of directors shall
consist of 10 directors, of whom five shall be Parent Designees and five
shall be Company Designees or (ii) the directors will take actions to
increase the board size to 12 and Parent Designees will select a Parent
Replacement Designee to fill the vacancy created by such increase in the
board's size. Following any date that the board of directors consists of 10
or 12 directors, pursuant to the preceding sentence, such board of
directors shall be entitled to increase the size of the board of directors
by one in order to fill such new directorship with the new Chief Executive
Officer of Parent. The Company and Parent will select their other designees
by November 1, 1996, from the current Independent Directors of their
respective boards of directors. If any of the Company Designees or Parent
Designees are unable to serve as directors for any reason prior to closing,
the Company or Parent, as the case may be, shall appoint a Company
Replacement Designee or Parent Replacement Designee as soon as reasonably
practicable. A Parent Replacement Designee shall mean an Independent
Director
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designated to replace a Parent Designee by the other remaining Parent
Designees and shall be selected from (i) the Independent Directors of the
Parent's board of directors as of the date hereof or (ii) any other
individual who qualifies as an Independent Director and who is approved by
at least one Company Designee, which approval shall not be unreasonably
withheld. A Company Replacement Designee shall mean an Independent Director
designated to replace a Company Designee by the other remaining Company
Designees and shall be selected from (i) the Independent Directors of the
Company's board of directors as of the date hereof or (ii) any other
individual who qualifies as an Independent Director and who is approved by
at least one Parent Designee, which approval shall not be unreasonably
withheld.
(d) As of the Effective Date, the designees for the classes of the
board of directors expiring in 1997, 1998 and 1999 shall consist of (i) for
the 1997 class, four members for the class, consisting of Mr. Crowley, Dr.
Hasan (or their respective replacements, if applicable), one Independent
Director appointed from the Parent Designees and one Independent Director
appointed from the Company Designees, (ii) for the 1998 class, three
members for the class, consisting of two Independent Directors appointed
from the Company Designees and one Independent Director appointed from the
Parent Designees and (iii) for the 1999 class, four members for the class,
consisting of two Independent Directors appointed from Parent Designees and
two Independent Directors appointed from the Company Designees.
(e) Except as provided in Subsection (c) above, the nominating
committee will nominate for election to the board of directors at Parent's
1997, 1998 and 1999 annual meetings, the Company Designees and Parent
Designees appointed to the class pursuant to this Section 2.01 whose term
expires at such meeting.
(f) As of the Effective Date and during the Transition Period, the
audit, nominating and compensation and stock option committees of the
Parent's board of directors shall consist of four Independent Directors,
two of whom shall be Parent Designees and two of whom shall be Company
Designees. Following the Transition Period a majority of the board of
directors shall select the directors (which do not have to be Independent
Directors unless required by law or applicable exchange regulations) to
serve on the committees to the Parent's board of directors. The investment
policy committee shall consist of an equal number of Parent Designees and
Company Designees, including initially Dr. Hasan and Mr. Crowley. There
shall be no executive committee during the Transition Period. During the
Transition Period, the Chairman of the nominating committee will be
selected from the Company Designees; the Chairman of the audit committee
will be selected from the Company Designees; the Chairman of the
compensation and stock option committee will be selected from the Parent
Designees; and the Chairman of the investment policy committee will be
selected from the Parent Designees.
(g) For purposes of this Section 2.01 an "Independent Director" shall
mean (i) any individual who is not a past or present employee or officer of
the Parent, the Company or their Affiliates or any Affiliate of such an
employee or officer or (ii) notwithstanding clause (i), any of the existing
directors of the Company and Parent (other than such individuals who are
officers or employees of the Parent or the Company, as of the date hereof);
provided that, after the Effective Date, each Independent Director shall
have no financial relationship with the Company (other than employment or
retirement awards granted prior to the Effective Date and benefits and
future director compensation and benefits); provided that with respect to
such Independent Directors whose law firms are providing legal services to
Parent, such law firms may complete work under existing assignments that,
in the judgment of the Parent, cannot be reasonably terminated. For
purposes of this Agreement "Affiliate" or "Affiliates" shall be defined as
(i) any other Person directly or indirectly controlling or controlled by or
under direct or indirect common control with such specified Person and (ii)
any family members of such Person. For purposes of this definition,
"Person" shall mean any individual, partnership, firm, corporation,
association, joint venture, trust or other entity. "Control" when used with
respect to any specified Person shall mean the power to direct the
management and policies of such Person, directly and indirectly, whether
through the ownership of voting securities, by contract or otherwise; and
the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
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(h) As of the Effective Time, Parent's board of directors shall cause
the following individuals to be designated as officers of Parent, and
Parent will honor the employment contracts and related agreements which
exist with or have been entered into in connection with this Agreement with
such individuals as follows: Mr. Crowley as Chairman of the Board of
Parent; Dr. Hasan as Chief Executive Officer and President of Parent; Jay
M. Gellert as Chief Operating Officer of the Parent; Jeffrey L. Elder as
Treasurer of the Parent; and B. Curtis Westen, Esq. as Secretary of the
Parent. Mr. Crowley will be Chairman of the Board for the period ending on
the earlier of: (i) the date one (1) year following the Effective Date, or
(ii) the date of Mr. Crowley's death, resignation or removal as Chairman of
the Board, upon which date Dr. Hasan shall become Chairman of the Board and
Chief Executive Officer. Parent will honor all other employment contracts
which have been previously entered into or have been entered into in
connection with this Agreement, by Parent and/or Company with employees of
Parent or the Company.
(i) Beginning on the Effective Date and (i) during the Transition
Period, (w) the affirmative vote of at least eight (8) of the members of
the board of directors shall be required for the board of directors to
approve, authorize or otherwise take any action pursuant to the following
sections of the Parent Amended Bylaws: Article II, Sections 2.2 and 2.3 (in
each case only with respect to the applicable portion of meetings for the
election or removal of directors, amendment of the Bylaws or other actions
inconsistent with the terms of this Agreement); Article III, Section 3.2;
Article IV, Section 4.6; and all of XI, (x) in the event of the death,
resignation, removal or failure to stand for reelection of any of the
directors originally designated by the Company or Parent, the vacancy or
nomination shall be filled with a Company Replacement Designee, or a Parent
Replacement Designee, as the case may be, (y) in the event of the death,
resignation or removal of any member of a committee, the vacancy will be
filled with a Company Designee or Parent Designee director, as the case may
be, to maintain an equal representation on such committee and (z) the board
of directors of Parent will waive all age limitations related to a person's
ability to serve as a director on the board of directors of Parent; (ii)
until the date two (2) years after Mr. Crowley is no longer employed by
Parent as an employee or officer, the employment agreements entered into
between the Parent or Company on the one hand and Mr. Crowley on the other
hand shall not be renewed, extended or amended, nor may Mr. Crowley be
rehired without the affirmative vote of at least eight (8) of the members
of the board of directors; and (iii) until the earlier of the date: (y) 18
months after the Effective Date or (z) six months following the date of Mr.
Crowley's death, resignation or removal as Chairman of the Board of Parent,
Dr. Hasan shall not be removed or otherwise replaced as the Chief Executive
Officer of Parent without the affirmative vote of at least eight (8) of the
members of the board of directors of Parent.
(j) During the Transition Period, the board of directors of each of
the direct or indirect Subsidiaries of Parent following the Effective Date
shall be the Chief Operating Officer and Chief Financial Officer of Parent
and to the extent applicable the chief operating officer of each such
Subsidiary and such other individuals reasonably required in the opinion of
the Chief Operating Officer and Chief Financial Officer of Parent or
otherwise as required by contract, or by any applicable law or regulation,
or as set forth in Section 2.01 of the Company Disclosure Schedule,
provided that the board of directors of the current Subsidiaries of the
Parent will not be changed unless authorized by the Chief Operating Officer
and the Chief Financial Officer of the Parent.
SECTION 2.02. HMO OPERATIONS. Following the Effective Date, the Company's
California HMO operations will be consolidated with, and operated as part of
Health Net and the headquarters of all such California HMO operations will be
located in Woodland Hills, California.
SECTION 2.03. THE SURVIVING CORPORATION.
(a) Certificate of Incorporation. At the Effective Time, the Certificate
of Incorporation of Merger Sub, as in effect immediately prior to the Effective
Time shall be the Certificate of Incorporation of the Surviving Corporation.
(b) Bylaws. At the Effective Time, the Bylaws of Merger Sub, as in effect
immediately prior to the Effective Time, shall be the Bylaws of the Surviving
Corporation.
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(c) Directors and Officers. At and after the Effective Time, until
successors are duly elected or appointed and qualified in accordance with
applicable law or until their earlier death, resignation or removal in
accordance with the Surviving Corporation's Certificate of Incorporation and
Bylaws, the directors of Merger Sub at the Effective Time shall be the directors
of the Surviving Corporation, and the officers of the Company at the Effective
Time shall be the initial officers of the Surviving Corporation.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as disclosed in the disclosure schedule referring specifically to
this Agreement (the "Company Disclosure Schedule") which has been delivered to
Parent on or prior to the execution hereof or as disclosed with reasonable
specificity in public filings made by the Company with the Securities and
Exchange Commission ("SEC") since June 30, 1995, the Company represents and
warrants to Parent as set forth below:
SECTION 3.01. CORPORATE EXISTENCE AND POWER. Each of the Company and its
Significant Subsidiaries is a corporation duly incorporated, validly existing
and in good standing under the laws of its respective jurisdiction of
incorporation and has all corporate power required to carry on its business as
now conducted. Each of the Company and its Significant Subsidiaries is duly
qualified to do business as a foreign corporation and is in good standing in
each jurisdiction where the character of the property owned or leased by it or
the nature of its activities makes such qualification necessary, except where
the failure to be so qualified or to be in good standing would not have a
Material Adverse Effect on the Company. For purposes of this Agreement,
"Significant Subsidiary" shall have the meaning set forth in Rule 1.02 of
Regulation S-X of the SEC; a "Material Adverse Effect," with respect to any
person or entity, shall mean a material adverse effect on the financial
condition, business, properties, assets, liabilities (including contingent
liabilities), results of operations of such person or entity and its
Subsidiaries, taken as a whole other than any such adverse effects relating to
general economic, market wide or general industry conditions; "Material Adverse
Change" shall mean a change or a development that would have a Material Adverse
Effect; and "person" shall mean any individual, corporation, partnership, joint
venture, association, joint-stock company, trust, unincorporated organization or
government or other agency or political subdivision thereof, or any other
entity. The Company has delivered or made available to Parent true and complete
copies of the Certificate of Incorporation and Bylaws of the Company and each of
its Significant Subsidiaries as currently in effect.
SECTION 3.02. CORPORATE AUTHORIZATION. The execution, delivery and
performance by the Company of this Agreement and the consummation by the Company
of the transactions contemplated hereby are within the Company's corporate
powers and have been duly authorized by all necessary corporate action, except
for the approval of this Agreement and the transactions contemplated hereby by
the Company's stockholders to the extent required by applicable law. This
Agreement has been duly and validly executed and delivered by the Company and,
assuming the due authorization, execution and delivery hereof by Parent and
Merger Sub, constitutes a valid and binding agreement of the Company,
enforceable against the Company in accordance with its terms, except that such
enforceability may be subject to (i) bankruptcy, insolvency, reorganization,
moratorium or other similar laws now or hereafter in effect relating to or
affecting creditors' rights generally and (ii) general principles of equity
(regardless of whether enforcement is sought in a proceeding in equity or at
law).
SECTION 3.03. GOVERNMENTAL AUTHORIZATION. The execution, delivery and
performance by the Company of this Agreement and the consummation by the Company
of the transactions contemplated by this Agreement 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");
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(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 requirements of the Securities Act of
1933, as amended, and the rules and regulations promulgated thereunder (the
"Securities Act");
(e) compliance with any applicable foreign or state securities or "blue
sky" laws, rules or regulations;
(f) compliance with Federal, foreign and state laws, rules and regulations
governing insurance, health maintenance organizations, health care services
plans, hospitals, third party administrators or other managed health care
organizations or antitrust; and
(g) such other filings or registrations with, or authorizations, consents
or approvals of, Governmental Entities, the failure of which to make or obtain
(i) would not reasonably be expected to have a Material Adverse Effect on the
Company or the Surviving Corporation or (ii) would not materially and adversely
affect the ability of the Company to consummate the transactions contemplated
hereby and operate its business as heretofore operated.
SECTION 3.04. NON-CONTRAVENTION. The execution, delivery and performance
by the Company of this Agreement and the consummation by the Company of the
transactions contemplated hereby do not and will not:
(a) contravene or conflict with any provision of the respective
charters or bylaws (or similarly governing documents) of the Company or any
of its Significant Subsidiaries;
(b) assuming compliance with the matters referred to in Section 3.03
and assuming the requisite approval of the Company's stockholders of the
transactions contemplated by this Agreement, 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 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 material 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 3.03, any
material 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 (as defined
below) on any material 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 in
the aggregate would not be reasonably expected to have a Material Adverse Effect
on the Company and would not materially impair the Company's ability to
consummate the transactions contemplated by this Agreement. For purposes of this
Agreement, the term "Lien" shall mean, with respect to any asset, any mortgage,
lien, pledge, charge, security interest or encumbrance of any kind in respect of
such asset.
SECTION 3.05. CAPITALIZATION. The authorized capital stock of the Company
consists of 100,000,000 shares of Company Common Stock and 1,000,000 shares of
preferred stock, $1.00 par value per share ("Company Preferred Stock"). As of
August 31, 1996, there were outstanding:
(i) 58,960,724 shares of Company Common Stock (excluding 100,000
shares held in treasury) (including the corresponding number of rights (the
"Company Rights") to purchase shares of Series A Participating Preferred
Stock of the Company (the "Company Series A Preferred Stock") pursuant to
the Rights Agreement dated as of September 27, 1991, as amended, between
Company and Chemical Trust Company of California as Rights Agent (the
"Company Rights Agreement");
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(ii) no shares of Company Preferred Stock; and
(iii) Company Options to purchase an aggregate of 3,754,665 shares of
Company Common Stock.
All outstanding shares of Company Common Stock have been duly authorized and
validly issued and are fully paid and nonassessable and free from any preemptive
rights. Except as set forth in this Section and as otherwise contemplated by
this Agreement and except for changes since August 31, 1996 resulting from the
exercise of options to purchase shares of Company Common Stock ("Company
Options"), there are outstanding, other than Company Options issued after the
date hereof pursuant to non-discretionary obligations under existing director
and employee benefit arrangements, as set forth in the Company Disclosure
Schedule, (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 and (iii) no options
or other rights to acquire from the Company, and no obligation of the Company to
issue, any capital stock, voting securities or securities convertible into or
exchangeable for capital stock or other voting securities of the Company (the
items in clauses (i), (ii) and (iii) being referred to collectively as the
"Company Securities"). Except as contemplated by this Agreement, other than
Company Options issued after the date hereof pursuant to non-discretionary
obligations under existing director and employee benefit arrangements, as set
forth in the Company Disclosure Schedule, there are no outstanding obligations
of the Company or any of its Subsidiaries to repurchase, redeem or otherwise
acquire any Company Securities. As of the Effective Time, certain of the Company
Options which are outstanding will be fully vested pursuant to the terms of
existing employment agreements as set forth in the Company Disclosure Schedule.
No holder of Company Securities has, as of the date hereof, any contractual
right to include any such securities in any registration statement proposed to
be filed by the Company under the Securities Act. All of the outstanding capital
stock of, or other ownership interests in, each Subsidiary of the Company is
owned by the Company, directly or indirectly, free and clear of any material
Lien and free of any other material limitation or restriction on its rights as
owner thereof (including any restriction on the right to vote, sell or otherwise
dispose of such capital stock or other ownership interests), other than those
imposed by applicable law. There are no existing options, calls or commitments
of any character relating to the issued or unissued capital stock or other
securities or equity interests of any Subsidiary of the Company. Neither the
Company nor its Subsidiaries owns directly or indirectly any equity interest or
equity investment in, nor is the Company or any of its Subsidiaries subject to
any obligation or requirement to provide for or to make any equity investment
in, any corporation, limited liability company, partnership, joint venture,
business, trust or entity.
SECTION 3.06. SEC REPORTS AND FINANCIAL STATEMENTS. Each periodic report,
registration statement and definitive proxy statement filed by the Company with
the SEC since July 1, 1993 (as such documents have since the time of their
filing been amended and each document filed between the date hereof and the
Effective Time, the "Company SEC Reports"), which include all the documents
(other than preliminary material) that the Company was required to file with the
SEC since such date, 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 Company SEC Reports. 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 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 financial statements of the
Company included in such reports comply 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 fairly present
(subject in the case of the unaudited statements, to normal, recurring audit
adjustments) the consolidated financial position of the Company and its
Subsidiaries as at the dates thereof and the consolidated results of their
operations and cash flows for the periods then ended. Since June 30, 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 June 30, 1996 (including the notes thereto) (the "Company
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Balance Sheet"), (ii) as incurred in connection with the transactions
contemplated, or as provided, by this Agreement, (iii) as incurred after June
30, 1996 in the ordinary course of business and consistent with past practices,
(iv) as described in the Company SEC Reports or (v) as would not, individually
or in the aggregate, have a Material Adverse Effect on the Company.
SECTION 3.07. ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in
the Company SEC Reports filed prior to the date hereof, since July 1, 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, individually or in the aggregate, having or which would
have a Material Adverse Effect on the Company.
SECTION 3.08. DISCLOSURE DOCUMENTS. None of the information supplied or to
be supplied by the Company for inclusion in (i) the joint proxy
statement/prospectus relating to the meetings of the Company's and Parent's
stockholders to be held in connection with the Merger (as the same may be
amended or supplemented from time to time, the "Joint Proxy Statement"), and
(ii) the registration statement on Form S-4 or other appropriate registration
form to be filed with the SEC by Parent in connection with the offer and
issuance of the Parent Common Stock in or as a result of the Merger (as the same
may be amended or supplemented from time to time, the "Registration Statement")
including the Joint Proxy Statement included therein, will, in the case of the
Joint Proxy Statement, either at the time of mailing of the Joint Proxy
Statement to stockholders of the Company or at the time of the meeting of such
stockholders to be held in connection with the Merger, 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 or will, in the case
of the Registration Statement either at the time the Registration Statement is
filed with the SEC or at the time the Registration Statement becomes effective
under the Securities Act, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein not misleading. The Joint Proxy Statement will
comply as to form in all material respects with the provisions of the Exchange
Act, except that no representation or warranty is made by the Company with
respect to information supplied by Parent or Merger Sub for inclusion therein.
SECTION 3.09. 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 has or which, individually or in the
aggregate, would 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 has or which, individually or in the aggregate, would
have a Material Adverse Effect on the Company.
SECTION 3.10. TAXES.
(a) The Company and each of its Subsidiaries (i) has filed (or the Company
has had timely filed on their behalf) or will file or cause to be filed 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, complete and correct in all material respects, (ii) either paid
when due and payable or established adequate reserves 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 ("Taxes") and there are no
material Taxes, interest, penalties, assessments or deficiencies claimed in
writing by any Taxing authority and received by the Company that, in the
aggregate, would result in any Tax liability in excess of the amount of the
reserves or accruals, and (iii) has or will establish in accordance with its
normal accounting practices and procedures accruals and reserves that, in the
aggregate, are adequate for the payment of all material Taxes not yet due and
payable and attributable to any period preceding the Effective Time.
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(b) Neither the Company nor any predecessor corporation, nor any of their
respective Subsidiaries, has executed or filed with the IRS 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.
(c) Neither the Company nor any of its Subsidiaries is a party to or is
bound by (or will prior to the Effective Date 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).
SECTION 3.11. EMPLOYEE BENEFIT PLANS; ERISA.
(a) Neither the Company nor any of its Subsidiaries is a party to any oral
or written (i) employment, severance, collective bargaining or material
consulting agreement not terminable on 60 days' or less notice, (ii) agreement
with any current or former executive officer or other current or former key
employee of the Company or any Subsidiary of the Company (A) the benefits of
which are contingent, or the terms of which are materially altered, upon the
occurrence of a transaction involving the Company or any Subsidiary of the
Company of the nature of any of the transactions contemplated by this Agreement,
(B) providing any term of employment or compensation guarantee extending for a
period longer than six months, or (C) providing severance benefits or other
benefits after the termination of employment of such executive officer or key
employee regardless of the reason for such termination of employment, (iii)
agreement, plan or arrangement under which any person may receive payments
subject to the tax imposed by Section 4999 of the Code, or (iv) agreement or
plan, including, without limitation, any stock option plan, stock appreciation
right plan, restricted stock plan or stock purchase plan, the benefits of which
would be increased, or the vesting of benefits of which will be accelerated, by
the occurrence of any of the transactions contemplated by this Agreement or the
value of any of the benefits of which will be calculated on the basis of any of
the transactions contemplated by this Agreement. The Company Disclosure Schedule
contains a true and correct description of the annual compensation, bonus plans
and awards, options, SAR's, deferred compensation and all other material
benefits for each of the executive officers of the Company.
(b) Neither the Company nor any corporation or other entity which under
Section 4001(b) of ERISA is under common control with the Company (a "Company
ERISA Affiliate") maintains any "Employee Pension Benefit Plan" ("Pension Plan")
or any "Employee Welfare Benefit Plan" ("Welfare Plan") as such terms are
defined in Sections 3(2) and 3(1) respectively of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), which is subject to ERISA. Each
Pension Plan and Welfare Plan of the Company and the Company ERISA Affiliates
has been maintained in all material respects in compliance with its terms and
all provisions of ERISA and the Code (including rules and regulations
thereunder) and other applicable laws. Neither the Company nor any Company ERISA
Affiliate is subject to potential liability under Section 4069(a) of ERISA.
(c) No Pension Plan or Welfare Plan of the Company or any Company ERISA
Affiliate is currently subject to an audit or other investigation by the IRS,
the Department of Labor, the Pension Benefit Guaranty Corporation or any other
Governmental Entity nor are any such plans subject to any lawsuits or legal
proceedings of any kind or to any material pending disputed claims by employees
or beneficiaries covered under any such plan or by any other parties.
(d) No "prohibited transaction," as defined in Section 406 of ERISA or
Section 4975 of the Code, resulting in material liability to the Company or any
Company ERISA Affiliate has occurred with respect to any Pension Plan or Welfare
Plan. The Company has no knowledge of any breach of fiduciary responsibility
under Part 4 of Title I of ERISA which has resulted in or would result in any
material liability to the Company, any trustee, administrator or fiduciary of
any Pension Plan or Welfare Plan of the Company or any Company ERISA Affiliate.
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(e) Neither the Company nor any Company ERISA Affiliate, since January 1,
1986, has maintained or contributed to, or been obligated or required to
contribute to, a "Multiemployer Plan," as such term is defined in Section
4001(a)(3) of ERISA. Neither the Company nor any Company ERISA Affiliate has
either withdrawn, partially or completely, or instituted steps to withdraw,
partially or completely, from any Multiemployer Plan nor has any event occurred
which would enable a Multiemployer Plan to give notice of and demand payment of
any material withdrawal liability with respect to the Company or any Company
ERISA Affiliate.
(f) There is no contract, agreement, plan or arrangement covering any
employee or former employee of the Company or any Company ERISA Affiliate that,
individually or collectively, could give rise to the payment of any material
amount that would not be deductible pursuant to the terms of Sections 162(m) or
280G of the Code.
(g) The Company has delivered or made available to Parent full and complete
copies or descriptions of, and the Company Disclosure Schedule contains a
complete list of each Pension Plan, Welfare Plan and each other material
agreement, policy, plan or other arrangement, whether written or oral, express
or implied, fixed or contingent, to which the Company or any Company ERISA
Affiliate is a party or by which the Company or any Company ERISA Affiliate or
any property or asset of the Company or any Company ERISA Affiliate is bound,
which is or relates to a pension, option, bonus, deferred compensation,
retirement, stock purchase, profit-sharing, severance pay, health, welfare,
incentive, vacation, sick leave, medical disability, hospitalization, life or
other insurance or fringe benefit plan, policy or arrangement. Certain of the
employment agreements contain change in control provisions which will be
triggered as of the Effective Time, as set forth in the Company Disclosure
Schedule.
(h) The Company has delivered or made available to Parent, for each Pension
Plan which is intended to be "qualified" within the meaning of Section 401(a) of
the Code, a copy of the most recent determination letter issued by the IRS to
the effect that each such Plan is so qualified and that each trust created
thereunder is tax exempt under Section 501 of the Code, and the Company is
unaware of any fact or circumstances that would jeopardize the qualified status
of each such Pension Plan or the tax exempt status of each trust created
thereunder.
SECTION 3.12. ENVIRONMENTAL MATTERS.
(a) No notice, notification, demand, request for information, citation,
summons, complaint or order has been received, no complaint has been filed, no
penalty has been assessed and 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, a
Material Adverse Effect on the Company.
(b) Neither the Company nor any of its Subsidiaries has any material
Environmental Liabilities and there has been no release of Hazardous Substances
into the environment or violation of any Environmental Law by the Company or any
such Subsidiary or with respect to any of their respective properties which has
had, or would reasonably be expected to have a Material Adverse Effect on the
Company.
(c) For the purposes of this Agreement, the following terms have the
following meanings:
"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 human
health, 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.
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"Environmental Liabilities" shall mean all liabilities which (i) arise
under or relate to 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, or any
substance having any constituent elements displaying any of the foregoing
characteristics 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.
SECTION 3.13. 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.
SECTION 3.14. COMPLIANCE WITH LAWS. Except for violations which do not
have and would not have, individually or in the aggregate, a Material Adverse
Effect on the Company, neither the Company nor any of its Subsidiaries is in
violation of, or has violated, any applicable provisions of any laws, statutes,
ordinances or regulations or any term of any judgment, decree, injunction or
order binding against it.
SECTION 3.15. FINDERS' FEES. Except for Morgan Stanley & Co. Incorporated
(the "Company Financial Advisor") there is no investment banker, broker, finder
or other intermediary which has been retained by or is authorized to act on
behalf of the Company or any of its Subsidiaries nor any of their respective
directors, officers or employees who is entitled to any fee or commission in
connection with the transactions contemplated by this Agreement.
SECTION 3.16. OPINIONS OF FINANCIAL ADVISOR. The Company has received the
opinion of the Company Financial Advisor to the effect that, as of the date of
this Agreement, the Exchange Ratio is fair, from a financial point of view, to
the holders of Company Common Stock.
SECTION 3.17. ACCOUNTING MATTERS. Neither the Company nor, to its
knowledge, any of its Affiliates has taken or agreed to take any action that
would prevent Parent from accounting for the transactions to be effected
pursuant to Article I of this Agreement in accordance with the
pooling-of-interests method of accounting under the requirements of Opinion No.
16 "Business Combinations" of the Accounting Principles Board of the American
Institute of Certified Public Accountants, as amended by applicable
pronouncements by the Financial Accounting Standards Board ("APB No. 16").
SECTION 3.18. COMPANY RIGHTS PLAN. Under the terms of the Company Rights
Agreement, as amended as of the date hereof, the transactions contemplated by
this Agreement will not cause a Distribution Date (as defined therein) to occur
or cause the rights issued pursuant to the Company Rights Agreement to become
exercisable, and as a result of the terms of the Company Rights Agreement such
rights will be cancelled and cease to exist immediately prior to the Effective
Time.
SECTION 3.19. TAKEOVER STATUS. The Board of Directors of the Company has
taken all appropriate action so that neither Parent nor Merger Sub will be an
"interested stockholder" within the meaning of Section 203 of the Delaware Law
by virtue of Company's entry into this Agreement or the Company Stock Option
Agreement and the consummation of the transactions contemplated thereunder.
SECTION 3.20. DIRECTORS' RESIGNATION. Each of the directors of the Company
has agreed to take all actions necessary or desirable to effect the terms of
Section 2.01, including the adoption of a resolution providing for the
resignation of such directors (other than the directors set forth in the Company
Disclosure Schedule Section 2.01) from the Board of Directors of the Company to
be effective as of the Effective Date.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT
Except as disclosed in a document referring specifically to this Agreement
(the "Parent Disclosure Schedule") which has been delivered to the Company on or
prior to the execution hereof or as disclosed with reasonable specificity in
public filings made by Parent with the SEC since January 1, 1995, Parent
represents and warrants to the Company as set forth below:
SECTION 4.01. CORPORATE EXISTENCE AND POWER. Each of Parent and its
Significant Subsidiaries is a corporation duly incorporated, validly existing
and in good standing under the laws of its respective jurisdiction of
incorporation and has all corporate power required to carry on its business as
now conducted. Merger Sub is a corporation duly incorporated, validly existing
and in good standing under the laws of the State of Delaware. Each of Parent and
its Significant Subsidiaries is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction where the character of
the property owned or leased by it or the nature of its activities makes such
qualification necessary, except where the failure to be so qualified or to be in
good standing would not have a Material Adverse Effect on Parent. Parent has
delivered or made available to the Company true and complete copies of the
Certificate of Incorporation and Bylaws of Merger Sub, Parent and each of its
Significant Subsidiaries as currently in effect.
SECTION 4.02. CORPORATE AUTHORIZATION. The execution, delivery and
performance by Parent and Merger Sub of this Agreement and the consummation by
Parent and Merger Sub of the transactions contemplated hereby are within
Parent's and Merger Sub's corporate powers and have been duly authorized by all
necessary corporate action, except for the approval of this Agreement and the
transactions contemplated hereby by Parent's stockholders to the extent required
by applicable law and NYSE rules and regulations. This Agreement has been duly
and validly executed and delivered by Parent and, assuming the due
authorization, execution and delivery hereof by the Company, constitutes a valid
and binding agreement of Parent and Merger Sub, enforceable against Parent and
Merger Sub in accordance with its terms, except that such enforceability may be
subject to (i) bankruptcy, insolvency, reorganization, moratorium or other
similar laws now or hereafter in effect relating to or affecting creditors'
rights generally and (ii) general principles of equity (regardless of whether
enforcement is sought in a proceeding in equity or at law).
SECTION 4.03. GOVERNMENTAL AUTHORIZATION. The execution, delivery and
performance by Parent and Merger Sub of this Agreement and the consummation by
Parent and Merger Sub of the transactions contemplated by this Agreement 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 requirements of the Securities Act;
(e) compliance with any applicable foreign or state securities or
"blue sky" laws, rules or regulations;
(f) 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
(g) such other filings or registrations with, or authorizations,
consents or approvals of, Governmental Entities, the failure of which to
make or obtain (i) would not reasonably be expected to have a Material
Adverse Effect on Parent or the Surviving Corporation, or (ii) would not
materially adversely affect the ability of Parent and Merger Sub to
consummate the transactions contemplated hereby and operate their
businesses as heretofore operated.
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SECTION 4.04. NON-CONTRAVENTION. The execution, delivery and performance
by Parent and Merger Sub of this Agreement and the consummation by Parent and
Merger Sub of the transactions contemplated hereby do not and will not:
(a) contravene or conflict with any provisions of the respective
charters or bylaws (or similarly governing documents) of Parent or any of
its Significant Subsidiaries;
(b) assuming compliance with the matters referred to in Section 4.03
and assuming the requisite approval of Parent's stockholders of the
transactions contemplated by this Agreement, 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 material agreement, contract or other
instrument binding upon Parent or any Subsidiary of Parent or (ii) assuming
compliance with the matters referred to in Section 4.03, any material
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 in
the aggregate would not be reasonably expected to have a Material Adverse Effect
on Parent and would not materially impair Parent's ability to consummate the
transactions contemplated by this Agreement.
SECTION 4.05. CAPITALIZATION. The authorized capital stock of Parent
consists of 135,000,000 shares of Parent Common Stock, 30,000,000 shares of
Class B Common Stock and 10,000,000 shares, $.001 par value per share, of
preferred stock ("Parent Preferred Stock"). As of September 27, 1996, there were
outstanding:
(a) 29,091,964 shares of Parent Common Stock (excluding 3,194,374
shares held in treasury);
(b) 19,297,642 shares of Class B Common Stock (the "CWF Common
Stock");
(c) no shares of Parent Preferred Stock; and
(d) Parent Options to purchase an aggregate of 2,235,564 shares of
Parent Common Stock.
All outstanding shares of Parent Common Stock and CWF Common Stock have been
duly authorized and validly issued and are fully paid and nonassessable and free
from any preemptive rights. Except as set forth in this Section and as otherwise
contemplated by this Agreement, and except for changes since September 27, 1996
resulting from the exercise of options to purchase shares of Parent Common Stock
("Parent Options"), there are outstanding, other than Parent Options issued,
after the date hereof, pursuant to non-discretionary obligations under existing
director and employee benefit arrangements, (i) no shares of capital stock or
other voting securities of Parent, (ii) no securities of Parent convertible into
or exchangeable for shares of capital stock or voting securities of Parent and
(iii) no options or other rights to acquire from Parent, and no obligation of
Parent to issue, any capital stock, voting securities or securities convertible
into or exchangeable for capital stock or other voting securities of Parent (the
items in clauses (i), (ii) and (iii) being referred to collectively as the
"Parent Securities"). Except as contemplated by this Agreement, other than
Parent Options issued, after the date hereof, pursuant to non-discretionary
obligations under existing director and employee benefit arrangements, there are
no outstanding obligations of Parent or any of its Subsidiaries to repurchase,
redeem or otherwise acquire any Parent Securities. As of the Effective Date, all
of the Parent Options which are outstanding will be fully vested pursuant to the
terms of existing Parent employee stock options plans. Other than the
Registration Rights Agreement, dated as of March 2, 1995 (the "CWF Registration
Rights Agreement"), by and between Parent and CWF and the Amended Foundation
Shareholder Agreement, dated as of January 28, 1992, by and between Parent and
CWF, no holder of Parent
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Securities has, as of the date hereof, any contractual right to include any such
securities in any registration statement proposed to be filed by Parent under
the Securities Act. All of the outstanding capital stock of, or other ownership
interests in, each Subsidiary of Parent, is owned by Parent, directly or
indirectly, free and clear of any material Lien and free of any other material
limitation or restriction on its rights as owner thereof (including any
restriction on the right to vote, sell or otherwise dispose of such capital
stock or other ownership interests), other than those imposed by applicable law.
There are no existing options, calls or commitments of any character relating to
the issued or unissued capital stock or other securities or equity interests of
any Subsidiary of Parent. Neither the Parent nor its Subsidiaries owns directly
or indirectly any equity interest or equity investment in, nor is the Parent or
any of its Subsidiaries subject to any obligation or requirement to provide for
or to make any equity investment in, any corporation, limited liability company,
partnership, joint venture, business, trust or entity.
SECTION 4.06. ORGANIZATION OF MERGER SUB. The authorized capital stock of
Merger Sub consists of 1,000 shares of common stock, par value $.01 per share,
all of which are outstanding. All the issued and outstanding capital stock of
Merger Sub is owned by Parent. Merger Sub has not conducted any business prior
to the date hereof and has no assets, liabilities or obligations of any nature
other than those incident to its formation and pursuant to this Agreement.
SECTION 4.07. NO PRIOR ACTIVITIES. As of the date hereof and the Effective
Time, except for obligations or liabilities incurred in connection with its
incorporation or organization and the transactions contemplated by this
Agreement and except for this Agreement and any other agreements or arrangements
contemplated by this Agreement, Merger Sub has not and will not have incurred,
directly or indirectly, through any Subsidiary or Affiliate, any obligations or
liabilities or engaged in any business activities of any type or kind whatsoever
or entered into any agreements or arrangements with any person.
SECTION 4.08. SEC REPORTS AND FINANCIAL STATEMENTS. Each form, report,
schedule, registration statement and definitive proxy statement filed by Parent
with the SEC since January 1, 1994 (as such documents have since the time of
their filing been amended and each document filed between the date hereof and
the Effective Time, the "Parent SEC Reports"), which include all the documents
(other than preliminary material) that Parent was required to file with the SEC
since such date, 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. 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 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 financial statements of Parent included in such reports
comply 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 fairly present
(subject, in the case of the unaudited statements, to normal, recurring audit
adjustments) the consolidated financial position of Parent and its Subsidiaries
as at the dates thereof and the consolidated results of their operations and
cash flows for the periods then ended. Since December 31, 1995, neither Parent
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 Parent and its Subsidiaries as of December 31, 1995
(including the notes thereto) (the "Parent Balance Sheet"), (ii) as incurred in
connection with the transactions contemplated, or as provided, by this
Agreement, (iii) as incurred after December 31, 1995 in the ordinary course of
business and consistent with past practices, (iv) as described in the Parent SEC
Reports or (v) as would not, individually or in the aggregate, have a Material
Adverse Effect on Parent.
SECTION 4.09. ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in
the Parent SEC Reports filed prior to the date hereof, since January 1, 1996,
Parent and its Subsidiaries have conducted their respective business only in the
ordinary course, consistent with past practice, and there has not occurred or
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arisen any event, individually or in the aggregate, having or which would have a
Material Adverse Effect on Parent.
SECTION 4.10. DISCLOSURE DOCUMENTS. None of the information supplied or to
be supplied by Parent for inclusion in the Joint Proxy Statement and the
Registration Statement, will, in the case of the Joint Proxy Statement, either
at the time of mailing of the Joint Proxy Statement to stockholders of Parent or
at the time of the meeting of such stockholders to be held in connection with
the Merger, contain any untrue statement of a material fact or will 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 or will, in the case of the Registration Statement, either
at the time the Registration Statement is filed with the SEC or at the time the
Registration Statement becomes effective under the Securities Act, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein not misleading.
The Registration Statement and Joint Proxy Statement will comply as to form in
all material respects with the provisions of the Securities Act and Exchange
Act, except that no representation or warranty is made by Parent with respect to
information supplied by the Company for inclusion therein.
SECTION 4.11. LITIGATION. There is no action, suit, proceeding, claim or
investigation pending or, to the knowledge of Parent, threatened against or
affecting Parent 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 Parent, including, without limitation, any claims for
indemnification arising under any agreement to which Parent or any of its
Subsidiaries is a party, which has or which, individually or in the aggregate,
would have a Material Adverse Effect on Parent. Parent is not subject to or in
default with respect to any writ, order, judgment, injunction or decree which
has or which would have, individually or in the aggregate, a Material Adverse
Effect on Parent.
SECTION 4.12. TAXES.
(a) Parent and each of its Subsidiaries (i) have filed (or have had timely
filed on their behalf) or will file or cause to be filed 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 them,
and all such returns, estimates and reports are or will be at the time of
filing, true, complete and correct in all material respects, (ii) either paid
when due and payable or established adequate reserves or otherwise accrued on
the Parent Balance Sheet all material Taxes, and there are no material Taxes,
interest, penalties, assessments or deficiencies claimed in writing by any
Taxing authority and received by Parent that, in the aggregate, would result in
any Tax liability in excess of the amount of the reserves or accruals, and (iii)
have or will establish in accordance with their normal accounting practices and
procedures accruals and reserves that, in the aggregate, are adequate for the
payment of all material Taxes not yet due and payable and attributable to any
period preceding the Effective Time.
(b) Neither Parent nor any predecessor corporation, nor any of their
respective Subsidiaries, has executed or filed with the IRS 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.
(c) Neither Parent nor any of its Subsidiaries is a party to or is bound by
(or will prior to the Effective Date 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 Parent and its Subsidiaries. Neither Parent
nor any of its Subsidiaries has been a member of an affiliated group or filed or
been included in a combined, consolidated or unitary Tax return other than one
filed by Parent (or a return for a group consisting solely of its Subsidiaries
and predecessors).
SECTION 4.13. EMPLOYEE BENEFIT PLANS; ERISA.
(a) Neither Parent nor any of its Subsidiaries is a party to any oral or
written (i) employment, severance, collective bargaining or material consulting
agreement not terminable on 60 days' or less notice, (ii) agreement with any
current or former executive officer or other current or former key employee of
Parent or any Subsidiary of Parent (A) the benefits of which are contingent, or
the terms of which are materially
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altered, upon the occurrence of a transaction involving Parent or any Subsidiary
of Parent of the nature of any of the transactions contemplated by this
Agreement, (B) providing any term of employment or compensation guarantee
extending for a period longer than six months or (C) providing severance
benefits or other benefits after the termination of employment of such executive
officer or key employee regardless of the reason for such termination of
employment, (iii) agreement, plan or arrangement under which any person may
receive payments subject to the tax imposed by Section 4999 of the Code, or (iv)
agreement or plan, including, without limitation, any stock option plan, stock
appreciation right plan, restricted stock plan or stock purchase plan, the
benefits of which would be increased, or the vesting of benefits of which will
be accelerated, by the occurrence of any of the transactions contemplated by
this Agreement or the value of any of the benefits of which will be calculated
on the basis of any of the transactions contemplated by this Agreement. The
Parent Disclosure Schedule contains a true and correct description of the annual
compensation, bonus plans and awards, options, SARs, deferred compensation and
all other material benefits for each of the executive officers of the Parent.
(b) Neither Parent nor any corporation or other entity which under Section
4001(b) of ERISA is under common control with Parent (a "Parent ERISA
Affiliate") maintains any Pension Plan or any Welfare Plan which is subject to
ERISA. Each Pension Plan and Welfare Plan of the Parent and the Parent ERISA
Affiliates has been maintained in all material respects in compliance with its
terms and all provisions of ERISA and the Code (including rules and regulations
thereunder) and other applicable laws. Neither Parent nor any Parent ERISA
Affiliate is subject to potential liability under Section 4069(e) of ERISA.
(c) No Pension Plan or Welfare Plan of the Parent or any Parent ERISA
Affiliate is currently subject to an audit or other investigation by the IRS,
the Department of Labor, the Pension Benefit Guaranty Corporation or any other
Governmental Entity nor are any such plans subject to any lawsuits or legal
proceedings of any kind or to any material pending disputed claims by employees
or beneficiaries covered under any such plan or by any other parties.
(d) No "prohibited transaction," as defined in Section 406 of ERISA or
Section 4975 of the Code, resulting in material liability to Parent or any
Parent ERISA Affiliate has occurred with respect to any Pension Plan or Welfare
Plan. Parent has no knowledge of any breach of fiduciary responsibility under
Part 4 of Title I of ERISA which has resulted in or would reasonably be expected
to result in any material liability to Parent, any trustee, administrator or
fiduciary of any Pension Plan or Welfare Plan of the Parent or any Parent ERISA
Affiliate.
(e) Neither Parent nor any Parent ERISA Affiliate, since January 1, 1986,
has maintained or contributed to, or been obligated or required to contribute
to, a "Multiemployer Plan," as such term is defined in Section 4001(a)(3) of
ERISA. Neither Parent nor any Parent ERISA Affiliate has either withdrawn,
partially or completely, or instituted steps to withdraw, partially or
completely, from any Multiemployer Plan nor has any event occurred which would
enable a Multiemployer Plan to give notice of and demand payment of any material
withdrawal liability with respect to Parent or any Parent ERISA Affiliate.
(f) There is no contract, agreement, plan or arrangement covering any
employee or former employee of Parent or any Parent ERISA Affiliate that,
individually or collectively, could give rise to the payment of any material
amount that would not be deductible pursuant to the terms of Sections 162(m) or
280G of the Code.
(g) Parent has delivered or made available to the Parent full and complete
copies or descriptions of, and the Parent Disclosure Schedule contains a
complete list of each Pension Plan, Welfare Plan and each other material
agreement, policy, plan or other arrangement, whether written or oral, express
or implied, fixed or contingent, to which Parent or any Parent ERISA Affiliate
is a party or by which Parent or any Parent ERISA Affiliate or any property or
asset of Parent or any Parent ERISA Affiliate is bound, which is or relates to a
pension, option, bonus, deferred compensation, retirement, stock purchase,
profit-sharing, severance pay, health, welfare, incentive, vacation, sick leave,
medical disability, hospitalization, life or other insurance or fringe benefit
plan, policy or arrangement.
(h) Parent has delivered or made available to the Company, for each Pension
Plan which is intended to be "qualified" within the meaning of Section 401(a) of
the Code, a copy of the most recent determination
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letter issued by the IRS to the effect that each such Plan is so qualified and
that each trust created thereunder is tax exempt under Section 501 of the Code,
and Parent is unaware of any fact or circumstances that would jeopardize the
qualified status of each such Pension Plan or the tax exempt status of each
trust created thereunder.
SECTION 4.14. ENVIRONMENTAL MATTERS.
(a) No notice, notification, demand, request for information, citation,
summons, complaint or order has been received, no complaint has been filed, no
penalty has been assessed and 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 Parent or any of its Subsidiaries of any Environmental
Law, (ii) alleged failure by Parent 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 reasonably
be expected to have, a Material Adverse Effect on the Company.
(b) Neither Parent nor any of its Subsidiaries has any material
Environmental Liabilities and there has been no release of Hazardous Substances
into the environment or violation of any Environmental Law by Parent or any such
Subsidiary or with respect to any of their respective properties which has had,
or would reasonably be expected to have, a Material Adverse Effect on Parent.
SECTION 4.15. LABOR MATTERS. Neither Parent nor any of its Subsidiaries is
a party to any collective bargaining agreement or other labor union contract
applicable to persons employed by Parent or any such Subsidiary, and, to the
knowledge of Parent, there are no activities or proceedings of any labor union
to organize any such employees.
SECTION 4.16. COMPLIANCE WITH LAWS. Except for violations which do not
have and would not reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect on Parent, neither Parent nor any of its
Subsidiaries is in violation of, or has violated, any applicable provisions of
any laws, statutes, ordinances or regulations or any term of any judgment,
decree, injunction or order binding against it.
SECTION 4.17. FINDERS' FEES. Except for Salomon Brothers Inc, Shattuck
Hammond Partners, Inc., Volpe, Welty & Company and Smith Barney Inc. (the
"Parent Financial Advisors"), there is no investment banker, broker, finder or
other intermediary which has been retained by or is authorized to act on behalf
of Parent or any of its Subsidiaries nor any of their respective directors,
officers or employees who is entitled to any fee or commission in connection
with the transactions contemplated by this Agreement.
SECTION 4.18. OPINIONS OF FINANCIAL ADVISORS. Parent has received the
opinion of each of Salomon Brothers Inc and Shattuck Hammond Partners, Inc. to
the effect that, as of the date of this Agreement, the Exchange Ratio is fair,
from a financial point of view, to the stockholders of Parent.
SECTION 4.19. ACCOUNTING MATTERS. Neither Parent nor, to its best
knowledge, any of its Affiliates has taken or agreed to take any action that
would prevent Parent from accounting for the transactions to be effected
pursuant to Article I of this Agreement in accordance with the
pooling-of-interest method of accounting under the requirements of APB No. 16.
SECTION 4.20. PARENT RIGHTS PLAN. Under the terms of the Parent Rights
Agreement, as amended as of the date hereof, the transactions contemplated by
this Agreement will not cause a Distribution Date (as defined therein) to occur
or cause the rights issued pursuant to the Parent Rights Agreement to become
exercisable.
SECTION 4.21. TAKEOVER STATUS. The Board of Directors of Parent has taken
all appropriate action so that the Company will not be an "interested
stockholder" within the meaning of Section 203 of the Delaware Law by virtue of
the Parent's or Merger Sub's entry into the Parent Stock Option Agreement and
the consummation of the transactions contemplated thereunder.
SECTION 4.22. CWF AGREEMENTS. Following the repayment of the Nonnegotiable
Senior Secured Promissory Note, by Health Net, a California Corporation, dated
January 28, 1992 (the "Note"), all of the
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agreements listed in Article IV, Section D (v) of Parent's Certificate of
Incorporation will be terminated and no "event of default" may occur so as to
cause an "Adjustment Event" as defined in such provision. As of the date hereof,
the aggregate principal amount of the Note outstanding is approximately $20
million. Except as provided in Parent's Certificate of Incorporation or required
by law, CWF has no other voting rights with respect to the CWF Common Stock.
Other than indebtedness owed to CWF pursuant to the Note, neither Parent nor any
of its Subsidiaries owes any indebtedness to CWF or any of its affiliates.
SECTION 4.23. DIRECTORS' RESIGNATION. Each of the directors of Parent has
agreed to take all actions necessary or desirable to effect the terms of Section
2.01, including the adoption of a resolution providing for the resignation of
such directors (other than Dr. Hasan and the other Parent Designees) from the
Board of Directors of Parent and adoption of Parent Amended Bylaws to be
effective as of the Effective Date.
ARTICLE V
COVENANTS OF THE COMPANY
From the date hereof until the occurrence of the earlier of (i) the
Effective Time or (ii) termination of this Agreement pursuant to Section 9.01
hereof, the Company agrees that:
SECTION 5.01. CONDUCT OF BUSINESS OF THE COMPANY PENDING THE EFFECTIVE
TIME. Except as expressly permitted or contemplated by this Agreement, or by
the Company Disclosure Schedule, the Company shall, and shall cause each of its
Subsidiaries to, conduct its operations in the ordinary and usual course of
business consistent with past practice and use its best efforts to preserve
intact their respective business organizations' goodwill, keep available the
services of their respective present officers and key employees, and preserve
the goodwill and business relationships with suppliers, distributors, customers
and others having business relationships with them. Without limiting the
generality of the foregoing, and except as otherwise permitted by this Agreement
or as specifically contemplated by the Company Disclosure Schedule, prior to the
Effective Time, without the consent of Parent, which consent shall not be
unreasonably withheld, the Company will not, and will cause each of its
Subsidiaries not to:
(a) amend or propose to amend their respective charters or bylaws; or
split, combine or reclassify their outstanding capital stock or declare,
set aside or pay any dividend or distribution in respect of any capital
stock or issue or authorize or propose the issuance of any other securities
in respect of, in lieu of or in substitution for shares of its capital
stock, except for dividends and distributions paid by Subsidiaries to other
Subsidiaries or to the Company;
(b) (i) issue or authorize or propose the issuance of, sell, pledge or
dispose of, or agree to issue or authorize or propose the issuance of,
sell, pledge or dispose of, any additional shares of, or any options,
warrants or rights of any kind to acquire any shares of, their capital
stock of any class, any debt or equity securities convertible into or
exchangeable for such capital stock or any other equity related right
(including any phantom stock or SAR rights), other than any such issuance
pursuant to options, warrants, rights or convertible securities outstanding
as of the date hereof in accordance with their terms; (ii) acquire or agree
to acquire by merging or consolidating with, or by purchasing a substantial
equity interest in or a substantial portion of the assets of, 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 which are material, individually
or in the aggregate, to the Company and its Subsidiaries taken as a whole;
provided, however, that the foregoing shall not restrict the Company from
entering into any such acquisition transaction in which the aggregate value
of the consideration paid therein shall be less than $10,000,000, provided
that the aggregate value of all acquisition transactions entered into by
the Company pursuant to the preceding proviso shall not exceed $10,000,000;
and provided further that the Company shall be permitted to consummate
those acquisition transactions pending as of the date hereof which have
previously been disclosed to Parent; (iii) sell (including by
sale-leaseback), lease, pledge, dispose of or encumber any assets or
interests therein, which are material, individually or in the aggregate, to
the Company and its Subsidiaries taken as a whole, other than in the
ordinary course of business and consistent with past practice or necessary
to fulfill conditions
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set forth in Article VIII provided that the Company has consulted with
Parent prior to taking any such action; (iv) incur or become contingently
liable with respect to any material indebtedness for borrowed money or
guarantee any such indebtedness or issue any debt securities or otherwise
incur any material obligation or liability (absolute or contingent) other
than short-term indebtedness in the ordinary course of business and
consistent with past practice or in connection with those acquisition or
disposition transactions pending as of the date hereof which have been
previously disclosed to Parent; (v) redeem, purchase, acquire or offer to
purchase or acquire any (x) shares of its capital stock or (y) long-term
debt other than as required by governing instruments relating thereto; or
(vi) enter into any contract, agreement, commitment or arrangement with
respect to any of the foregoing;
(c) enter into or amend any employment, severance, special pay
arrangement with respect to termination of employment or other arrangements
or agreements with any directors, officers or key employees except for (i)
normal salary increases and merit bonuses, (ii) arrangements in connection
with employee transfers or (iii) agreements with new employees, in each
case, in the ordinary course of business consistent with past practice;
(d) adopt, enter into or amend any, or become obligated under any new
bonus, profit sharing, compensation, stock option, pension, retirement,
deferred compensation, health care, employment or other employee benefit
plan, agreement, trust, fund or arrangement for the benefit or welfare of
any employee or retiree, except as required to comply with changes in
applicable law occurring after the date hereof;
(e) waive, amend or otherwise alter the Company Rights Agreement;
(f) make any material commitment or enter into any material contract
or agreement except in the ordinary course of business consistent with past
practice;
(g) alter through merger, liquidation, reorganization, restructuring
or in any other fashion the corporate structure or ownership of any
Subsidiary of the Company;
(h) 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;
(i) revalue any of its assets, including, without limitation, writing
down the value of its inventory or writing off notes or accounts
receivable, other than in the ordinary course of business;
(j) make any material tax election or settle or compromise any
material income tax liability;
(k) settle or compromise any pending or threatened suit, action or
claim relating to the transactions contemplated hereby;
(l) pay, discharge or satisfy any material 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 of liabilities reflected or reserved against
in, or contemplated by, the financial statements (or the notes thereto) of
the Company incurred in the ordinary course of business consistent with
past practice;
(m) except in connection with the exercise of its fiduciary duties by
the Board of Directors of the Company as set forth in Section 7.03, waive,
amend or allow to lapse any material term or condition of the Company
Rights Agreement or any confidentiality or "standstill" agreement to which
the Company or any Subsidiary is a party; or
(n) take or agree to take any of the foregoing actions or any action
that would, or is reasonably likely to, result in any of its
representations and warranties set forth in this Agreement becoming untrue,
or in any of the conditions to the Merger set forth in Article VIII not
being satisfied or adversely affect the ability of Parent to account for
the Merger as a pooling-of-interests.
SECTION 5.02. ACCESS TO FINANCIAL AND OPERATIONAL INFORMATION. Subject to
compliance with applicable law, upon reasonable notice, the Company will, and
will cause each of its Subsidiaries to, give Parent, its
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directors, its counsel, financial advisors, auditors and other authorized
representatives reasonable access during normal business hours to the offices,
properties, books and records of the Company and its Subsidiaries, will furnish
to Parent, its counsel, financial advisors, auditors and other authorized
representatives such financial and operating data as such persons may reasonably
request (other than proprietary information related to CHAMPUS, the disclosure
of which could have an adverse effect on the Company's business); and will
instruct and request the Company's directors, officers, employees, counsel and
financial advisors to cooperate with Parent in its investigation of the business
of the Company and its Subsidiaries and in the planning for the combination of
the businesses of the Company and Parent following the consummation of the
Merger provided that no investigation pursuant to this Section shall affect any
representation or warranty given by the Company to Parent hereunder; and
provided further that notwithstanding the provision of information by Company to
Parent or any investigation by Parent prior to or after the date hereof, Company
shall not be deemed to make any representation or warranty regarding the Company
except as expressly set forth in this Agreement. The financial and operating
data requested pursuant to this Section 5.02 shall specifically include, but
shall not be limited to, all materials 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 (including CHAMPUS) and any notice of
termination from any employee group or program representing 10% or more of the
revenue of any Subsidiary. Unless otherwise required by law, the parties will
hold any such information which is nonpublic in confidence until such time as
such information otherwise becomes publicly available through no wrongful act of
either party and in the event of termination of this Agreement for any reason,
each party shall promptly return all nonpublic documents obtained from any other
party, and any copies made of such documents, to such other party. In addition,
in the event of such termination, all documents, memoranda, notes and other
writing whatsoever prepared by each party based on the information in such
material shall be destroyed (and each party shall use its best efforts to cause
its advisors and their representatives to similarly destroy their respective
documents, memoranda and notes), and such destruction (and best efforts) shall
be certified in writing to the other party by an authorized officer supervising
such destruction. All non-public information obtained pursuant to this Section
5.02 shall be governed by the Confidentiality Agreement dated August 22, 1996
between Parent and the Company (the "Confidentiality Agreement").
SECTION 5.03. NOTICES OF CERTAIN EVENTS. The Company shall, upon obtaining
knowledge of any of the following, promptly notify Parent of:
(a) any material notice or other material communication from any
Governmental Entity in connection with the Merger; and
(b) any actions, suits, claims, investigations or other judicial
proceedings commenced or threatened against the Company or any of its
Subsidiaries which, if pending on the date of this Agreement, would have
been required to have been disclosed pursuant to Section 3.09 or which
relate to the consummation of the Merger.
SECTION 5.04. LETTER OF COMPANY'S ACCOUNTANTS. The Company shall use all
reasonable efforts to cause to be delivered to Parent a letter of Deloitte &
Touche LLP, the Company's independent auditors, dated a date within two business
days before the date on which the Registration Statement shall become effective
and addressed to Parent, in form and substance reasonably satisfactory to Parent
and customary in scope and substance for letters delivered by independent public
accounts in connection with registration statements similar to the Registration
Statement.
SECTION 5.05. OPINIONS OF FINANCIAL ADVISOR. Subject to the exercise of
its fiduciary duties by the Board of Directors of the Company as set forth in
Section 7.03, the Company shall use all reasonable 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 Joint Proxy
Statement is mailed to stockholders of Parent and the Company, the Exchange
Ratio is fair, from a financial point of view, to the holders of Company Common
Stock, and shall include such updated opinion in the Joint Proxy Statement.
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ARTICLE VI
COVENANTS OF PARENT
From the date hereof until the occurrence of the earlier of (i) the
Effective Time or (ii) termination of this Agreement pursuant to Section 9.01
hereof, Parent agrees that:
SECTION 6.01. CONDUCT OF BUSINESS OF PARENT PENDING THE EFFECTIVE
TIME. Except as expressly permitted or contemplated by this Agreement or by the
Parent Disclosure Schedule, Parent shall, and shall cause each of its
Subsidiaries to, conduct its operations in the ordinary and usual course of
business consistent with past practice and use its best efforts to preserve
intact their respective business organizations' goodwill, keep available the
services of their respective present officers and key employees, and preserve
the goodwill and business relationships with suppliers, distributors, customers
and others having business relationships with them. Without limiting the
generality of the foregoing, and except as otherwise permitted by this Agreement
or as specifically contemplated by the Parent Disclosure Schedule, prior to the
Effective Time, without the consent of the Company, which consent shall not be
unreasonably withheld, Parent will not, and will cause each of its Subsidiaries
not to:
(a) amend or propose to amend their respective charters or bylaws
(other than as contemplated by this Agreement); or split, combine or
reclassify their outstanding capital stock or declare, set aside or pay any
dividend or distribution in respect of any capital stock or issue or
authorize or propose the issuance of any other securities in respect of, in
lieu of or in substitution for shares of its capital stock, except for
dividends and distributions paid by Subsidiaries to other Subsidiaries or
to Parent;
(b) (i) issue or authorize or propose the issuance of, sell, pledge or
dispose of, or agree to issue or authorize or propose the issuance of,
sell, pledge or dispose of, any additional shares of, or any options,
warrants or rights of any kind to acquire any shares of, their capital
stock of any class, any debt or equity securities convertible into or
exchangeable for such capital stock or any other equity related right
(including any phantom stock or SAR rights), other than any such issuance
pursuant to options, warrants, rights or convertible securities outstanding
as of the date hereof in accordance with their terms; (ii) acquire or agree
to acquire by merging or consolidating with, or by purchasing a substantial
equity interest in or a substantial portion of the assets of, or by any
other manner, any business or any corporation, partnership, association or
other business organization division thereof or otherwise acquire or agree
to acquire any assets in each case which are material, individually or in
the aggregate, to Parent and its Subsidiaries taken as a whole; provided,
however, that the foregoing shall not restrict Parent from entering into
any such acquisition transaction in which the aggregate value of the
consideration paid therein shall be less than $10,000,000, provided that
the aggregate value of all acquisition transactions entered into by Parent
pursuant to the preceding proviso shall not exceed $10,000,000; (iii) sell
(including by sale-leaseback), lease, pledge, dispose of or encumber any
assets or interests therein, which are material, individually or in the
aggregate, to Parent and its Subsidiaries taken as whole, other than in the
ordinary course of business and consistent with past practice or necessary
to fulfill conditions set forth in Article VIII, provided that the Parent
has consulted with the Company prior to the taking any such action; (iv)
incur or become contingently liable with respect to any material
indebtedness for borrowed money or guarantee any such indebtedness or issue
any debt securities or otherwise incur any material obligation or liability
(absolute or contingent) other than short-term indebtedness in the ordinary
course of business and consistent with past practice or in connection with
those acquisition or disposition transactions pending as of the date hereof
which have been previously disclosed to the Company; (v) redeem, purchase,
acquire or offer to purchase or acquire any (x) shares of its capital stock
or (y) long-term debt, other than as required by the governing instruments
relating thereto; or (vi) enter into any contract, agreement, commitment or
arrangement with respect to any of the foregoing;
(c) enter into or amend any employment, severance, special pay
arrangement with respect to termination of employment or other arrangements
or agreements with any directors, officers or key employees, except for (i)
normal salary increases and merit bonuses, (ii) arrangements in connection
with employee transfers or (iii) agreements with new employees, in each
case, in the ordinary course of business consistent with past practice;
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(d) adopt, enter into or amend any, or become obligated under any new
bonus, profit sharing, compensation, stock option, pension, retirement,
deferred compensation, health care, employment or other employee benefit
plan, agreement, trust, fund or arrangement for the benefit or welfare of
any employee or retiree, except as required to comply with changes in
applicable law occurring after the date hereof;
(e) waive, amend or otherwise alter the Parent Rights Agreement;
(f) make any material commitment or enter into any material contract
or agreement except in the ordinary course of business consistent with past
practice;
(g) alter through merger, liquidation, reorganization, restructuring
or in any other fashion the corporate structure or ownership of any
Subsidiary of the Parent;
(h) 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;
(i) revalue any of its assets, including, without limitation, writing
down the value of its inventory or writing off notes or accounts
receivable, other than in the ordinary course of business;
(j) make any material tax election or settle or compromise any
material income tax liability;
(k) settle or compromise any pending or threatened suit, action or
claim relating to the transactions contemplated hereby;
(l) pay, discharge or satisfy any material 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 of liabilities reflected or reserved against
in, or contemplated by, the financial statements (or the notes thereto) of
the Parent of incurred in the ordinary course of business consistent with
past practice;
(m) except in connection with the exercise of its fiduciary duties by
the Board of Directors of the Parent as set forth in Section 7.03, waive,
amend or allow to lapse any term or condition of any confidentiality or
"standstill" agreement to which the Parent or any Subsidiary is a party; or
(n) take or agree to take any of the foregoing actions or any action
that would, or is reasonably likely to, result in any of its
representations and warranties set forth in this Agreement becoming untrue,
or in any of the conditions to the Merger set forth in Article VIII not
being satisfied or adversely affect the ability of Parent to account for
the Merger as a pooling-of-interests.
SECTION 6.02. ACCESS TO FINANCIAL AND OPERATIONAL INFORMATION. Subject to
compliance with applicable law, upon reasonable notice, Parent will, and will
cause each of its Subsidiaries to, give the Company, its directors, its counsel,
financial advisors, auditors and other authorized representatives reasonable
access during normal business hours to the offices, properties, books and
records of Parent and its Subsidiaries, will furnish to the Company, its
counsel, financial advisors, auditors and other authorized representatives such
financial and operating data as such persons may reasonably request (other than
proprietary information related to CHAMPUS, the disclosure of which could have
an adverse effect on the Parent's business) and will instruct and request
Parent's directors, officers, employees, counsel and financial advisors to
cooperate with the Company in its investigation of the business of Parent and
its Subsidiaries and in the planning for the combination of the businesses of
the Company and Parent following the consummation of the Merger; provided that
no investigation pursuant to this Section shall affect any representation or
warranty given by Parent to the Company hereunder; and provided further that
notwithstanding the provision of information by Parent to Company or any such
investigation by Company, Parent shall not be deemed to make any representation
or warranty regarding the Company except as expressly set forth in this
Agreement. The financial and operating data requested pursuant to this Section
6.02 shall specifically include, but shall not be limited to, all materials
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
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federal agency (including CHAMPUS) and any notice of termination from any
employee group or program representing 10% or more of the revenue of any
Subsidiary. Unless otherwise required by law, the parties will hold any such
information which is nonpublic in confidence until such time as such information
otherwise becomes publicly available through no wrongful act of either party and
in the event of termination of this Agreement for any reason, each party shall
promptly return all nonpublic documents obtained from any other party, and any
copies made of such documents, to such other party. In addition, in the event of
such termination, all documents, memoranda, notes and other writing whatsoever
prepared by each party based on the information in such material shall be
destroyed (and each party shall use its best efforts to cause its advisors and
their representatives to similarly destroy their respective documents, memoranda
and notes), and such destruction (and best efforts) shall be certified in
writing to the other party by an authorized officer supervising such
destruction. All non-public information obtained pursuant to this Section 6.02
shall be governed by the Confidentiality Agreement.
SECTION 6.03. NOTICES OF CERTAIN EVENTS. Parent shall, upon obtaining
knowledge of any of the following, promptly notify the Company of:
(a) any material notice or other material communication from any
Governmental Entity in connection with the Merger; and
(b) any actions, suits, claims, investigations or other judicial
proceedings commenced or threatened against Parent or any of its
Subsidiaries which, if pending on the date of this Agreement, would have
been required to have been disclosed pursuant to Section 4.11 or which
relate to the consummation of the Merger.
SECTION 6.04. LETTER OF PARENT'S ACCOUNTANTS. Parent shall use all
reasonable efforts to cause to be delivered to the Company a letter of Deloitte
& Touche LLP, Parent's independent auditors, dated a date within two business
days before the date on which the Registration Statement shall become effective
and addressed to the Company, in form and substance reasonably satisfactory to
the Company and customary in scope and substance for letters delivered by
independent public accountants in connection with registration statements
similar to the Registration Statement.
SECTION 6.05. OPINION OF FINANCIAL ADVISORS. Subject to the exercise of
its fiduciary duties by the Board of Directors of Parent as set forth in Section
7.03, Parent shall use all reasonable efforts to cause the Parent Financial
Advisors to provide its opinion to the effect that, as of a date no earlier than
three business days prior to the date that the Joint Proxy Statement is mailed
to stockholders of Parent and the Company, the Exchange Ratio is fair, from a
financial point of view, to the stockholders of Parent, and shall include such
updated opinion in the Joint Proxy Statement.
SECTION 6.06. ASSUMPTION OF INDENTURE. As of the Effective Date, Parent
will take all actions necessary to assume the existing obligations of the
Company under the Indenture related to the 7 3/4% Senior Notes due June 1, 2003.
ARTICLE VII
COVENANTS OF PARENT AND THE COMPANY
From the date hereof until the occurrence of the earlier of (i) the
Effective Time or (ii) termination of this Agreement pursuant to Section 9.01
hereof, the Company and Parent agree that:
SECTION 7.01. ADVICE OF CERTAIN CHANGES. Each party will promptly advise
each other party to this Agreement in writing to the extent such party has
knowledge (i) of the occurrence of any event subsequent to the date of this
Agreement that would render any representation or warranty of such party
contained in this Agreement, if made on or as of the date of such event or the
Effective Date, untrue, inaccurate or misleading in any material respect and
(ii) of any Material Adverse Change with respect to such party.
SECTION 7.02. AGREEMENT TO COOPERATE; FURTHER ASSURANCES. Subject to the
terms and conditions of this Agreement, each of the Company and Parent shall use
all reasonable efforts to take, or cause to be taken, all
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action and to do, or cause to be done, all things necessary, proper or advisable
under applicable laws and regulations to consummate and make effective the
transactions contemplated by this Agreement, subject to the requisite vote of
stockholders of the Company and Parent, including providing information and
using all reasonable efforts to (i) promptly obtain all necessary or appropriate
waivers, consents and approvals, and promptly effect all necessary registrations
and filings (including filings under the HSR Act and with the agencies governing
insurance, health maintenance organizations or other managed health care
organizations of the various states), (ii) promptly effect, if necessary, the
sale of assets or modification of contracts by either party so long as such
sales of assets or modification of contracts by either party would not
constitute a Material Adverse Effect on Parent and the Surviving Corporation,
taken as a whole or adversely affect the ability of Parent to account for the
Merger as a pooling-of-interests, (iii) promptly obtain necessary consents from
both parties' bank lenders or mutually or separately restructure their credit
agreements so that obtaining such consents shall not delay or prevent
consummation of the transactions contemplated by this Agreement and (iv)
promptly take all actions necessary or desirable to ensure that the Merger will
be accounted for as a pooling-of-interests. The Company further agrees that it
will not waive, amend or otherwise alter any provision under the FPA Agreement
(as defined below), without the prior written consent of Parent. In case at any
time after the Effective Time any further action is necessary or desirable to
carry out the purposes of this Agreement, the proper officers and directors of
each party to this Agreement shall take all necessary actions to the extent not
inconsistent with their other duties and obligations or applicable law.
SECTION 7.03. NO SOLICITATION.
(a) Each of the Company and Parent shall not, directly or indirectly,
through any officer, director, employee, investment banker, attorney,
representative or agent of such party or any of its Subsidiaries, (i) solicit,
initiate, or encourage any inquiries or proposals that constitute, or could
reasonably be expected to lead to, a proposal or offer for a merger,
consolidation, business combination, sale of substantial assets, sale of shares
of capital stock (including without limitation by way of a tender offer) or
similar transactions involving such party or any of its Subsidiaries, other than
the transactions contemplated by or described in this Agreement (any of the
foregoing inquiries or proposals being referred to in this Agreement as 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 Parent or their respective Boards of
Directors from (A) furnishing nonpublic information or data to, or entering into
discussions or negotiations with, any person or entity in connection with an
unsolicited bona fide written Acquisition Proposal to such party or the
stockholders of such party, if and only to the extent that (1) the Board of
Directors of such party determines in good faith (after consultation with its
financial advisor) that such Acquisition Proposal would, if consummated, result
in a transaction more favorable to such party's stockholders from a financial
point of view than the transaction contemplated by this Agreement (any such more
favorable Acquisition Proposal being referred to in this Agreement as a
"Superior Proposal") and the Board of Directors of such party determines in good
faith, based upon the written opinion of its outside legal counsel, that such
action is necessary for such party to comply with its fiduciary duties to its
stockholders under applicable law and (2) prior to furnishing such non-public
information to, or entering into discussions or negotiations with, such person
or entity, such Board of Directors receives from such person or entity an
executed confidentiality agreement with terms no less favorable to such party
than those contained in the Confidentiality Agreement; or (B) complying with
Rule 14e-2 promulgated under the Exchange Act with regard to an Acquisition
Proposal. Each of the Company and Parent 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 and Parent shall each (i) promptly notify the other party
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 the other
party 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
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requested by such person, that may be considering making, or has made, an
Acquisition Proposal and promptly provide the other party with any nonpublic
information which is given to such person pursuant to this Section 7.03(b), and
(iii) keep the other party advised of the status and principal financial terms
of any such Acquisition Proposal, indication or request unless the board of
directors believes in good faith that a Superior Proposal has been made and
shall have determined in good faith, based upon the written opinion of its
outside legal counsel, that the nondisclosure of the information required
pursuant to this subsection (iii) to the other party is necessary for such board
of directors to comply with its fiduciary duties to its stockholders under
applicable law.
SECTION 7.04. JOINT PROXY STATEMENT; REGISTRATION STATEMENT.
(a) As promptly as practicable after the execution of this Agreement, the
Company and Parent shall prepare and file with the SEC the Joint Proxy
Statement, and, in connection therewith, Parent shall prepare and file with the
SEC the Registration Statement, in which the Joint Proxy Statement will be
included as a prospectus. The Company and Parent shall use all reasonable
efforts to cause the Registration Statement to become effective as soon after
such filing as practical. The Joint Proxy Statement shall include the
recommendation of the Board of Directors of Parent in favor of this Agreement
and the transactions contemplated hereby, and the recommendation of the Board of
Directors of the Company in favor of this Agreement and the transactions
contemplated hereby; provided that the Board of Directors of either party may
modify or withdraw such recommendation if such Board of Directors believes in
good faith that a Superior Proposal has been made and shall have determined in
good faith, based upon the written opinion of its outside legal counsel, that
the modification or withdrawal of such recommendation is necessary for such
Board of Directors to comply with its fiduciary duties to its stockholders under
applicable law.
(b) The Company and Parent shall make all necessary filings with respect to
the Merger under the Securities Act and the Exchange Act.
SECTION 7.05. STOCKHOLDERS' MEETINGS. Each of the Company and Parent shall
call a meeting of its stockholders to be held as promptly as practicable for the
purpose of voting upon this Agreement and the transactions contemplated hereby.
Subject to Sections 7.03 and 7.04, the Company and Parent will, through their
respective Boards of Directors, recommend to their respective stockholders
approval of such matters and will coordinate and cooperate with respect to the
timing of such meetings and shall use their best efforts to hold such meetings
on the same day and as soon as practicable after the date hereof (and in any
event within 75 days of the date on which the Registration Statement shall be
declared effective by the SEC) each party shall use all reasonable efforts to
solicit from stockholders of such party proxies in favor of such matters.
Subject to Sections 7.03 and 7.04, each of the Company and Parent agrees that
except as permitted by this Agreement it will not take any action or enter into
any transaction prior to the meetings of stockholders referred to above that
would be reasonably likely to cause a delay in the effectiveness of the
Registration Statement or require a recirculation of the Joint Proxy Statement
following its initial mailing to stockholders.
SECTION 7.06. CONFIDENTIAL INFORMATION. The Company and Parent acknowledge
that the Confidentiality Agreement shall remain in full force and effect at all
times prior to the Effective Time and after any termination of this Agreement
except as provided in such Confidentiality Agreement, and reaffirm their
agreement to comply with the terms thereof.
SECTION 7.07. COMMUNICATIONS. Neither the Company nor Parent will furnish
any communication or otherwise make any public statement to its stockholders or
to the public generally if the subject matter thereof relates to the
transactions contemplated by this Agreement without the prior approval of the
other as to the content thereof, which approval shall not be unreasonably
withheld; provided that the foregoing shall not be deemed to prohibit any
disclosure required by any applicable law or the rules of the NYSE.
SECTION 7.08. STOCK OPTION PLANS AND BENEFIT PLANS.
(a) The Company and Parent shall take such action as may be necessary to
cause each unexpired and unexercised Company Option granted under the Company's
stock option plans listed on Schedule 3.11 of the Company Disclosure Schedule
(the "Company Stock Option Plans"), to be automatically converted at the
Effective Time into an option (a "New Parent Option") to purchase a number of
shares of Parent Common
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Stock equal to the number of shares of Company Common Stock that could have been
purchased under the Company Option multiplied by the Exchange Ratio (with the
resulting number of shares rounded down to the nearest whole share), at a price
per share of Parent Common Stock equal to the option exercise price determined
pursuant to the Company Option divided by the Exchange Ratio (with the resulting
exercise price rounded up to the nearest whole cent). Such New Parent Option
shall otherwise be subject to substantially similar terms and conditions as the
Company Option. Parent shall (i) as of the Effective Time, assume all of the
Company's obligations with respect to Company Options as so converted, (ii) on
or prior to the Effective Time, reserve for issuance the number of shares of
Parent Common Stock that will become subject to New Parent Options pursuant to
this Section 7.08, (iii) from and after the Effective Time, upon exercise of the
New Parent Options in accordance with the terms thereof, make available for
issuance all shares of Parent Common Stock covered thereby and (iv) at the
Effective Time, issue to each holder of an outstanding Company Option a document
evidencing the foregoing assumption by Parent.
(b) It is the intention of the parties that Company Options assumed by
Parent qualify following the Effective Time of the Merger as incentive stock
options as defined in Section 422 of the Code to the extent Company Options
qualified as incentive stock options prior to the Effective Time.
(c) Subject to applicable collective bargaining agreements, for a period of
three years following the Effective Time, any reductions in workforce in respect
of employees of Parent and the Surviving Corporation shall be made on a fair and
equitable basis, without regard to whether employment was with Parent or the
Company or their respective Subsidiaries, and any employee whose employment is
terminated or job is eliminated by Parent or any of its Subsidiaries during such
period shall be entitled to participate on a fair and equitable basis in the job
opportunity and employment placement programs offered by Parent or any of its
Subsidiaries.
SECTION 7.09. REGISTRATION OF COMPANY STOCK OPTION PLANS. Parent will file
on, or as soon as practicable after, the Effective Date but in no event later
than 30 days after the Effective Date a registration statement on Form S-8, or
Form S-3 as required, under the Securities Act covering the shares of Parent
Common Stock issuable upon the exercise of New Parent Options created upon the
assumption by Parent of Company Options under Section 7.08, and will use its
reasonable efforts to cause such registration statement to become effective on
the Effective Date or as soon thereafter as practicable and to maintain such
registration statement in effect until the exercise or expiration of each such
New Parent Option.
SECTION 7.10. OBLIGATIONS OF MERGER SUB. Parent will take all action
necessary to cause Merger Sub to perform its obligations under this Agreement
and to consummate the Merger on the terms and conditions set forth in this
Agreement. Merger Sub will not issue any shares of its capital stock, any
securities convertible into or exchangeable for its capital stock, or any
option, warrant or other right to acquire its capital stock to any person or
entity other than Parent.
SECTION 7.11. EXPENSES. Except as otherwise provided in Section 9.04
hereof and in addition to the amounts that may be owed pursuant to Section 9.04
hereof, 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 all expenses (excluding fees of counsel and accountants)
incurred in connection with printing and mailing the Joint Proxy Statement and
the Registration Statement (as well as the filing fee relating thereto) and
obtaining regulatory approvals (including all filing fees and local counsel
fees) shall be shared equally by Parent and the Company.
SECTION 7.12. CONTINUANCE OF EXISTING INDEMNIFICATION RIGHTS.
(a) From and after the Effective Time, and for a period of six years
thereafter and for so long as such matters that have arisen prior to the end of
such six-year period remain outstanding, Parent shall continue and guarantee the
performance of the indemnification rights of present and former directors and
officers of the Company and Parent provided for in the Certificate of
Incorporation, Bylaws and Indemnification Agreements of the Company and Parent
as in effect on the date of this Agreement, and with respect to indemnification
for acts and omissions occurring prior to the Effective Time.
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(b) For six years after the Effective Time, Parent shall cause to be
maintained the current policies of the officers' and directors' liability
insurance maintained by the Company and Parent covering persons who are
presently covered by the Company's and Parent's officers' and directors'
liability insurance policies with respect to actions and omissions occurring
prior to the Effective Time to the extent available; provided that policies with
third party insurers of similar or better A.M. Best rating of at least the same
coverage containing terms and conditions that are no less advantageous to the
insureds may be substituted therefor; and provided further that in no event
shall Parent be required to expend to maintain or procure insurance coverage
pursuant to this Section 7.12 an amount per annum in excess of 150% of the
current annual premiums for the twelve-month period ended June 30, 1997 (the
"Maximum Premium") with respect to such insurance, or, if the cost of such
coverage exceeds the Maximum Premium, the maximum amount of coverage that can be
purchased or maintained for the Maximum Premium.
SECTION 7.13. AFFILIATE AGREEMENTS. Each of Parent and the Company (each
of which is referred to in this Section 7.13 as a "Subject Company") shall,
within 30 days of the date hereof, cause to be delivered to the other a list,
reviewed by its counsel, identifying all persons who are, in its opinion, at the
time of the meeting of the Subject Company's stockholders to be held in
accordance with Article I, "affiliates" of the Subject Company for purposes of
Rule 145 promulgated by the SEC under the Securities Act. Each Subject Company
shall furnish such information and documents as the other may reasonably request
in connection with the review of such list. Each Subject Company shall use its
reasonable efforts to cause each person who is identified as an "affiliate" in
the list furnished pursuant to this Section 7.13 to execute a written agreement
on or prior to the Effective Date in a form satisfactory to the other (an
"Affiliate Agreement"), that such person (a) will not offer or sell or otherwise
dispose of any of the shares of Parent Common Stock issued to such person
pursuant to the Merger in violation of the Securities Act, and (b) will not
offer or sell or otherwise dispose of any of the shares of Company Common Stock
or Parent Common Stock in a manner or at a time that will disqualify Parent from
accounting for the transactions contemplated by this Agreement in accordance
with the pooling-of-interests method of accounting.
SECTION 7.14. ANNUAL MEETING OF STOCKHOLDERS. Parent and the Company each
shall defer and/or postpone the holding of its annual meeting of stockholders
indefinitely pending consummation of the Merger unless Parent or the Company is
otherwise required to hold an annual meeting by an order from a court of
competent jurisdiction.
ARTICLE VIII
CONDITIONS TO THE MERGER
SECTION 8.01. 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, at or prior to the Effective Time, of
each of the following conditions:
(a) Covenants; Accuracy of Representations and Warranties. (i) The
Company shall have performed in all material respects its agreements
contained in this Agreement required to be performed 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 for inaccuracies in any
such representation 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 (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) Consents. The Company shall have obtained all written consents,
assignments, waivers or authorizations, other than those governmental
approvals contemplated by Section 8.03(d), that are required to be obtained
by the Company as a result of the Merger, except those for which failure to
obtain such consents, assignments, waivers or authorizations would not,
individually or in the aggregate, have a
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Material Adverse Effect on Parent and the Surviving Corporation, taken as a
whole, or upon the consummation of the transactions contemplated hereby.
(c) Letter of Company's Accountants. Parent shall have received the
letter of Deloitte & Touche LLP referred to in Section 5.04 hereof.
(d) Care Center Operations. Any physician practice groups, medical
groups and/or care centers (the "Care Center Operations") which are subject
to the Stock and Note Purchase Agreement, as amended, dated June 28, 1996
(the "FPA Agreement"), by and between the Company, FPA Medical Management,
Inc. and certain other parties thereto, which are not sold by the Company
in accordance with the FPA Agreement shall have, under a budget prepared by
the Company and delivered to Parent no later than the Effective Time, which
is reasonably acceptable to Parent, projected pre-tax operating losses
(exclusive of any extraordinary charges, restructuring charges and losses
on sales of assets) for the 12 month period ended December 31, 1997 of less
than $15 million; provided that a Care Center Operation that is to be sold
pursuant to a binding agreement that is subject to only customary closing
conditions that are reasonably expected to be satisfied shall not be deemed
to be retained for purposes of this condition.
SECTION 8.02. CONDITIONS TO OBLIGATIONS OF THE COMPANY. The obligations of
the Company hereunder to consummate the Merger are subject to the satisfaction
or waiver, at or prior to the Effective Time, of each of the following
conditions:
(a) Covenants; Accuracy of Representations and Warranties. (i) Parent
shall have performed in all material respects its agreements contained in
this Agreement required to be performed at or prior to the Effective Time;
(ii) the representations and warranties of Parent set forth 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
representation 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.
(b) Consents. Parent shall have obtained all written consents,
assignments, waivers or authorizations, other than the governmental
approvals contemplated by Section 8.03(d), that are required to be obtained
by Parent as a result of the Merger, except those for which failure to
obtain such consents, assignments, waivers or authorizations 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.
(c) Letter of Parent's Accountants. The Company shall have received the
letter of Deloitte & Touche LLP referred to in Section 6.04 hereof.
(d) Tax Opinion. The Company shall have received an opinion in form
and substance reasonably satisfactory to it from Pillsbury Madison & Sutro
LLP, counsel to the Company, dated the Effective Date, substantially to the
effect that the Merger shall be treated as reorganization within the
meaning of Section 368(a) of the Code subject to reasonable assumptions or
representations including those of Company and Parent typical to opinions
of this nature.
SECTION 8.03. 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 subject to the satisfaction or waiver,
at or prior to the Effective Time, of each of the following conditions:
(a) Stockholder Approval. Parent's and the Company's stockholders
shall have duly approved this Agreement and the transactions contemplated
hereby, all in accordance with applicable laws and regulatory requirements
and the Parent's stockholders shall have approved the amendment to the
Parent's Certificate of Incorporation required under Section 2.01.
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(b) Registration Statement. The Registration Statement shall have
become effective under the Securities Act and shall not be the subject of
any stop order or proceedings seeking a stop order, and the Joint Proxy
Statement shall as of the Effective Time not be subject to any proceedings
commenced or overtly threatened by the SEC.
(c) 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 or Governmental Entity which prohibits the
consummation of the transactions contemplated by this Agreement or imposes
material conditions with respect thereto (each party agreeing to use all
reasonable efforts to have any such order, decree or injunction lifted).
(d) 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, 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.
(e) HSR Act. The waiting period (and any extension thereof)
applicable to the consummation of the Merger under the HSR Act shall have
expired or been terminated.
(f) NYSE Listing. Listing on the NYSE of shares of Parent Common
Stock to be issued in the Merger shall have been approved on notice of
issuance thereof.
(g) Pooling Letters. Each of Parent and the Company shall have
received a letter of its independent public accountants, dated the
Effective Date, in form and substance reasonably satisfactory to it stating
that the transactions effected pursuant to Article I of this Agreement will
qualify as transactions to be accounted for in accordance with the
pooling-of-interests method of accounting under the requirements of APB No.
16 (each being referred to as a "Pooling Letter").
ARTICLE IX
TERMINATION OF AGREEMENT
SECTION 9.01. 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 or Parent:
(a) by mutual consent of the Boards of Directors of Parent and the
Company;
(b) by Parent or the Company, if (i) the Effective Date shall not have
occurred on or before March 31, 1997 (or April 30, 1997 if the only
condition remaining unfulfilled at March 31, 1997 is approval by any
required Governmental Entity and Parent and Company are continuing to seek
to obtain such approval), (ii) any Governmental Entity, the consent of
which is a condition to the obligations of Parent and the Company to
consummate the transactions contemplated hereby, shall have determined not
to grant its consent and all appeals of such determination shall have been
taken and have been unsuccessful or (iii) any court of competent
jurisdiction shall have issued an order, judgment or decree (other than a
temporary restraining order) 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 Parent or the Company, if, at the meeting of the Company
stockholders (including any adjournment or postponement thereof) called
pursuant to Section 7.05 hereof, the requisite vote of the stockholders of
the Company for the Merger shall not have been obtained;
(d) by Parent or the Company, if, at the meeting of Parent
stockholders (including any adjournment or postponement thereof) called
pursuant to Section 7.05 hereof, the requisite vote of stockholders
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of Parent for the Merger and to amend the Certificate of Incorporation
shares shall not have been obtained;
(e) by Parent, if (i) there has been a breach by the Company of any
representation or warranty set forth in this Agreement, which breach would
result in Material Adverse Effect on Parent and the Surviving Corporation,
taken as a whole, or upon the consummation of the transactions contemplated
hereby, which has not been cured within ten business days following receipt
by the breaching party of notice of such breach; (ii) there has been a
material breach by the Company of any covenant or agreement set forth in
this Agreement, which breach has not been cured within ten business days
following receipt by the Company of notice of such breach; (iii) the Board
of Directors of the Company shall have withdrawn or modified in a manner
adverse to Parent its approval or recommendation of the transactions
contemplated by this Agreement or recommended another Acquisition Proposal;
or (iv) subject to Section 9.02 hereof, the Board of Directors of Parent
shall have withdrawn or modified in a manner adverse to the Company its
approval or recommendation of the transactions contemplated by this
Agreement in order to permit the Parent 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 9.01(e)(i) or (ii) shall not be available to
Parent if it, at such time, is in material breach of any representation,
warranty, covenant or agreement set forth in this Agreement;
(f) by the Company, if (i) there has been a breach by Parent of any
representation or warranty set forth in this Agreement, which breach would
result in Material Adverse Effect on Parent and the Surviving Corporation,
taken as a whole, or upon the consummation of the transactions contemplated
hereby, which has not been cured within ten business days following receipt
by the Parent of notice of such breach; (ii) there has been a material
breach by Parent of any covenant or agreement set forth in this Agreement,
which breach is not cured within ten days following receipt by the Parent
of notice of such breach; (iii) the Board of Directors of Parent shall have
withdrawn or modified in a manner adverse to the Company its approval or
recommendation of the transactions contemplated by this Agreement or
recommended another Acquisition Proposal; or (iv) subject to Section 9.02
hereof, the Board of Directors of the Company shall have withdrawn or
modified in a manner adverse to Parent its approval or recommendation of
the transactions contemplated by 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 9.01(f)(i)
or (ii) shall not be available to the Company if it, at such time, is in
material breach of any representation, warranty, covenant or agreement set
forth in this Agreement.
(g) by Parent or the Company at any time following the date 30 days
after notice is delivered by the other party as required in Section
7.03(b)(i) concerning the receipt of an Acquisition Proposal unless, prior
to termination under this subsection (g), the party which gave such notice
provides written notice to the other party that such Acquisition Proposal
has been rejected or withdrawn or the party 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 (g) to a number of days equal to 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).
SECTION 9.02. CERTAIN ACTIONS PRIOR TO TERMINATION.
(a) Parent shall provide to the Company the written notice required by
Section 7.03(b) prior to any termination of this Agreement pursuant to Section
9.01(e)(iv) advising the Company that the Board of Directors of Parent has
received a Superior Proposal. At any time after the fourth business day
following such notice, Parent may terminate this Agreement as provided in
Section 9.01(e)(iv) only if (i) the Board of Directors of Parent determines that
such Superior Proposal remains more favorable to its stockholders than the
transactions contemplated by this Agreement (which determination shall be made
in light of any revised
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proposal made by the Company prior to the expiration of such four-business day
period) and (ii) the termination fee contemplated by Section 9.04(d) shall have
been paid to the Company.
(b) The Company shall provide to Parent the written notice required by
Section 7.03(b) prior to any termination of this Agreement pursuant to Section
9.01(f)(iv) advising Parent that the Board of Directors of the Company has
received a Superior Proposal. At any time after the fourth business day
following such notice, the Company may terminate this Agreement as provided in
Section 9.01(f)(iv) only if (i) the Board of Directors of the Company determines
that such Superior Proposal remains more favorable to its stockholders than the
transactions contemplated by this Agreement (which determination shall be made
in light of any revised proposal made by Parent prior to the expiration of such
four-business day period) and (ii) the termination fee contemplated by Section
9.04(a) shall have been paid to the Parent.
SECTION 9.03. EFFECT OF TERMINATION. In the event of termination of this
Agreement by either Parent or the Company as provided in Section 9.01 hereof,
this Agreement shall forthwith become void (except as set forth in the last
three sentences of each of Sections 5.02 and 6.02 and in Sections 7.06, 7.07,
7.11 and 9.04) and there shall be no liability on the part of Parent, Merger Sub
or the Company or their respective officers or directors, except for any breach
of a party's obligations under this Section 9.03, in the last two sentences of
Sections 5.02 and 6.02 and in Sections 7.06, 7.07, 7.11 and 9.04.
Notwithstanding the foregoing, no party hereto shall be relieved from liability
for any willful or intentional breach of this Agreement.
SECTION 9.04. TERMINATION FEE.
(a) Notwithstanding any other provision of this Agreement so long as the
Company is not entitled to terminate this Agreement by reason of Section
9.01(f)(ii), (i) if this Agreement is terminated pursuant to Section
9.01(e)(iii) or Section 9.01(f)(iv), then the Company shall promptly pay to
Parent a fee of $40,000,000; (ii) if this Agreement is terminated pursuant to
Section 9.01(e)(ii), then the Company shall promptly pay to Parent a fee of
$20,000,000; (iii) if this Agreement is terminated pursuant to Section 9.01(c),
then the Company shall promptly pay to Parent a fee of $5,000,000; (iv) (A)
after the date hereof and prior to the termination of this Agreement pursuant to
Section 9.01(e)(ii) or Section 9.01(c), there shall have been publicly announced
a Transaction Proposal (as defined below) involving the Company or its
Significant Subsidiaries (whether or not such offer or proposal shall have been
rejected or shall have been withdrawn prior to the time of such termination or
of the meeting of the Company's stockholders), then, in lieu of the fees payable
pursuant to Section 9.04(a)(ii) or (iii), the Company shall pay to Parent a fee
equal to $40,000,000 minus any amounts as may have been previously paid by the
Company pursuant to this Section 9.04(a) or (c) or (B) if within one year of any
termination pursuant to Section 9.01(e)(ii) or Section 9.01(c), the Company or
its Significant Subsidiaries accepts a written offer for, or otherwise enters
into an agreement to consummate or consummates, a Transaction Proposal with
another Person, then the Company, 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 a fee equal to $40,000,000 minus any amounts as may have been
previously paid by the Company pursuant to this Section 9.04(a) or (c); or (v)
if within one year of the termination of this Agreement pursuant to Section
9.01(g) by Parent, the Company or its Significant Subsidiaries accepts a written
offer for, or otherwise enters into an agreement to consummate or consummates, a
Transaction Proposal with another Person, then the Company, 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 a fee equal to $20,000,000.
(b) As used in this Section 9.04 "Transaction Proposal" shall mean a
proposal or offer (other than by another party hereto) (i) to acquire beneficial
ownership (as defined under Rule 13(d) of the Exchange Act) of a 20% or greater
equity interest in either Company or Parent or their respective Significant
Subsidiaries holding substantially all of the assets of the Company or Parent
and their respective 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 a 20% or greater
equity interest in either Company or Parent or their respective Significant
Subsidiaries holding
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substantially all of the assets of the Company or Parent and their respective
Subsidiaries, (ii) to purchase all or substantially all of the business or
assets of the Company and Parent or their respective Subsidiaries or (iii) to
otherwise effect a business combination involving the Company or Parent or any
of their respective Significant Subsidiaries holding substantially all of the
assets of the Company or Parent and their respective Subsidiaries.
(c) If this Agreement is terminated pursuant to Section 9.01(c) and if the
Company is not obligated to pay a termination fee to Parent pursuant to Section
9.04(a)(iv)(A), and if the Company is not entitled to terminate this Agreement
by reason of Section 9.01(f)(ii), then promptly after such termination, the
Company shall reimburse Parent for 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 $5,000,000. The obligation to pay any termination
fee or expenses pursuant to Section 9.04(a) or 9.04(c) shall be in addition to
any other rights or remedies that may be available to Parent, including, without
limitation, the expenses to be paid by the Company pursuant to Section 7.11
hereof. 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.
(d) Notwithstanding any other provision of this Agreement, so long as
Parent is not entitled to terminate this Agreement by reason of Section
9.01(e)(ii), (i) if this Agreement is terminated pursuant to Section
9.01(f)(iii) or Section 9.01(e)(iv), then the Parent shall promptly pay to the
Company a fee of $40,000,000; (ii) if this Agreement is terminated pursuant to
Section 9.01(f)(ii), then the Parent shall promptly pay to the Company a fee of
$20,000,000; (iii) if this Agreement is terminated pursuant to Section 9.01(d),
then Parent shall promptly pay to the Company a fee of $5,000,000; (iv) (A)
after the date hereof and prior to the termination of this Agreement pursuant to
Section 9.01(f)(ii) or Section 9.01(d), there shall have been publicly announced
a Transaction Proposal involving Parent or its Significant Subsidiaries (whether
or not such offer or proposal shall have been rejected or shall have been
withdrawn prior to the time of such termination or of the meeting of Parent's
stockholders), then, in lieu of the fees payable pursuant to Section
9.04((d)(ii) or (iii), Parent shall pay to the Company a fee equal to
$40,000,000 minus any amounts as may have been previously paid by the Parent
pursuant to this Section 9.04(d) or (e) or (B) if within one year of any
termination pursuant to Section 9.01(f)(ii) or Section 9.01(d), Parent or its
Significant Subsidiaries accepts a written offer for, or otherwise enters into
an agreement to consummate or consummates, a Transaction Proposal with another
Person, then Parent, 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, Parent shall pay to the Company a
fee equal to $40,000,000 minus any amounts as may have been previously paid by
Parent pursuant to this Section 9.04(d) or (e); or (v) if within one year of the
termination of this Agreement pursuant to Section 9.01(g) by the Company, Parent
or its Significant Subsidiaries accepts a written offer for, or otherwise enters
into an agreement to consummate, or consummates, a Transaction Proposal with
another Person, then Parent, 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, Parent shall pay to the Company a
fee equal to $20,000,000.
(e) If this Agreement is terminated pursuant to Section 9.01(d) and if
Parent is not obligated to pay a termination fee to the Company pursuant to
Section 9.04(d)(iv)(A), and if Parent is not entitled to terminate this
Agreement by reason of Section 9.01(e)(ii), then promptly after such
termination, Parent shall reimburse the Company for all of the costs and
expenses incurred by the Company in connection with this Agreement and the
transactions contemplated hereby (upon receipt of reasonable documentation in
respect thereto) up to an aggregate of $5,000,000. The obligation to pay any
termination fee or expenses pursuant to Section 9.04(d) or 9.04(e) shall be in
addition to any other rights or remedies that may be available to the Company,
including, without limitation, the expenses to be paid by Parent pursuant to
Section 7.11 hereof. Parent shall make all such payments promptly (and in any
event within two days of receipt by Parent of written notice from the Company)
by wire transfer of immediately available funds to an account designated by the
Company.
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ARTICLE X
MISCELLANEOUS
SECTION 10.01. FURTHER ASSURANCES. Each party agrees to cooperate fully
with the other parties and to execute such further instruments, documents and
agreements and to give such further written assurances as may be reasonably
requested by any other party to better evidence and reflect the transactions
described herein and contemplated hereby and to carry into effect the intents
and purposes of this Agreement. The covenants and agreements contained in this
Agreement shall survive the Effective Time and if the Agreement is terminated
the provisions of Section 9.03 shall apply.
SECTION 10.02. SURVIVAL. None of the representations and warranties in
this Agreement or any instrument delivered pursuant to this Agreement in
accordance with Article IX shall survive the termination of this Agreement or
the Effective Time; provided, however, the termination of this Agreement shall
not relieve any party hereto from any liability for any willful breach of this
Agreement.
SECTION 10.03. NOTICES. Whenever any party hereto desires or is required
to give any notice, demand, or request with respect to this Agreement, each such
communication shall be in writing and shall be effective only if it is delivered
by personal service or mailed, United States registered or certified mail,
postage prepaid, or sent by prepaid overnight courier or confirmed telecopier,
addressed as follows:
Parent and Merger Sub:
Health Systems International, Inc.
225 North Main Street
Pueblo, Colorado 81003
Attention: General Counsel
With copy to:
Skadden, Arps, Slate, Meagher & Flom
300 South Grand Avenue
Los Angeles, California 90071
Telecopy: (213) 687-5600
Attention: Brian J. McCarthy & Peter C. Krupp
The Company:
Foundation Health Corporation
3400 Data Drive
Rancho Cordova, California 95670
Attention: General Counsel
With copy to:
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, NY 10004
Telecopy: (212) 859-4000
Attention: Arthur Fleischer, Jr.
With copy to:
Pillsbury Madison & Sutro LLP
235 Montgomery Street
San Francisco, California 94104
Telecopy: (415) 983-1200
Attention: Linda C. Williams
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Such communications shall be effective when they are received by the
addressee thereof. Any party may change its address for such communications by
giving notice thereof to the other parties in conformity with this Section.
SECTION 10.04. 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 hereof 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 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.
SECTION 10.05. BINDING UPON SUCCESSORS AND ASSIGNS; ASSIGNMENT. This
Agreement and the provisions hereof shall be binding upon each of the parties,
their permitted successors and assigns. This Agreement may not be assigned by
any party without the prior consent of the other.
SECTION 10.06. SEVERABILITY. If any provision of this Agreement, or the
application thereof, shall for any reason or to any extent be invalid or
unenforceable, the remainder of this Agreement and application of such provision
to other persons or circumstances shall continue in full force and effect and in
no way be affected, impaired or invalidated.
SECTION 10.07. ENTIRE AGREEMENT; NO THIRD PARTY BENEFICIARIES. This
Agreement, together with the Voting Agreement, Confidentiality Agreement and the
other agreements and instruments referenced herein or therein (a) constitute the
entire understanding and agreement of the parties with respect to the subject
matter hereof and supersede all prior and contemporaneous agreements or
understandings, inducements or conditions, express or implied, written or oral,
between the parties with respect hereto and (b) except for the provisions of
Section 7.12, are not intended to confer upon any person other than the parties
any rights or remedies hereunder.
SECTION 10.08. OTHER REMEDIES. Except as otherwise provided herein, any
and all remedies herein expressly conferred upon a party shall be deemed
cumulative with and not exclusive of any other remedy conferred hereby or by law
on such party, and the exercise of any one remedy shall not preclude the
exercise of any other.
SECTION 10.09. 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 approval of this Agreement and the Merger by the
stockholders of the Company 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 approval by the
stockholders of the Company there shall be no amendment or change to the
provisions hereof with respect to the Exchange Ratio 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.
SECTION 10.10. NO WAIVER. The failure of any party to enforce any of the
provisions hereof shall not be construed to be a waiver of the right of such
party thereafter to enforce such provisions.
SECTION 10.11. CONSTRUCTION OF AGREEMENT. A reference to an Article,
Section or an Exhibit shall mean an Article of, a Section in, or Exhibit to,
this Agreement unless otherwise explicitly set forth. The titles and headings
herein are for reference purposes only and shall not in any manner limit the
construction of this Agreement which shall be considered as a whole. The words
"include," "includes" and "including" when used herein shall be deemed in each
case to be followed by the words "without limitation."
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SECTION 10.12. COUNTERPARTS. This Agreement may be executed in any number
of counterparts, each of which shall be an original as against any party whose
signature appears thereon and all of which together shall constitute one and the
same instrument. This Agreement shall become binding when one or more
counterparts hereof, individually or taken together, shall bear the signatures
of all of the parties reflected hereon as signatories.
SECTION 10.13. TREATMENT UNDER SECTION 280G OF THE CODE. In the absence of
a change in relevant "authority" (as such term is defined in Treasury Regulation
Section 1.6662-4(d)(3)(iii) for purposes of Section 6662 of the Code), with
respect to any income tax filing relating to Sections 280G or 4999 of the Code,
(1) Parent intends to take, and to cause its subsidiaries to take, the position
that none of the execution of this Agreement, the approval of this Agreement by
stockholders of the Company, or the consummation of the Merger shall constitute
a change in the ownership or effective control of the Company or a change in the
ownership of a substantial portion of the assets of the Company within the
meaning of Section 280G of the Code, and (2) Parent intends not to withhold from
any amounts payable to any Company employee by reason of consummation of the
transactions contemplated hereby (including by reason of any termination of
employment of any such employee within specified periods following the Effective
Time) any amounts in respect of the excise tax described in Section 4999 of the
Code.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
HEALTH SYSTEMS INTERNATIONAL, INC.
By /s/ JAY GELLERT
--------------------------------------
Name: Jay Gellert
Title: President and Chief
Operating Officer
FH ACQUISITION CORP.
By /s/ JAY GELLERT
--------------------------------------
Name: Jay Gellert
Title: President
FOUNDATION HEALTH CORPORATION
By /s/ DANIEL D. CROWLEY
--------------------------------------
Name: Daniel D. Crowley
Title: Chairman, President and
Chief Executive Officer
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DEFINED TERMS INDEX
The following defined terms have the meaning defined in the indicated
Section of the Agreement and Plan of Reorganization:
<TABLE>
<CAPTION>
TERM SECTION REFERENCE
- ---- -----------------
<S> <C>
Acquisition Proposal......................... 7.03(a)
Action....................................... 3.12(a), 4.14(a)
Affiliate.................................... 2.01(g)
Affiliate Agreement.......................... 7.13
Agreement.................................... Introductory Paragraph
Care Center Operations....................... 8.01(d)
Certificates................................. 1.03(b)
Certificate of Merger........................ 1.01(b)
Code......................................... Recitals
Company...................................... Introductory Paragraph
Company Balance Sheet........................ 3.06
Company Common Stock......................... 1.02
Company Designees............................ 2.01(c)
Company Disclosure Schedule.................. Art. III's Introductory Paragraph
Company ERISA Affiliate...................... 3.11(b)
Company Financial Advisors................... 3.15
Company Options.............................. 3.05
Company Preferred Stock...................... 3.05
Company Replacement Designee................. 2.01(c)
Company Rights............................... 3.05
Company Rights Agreement..................... 3.05
Company SEC Reports.......................... 3.06
Company Securities........................... 3.05
Company Series A Preferred Stock............. 3.05
Company Stock Option Plans................... 7.08(a)
Confidentiality Agreement.................... 5.02
Constituent Corporations..................... 1.01(a)
CWF.......................................... Recitals
CWF Common Stock............................. 4.05(b)
CWF Registration Rights Agreement............ 4.05
Delaware Law................................. 1.01(a)
Effective Date............................... 1.01(b)
Effective Time............................... 1.01(b)
Employee Pension Benefit Plan................ 3.11(b)
Employee Welfare Benefit Plan................ 3.11(b)
Environmental Laws........................... 3.12(c)
Environmental Liabilities.................... 3.12(c)
ERISA........................................ 3.11(b)
Exchange Act................................. 3.03(c)
Exchange Agent............................... 1.03(a)
Exchange Fund................................ 1.03(a)
Exchange Ratio............................... 1.02(c)
FPA Agreement................................ 8.01(d)
Governmental Entity.......................... 3.03
</TABLE>
39
<PAGE> 141
<TABLE>
<CAPTION>
TERM SECTION REFERENCE
- ---- -----------------
<S> <C>
Hazardous Substances......................... 3.12(c)
HSR Act...................................... 3.03(b)
Independent Directors........................ 2.01(g)
include, includes, including................. 10.11
Joint Proxy Statement........................ 3.08
Lien......................................... Paragraph following 3.04(d)
Material Adverse Change...................... 3.01
Material Adverse Effect...................... 3.01
Maximum Premium.............................. 7.12(b)
Merger....................................... Recitals
Merger Sub................................... Introductory Paragraph
New Parent Option............................ 7.08(a)
Note......................................... 4.22
NYSE......................................... 1.03(e)
Parent....................................... Introductory Paragraph
Parent Amended Bylaws........................ 2.01(b)
Parent Amended Certificate................... 2.01(a)
Parent Balance Sheet......................... 4.08
Parent Common Stock.......................... 1.02(b)
Parent Designees............................. 2.01(c)
Parent Disclosure Schedule................... Art. IV's Introductory Paragraph
Parent ERISA Affiliate....................... 4.13(b)
Parent Financial Advisors.................... 4.17
Parent Options............................... 4.05
Parent Preferred Stock....................... 4.05
Parent Replacement Designee.................. 2.01(c)
Parent Rights................................ 1.02(c)
Parent Rights Agreement...................... 1.02(c)
Parent SEC Reports........................... 4.08
Parent Series A Preferred Stock.............. 1.02(c)
Parent Securities............................ Paragraph following 4.05(d)
Pension Plan................................. 3.11(b)
person....................................... 3.01
Registration Statement....................... 3.08
Regulated Activity........................... 3.12(c)
SEC.......................................... Art. III's Introductory Paragraph
Securities Act............................... 3.03(d)
Significant Subsidiary....................... 3.01
Subject Company.............................. 7.13
Superior Proposal............................ 7.03(a)
Surviving Corporation........................ 1.01(a)
Taxes........................................ 3.10(a)
Transaction Proposal......................... 9.04(b)
Transition Period............................ 2.01(c)
Welfare Plan................................. 3.11(b)
without limitation........................... 10.11
</TABLE>
40
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APPENDIX II
FOURTH AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
HEALTH SYSTEMS INTERNATIONAL, INC.
Health Systems International, Inc., a corporation organized and existing
under the laws of the State of Delaware, hereby certifies as follows:
1. The name of the corporation is Health Systems International, Inc. Health
Systems International, Inc. was originally incorporated under the name of HN
Management Holdings, Inc., and the original Certificate of Incorporation was
filed with the Delaware Secretary of State on June 7, 1990.
2. The First Amended and Restated Certificate of Incorporation was filed
with the Delaware Secretary of State on July 19, 1991.
3. The Second Amended and Restated Certificate of Incorporation was filed
with the Delaware Secretary of State on January 15, 1992.
4. The Third Amended and Restated Certificate of Incorporation was filed
with the Delaware Secretary of State on January 28, 1994.
5. Pursuant to Sections 242 and 245 of the General Corporation Law of the
State of Delaware, this Fourth Amended and Restated Certificate of Incorporation
amends and restates the provisions of the Third Amended and Restated Certificate
of Incorporation of the corporation.
6. The text of the Certificate of Incorporation is hereby amended and
restated to read in its entirety as follows:
ARTICLE I
NAME
The name of the corporation (hereinafter called the "Corporation") is Foundation
Health Systems, Inc.
ARTICLE II
PRINCIPAL OFFICES
The registered office of the Corporation in the State of Delaware shall be
located at Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware
19801, County of New Castle. The name of the Corporation's registered agent is
The Corporation Trust Company.
ARTICLE III
PURPOSE
The purpose for which the Corporation is organized is to engage in any
lawful act or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware.
<PAGE> 143
ARTICLE IV
AUTHORIZED CAPITAL STOCK
SECTION 1. The total number of shares of all classes of stock which the
Corporation shall have authority to issue is Three Hundred Ninety Million
(390,000,000) shares as follows: (a) Three Hundred Fifty Million (350,000,000)
shares of Class A Common Stock, $.001 par value per share ("Class A Common
Stock"), (b) Thirty Million (30,000,000) shares of Class B Convertible Common
Stock, $.001 par value per share ("Class B Common Stock"), and (c) Ten Million
(10,000,000) shares of Preferred Stock, $.001 par value per share ("Preferred
Stock").
SECTION 2. The designations, preferences, qualifications, privileges,
limitations and restrictions of the classes of stock of the Corporation and the
express grant of authority to the Board of Directors of the Corporation (the
"Board of Directors") to fix by resolution the designations, preferences,
qualifications, privileges, limitations and restrictions relating to the classes
of stock of the Corporation which are not fixed by this Certificate of
Incorporation are as follows:
CLASS A COMMON STOCK
A. DIVIDENDS.
Subject to any other provisions of this Certificate of Incorporation, as
amended from time to time, holders of Class A Common Stock shall be entitled to
receive such dividends and other distributions in cash, stock or property of the
Corporation as may be declared thereon from time to time by the Board of
Directors out of assets or funds of the Corporation legally available therefor.
B. VOTING.
(i) At every meeting of the stockholders, every holder of Class A
Common Stock shall be entitled to one (1) vote in person or by proxy for
each share of Class A Common Stock standing in his or her name on the
transfer books of the Corporation.
(ii) The provisions of this Article IV of this Certificate of
Incorporation shall not be modified, revised, altered or amended, repealed
or rescinded, in whole or in part, without the affirmative vote of the
holders of a majority of the shares of Class A Common Stock.
CLASS B COMMON STOCK
C. DIVIDENDS.
Subject to any other provisions of this Certificate of Incorporation, as
amended from time to time, holders of Class B Common Stock shall be entitled to
receive such dividends and other distributions in cash, common stock or property
of the Corporation as may be declared on the Class A Common Stock from time to
time by the Board of Directors out of the assets or funds of the Corporation
legally available therefor.
D. VOTING.
(i) The holders of Class B Common Stock shall have no right to vote on
any matters to be voted on by the stockholders of the Corporation
(including, without limitation, any election or removal of the directors of
the Corporation), and the Class B Common Stock shall not be included in
determining the number of shares voting or entitled to vote on such
matters. No amendment, modification or waiver of any provision of this
portion of Article IV titled Class B Common Stock or any provision of this
Certificate of Incorporation applicable to or affecting the rights of the
Class B Common Stock (or the number required to approve such amendment,
modification or waiver) will be effective without the prior written consent
of the holders of a majority of shares of Class B Common Stock at the time
outstanding.
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<PAGE> 144
No amendment, modification or waiver of any provision of this portion of
Article IV titled Class B Common Stock will extend to or affect any
obligation not expressly amended, modified or waived or impair any right
consequent thereon. No course of dealing, and no failure to exercise or
delay in exercising any right, remedy, power or privilege under this
portion of Article IV titled Class B Common Stock will act as a waiver,
amendment or modification of any provision of this portion of Article IV
entitled Class B Common Stock.
(ii) Upon the occurrence of an Adjustment Event (as defined below),
the holders of Class B Common Stock shall, voting as a class, be entitled
to elect a number of members of the Board of Directors equal to the number
of members of the Board of Directors then serving plus one (1). The
remaining members of the Board of Directors shall be elected separately by
the holders of Class A Common Stock. At such time as all Adjustment Events
which gave rise to the exercise of voting rights provided for in this
paragraph shall have been cured and no other Adjustment Event shall have
occurred and remain uncured, the contingent rights of the holders of the
Class B Common Stock shall cease, subject to renewal from time to time upon
the same terms and conditions.
(iii) At any time after the voting power to elect members of the Board
of Directors shall have become vested in the holders of the Class B Common
Stock as provided above, the President or any Executive Vice President of
the Corporation may, and upon the request of the record holders of Class B
Common Stock shall, call a special meeting of the holders of Class A Common
Stock and Class B Common Stock and such other classes of the Corporation's
stock as shall then have the right to vote for the election of directors,
to be held at the place and upon the notice provided in the Bylaws of the
Corporation for the holding of meetings of the stockholders. If the meeting
shall not be so called within ten (10) days after personal service of the
request, or within fifteen (15) days after mailing of the request by
registered mail within the United States of America, then the record
holders of the Class B Common Stock may call the meeting, and may call for
the meeting at the place and upon the notice above provided, and for that
purpose shall have access to the stock books of the Corporation.
(iv) When the limited rights of the holders of Class B Common Stock to
vote as provided above have ceased, the term of office of the persons
elected by it as directors pursuant thereto as a result of an Adjustment
Event shall terminate and the vacancies may (but need not) be filled by the
remaining members of the Board of Directors.
(v) The term "Adjustment Event" shall mean any one or more of the
following events, which shall be deemed to have occurred ninety (90) days
after the date on which the holders of Class B Common Stock give notice in
writing ("Notice") to the Corporation of the Adjustment Event:
(1) There shall have occurred an Event of Default (as defined below)
under that certain Nonnegotiable Senior Secured Promissory Note by Health
Net, a California corporation ("Health Net"), in the original principal
amount of One Hundred Fifty Million Dollars ($150,000,000).
(2) There shall have occurred an Event of Default (as defined below)
under that certain Nonnegotiable Subordinated Secured Promissory Note by
Health Net, in the original principal amount of Seventy-five Million
Dollars ($75,000,000).
(3) There shall have occurred an Event of Default (as defined below)
under that certain Senior Security Agreement dated as of January 28, 1992,
by and between The California Wellness Foundation, a California nonprofit
public benefit corporation (the "Foundation"), and Health Net.
(4) There shall have occurred an Event of Default (as defined below)
under that certain Subordinated Security Agreement dated as of January 28,
1992, by and between the Foundation and Health Net.
(5) There shall have occurred an Event of Default (as defined below)
under that certain Cash Pledge Agreement dated as of January 28, 1992, by
and between the Foundation and Health Net.
(6) There shall have occurred an Event of Default (as defined below)
under that certain Sinking Fund Agreement dated as of January 28, 1992, by
and between the Foundation and Health Net.
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<PAGE> 145
The term "Event of Default" as used above shall have the meaning ascribed
to it in the document listed in subsections D(v)(1)-(6) above.
E. CONVERSION.
(i) Upon the transfer of any whole number of all of the shares of
Class B Common Stock to a third party affiliated with the original owner,
the transferred shares of Class B Common Stock shall convert into fully
paid and nonnegotiable shares of Class A Common Stock at the rate of one
share of Class A Common Stock for each share of Class B Common Stock so
converted. The conversion shall be effected at the time the holders of
Class B Common Stock surrender such holders' certificate or certificates
for Class B Common Stock to be transferred, duly endorsed, at the office of
the Corporation or any transfer agent for Class B Common Stock. Promptly
thereafter, the Corporation shall issue and deliver to the assignee, a
certificate or certificates for the number of shares of Class A Common
Stock to which the assignee shall be entitled as aforesaid. The conversion
shall be deemed to have been made at the close of business on the date of
the surrender and the person or persons entitled to receive shares of Class
A Common Stock issuable on the conversion shall be treated for all purposes
as the record holder or holders of the shares of Class A Common Stock on
that date.
(ii) The Corporation shall at all times reserve and keep available out
of the authorized and unissued shares of Class A Common Stock, solely for
the purpose of effecting the conversion of the outstanding Class B Common
Stock, such number of shares of Class A Common Stock as shall from time to
time be sufficient to effect a conversion of all shares of Class B Common
Stock, and if, at any time, the number of authorized and unissued shares of
Class A Common Stock shall not be sufficient to effect conversion of the
then outstanding Class B Common Stock, the Corporation shall take such
corporate action as may be necessary to increase the number of authorized
and unissued shares of Class A Common Stock to such number as shall be
sufficient for such purposes.
F. REDEMPTION.
The Corporation shall have the right to redeem the Class B Common Stock in
accordance with that certain Amended Foundation Shareholder Agreement (the
"Agreement") dated as of January 28, 1992, by and among the Corporation, the
Foundation and the holders of Class A Common Stock listed on Schedule 1 to the
Agreement; a copy of the Agreement is available for inspection at the
Corporation's principal place of business.
G. ADJUSTMENTS.
The initial number of shares of Class A Common Stock into which shares of
Class B Common Stock are convertible shall be subject to adjustment from time to
time, after the date hereof, in case the Corporation shall:
(i) Pay a dividend in, or make a distribution of, shares of Class A
Common Stock;
(ii) Subdivide its outstanding shares of Class A Common Stock into a
greater number of such shares;
(iii) Combine its outstanding shares of Class A Common Stock into a
smaller number of such shares; or
(iv) Consolidate or merge with or into another corporation (other than
a consolidation or merger which does not result in any reclassification or
change of the Class A Common Stock), or sell or convey all or substantially
all of the Corporation's assets as an entirety to another corporation.
The total number of shares of Class A Common Stock and the number of shares
of capital stock convertible into Class A Common Stock shall be adjusted so that
the holder of Class B Common Stock thereafter surrendered for conversion shall
be entitled to receive the number of shares of Class A Common Stock which it
would have owned or have been entitled to receive immediately following the
happening of any of the events described above had such Class B Common Stock
been converted immediately following the
4
<PAGE> 146
happening of such event. An adjustment made pursuant to this Section shall, in
the case of a stock dividend or distribution, become effective as of the record
date therefor and, in the case of a subdivision, combination, grant, conveyance
or merger, be made as of the effective date thereof.
PREFERRED STOCK
The Board of Directors is authorized to provide, by resolution, for the
issuance of one or more series of Preferred Stock out of the unissued shares of
Preferred Stock. Except as may be required by law, the shares in any series of
Preferred Stock or any shares of stock of any other class need not be identical
to any other series of Preferred Stock or any other class. Before any shares of
Preferred Stock of any series are issued, the Board of Directors shall fix, and
is hereby expressly empowered to fix, by resolution, the following provisions
regarding such shares:
(i) The designations of such series, the number of shares to
constitute such series and the stated value thereof if different from the
par value thereof;
(ii) Whether the shares of such series shall have voting rights, and,
if so, the terms of the voting right, which may be general or limited;
(iii) The dividends, if any, payable on the Series, whether any
dividends shall be cumulative, and, if so, from what dates; the conditions
and dates upon which the dividends shall be payable; the preference or
relation which the dividends shall bear to the dividends payable on any
shares of stock of any other series of Preferred Stock;
(iv) Whether the shares of the series shall be subject to redemption
by the Corporation and, if so, the times, prices and other conditions of
the redemption;
(v) The amount or amounts payable upon shares of the series, and the
rights of the holders of such series in the event of voluntary or
involuntary liquidation, dissolution or winding up, or upon any
distribution of the assets, of the Corporation;
(vi) Whether the shares of the series shall be subject to the
operation of a retirement or sinking fund and, if so, the extent to and
manner in which such retirement or sinking fund shall be applied to the
purchase or redemption of the shares of the series for retirement or other
corporate purposes and the terms and provisions relative to the operation
thereof;
(vii) Whether the shares of the series shall be convertible into, or
exchangeable for, shares of Class A Common Stock or any other series of
Preferred Stock or any other securities (whether or not issued by the
Corporation), and, if so, the price or prices or the rate or rates of
conversion or exchange and the method, if any, of adjusting the same, and
any other terms and conditions of conversion or exchange;
(viii) The limitations and restrictions, if any, to be effective upon
the payment of dividends or the making of other distributions on, and upon
the purchase, redemption or other acquisition by the Corporation of, Class
A Common Stock, Class B Common Stock or shares of stock of any other class
or any other series of Preferred Stock;
(ix) The conditions or restrictions, if any, upon the creation of
indebtedness of the Corporation or upon the issuance of any additional
stock, including additional shares of the series or any other series of
Preferred Stock or any other class of stock;
(x) The ranking (be it pari passu, junior or senior) of each class or
series vis-a-vis any other class or series of any class of Preferred Stock
as to the payment of dividends, the distribution of assets and all other
matters; and
(xi) Any other powers, preferences and relative, participating,
optional and other special rights, and any qualifications, limitations and
restrictions thereof, insofar as they are not inconsistent with the
provisions of this Certificate of Incorporation, to the full extent
permitted in accordance with the laws of the State of Delaware.
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<PAGE> 147
The powers, preferences and relative, participating, optional and other
special rights of each series of Preferred Stock, and the qualifications,
limitations or restrictions thereof, if any, may differ from those of any and
all other series at any time outstanding.
ARTICLE V
COMPOSITION OF BOARD OF DIRECTORS
AND STOCKHOLDER MEETINGS
The following provisions are inserted for the management of the business
and for the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and of
its directors and stockholders:
SECTION 1. The business and affairs of the Corporation shall be
managed by or under the direction of a Board of Directors consisting of not
less than three nor more than twenty directors, the exact number of
directors to be determined in accordance with the Bylaws of the
Corporation. The directors shall be divided into three classes, designated
Class I, Class II and Class III. Each class shall consist, as nearly as may
be possible, of one-third of the total number of directors constituting the
entire Board of Directors. At each annual meeting of stockholders beginning
in 1994, successors to the class of directors whose term expires at that
annual meeting shall be elected for a three-year term. If the number of
directors is changed, any increase or decrease shall be apportioned among
the classes so as to maintain the number of directors in each class as
nearly equal as possible. In no case shall a decrease in the number of
directors shorten the term of any incumbent director. A director shall hold
office until the annual meeting for the year in which his term expires and
until his successor shall be elected and shall qualify, subject, however,
to prior death, resignation, retirement, disqualification or removal from
office.
SECTION 2. Subject to the rights of holders of any series of Preferred
Stock then outstanding or any other securities of the Corporation
(including Class B Common Stock pursuant to Section 2(D) of Article IV
hereof), any vacancy on the Board of Directors that results from an
increase in the number of directors (subject to Section 1 of this Article
V) may be filled by a majority of the Board of Directors then in office,
provided that a quorum is present, and any other vacancy occurring in the
Board of Directors may be filled by a majority of the directors then in
office, even if less than a quorum, or by a sole remaining director. Any
director of any class elected to fill a vacancy resulting from an increase
in such class shall hold office for a term that shall coincide with the
remaining term of that class. Any director elected to fill a vacancy not
resulting from an increase in the number of directors shall have the same
remaining term as that of his predecessor.
SECTION 3. Subject to the rights of holders of any series of Preferred
Stock then outstanding, any director or the entire Board of Directors may
be removed only for cause by an affirmative vote of the holders of
sixty-six and two-thirds percent (66 2/3%) of the then outstanding shares
of Voting Stock (as defined in Article VIII); provided, however, that if a
proposal to remove a director for cause is made by or on behalf of an
Interested Stockholder (as defined in Article VIII) or a director
affiliated with an Interested Stockholder, then such removal shall require
the affirmative vote of the holders of a majority of the Disinterested
Shares. For purposes of this Section 3 of Article V, "Disinterested Shares"
means, as to any Interested Stockholder, shares of Voting Stock held by
stockholders other than such Interested Stockholder. For purposes of this
Section 3 of Article V, "cause" shall mean the willful and continuous
failure of a director substantially to perform his or her duties to the
Corporation (other than a failure resulting from incapacity because of
physical or mental illness) or the willful engaging by a director in gross
misconduct materially and demonstrably injurious to the Corporation.
SECTION 4. Notwithstanding the foregoing, whenever the holders of any
one or more series of Preferred Stock issued by the Corporation or of any
other securities of the Corporation (including Class B Common Stock
pursuant to Section 2(D) of Article IV hereof) shall have the right, voting
separately by series, to elect directors at an annual or special meeting of
stockholders, the election, term of office, filling of vacancies and other
features of such directorships shall be governed by the terms of this
Certificate of Incorporation, and such directors so elected shall not be
divided into classes pursuant to this Article V unless expressly provided
by such terms.
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SECTION 5. Election of directors need not be by ballot unless the
Bylaws so provide.
SECTION 6. In addition to the powers and authorities hereinabove or by
statute expressly conferred upon them, the Board of Directors is hereby
empowered to exercise all powers and do all acts and things as may be
exercised or done by the Corporation; subject, nevertheless, to the
provisions of the statutes of Delaware, of this Certificate of
Incorporation, and to any bylaws from time to time made by the
stockholders; provided, however, that no bylaw so made shall invalidate any
prior act of the Board of Directors which would have been valid if that
bylaw had not been made.
SECTION 7. The Board of Directors shall have the concurrent power with
the stockholders to make, alter, amend, change, add to or repeal
(collectively referred to as a "Change") the Bylaws of the Corporation;
provided that any Change of the Bylaws must be approved either by (i)
seventy-five percent (75%) of the authorized number of directors and, if
one or more Interested Stockholder exists, by a majority of the directors
who are Continuing Directors (as defined in Article VIII), or (ii) the
affirmative vote of the holders of not less than eighty percent (80%) of
the then outstanding shares of Voting Stock and, if the Change is proposed
by or on behalf of an Interested Stockholder or a director affiliated with
an Interested Stockholder, by the affirmative vote of the holders of a
majority of the Disinterested Shares.
SECTION 8. No action required or permitted to be taken at any annual
or special meeting of stockholders of the Corporation may be taken by
written consent without a meeting of such stockholders.
SECTION 9. Special meetings of the stockholders of the Corporation for
any purpose or purposes may be called at any time by the Chairman of the
Board, or by a majority of the members of the Board of Directors; provided,
however, that where a proposal requiring stockholder approval is made by or
on behalf of an Interested Stockholder or director affiliated with an
Interested Stockholder, or where an Interested Stockholder otherwise seeks
action requiring stockholder approval, then the affirmative vote of a
majority of the Continuing Directors shall also be required to call a
special meeting of stockholders for the purpose of considering such
proposal or obtaining such approval. Such special meeting may not be called
by any other person or persons or in any other manner.
ARTICLE VI
INDEMNIFICATION
SECTION 1. The Corporation shall indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he or she is or was a director or an
officer of the Corporation, against expenses (including, but not limited to,
attorneys' fees), judgments, fines or payments paid in settlement actually and
reasonably incurred by him or her in connection with such action, suit or
proceeding to the fullest extent and in the manner set forth in and permitted by
the General Corporation Law of the State of Delaware and any other applicable
law, as from time to time in effect. To the maximum extent permitted by law, the
Corporation shall advance expenses (including attorneys' fees) incurred by such
person indemnified hereunder in defending any civil, criminal, administrative or
investigative action, suit or proceeding upon an undertaking by or on behalf of
such person to repay such amount if it shall ultimately be determined that he or
she is not entitled to be indemnified by the Corporation. Such rights of
indemnification and advancement of expenses shall not be deemed to be exclusive
of any other rights to which such director or officer may be entitled apart from
the foregoing provisions. The foregoing provisions of this Section 6.1 shall be
deemed to be a contract between the Corporation and each director and officer
who serves in such capacity at any time while this Section 6.1 and the relevant
provisions of the General Corporation Law of the State of Delaware and other
applicable law, if any, are in effect, and any repeal or modification thereof
shall not affect any rights or obligations then existing, with respect to any
state of facts then or theretofore existing, or any action, suit or proceeding
theretofore or thereafter brought or threatened based in whole or in part upon
any such state of facts.
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SECTION 2. The Corporation may indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he or she is or was an employee or
agent of the Corporation, or is or was serving at the request of the
Corporation, as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including, but not limited to, attorneys' fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by him in connection with
such action, suit or proceeding to the extent and in the manner set forth in and
permitted by the General Corporation Law of the State of Delaware and any other
applicable law as from time to time in effect. Such right of indemnification
shall not be deemed to be exclusive of any other rights to which any such person
may be entitled apart from the foregoing provisions.
ARTICLE VII
LIABILITY FOR BREACH OF FIDUCIARY DUTY
No director shall be personally liable to the Corporation or its
stockholders for monetary damages for any breach of fiduciary duty by the
director as a director. Notwithstanding the foregoing sentence, a director shall
be liable to the extent provided by applicable law (i) for breach of the
director's duty of loyalty to the Corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) pursuant to Section 174 of the General
Corporation Law of the State of Delaware, or (iv) for any transaction from which
the director derived an improper personal benefit. No amendment to or repeal of
this Article VII shall apply to or have any effect on the liability or alleged
liability of any director of the Corporation for or with respect to any act or
omission of a director occurring prior to such amendment.
ARTICLE VIII
BUSINESS COMBINATIONS
SECTION 1. In addition to any affirmative vote required by law or this
Certificate of Incorporation or the Bylaws of the Corporation, and except as
otherwise expressly provided in Section 2 of this Article VIII, a Business
Combination (as defined below) with, or proposed by or on behalf of, any
Interested Stockholder or any Affiliate (as defined below) or Associate (as
defined below) of any Interested Stockholder or any person who thereafter would
be an Affiliate or Associate of such Interested Stockholder shall require the
affirmative vote of not less than eighty percent (80%) of the votes entitled to
be cast by the holders of all the then outstanding shares of Voting Stock,
voting together as a single class, excluding Voting Stock beneficially owned by
the Interested Stockholder. Such affirmative vote shall be required
notwithstanding the fact that no vote may be required, or that a lesser
percentage or separate class vote may be specified, by law or in any agreement
with any national securities exchange or otherwise.
SECTION 2. The provisions of Section 8.1 shall not be applicable to any
particular Business Combination, and such Business Combination shall require
only such affirmative vote, if any, as is required by law or by any other
provision of this Certificate of Incorporation or the Bylaws of the Corporation,
or any agreement with any national securities exchange, if all of the conditions
specified in either of the following paragraph (a) or (b) are met, or in the
case of a Business Combination not involving the payment of consideration to the
holders of the Corporation's outstanding Capital Stock (as defined below), if
the conditions specified in the following paragraph (a) are met:
(a) The Business Combination shall have been approved, either
specifically or as a transaction which is within an approved category of
transactions, by a majority whether such approval is made prior to or
subsequent to the acquisition of, or announcement or public disclosure of
the intention to acquire, beneficial ownership of the Voting Stock that
caused the Interested Stockholder to become an Interested Stockholder of
the Continuing Directors.
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(b) All of the following conditions shall have been met:
(i) The aggregate amount of cash and the Fair Market Value (as
defined below), as of the date of the consummation of the Business
Combination, of consideration other than cash to be received per share
by holders of Common Stock (as defined below) in such Business
Combination shall be at least equal to the highest amount determined
under clauses (1) and (2) below.
(A) (if applicable) the highest per-share price (including any
brokerage commissions, transfer taxes and soliciting dealers' fees) paid by
or on behalf of the Interested Stockholder for any share of Class A Common
Stock in connection with the acquisition by the Interested Stockholder of
beneficial ownership of shares of Class A Common Stock (x) within the
two-year period immediately prior to the first public announcement of the
proposed Business Combination (the "Announcement Date") or (y) in the
transaction in which it became an Interested Stockholder, whichever is
higher, in either case as adjusted for any subsequent stock split,
subdivision or reclassification with respect to the Class A Common Stock;
and
(B) The Fair Market Value per share of the Class A Common Stock on the
Announcement Date or on the date on which the Interested Stockholder became
an Interested Stockholder (the "Determination Date"), whichever is higher,
as adjusted for any subsequent stock split, stock dividend, subdivision or
reclassification with respect to the Common Stock.
(ii) The aggregate amount of cash and the Fair Market Value, as of
the date of the consummation of the Business Combination, of
consideration other than cash to be received per share by holders of
shares of any class or series of outstanding Capital Stock, other than
Common Stock, shall be at least equal to the highest amount determined
under clauses (A), (B) and (C) below:
(A) (if applicable) the highest per-share price (including any
brokerage commission, transfer taxes and soliciting dealers' fees) paid by
or on behalf of the Interested Stockholder for any share of such class or
series of Capital Stock in connection with the acquisition by the
Interested Stockholder beneficial ownership of shares of such class or
series of Capital Stock (x) within the two-year period immediately prior to
the Announcement Date or (y) in the transaction in which it became an
Interested Stockholder, whichever is higher, in either case as adjusted for
any subsequent stock split, stock dividend, subdivision or reclassification
with respect to such class or series of Capital Stock;
(B) The Fair Market Value per share of such class or series of Capital
Stock on the Announcement Date or on the Determination Date, whichever is
higher, as adjusted for any subsequent stock split, stock dividend,
subdivision or reclassification with respect to such class or series of
Capital Stock; and
(C) (if applicable) the highest preferential amount per share to which
the holders of shares of such class or series of Capital Stock would be
entitled in the event of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Corporation regardless of
whether the Business Combination to be consummated constitutes such an
event.
The provisions of this paragraph (b) shall be required to be met with
respect to every class or series of outstanding Capital Stock, whether or not
the Interested Stockholder has previously acquired beneficial ownership of any
shares of a particular class or series of Capital Stock.
(iii) The consideration to be received by holders of a particular
class or series of outstanding Capital Stock shall be in cash or in the
same form as previously has been paid by or on behalf of the Interested
Stockholder in connection with its direct or indirect acquisition of
beneficial ownership of shares of such class or series of Capital Stock.
If the consideration so paid for shares of any class or series of
Capital Stock varied as to form, the form of consideration for such
class or series of Capital Stock shall be either cash or the form used
to acquire beneficial ownership of the largest number of shares of such
class or series of Capital Stock previously issued by the Interested
Stockholder.
(iv) After the Determination Date or prior to the consummation of
such Business Combination, (A) except as approved by a majority of the
Continuing Directors, there shall have been no
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failure to declare and pay at the regular date therefor any full
quarterly dividends (whether or not cumulative) payable in accordance
with the terms of any outstanding Capital Stock; (B) there shall have
been no reduction in the annual rate of dividends paid on the Common
Stock (except as necessary to reflect any stock split, stock dividend or
subdivision of the Common Stock) except as approved by a majority of the
Continuing Directors; (C) there shall have been an increase in the
annual rate of dividends paid on the Common Stock as necessary to
reflect any reclassification (including any reverse stock split),
recapitalization, reorganization or any similar transaction that has the
effect of reducing the number of outstanding shares of Common Stock,
unless the failure so to increase such annual rate is approved by a
majority of the Continuing Directors; and (D) such Interested
Stockholder shall not have become the beneficial owner of any additional
shares of Capital Stock except as part of the transaction that results
in such Interested Stockholder becoming an Interested Stockholder and
except in a transaction that, after giving the effect thereto, would not
result in any increase in the Interested Stockholder's percentage
beneficial ownership of any class or series of Capital Stock.
(v) After the Determination Date, such Interested Stockholder shall
not have received the benefit, directly or indirectly (except
proportionately as a stockholder of the Corporation), of any loans,
advances, guarantees, pledges or other financial assistance or any tax
credits or other tax advantages provided by the Corporation, whether in
anticipation of or in connection with such Business Combination or
otherwise.
(vi) A proxy or information statement describing the proposed
Business Combination and complying with the requirements of the
Securities Exchange Act of 1934, as amended, and the rules and
regulations thereunder (the "Exchange Act") (or any subsequent
provisions replacing such Exchange Act, rules or regulations) shall be
mailed to all stockholders of the Corporation at least 30 days prior to
the consummation of such Business Combination (whether or not such proxy
or information statement is required to be mailed pursuant to the
Exchange Act or subsequent provisions). The proxy or information
statement shall contain on the first page thereof, in a prominent place,
any statement as to the advisability (or inadvisability) of the Business
Combination that the Continuing Directors, or any of them, may choose to
make and, if deemed advisable by a majority of the Continuing Directors,
the opinion of an investment banking firm selected by a majority of the
Continuing Directors as to the fairness (or unfairness) of the terms of
the Business Combination from a financial point of view to the holders
of the outstanding shares of Capital Stock other than the Interested
Stockholder and its Affiliates or Associates, such investment banking
firm to be paid a reasonable fee for its services by the Corporation.
(vii) Such Interested Stockholder shall not have made any major
change in the Corporation's business or equity capital structure without
the approval of a majority of the Continuing Directors.
SECTION 3. The following definitions shall apply with respect to this
Article VIII:
(a) The term "Business Combination" shall mean:
(i) any merger or consolidation of the Corporation or any
Subsidiary (as defined below) with (x) any Interested Stockholder or (y)
any other corporation (whether or not itself an Interested Stockholder)
which is or after such merger or consolidation would be an Affiliate or
Associate of an Interested Stockholder; or
(ii) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition or security arrangement, investment, loan, advance,
guarantee, agreement to purchase, agreement to pay, extension of credit,
joint venture participation or other arrangement (in one transaction or
a series of transactions) with or for the benefit of any Interested
Stockholder or any Affiliate or Associate of any Interested Stockholder
involving any assets, securities or commitments of the Corporation, any
Subsidiary or any Interested Stockholder or any Affiliate or Associate
of any Interested Stockholder which, together with all other such
arrangements (including all contemplated future events), has an
aggregate Fair Market Value and/or involves aggregate commitments of
$10,000,000 or more or
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constitutes more than five percent (5%) of the book value of the total
assets (in the case of transactions involving assets or commitments
other than Capital Stock) or five percent (5%) of the stockholders'
equity (in the case of transactions in Capital Stock) of the entity in
question (the "Substantial Part"), as reflected in the most recent
fiscal year-end consolidated balance sheet of such entity existing at
the time the stockholders of the Corporation would be required to
approve or authorize the Business Combination involving the assets,
securities and/or commitments constituting any Substantial Part; or
(iii) the adoption of any plan or proposal for the liquidation or
dissolution of the Corporation or for any amendment to the Corporation's
Bylaws or to this Certificate of Incorporation proposed by or on behalf
of an Interested Stockholder or any Affiliate or associate of any
Interested Stockholder; or
(iv) any reclassification of securities (including any reverse
stock split), or recapitalization of the Corporation, or any merger or
consolidation of the Corporation with any of its Subsidiaries or any
other transaction (whether or not with or otherwise involving an
Interested Stockholder) that has the effect, directly or indirectly, of
increasing the proportionate share of any class or series of Capital
Stock, or any securities convertible into Capital Stock or into equity
securities of any Subsidiary, that is beneficially owned by any
Interested Stockholder or any Affiliate or Associate of any Interested
Stockholder; or
(v) any agreement, contract or other arrangement providing for any
one or more of the actions specified in the foregoing clauses (i) to
(iv).
(b) The term "Capital Stock" shall mean all capital stock of the
Corporation authorized to be issued from time to time under Article IV of
this Certificate of Incorporation. The term "Voting Stock" shall mean all
Capital Stock which by its terms may be voted on all matters submitted to
stockholders of the Corporation generally. The term "Common Stock" shall
mean collectively the Class A Common Stock, the Class B Common Stock and
any other classes of common stock of the Corporation as may be issued from
time to time under Article IV of this Certificate of Incorporation.
(c) The term "person" shall mean any individual, firm, corporation or
other entity and shall include any group comprised of any person and any
other person with whom such person or any Affiliate or Associate of such
person has any agreement, arrangement or understanding, directly or
indirectly, for the purpose of acquiring, holding, voting or disposing of
Capital Stock.
(d) The term "Interested Stockholder" shall mean any person (other
than the Corporation or any Subsidiary and other than any profit-sharing,
employee stock ownership or other employee benefit plan of the Corporation
or any Subsidiary or any trustee of or fiduciary with respect to any such
plan when acting in such capacity or the Co-Presidents of the Corporation
on the date of the filing of this Certificate of Incorporation) who (i) is
or has announced or publicly disclosed a plan or intention to become the
beneficial owner of Voting Stock representing ten percent (10%) or more of
the votes entitled to be cast by the holders of all then outstanding shares
of Voting Stock; or (ii) is an Affiliate or Associate (other than the
Co-Presidents of the Corporation on the date of the filing of this
Certificate of Incorporation) of the Corporation and at any time within the
two-year period immediately prior to the date in question was the
beneficial owner of Voting Stock representing ten percent (10%) or more of
the votes entitled to be cast by the holders of all then outstanding shares
of Voting Stock.
(e) A person shall be a "beneficial owner" of any Capital Stock (i)
which such person or any of its Affiliates or Associates beneficially owns,
directly or indirectly; (ii) which such person or any of its Affiliates or
Associates has, directly or indirectly, (A) the right to acquire (whether
such right is exercisable immediately or subject only to the passage of
time), pursuant to an agreement, arrangement or understanding or upon the
exercise of conversion rights, exchange rights, warrants or options, or
otherwise, or (B) the right to vote pursuant to any agreement, arrangement
or understanding; or (iii) which is beneficially owned, directly or
indirectly, by any other person with which such person or any of its
Affiliates or Associates has any agreement, arrangement or understanding
for the purpose of acquiring, holding, voting or disposing of any shares of
Capital Stock. For the purpose of determining
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whether a person is an Interested Stockholder pursuant to paragraph (d) of
this Section 8.3, the number of shares of Capital Stock deemed to be
outstanding shall include shares deemed beneficially owned by such person
through application of this paragraph (e) of Section 8.3 but shall not
include any other shares of Capital Stock that may be issuable pursuant to
any agreement, arrangement or understanding, or upon exercise of conversion
rights, warrants or options, or otherwise.
(f) The terms "Affiliate" and "Associate" shall have the respective
meanings ascribed to such terms in Rule 12b-2 under the Exchange Act as in
effect on the date of filing of this Certificate of Incorporation with the
Secretary of State of the State of Delaware (the term "registrant" in said
Rule 12b-2 meaning in this case the Corporation).
(g) The term "Subsidiary" means any company of which a majority of any
class of equity security is beneficially owned by the Corporation;
provided, however, that for the purposes of the definition of Interested
Stockholder set forth in paragraph (d) of this Section 8.3, the term
"Subsidiary" shall mean only a company of which a majority of each class of
equity security is beneficially owned by the Corporation.
(h) The term "Continuing Director" means any member of the Board of
Directors, while such person is a member of the Board of Directors, who is
not an Affiliate or Associate or representative of the Interested
Stockholder and was a member of the Board of Directors prior to the time
that an Interested Stockholder became an Interested Stockholder, and any
successor of a Continuing Director while such successor is a member of the
Board of Directors, who is not an Affiliate or Associate or representative
of the Interested Stockholder and is recommended or elected to succeed the
Continuing Director by a majority of the continuing Directors.
(i) "Fair Market Value" means (i) in the case of cash, the amount of
such cash; (ii) in the case of stock, the highest closing sale price during
the 30-day period immediately preceding the date in question of a share of
such stock on the Composite Tape for New York Stock Exchange-Listed Stocks,
or, if such stock is not quoted on the Composite Tape, on the New York
Stock Exchange, or, if such stock is not listed on such exchange, on the
principal United States securities exchange registered under the Exchange
Act on which such stock is listed, or, if such stock is not listed on any
such exchange, the highest closing bid quotation with respect to a share of
such stock during the 30-day period preceding the date in question on the
National Association of Securities Dealers, Inc. Automated Quotations
System or any similar system then in use, or if no such quotations are
available, the fair market value on the date in question of a share of such
stock as determined by a majority of the Continuing Directors in good
faith; and (iii) in the case of property other than cash or stock, the Fair
Market Value of such property on the date in question as determined in good
faith by a majority of the Continuing Directors.
(j) In the event of any Business Combination in which the Corporation
survives, the phrase "consideration other than cash to be received" as used
in paragraphs (b)(i) and (b)(ii) of Section 8.2 shall include the shares of
Common Stock and/or the shares of any other class or series of Capital
Stock retained by the holders of such shares.
SECTION 4. A majority of the Continuing Directors shall have the power and
duty to determine for the purpose of this Article VIII, on the basis of
information known to them after reasonable inquiry, all questions arising under
this Article VIII, including, without limitation, (i) whether a person is an
Interested Stockholder, (ii) the number of shares of Capital Stock or other
securities beneficially owned by any person, (iii) whether a person is an
Affiliate or Associate of another, (iv) whether a Proposed Action (as defined
below) is with, or proposed by, or on behalf of an Interested Stockholder or an
Affiliate or Associate of an Interested Stockholder, (v) whether the assets that
are the subject of any Business Combination have or the consideration to be
received for the issuance or transfer of securities by the Corporation or any
Subsidiary in any Business Combination has, an aggregated Fair Market Value of
Ten Million Dollars ($10,000,000) or more and (vi) who have assets or securities
that are the subject of any Business Combination constitute a Substantial Part.
Any such determination made in good faith shall be binding and conclusive on all
parties.
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SECTION 5. Nothing contained in this Article VIII shall be construed to
relieve any Interested Stockholder from any fiduciary obligation imposed by law.
SECTION 6. The fact that any Business Combination complies with the
provisions of Section 8.2 shall not be construed to impose any fiduciary duty,
obligation or responsibility on the Board of Directors, or any member thereof,
to approve such Business Combination or recommend its adoption or approval to
the stockholders of the Corporation, nor shall such compliance limit, prohibit
or otherwise restrict in any manner the Board of Directors, or any member
thereof, with respect to evaluations of, or actions and responses taken with
respect to, such Business Combination.
SECTION 7. For purposes of this Article VIII, a Business Combination or any
proposal to amend, repeal or adopt any provision of this Certificate of
Incorporation inconsistent with this Article VIII (collectively, "Proposed
Action") is presumed to have been proposed by, or on behalf of, an Interested
Stockholder or an Affiliate or Associate of an Interested Stockholder or a
person who thereafter would become such if (i) after the Interested Stockholder
became such, the Proposed Action is proposed following the election of any
director of the Corporation who, with respect to such Interested Stockholder,
would not qualify to serve as a Continuing Director or (ii) such Interested
Stockholder, Affiliate, Associate or person votes for or consents to the
adoption of any such Proposed Action, unless as to such Interested Stockholder,
Affiliate, Associate or person, a majority of the Continuing Directors makes a
good-faith determination that such Proposed Action is not proposed by or on
behalf of such Interested Stockholder, Affiliate, Associate or person, based on
information known to them after reasonable inquiry.
SECTION 8. Notwithstanding any other provisions of this Certificate of
Incorporation or the Bylaws of the Corporation (and notwithstanding the fact
that a lesser percentage or separate class vote may be specified by law, this
Certificate of Incorporation or the Bylaw of the Corporation), the affirmative
vote of the holders of not less than eighty percent (80%) of the votes entitled
to be cast by the holders of all the then outstanding shares of Voting Stock,
voting together as a single class, excluding Voting Stock beneficially owned by
such Interested Stockholder, shall be required to amend or repeal, or adopt any
provisions inconsistent with, this Article VIII; provided, however, that this
Section 8.8 shall not apply to, and such eighty percent (80%) vote shall not be
required for, any amendment, repeal or adoption unanimously recommended by the
Board of Directors if all of such directors are persons who would be eligible to
serve as Continuing Directors within the meaning of Section 3, paragraph (h), of
this Article VIII.
ARTICLE IX
BOOKS AND RECORDS
The books and records of the Corporation may be kept (subject to any
provision contained in the statutes) outside the State of Delaware at such place
or places as may be designated from time to time by the Board of Directors or in
the Bylaws of the Corporation.
ARTICLE X
RIGHT TO AMEND CERTIFICATE OF INCORPORATION
The Corporation reserves the right to Change (as defined in Article V) any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation; provided, however, that subject
to the powers and rights provided for herein with respect to Preferred Stock
issued by the Corporation, if any, but notwithstanding anything else contained
in this Certificate of Incorporation to the contrary, the affirmative vote of
the holders of at least eighty percent (80%) of the then outstanding shares of
the Voting Stock (as defined in Article VIII), voting together as a single
class, shall be required to Change Article V, Article VI, Article VII, Article
VIII or this Article X.
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APPENDIX III
FOURTH AMENDED AND
RESTATED BYLAWS
OF
HEALTH SYSTEMS INTERNATIONAL, INC.
<PAGE> 156
ARTICLE I
OFFICES
SECTION 1.1 REGISTERED OFFICE. The registered office of Health Systems
International, Inc. (the "Corporation") in the State of Delaware shall be at
Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County
of New Castle. The name of the Corporation's registered agent at such address is
The Corporation Trust Company.
SECTION 1.2 EXECUTIVE OFFICES. The Corporation will maintain its executive
offices in such location as may be determined by the Corporation's board of
directors (the "Board of Directors").
SECTION 1.3 OTHER OFFICES. The Corporation may also have an office or
offices and keep the books and records of the Corporation, except as may
otherwise be required by law, at such other place or places, either within or
outside of the State of Delaware, as the Board of Directors may from time to
time determine or as the business of the Corporation requires.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 2.1 PLACE OF MEETING. Meetings of stockholders shall be held at
any place within or outside the State of Delaware designated by the Board of
Directors. In the absence of any such designation by the Board of Directors,
stockholders' meetings shall be held at the principal executive office of the
Corporation.
SECTION 2.2 ANNUAL MEETINGS. The annual meeting of the Stockholders for
the election of directors and for the transaction of such other business as may
properly come before such meeting shall be held on the second Friday of May each
year at 10:00 A.M., if not a legal holiday under the laws of the place where
such meeting is to be held, and if a legal holiday, then on the next succeeding
day not a legal holiday under the laws of that place, or on such other date and
at such hour as may be fixed from time to time by a majority of the Board of
Directors.
SECTION 2.3 SPECIAL MEETINGS. Subject to the rights of the holders of any
class or series of stock having a preference over the Corporation's common stock
(the "Common Stock") as to dividends or upon liquidation, special meetings of
the Stockholders for any purpose or purposes may be called only by a majority of
the entire Board of Directors. Only the business specified in the notice of any
special meeting of the Stockholders shall come before such meeting.
SECTION 2.4 NOTICE OF MEETINGS. Written notice of each meeting of the
Stockholders, whether annual or special, shall be given, either by personal
delivery or by mail, not less than 10 days nor more than 60 days before the date
of such meeting to each Stockholder of record entitled to notice of the meeting.
If mailed, the notice shall be deemed to be given when deposited in the United
States of America mail, postage prepaid, directed to the Stockholder at the
Stockholder's address as it appears on the records of the Corporation. Each
notice shall state the place, date and hour of the meeting and the purpose or
purposes for which the meeting is called.
Notice of any meeting of Stockholders shall be deemed waived by any
Stockholder who shall attend the meeting in person or by proxy without
protesting, prior to or at the commencement of the meeting, the lack of proper
notice or who shall waive notice thereof as provided in Article X of these
Bylaws. Notice of adjournment of a meeting of Stockholders need not be given if
the time and place to which it is adjourned are announced at the meeting, unless
the adjournment is for more than 30 days or, after adjournment, a new record
date is fixed for the adjourned meeting.
SECTION 2.5 QUORUM. The holders of a majority of the votes entitled to be
cast by the Stockholders entitled to vote, which if any vote is to be taken by
classes shall mean the holders of a majority of the votes entitled to be cast by
the Stockholders of each class, present in person or by proxy, shall constitute
a quorum for the transaction of business at any meeting of the Stockholders.
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SECTION 2.6 ADJOURNMENTS. In the absence of a quorum, the holders of a
majority of the votes entitled to be cast by the Stockholders, present in person
or by proxy, may adjourn the meeting from time to time. Whether or not a quorum
is present at such meeting, the chairman of the meeting may adjourn the meeting
from time to time. At any adjourned meeting at which a quorum may be present,
any business may be transacted which might have been transacted at the meeting
as originally called.
SECTION 2.7 ORDER OF BUSINESS. At each meeting of the Stockholders, the
Chairman of the Board, or, in his absence, such person designated by the Board
of Directors, shall act as chairman.
SECTION 2.8 LIST OF STOCKHOLDERS. It shall be the duty of the Secretary or
other officer of the Corporation who has charge of the stock ledger to prepare
and make, at least 10 days before each meeting of the Stockholders, a complete
list of the Stockholders entitled to vote thereat, arranged in alphabetical
order, and showing the address of each Stockholder and the number of shares
registered in the Stockholder's name. The list shall be produced and kept
available at the times and places required by law.
SECTION 2.9 VOTING. Each Stockholder of record of any class or series of
stock having a preference over the Common Stock as to dividends or upon
liquidation shall be entitled at each meeting of the Stockholders to that number
of votes for each share of the stock as may be fixed in the Corporation's
Certificate of Incorporation (the "Certificate of Incorporation") or in the
resolution or resolutions adopted by the Board of Directors providing for the
issuance of the stock. Unless specifically provided otherwise in the Certificate
of Incorporation or in resolutions adopted by the Board of Directors providing
for the issuance of a class or series of Common Stock, each Stockholder of
record of Common Stock shall be entitled at each meeting of the Stockholders to
one vote for each share of the stock registered in that Stockholder's name on
the books of the Corporation:
(a) on the date fixed pursuant to Section 7.6 of Article VII of these
Bylaws as the record date for the determination of Stockholders entitled to
notice of and to vote at the meeting; or
(b) if no record date shall have been fixed, then at the close of
business on the day next preceding the day on which notice of the meeting
is given, or if notice is waived, then at the close of business on the day
next preceding the day on which the meeting is held.
Each Stockholder entitled to vote at any meeting of the Stockholders may
authorize not in excess of three persons to act for the Stockholder by a proxy
signed by the Stockholder or the Stockholder's attorney-in-fact. Any proxy shall
be delivered to the Secretary of the Corporation at or prior to the time
designated for holding the meeting, but in any event not later than the time
designated in the order of business for so delivering proxies. No proxy shall be
voted or acted upon after three years from its date, unless the proxy provides
for a longer period.
Except as provided in the Certificate of Incorporation, at each meeting of
the Stockholders, all corporate actions to be taken by vote of the Stockholders
shall be authorized by a majority of the votes cast by the Stockholders entitled
to vote thereon, present in person or represented by proxy, and where a separate
vote by class is required, a majority of the votes cast by the Stockholders of
that class, present in person or represented by proxy, shall be the act of the
class.
Unless required by law or determined by the chairman of the meeting to be
advisable, the vote on any matter, including the election of directors, need not
be by written ballot, In the case of a vote by written ballot, each ballot shall
be signed by the Stockholder voting, or by the Stockholder's proxy, and shall
state the number of shares voted.
SECTION 2.10 INSPECTORS. Either the Board of Directors or, in the absence
of designation of inspectors by the Board of Directors, the chairman of the
meeting of the Stockholders may, in its or such person's discretion, appoint one
or more inspectors to act at any meeting of the Stockholders. The inspectors
shall perform such duties as shall be specified by the Board of Directors or the
chairman of the meeting. Inspectors need not be Stockholders. No director or
nominee for the office of director shall be appointed as an inspector.
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SECTION 2.11 CONSENT IN LIEU OF MEETING. Notwithstanding anything
contained in these Bylaws to the contrary, no action required or permitted to be
taken at any meeting of Stockholders of this Corporation may be taken by written
consent without a meeting of Stockholders.
ARTICLE III
BOARD OF DIRECTORS
SECTION 3.1 GENERAL POWERS. The business and affairs of the Corporation
shall be managed by or under the direction of the Board of Directors, which may
exercise all powers of the Corporation and do all lawful acts and things as are
not by law or by the Certificate of Incorporation directed or required to be
exercised or done by the Stockholders.
SECTION 3.2 NUMBER, QUALIFICATION AND ELECTION. Subject to Article XIII,
the Board of Directors shall consist of not less than three (3) nor more than
twenty (20) directors, the exact number of which shall be fixed from time to
time by the Board of Directors.
Each of the directors of the Corporation shall hold office for the term for
which he is elected and until (i) his successor has been elected and qualified
or (ii) his earlier death, resignation or removal. The directors of the
Corporation shall be classified, with respect to the time for which they hold
office, into three classes as nearly equal in number as possible: Class I whose
term expires at the annual meeting of Stockholders held in 1997, Class II whose
term expires at the annual meeting of Stockholders held in 1998 and Class III
whose term expires at the annual meeting of Stockholders held in 1999, with each
class to hold office until its successors are elected and qualified. If the
number of directors is changed by the Board of Directors, then any newly created
directorships or any decrease in directorships shall be so apportioned among the
classes as to make all classes as nearly equal as possible; provided that no
decrease in the number of directors shall shorten the term of any incumbent
director. At each annual meeting of the Stockholders, subject to the rights of
the holders of any class or series of stock having a preference over the Common
Stock as to dividends or upon liquidation, the successors of the class of
directors whose term expires at that meeting shall be elected to hold office for
a term expiring at the annual meeting of Stockholders held in the third year
following the year of their election.
Directors need not be Stockholders. In any election of directors, the
persons receiving a plurality of the votes cast, up to the number of directors
to be elected in such election, shall be deemed to be elected.
SECTION 3.3 NOTIFICATION OF NOMINATIONS. Subject to the rights of the
holders of any class or series of stock having a preference over the Common
Stock as to dividends or upon liquidation, nominations for the election of
directors shall be made by the Nominating Committee as provided in Article IV,
Section 4.4, or by any Stockholder entitled to vote for the election of
directors.
A Stockholder's nomination shall be made by giving timely notice in proper
written form thereof to the Secretary of the Corporation. To be timely, a
Stockholder's notice shall be delivered to or mailed and received at the
executive offices of the Corporation not less than 60 calendar days nor more
than 90 calendar days prior to the meeting; provided that, in the event that
less than 40 calendar days' notice or prior public disclosure of the date of the
meeting is given or made to the Stockholders, notice by the Stockholder to be
timely must be so received not later than the close of business on the tenth
calendar day following the day on which the notice of the date of the meeting
was mailed or public disclosure was made.
To be in proper written form, a Stockholder's notice shall set forth in
writing: (i) as to each person whom the Stockholder proposes to nominate for
election as a director, all information relating to that person that is required
to be disclosed in solicitations of proxies for the election of directors or is
otherwise required, in each case pursuant to Regulation 14A promulgated under
the Securities Exchange Act of 1934, as amended, including, but not limited to,
the person's written consent to being named in the proxy statement as a nominee
and to serving as a director if elected; and (ii) as to the Stockholder giving
the notice, (w) the name and record address, as they appear on the Corporation's
books, of the Stockholder, (x) the class and number of shares of stock of the
Corporation which are owned beneficially or of record by the Stockholder, (y) a
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description of all arrangements or understandings between the Stockholder and
each proposed nominee and any other person or persons (including their names)
pursuant to which the nominations are to be made by the Stockholder and (z) a
representation that the Stockholder intends to appear in person or by proxy at
the meeting to nominate the persons named in the notice. At the request of the
Board of Directors, any person nominated by the Nominating Committee for
election as a director shall furnish to the Secretary of the Corporation the
information required to be set forth in a Stockholder's notice of nomination
which pertains to the nominee.
In the event that a Stockholder seeks to nominate one or more directors,
the Secretary shall appoint an inspector, who shall not be affiliated with the
Corporation, to determine whether the Stockholder has complied with this Section
3.3. If the inspector shall determine that the Stockholder has not complied with
this Section 3.3, then the inspector shall direct the chairman of the meeting to
declare to the meeting that a nomination was not made in accordance with the
procedures prescribed by these Bylaws, and the chairman shall so declare to the
meeting and the defective nomination shall be disregarded.
SECTION 3.4 QUORUM AND MANNER OF ACTING. Except as may otherwise be
provided by these Bylaws or the Certificate of Incorporation, a majority of the
entire Board of Directors shall constitute a quorum for the transaction of
business at any meeting of the Board of Directors, and the vote of a majority of
the directors present at any meeting at which a quorum is present shall be the
act of the Board of Directors. In the absence of a quorum, a majority of the
directors present may adjourn the meeting to another time and place. At any
adjourned meeting at which a quorum is present, any business may be transacted
which might have been transacted at the meeting as originally called.
SECTION 3.5 PLACE OF MEETING. The Board of Directors may hold its
meetings, both regular and special, at such place or places within or without
the State of Delaware as the Board of Directors may from time to time determine,
or as shall be specified or fixed in the respective notices or waivers of notice
thereof.
SECTION 3.6 REGULAR MEETINGS. Regular meetings of the Board of Directors
shall be held at such times as the Board of Directors shall from time to time by
resolution determine. If any day fixed for a regular meeting shall be a legal
holiday under the laws of the place where the meeting is to be held, then the
meeting which would otherwise be held on that day shall be held at the same hour
on the next succeeding business day.
SECTION 3.7 SPECIAL MEETINGS. Special meetings of the Board of Directors
shall be held whenever called by the Chairman of the Board or by a majority of
the Board of Directors.
SECTION 3.8 NOTICE OF MEETINGS. Notice of regular meetings of the Board of
Directors or of any adjourned meeting thereof need not be given. Notice of each
special meeting of the Board of Directors shall be mailed to each director,
addressed to the director at the director's residence or usual place of
business, at least one calendar day before the day on which the meeting is to be
held or shall be sent to the director at such place by telegraph or be given
personally or by telephone or telecopy not later than one calendar day before
the meeting is to be held, but notice need not be given to any director who
shall, either before or after the meeting, submit a signed waiver of notice or
who shall attend the meeting without protesting, prior to or at its
commencement, the lack of notice. Every notice shall state the time and place
but need not state the purpose of the meeting.
SECTION 3.9 ORDER OF BUSINESS. The Chairman of the Board shall preside at
meetings of the Board of Directors and shall call such meetings to order and may
adjourn such meetings from time to time. In the absence of the Chairman of the
Board, the President and Chief Executive Officer shall preside at meetings of
the Board of Directors.
SECTION 3.10 PARTICIPATION IN MEETING BY MEANS OF COMMUNICATIONS
EQUIPMENT. Any one or more members of the Board of Directors or any committee
thereof may participate in any meeting of the Board of Directors or of any such
committee by means of conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other,
and such participation in a meeting shall constitute presence in person at the
meeting.
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SECTION 3.11 ACTION WITHOUT MEETING. Any action required or permitted to
be taken at any meeting of the Board of Directors or any committee thereof may
be taken without a meeting if all of the members of the Board of Directors or of
the committee consent thereto in writing and the writing or writings are filed
with the minutes of proceedings of the Board of Directors or of the committee.
SECTION 3.12 RESIGNATIONS. Any director of the Corporation may at any time
resign by giving written notice to the Board of Directors, the Chairman of the
Board, the President or the Secretary of the Corporation. Such resignation shall
take effect at the time specified therein, or, if the time is not specified,
upon receipt thereof; and, unless otherwise specified therein, the acceptance of
the resignation shall not be necessary to make it effective.
SECTION 3.13 REMOVAL OF DIRECTORS. Any director may be removed at any time
only for cause by an affirmative vote of the holders of sixty-six and two-thirds
percent (66 2/3%) of the then outstanding shares of voting stock. A vacancy in
the Board of Directors caused by any removal may be filled by the Stockholders
at that meeting or as provided in Section 3.14 of these Bylaws.
SECTION 3.14 VACANCIES. Subject to Article XIII, in the case of any
vacancy on the Board of Directors or in the case of any newly created
directorship, a director elected to fill the vacancy or the newly created
directorship for the unexpired portion of the term being filled shall be filled
by the Nominating Committee. The director elected to fill a vacancy shall hold
office for the unexpired term in respect of which the vacancy occurred and until
his successor shall be elected and shall qualify or until his earlier death,
resignation or removal in the manner provided by these Bylaws.
SECTION 3.15 COMPENSATION. Each director who shall not at the time also be
a salaried officer or employee of the Corporation or any of its subsidiaries
(hereinafter referred to as an "outside director"), in consideration of such
person serving as a director, shall be entitled to receive from the Corporation
such amount per annum and such fees for attendance at meetings of the Board of
Directors or of committees of the Board of Directors, or both, as the Board of
Directors shall from time to time determine. In addition, each director, whether
or not an outside director, shall be entitled to receive from the Corporation
reimbursement for the reasonable expenses incurred by such person in connection
with the performance of such person's duties as a director. Nothing contained in
this Section 3.15 shall preclude any director from serving the Corporation or
any of its subsidiaries in any other capacity and receiving proper consideration
therefor.
ARTICLE IV
COMMITTEES
SECTION 4.1 COMMITTEES. The standing committees of the Board of Directors
of the Corporation shall be a Compensation and Stock Option Committee, an Audit
Committee, an Investment Policy Committee and a Nominating Committee. Subject to
Article XIII, members of each committee of the Board of Directors, including
committees established under Section 4.6 hereof, shall be designated by a
majority of the Board of Directors. Subject to the terms of Article XIII, the
Chairman of the Board shall appoint the chairman of each committee.
SECTION 4.2 COMPENSATION AND STOCK OPTION COMMITTEE. The Compensation and
Stock Option Committee shall have the exclusive power:
(a) To recommend to the Board of Directors the compensation, including
direct regular compensation, stock options or other appropriate incentive
plans, and perquisites, if any, of the two most highly compensated
Corporate Officers of the Corporation, which recommendation shall be
subject to ratification, modification or rejection by the Board of
Directors;
(b) To approve the compensation, including direct regular compensation,
stock options or other appropriate incentive plans, and perquisites, if
any, of the other Corporate Officers not covered in Subsection (a) above
and all other officers from Senior Vice-Presidents and above of the
Corporation and its operating Subsidiaries;
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(c) To review and approve, on a general and policy level basis only,
the compensation and benefits of officers, managers and employees other
than those identified in (a) and (b) above, and such compensation and
benefit matters shall be deemed within the Committee's general oversight;
(d) To recommend to the Board of Directors corporate-wide policies
with respect to direct regular compensation, stock options or other
appropriate incentive plans, and perquisites, if any;
(e) To administer the Corporation's stock option or other stock-based
and equity-based plans (the "Plans");
(f) To fulfill the purposes of the Plans, including, without
limitation, through the conditional grant of options and other benefits
under the Plans;
(g) To recommend to the Board of Directors any revisions or additions
to the Plans;
(h) To recommend to the Board of Directors appropriate actions with
respect to modification, revision or termination of trusteed employee
benefit or welfare plans (such as 401(k) or pension plans), with action
with respect to such trusteed plans being reserved to the Board of
Directors; and
(i) To review and report to the Board of Directors, when so requested,
on any compensation matter.
SECTION 4.3 AUDIT COMMITTEE. The Audit Committee shall have the following
responsibilities:
(a) To review the scope, cost, and results of the independent audit of
the Corporation's books and records, including the annual financial
statements, through conferences and direct communication with the
independent auditors;
(b) To review the results of the independent audit of the annual
financial statements with management and the internal auditors;
(c) To review the adequacy of the Corporation's accounting, financial,
and operating controls, and the recommendations of the independent auditors
related thereto, through conferences and direct communication with the
internal auditors and other responsible corporate executives;
(d) To recommend annually to the Board of Directors the selection of
the independent auditors;
(e) To approve the appointment or removal of the independent audit
manager;
(f) To consider proposals made by the Corporation's independent
auditors for consulting work other than normal auditing and to judge
whether or not such work could result in a loss of "independence"; and
(g) To review and report to the Board of Directors, when so requested,
on any accounting or financial matters.
SECTION 4.4 NOMINATING COMMITTEE. Subject to the terms of Article XIII,
the Nominating Committee shall have the following responsibilities:
(a) To review qualifications of candidates for Board of Directors
membership from whatever source received;
(b) (i) To nominate candidates for election to the Board of Directors
at each annual meeting of Stockholders of the Corporation and (ii) to fill
vacancies on the Board of Directors which occur between annual meetings of
Stockholders;
(c) To recommend to the Board of Directors criteria relating to tenure
as a director, such as retirement age, limitations on the number of times a
director may stand for reelection, the continuation of directors in an
honorary or similar capacity and the definition of independence as it
relates to the directors; and
(d) To recommend to the Board of Directors the actual assignments of
individual directors (by name) to Board of Directors committees.
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SECTION 4.5 INVESTMENT POLICY COMMITTEE. The Investment Policy Committee
shall have the following responsibilities:
(a) To review the Corporation's investment policies and guidelines;
(b) To monitor performance of the Corporation's investment portfolio;
(c) To review the Corporation's financial structure and operations in
light of the Corporation's long-term objectives and to coordinate such
review with the Audit Committee; and
(d) To review and recommend to the Board of Directors appropriate
action on proposed acquisitions and divestitures.
SECTION 4.6 OTHER COMMITTEES. The Board of Directors may, by resolution
adopted by a majority of the entire Board of Directors, designate from among its
members one or more other committees, each of which shall have such authority of
the Board of Directors as may be specified in the resolution of the Board of
Directors designating such committee.
SECTION 4.7 PROCEDURES. Any committee of the Board of Directors may adopt
such rules and regulations not inconsistent with the provisions of law, the
Certificate of Incorporation or these Bylaws for the conduct of its meetings as
the committee may deem to be proper. A majority of the members of a committee of
the Board of Directors shall constitute a quorum for the transaction of business
at any meeting, and the vote of a majority of the members thereof present at a
meeting at which a quorum is present shall be the act of the committee. No
meeting of any committee of the Board of Directors may be held unless notice has
been given and/or waived by the members of the committee. Meetings may be held
at such times and places as shall be fixed by resolution adopted by a majority
of the members thereof. Special meetings of any committee of the Board of
Directors shall be called at the request of any member thereof. Notice of each
committee meeting of the Board of Directors shall be sent by mail, telegraph or
telephone or delivered personally to each member thereof not later than one
calendar day before the day on which the meetings is to be held, but notice need
not be given to any member who shall, either before or after the meeting, submit
a signed waiver of notice or who shall attend the meeting without protesting
prior to or at its commencement the lack of notice. Any special meeting of any
committee of the Board of Directors shall be a legal meeting without any notice
thereof having been given if all of the members thereof shall be present thereat
and shall not protest the holding of the meeting. Any committee of the Board of
Directors shall keep written minutes of its proceedings and shall report on its
proceedings to the Board of Directors.
ARTICLE V
OFFICERS
SECTION 5.1 ELECTION. Subject to Article XIII, the officers of the
Corporation shall be a Chairman of the Board (who must be a director), a
President and Chief Executive Officer, a Chief Operating Officer, a Secretary
and a Treasurer and any other officer designated as a Corporate Officer from
time to time by a resolution of the Board of Directors, each of whom shall be
elected by the Board of Directors and shall hold office for such term and shall
exercise such powers and perform such duties as set forth in these Bylaws and as
shall be determined from time to time by the Board of Directors (collectively,
the Chairman of the Board, President and Chief Executive Officer, Chief
Operating Officer, Secretary and Treasurer, the "Corporate Officers"). The Board
of Directors or the President and Chief Executive Officer, in its or his
discretion, may also choose one or more Executive Vice Presidents, Senior Vice
Presidents, Vice Presidents, Assistant Secretaries, Assistant Treasurers and
other officers, each of whom shall hold office for such term and shall exercise
such powers and perform such duties as set forth in these Bylaws and as shall be
determined from time to time by the Board of Directors, if such officer was
appointed by the Board of Directors, or the President and Chief Executive
Officer, if such officer was appointed by the President and Chief Executive
Officer. Any number of offices may be held by the same person, unless otherwise
prohibited by law, the Certificate of Incorporation or these Bylaws. The
officers of the Corporation need not be stockholders of the Corporation nor,
except in the case of the Chairman of the Board of Directors, need such officers
be directors of the Corporation. Subject to Article XIII, any vacancy occurring
in any office of the Corporation shall be
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filled by the Board of Directors or by President and Chief Executive Officer in
accordance with this Section 5.1.
SECTION 5.2 REMOVAL. All officers of the Corporation shall hold office
until their successors are chosen and qualified, or until their earlier
resignation or removal. Subject to Article XIII, any officer (including any
Corporate Officer) may be removed at any time by the affirmative vote of a
majority of the Board of Directors. Subject to Article XIII, any officer other
than a Corporate Officer may be removed at any time by the Chairman of the Board
or the President and Chief Executive Officer or by the affirmative vote of a
majority of the Board of Directors.
SECTION 5.3 RESIGNATION. Any officer may resign at any time by giving
notice to the Board of Directors, the President and Chief Executive Officer or
the Secretary of the Corporation. Any resignation shall take effect at the date
of receipt of the notice of resignation or at any later date specified therein,
but the acceptance of the resignation shall not be necessary to make it
effective.
SECTION 5.4 VACANCIES. A vacancy in any office because of death,
resignation, removal or any other cause may be filled for the unexpired portion
of the term in the manner prescribed in these Bylaws for election to the office.
SECTION 5.5 CHAIRMAN OF THE BOARD. The duties of the Chairman of the Board
shall be to preside at meetings of the Board of Directors and, if present, to
preside at the meetings of the Stockholders. Subject to Article XIII, the
Chairman of the Board shall preside as chairman of the meetings of the Board of
Directors or of any committee on which he serves, and shall preside as chairman
of the Stockholder meetings. The Chairman shall work in cooperation with the
President and Chief Executive Officer to prepare agendas and presentations for
all meetings of the Board of Directors and of Stockholders. Except where by law
the signature of the President is required the Chairman of the Board shall
possess the same power as the President to sign all contracts, certificates and
other instruments of the Corporation that may be authorized by the Board of
Directors. The Chairman of the Board shall perform such other duties and may
exercise such other powers as from time to time may be assigned to him by the
Bylaws or by the Board of Directors, subject to the terms of applicable
employment agreements.
SECTION 5.6 PRESIDENT AND CHIEF EXECUTIVE OFFICER. The President and Chief
Executive Officer of the Corporation shall, subject to the control of the Board
of Directors, have general supervision of the business of the Corporation and
shall see that all orders and resolutions of the Board of Directors are carried
into effect. In the absence of the Chairman of the Board, the President and
Chief Executive Officer shall preside at all meetings of the Stockholders and
the Board of Directors and otherwise exercise and discharge all the duties of
the Chairman. The President and Chief Executive Officer shall perform such other
duties as the Board of Directors may from time to time determine, subject to the
terms of applicable employment agreements.
SECTION 5.7 CHIEF OPERATING OFFICER. The Chief Operating Officer shall,
subject to the control of the President and Chief Executive Officer, have
general supervision of the executives in charge of the business of the
Corporation in each region or territory in which the Corporation operates and
shall see that all orders of the President and Chief Executive Officer are
carried into effect. The Chief Operating Officer shall perform such other duties
as the Chairman of the Board may from time to time determine, subject to the
terms of applicable employment agreements. During the absence or disability of
the President, the Chief Operating Officer shall exercise all the powers and
discharge all the duties of the President and Chief Executive Officer.
SECTION 5.8 TREASURER. The Treasurer shall perform all duties incident to
the office of Treasurer and such other duties as from time to time may be
assigned to him by the Chairman of the Board or the Board of Directors.
SECTION 5.9 EXECUTIVE VICE PRESIDENTS, SENIOR VICE PRESIDENTS AND VICE
PRESIDENTS. Each Executive Vice President, Senior Vice President and Vice
President shall have such powers and duties as shall be prescribed by the
President and Chief Executive Officer or the Board of Directors.
SECTION 5.10 SECRETARY. The Secretary shall see that all notices required
to be given by the Corporation are duly given and served. The Secretary shall be
custodian of the seal of the Corporation and shall affix the
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seal or cause it to be affixed to all certificates of stock of the Corporation
(unless the seal of the Corporation on the certificates shall be a facsimile, as
hereinafter provided) and to all documents, the execution of which on behalf of
the Corporation under its seal is duly authorized in accordance with the
provisions of these Bylaws. The Secretary shall have charge of the stock ledger
and also of the other books, records and papers of the Corporation and shall see
that the reports, statements and other documents required by law are properly
kept and filed, and the Secretary shall in general perform all of the duties
incident to the office of Secretary and such other duties as from time to time
may be assigned by the Chairman of the Board or the Board of Directors.
SECTION 5.11 ASSISTANT TREASURERS AND ASSISTANT SECRETARIES. The Assistant
Treasurers and Assistant Secretaries, if any, shall perform such duties as shall
be assigned to them by the Chairman of the Board or the Board of Directors, and
in the absence of the Secretary or Treasurer, as the case may be, or in the
event of his disability or refusal to act, shall perform the duties of the
Secretary or Treasurer, respectively, and when so acting shall have all the
powers of and be subject to all the restrictions upon the Secretary or
Treasurer, respectively.
ARTICLE VI
INDEMNIFICATION
SECTION 6.1 DIRECTORS AND OFFICERS. The Corporation shall indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that he is or
was a director or an officer of the Corporation, against expenses (including,
but not limited to, attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding to the fullest extent and in the manner set forth in
and permitted by the General Corporation Law of the State of Delaware and any
other applicable law as from time to time may be in effect. To the maximum
extent permitted by law, the Corporation shall advance expenses (including
attorneys' fees) incurred by any person indemnified hereunder in defending any
civil, criminal, administrative or investigative action, suit or proceeding upon
any undertaking by or on behalf of such person to repay such amount if it shall
ultimately be determined that he or she is not entitled to be indemnified by the
Corporation. Such right of indemnification and advancement of expenses shall not
be deemed to be exclusive of any other rights to which such director or officer
may be entitled apart from the foregoing provisions. The foregoing provisions of
this Section 6.1 shall be deemed to be a contract between the Corporation and
each director or officer who serves in such capacity at any time while this
Section 6.1 and the relevant provisions of the General Corporation Law of the
State of Delaware and other applicable law, if any, are in effect, and any
repeal or modification thereof shall not affect any right or obligation then
existing, with respect to any state of facts then or theretofore existing, or
any action, suit or proceeding theretofore or thereafter brought or threatened
based in whole or in part upon any such state of facts.
SECTION 6.2 AGENTS AND EMPLOYEES. The Corporation may indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative by reason of the fact that he is or was an
employee or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including, but not limited to, attorneys' fees), judgments, fines, and amounts
paid in settlement actually and reasonably incurred by him in connection with
such action, suit or proceeding to the extent and in the manner set forth in and
permitted by the General Corporation Law of the State of Delaware and any other
applicable law as from time to time may be in effect. Such right of
indemnification shall not be deemed to be exclusive of any other right to which
such person may be entitled apart from the foregoing provisions.
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ARTICLE VII
CAPITAL STOCK
SECTION 7.1 CERTIFICATES OF SHARES. Certificates representing shares of
stock of each class of the Corporation, whenever authorized by the Board of
Directors, shall be in such form as shall be approved by the Board of Directors.
The certificates representing shares of stock of each class shall be signed by,
or in the name of the Corporation by, the Chairman of the Board or the President
and Chief Executive Officer or a Vice President and by the Secretary or an
Assistant Secretary or the Treasurer or an Assistant Treasurer of the
Corporation, and sealed with the seal of the Corporation, which may be a
facsimile thereof. Any or all signatures may be facsimiles if countersigned by a
transfer agent or registrar. If any officer, transfer agent or registrar whose
manual or facsimile signature is affixed to any certificate ceases to be an
officer, transfer agent or registrar before the certificate has been issued, it
may nevertheless be issued by the Corporation with the same effect as if the
officer, transfer agent or registrar were still such at the date of its issue.
SECTION 7.2 TRANSFER OF SHARES. Transfers of shares of stock of each class
of the Corporation shall be made only on the books of the Corporation by the
holder thereof or by such holder's attorney thereunto authorized by a power of
attorney duly executed and filed with the Secretary of the Corporation or a
transfer agent for such stock, if any, and on surrender of the certificate or
certificates for such shares properly endorsed or accompanied by a duly executed
stock transfer power and the payment of all taxes thereon. The person in whose
name such shares of stock stand on the books of the Corporation shall be deemed
to be the owner thereof for all purposes as regards the Corporation; provided
that whenever any transfer of shares of stock shall be made for collateral
security and not absolutely, and written notice thereof shall be given to the
Secretary or to such transfer agent, such fact shall be stated in the stock
ledger entry for the transfer. No transfer of shares of stock shall be valid as
against the Corporation, its stockholders and creditors for any purpose, except
to render the transferee liable for the debts of the Corporation to the extent
provided by law, until it shall have been entered in the stock records of the
Corporation by an entry showing from and to whom transferred.
SECTION 7.3 ADDRESSES OF STOCKHOLDERS. Each Stockholder shall designate to
the Secretary or transfer agent of the Corporation an address at which notice of
meetings and all other corporate notices may be served or mailed to such person,
and, if any Stockholder shall fail to designate such address, corporate notices
may be served upon such person by mail directed to the person at the person's
post office address, if any, as the same appears on the stock record books of
the Corporation or at such person's last known post office address.
SECTION 7.4 LOST, DESTROYED AND MUTILATED CERTIFICATES. The holder of any
share of stock of the Corporation shall immediately notify the Corporation of
any loss, theft, destruction or mutilation of the certificate therefor. The
Corporation may issue to such holder a new certificate or certificates for such
shares of stock, upon the surrender of the mutilated certificates or, in the
case of loss, theft or destruction of the certificate, upon satisfactory proof
of such loss, theft or destruction. The Board of Directors, or a committee
designated thereby, or the transfer agents and registrars for the stock, may, in
their discretion, require the owner of the lost, stolen or destroyed
certificate, or such person's legal representative, to give the Corporation a
bond in such sum and with such surety or sureties as they may direct to
indemnify the Corporation and such transfer agents and registrars against any
claim that may be made on account of the alleged loss, theft or destruction of
any certificate or the issuance of a new certificate.
SECTION 7.5 REGULATIONS. The Board of Directors may make such additional
rules and regulations as it may deem to be expedient concerning the issue and
transfer of certificates representing shares of stock of each class of the
Corporation and may make such rules and take such action as it may deem to be
expedient concerning the issue of certificates in lieu of certificates claimed
to have been lost, destroyed, stolen or mutilated.
SECTION 7.6 FIXING DATE FOR DETERMINATION OF STOCKHOLDERS OF RECORD. In
order that the Corporation may determine the Stockholders entitled to notice of
or to vote at any meeting of the Stockholders or any adjournment thereof, or
entitled to receive payment of any dividend or other distribution or allotment
or any right, or entitled to exercise any right in respect of any change,
conversion or exchange of stock or for the purpose of any lawful action, the
Board of Directors may fix, in advance, a record date, which shall not be
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more than 60 calendar days nor less than 10 calendar days before the date of
such meeting, nor more than 60 calendar days prior to any other action. A
determination of the Stockholders entitled to notice or to vote at a meeting of
the Stockholders shall apply to any adjournment of the meeting; provided that
the Board of Directors may fix a new record date for the adjourned meeting.
ARTICLE VIII
SEAL
The Board of Directors shall provide a corporate seal, which shall bear the
full name of the Corporation and such other words and figures as the Board of
Directors may approve and adopt. The seal may be used by causing it or a
facsimile thereof to be impressed or affixed or in any other manner reproduced.
ARTICLE IX
FISCAL YEAR
The fiscal year of the Corporation shall end on the 31st day of December in
each year.
ARTICLE X
WAIVER OF NOTICE
Whenever any notice whatsoever is required to be given by these Bylaws, by
the Certificate of Incorporation or by law, the person entitled thereto may,
either before or after the meeting or other matter in respect of which such
notice is to be given, waive such notice in writing, which writing shall be
filed with or entered upon the records of the meeting or the records kept with
respect to such other matter, as the case may be, and in such event such notice
need not be given to such person and such waiver shall be deemed to be
equivalent to such notice.
ARTICLE XI
AMENDMENTS
The Board of Directors shall have the power to amend, alter or repeal these
Bylaws and to adopt new Bylaws from time to time by an affirmative vote of
seventy-five percent (75%) of the entire Board of Directors, as then
constituted.
ARTICLE XII
MISCELLANEOUS
SECTION 12.1 EXECUTION OF DOCUMENTS. The Board of Directors or any
committee thereof shall designate the officers, employees and agents of the
Corporation who shall have the power to execute and deliver deeds, contracts,
mortgages, bonds, debentures, notes, checks and other orders for the payment of
money and other documents for and in the name of the Corporation and may
authorize such officers, employees and agents to delegate such power (including,
but not limited to, the authority to redelegate) by written instrument to other
officers, employees or agents of the Corporation. Such delegation may be by
resolution or otherwise and the authority granted shall be general or confined
to specific matters, all as the Board of Directors or any such committee may
determine. In the absence of such designation referred to in the first sentence
of this Section 12.1, the officers of the Corporation shall have such power so
referred to, to the extent incident to the normal performance of their duties.
SECTION 12.2 DEPOSITS. All funds of the Corporation not otherwise employed
shall be deposited from time to time to the credit of the Corporation or
otherwise as the Board of Directors or any committee thereof
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or any officer of the Corporation to whom power in that respect shall have been
delegated by the Board of Directors or any such committee shall select.
SECTION 12.3 CHECKS. All checks, drafts, and other orders for the payment
of money out of the funds of the Corporation, and all notes or other evidences
of indebtedness of the Corporation, shall be signed on behalf of the Corporation
in such manner as shall from time to time be determined by resolution of the
Board of Directors or of any committee thereof.
SECTION 12.4 PROXIES IN RESPECT OF STOCK OR OTHER SECURITIES OF OTHER
CORPORATIONS. The Board of Directors or any committee thereof shall designate
the officers of the Corporation who shall have the authority from time to time
to appoint an agent or agents of the Corporation to exercise in the name and on
behalf of the Corporation the powers and rights which the Corporation may have
as the holder of stock or other securities in any other corporation and to vote
or consent in respect of such stock or securities. Such designated officers may
instruct the person or persons so appointed as to the manner of exercising such
powers and rights, and such designated officers may execute or cause to be
executed in the name and on behalf of the Corporation and under its corporate
seal, or otherwise, such written proxies, powers of attorney or other
instruments as they may deem to be necessary or proper so that the Corporation
may exercise its powers and rights. In the absence of any such designation, the
President shall have the authority granted under this Section 12.4.
SECTION 12.5 BYLAWS SUBJECT TO LAW AND CERTIFICATE OF INCORPORATION. Each
provision of these Bylaws is subject to any contrary provision contained in the
Certificate of Incorporation or of any applicable law as from time to time may
be in effect, and, to the extent any such provision is inconsistent therewith,
such provision shall be superseded thereby for as long as and in any case in
which it is inconsistent, but for all other purposes these Bylaws shall continue
in full force and effect.
ARTICLE XIII
TRANSITION PERIOD MATTERS
Notwithstanding anything else contained in these Bylaws to the contrary,
the provisions of this Article XIII are intended to reflect certain transitional
matters set forth in the Agreement and Plan of Merger, dated October 1, 1996, by
and among the Corporation, FH Acquisition Corp. and Foundation Health
Corporation ("FHC") (the "Merger Agreement"). The provisions set forth below
shall become effective as of the Effective Date:
A. The designees for the classes of the Board of Directors expiring in
1997, 1998 and 1999 as set forth in Section 3.2 hereof shall consist of (i)
for the 1997 class, four members for the class, consisting of Daniel D.
Crowley, Malik M. Hasan, M.D. (or their respective replacements), one
Independent Director appointed from the Corporation's Designees and one
Independent Director appointed from FHC's Designees, (ii) for the 1998
class, three members for the class, consisting of two Independent Directors
appointed from FHC's Designees and one Independent Director appointed from
the Corporation's Designees and (iii) for the 1999 class, four members for
the class, consisting of two Independent Directors appointed from the
Corporation's Designees and two Independent Directors appointed from FHC's
Designees. For purposes of these Bylaws, the "FHC Designees" shall mean the
directors selected by FHC as set forth in Section 2.01(c) of the Merger
Agreement and any FHC Replacement Designees (as defined below), the
"Corporation Designees" shall mean the directors selected by the
Corporation as set forth in Section 2.01(c) of the Merger Agreement and any
Corporation Replacement Designees (as defined below).
B. During the Transition Period (as defined below), the committees of
the Board shall be constituted as follows:
(i) the Compensation and Stock Option Committee shall consist of
four members, two Independent Directors selected from FHC's Designees
and two Independent Directors selected from the Corporation's Designees,
and the Chairman of such Committee shall be selected from the
Corporation's Designees;
12
<PAGE> 168
(ii) the Audit Committee shall consist of four members, two
Independent Directors selected from FHC's Designees and two Independent
Directors selected from the Corporation's Designees, and the Chairman of
such Committee shall be selected from FHC's Designees;
(iii) the Investment Policy Committee shall consist of an equal
number of FHC's Designees (initially including Mr. Crowley and one
Independent Director) and Corporation's Designees (initially including
Dr. Hasan and one Independent Director), and the Chairman of such
Committee shall be selected from the Corporation's Designees;
(iv) the Nominating Committee shall consist of four members, two
Independent Directors selected from FHC's Designees and two Independent
Directors selected from the Corporation's Designees, and the Chairman of
such Committee shall be selected from FHC's Designees; and
(v) there will be no Executive Committee.
Following the Transition Period a majority of the Board of Directors shall
select the directors (which do not have to be Independent Directors unless
required by law or applicable exchange regulation) to serve on the committees to
the Board of Directors.
C. The Board of Directors shall cause the following individuals to be
designated as Corporate Officers of the Corporation, and the Corporation
will honor the employment contracts and related agreements which exist or
are entered into simultaneously with such individuals and certain other
individuals, as described in the Merger Agreement, as follows: Mr. Crowley
as Chairman of the Board, Dr. Hasan as Chief Executive Officer and
President, Jay M. Gellert as Chief Operating Officer, Jeffrey L. Elder as
Treasurer and B. Curtis Westen, Esq., as Secretary. Mr. Crowley will be
Chairman of the Board for the period ending on the earlier of: (i) the date
one (1) year following the Effective Date, or (ii) the date of Mr.
Crowley's death, resignation or removal as Chairman of the Board, upon
which date Dr. Hasan shall become Chairman of the Board and Chief Executive
Officer.
D. During the period beginning on the Effective Date and:
(i) except as hereinafter provided, ending on the date five (5)
years following the Effective Date the number of directors comprising
the full Board of Directors shall be eleven (11), and initially six (6)
of such directors (Mr. Crowley and five (5) other Independent Directors)
shall be designated by FHC and five (5) of such directors (Dr. Hasan and
four (4) other Independent Directors) shall be designated by the
Corporation; provided that for a period beginning on the Effective Date
and up to, but not including, the election of directors at the May 2000
Annual Meeting of Stockholders (the "Transition Period"), if Dr. Hasan,
at any time, is not the Chief Executive Officer of the Corporation and
not on the Board of Directors, then prior to the next meeting of the
Board of Directors following such occurrence, the other Corporation
Designees will select a Corporation Replacement Designee to replace Dr.
Hasan as director, and either (y) an FHC Designee will resign so that
the Board shall consist of ten (10) directors, of whom five shall be
Corporation Designees and five shall be FHC Designees, or (z) the
directors will take actions to increase the board size to twelve (12)
and the Corporation Designees shall select a Corporation Replacement
Designee to fill the vacancy created by such increase in the board's
size and following any date that the Board of Directors consists of ten
(10) or twelve (12) directors pursuant to this paragraph, such Board
shall be entitled to increase the size of the Board by one (1) in order
to fill such new directorship with the new Chief Executive Officer of
the Corporation. A Corporation Replacement Designee shall mean an
Independent Director designated to replace a Corporation Designee by the
other remaining Corporation Designees and shall be selected from (i) the
Independent Directors of the Corporation's board of directors as of the
date of the Merger Agreement or (ii) any other individual who qualifies
as an Independent Director and who is approved by at least one FHC
Designee, which approval shall not be unreasonably withheld. An FHC
Replacement Designee shall mean an Independent Director designated to
replace an FHC Designee by the other remaining FHC Designees and shall
be selected from (i) the Independent Directors of FHC's board of
directors as of the date of the Merger Agreement or (ii) any other
individual who qualifies as an Independent Director and who is approved
by at least one Corporation Designee, which approval shall not be
unreasonably withheld;
13
<PAGE> 169
(ii) during the Transition Period, except as provided in clause (i)
above, the nominating committee shall nominate for election to the board
of directors at the 1997, 1998 and 1999 Annual Meetings of Stockholders,
the FHC Designees and Corporation Designees appointed to the class
pursuant to these Bylaws and the Merger Agreement;
(iii) during the Transition Period, (w) the affirmative vote of at
least eight (8) of the members of the Board shall be required for the
Board of Directors to approve, authorize or otherwise take any action
pursuant to Article II, Sections 2.2 and 2.3 (in each case only with
respect to the applicable portion of the meetings for the election or
removal of directors, amendment of the Bylaws or other actions
inconsistent with the terms of the Merger Agreement); Article III,
Section 3.2; Article IV, Section 4.6; and all of Article XI, (x) in the
event of the death, resignation, removal or failure to stand for
reelection of any of the directors originally designated by FHC or the
Corporation pursuant to the Merger Agreement, the vacancy shall be
filled with an FHC Replacement Designee or a Corporation Replacement
Designee, as the case may be, (y) in the event of the death, resignation
or removal of any member of a committee, the vacancy will be filled with
an FHC Designee or a Corporation Designee director, as the case may be,
to maintain an equal representation on such committee, and (z) the Board
of Directors of the Corporation shall waive all age limitations related
to a persons' ability to serve as a director on the Board of Directors
of the Corporation;
(iv) until the date (2) years after Mr. Crowley is no longer
employed by the Corporation as an employee or officer, the employment
agreements entered into between the Corporation or FHC on the one hand
and Mr. Crowley on the other hand shall not be renewed, extended or
amended, nor may Mr. Crowley be rehired without the affirmative vote of
at least eight (8) of the members of the Board of Directors; and
(v) until the earlier of the date: (y) 18 months after the
Effective Date or (z) six months following the date of Mr. Crowley's
death, resignation or removal as Chairman of the Board, Dr. Hasan shall
not be removed or otherwise replaced as the Chief Executive Officer
without the affirmative vote of at least eight (8) of the members of the
Board of Directors.
E. No action may be taken which could be deemed to be inconsistent
with this Article XIII or the terms of the Merger Agreement, including
without limitation the provisions of Sections 2.01, 2.02, 7.08 and 7.12 of
the Merger Agreement without the consent of at least eight (8) members of
the Board of Directors.
F. For the purposes of this Article XIII, an "Independent Director"
shall mean (i) any individual who is not a past or present employee or
officer of the Corporation, FHC or their Affiliates or any Affiliate of
such an employee or officer or (ii) notwithstanding clause (i), any of the
existing directors of FHC and the Corporation (other than such individuals
who were officers or employees of the Corporation or FHC as of September
30, 1996); provided that, after the Effective Date each Independent
Director shall have no financial relationship with the Corporation (other
than employment and retirement awards granted prior to the Effective Date
and benefits and future director compensation and benefits); provided that
with respect to such Independent Directors whose law firms are providing
legal services to the Corporation, such law firms may complete work on
existing assignments that in the judgment of the Corporation cannot be
reasonably terminated; provided further that such financial relationship
restriction will not apply to New FHS director George Deukmejian, with
respect to his current law firm. For the purposes of these Bylaws,
"Affiliate" or "Affiliates" shall be defined as (i) any other Person
directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person and (ii) any family
members of such Person. For purposes of this definition, "Person" shall
mean any individual, partnership, firm, corporation, association, joint
venture, trust or other entity. "Control" when used with respect to any
specified Person shall mean the power to direct the management and policies
of such Person, directly and indirectly, whether through the ownership of
voting securities, by contract or otherwise; and the terms "controlling"
and "controlled" have meanings correlative to the foregoing.
14
<PAGE> 170
APPENDIX IV
[MORGAN STANLEY LETTERHEAD]
MORGAN STANLEY & CO.
INCORPORATED
1585 BROADWAY
NEW YORK, NEW YORK 10036
(212) 761-4000
January 6, 1997
Board of Directors
Foundation Health Corporation
3400 Data Drive
Rancho Cordova, CA 95670
Dear Sirs:
We understand that Foundation Health Corporation (the "Company"), Health
Systems International, Inc. ("Parent") and FH Acquisition Corp., a wholly owned
subsidiary of Parent ("Merger Sub"), have entered into an Agreement and Plan of
Merger, dated as of October 1, 1996 (the "Merger Agreement"), which provides,
among others things, for the merger ("Merger") of Merger Sub with and into the
Company. Pursuant to the Merger, the Company will become a wholly owned
subsidiary of Parent and each issued and outstanding share of common stock, par
value $0.01 per share, of the Company (the "Company Common Stock"), other than
shares held in treasury or owned by Parent or any wholly owned subsidiary of
Parent, will be converted into the right to receive 1.300 (the "Exchange Ratio")
shares of Class A Common Stock, par value $0.001 per share, of Parent (the
"Parent Common Stock"). The terms and conditions of the Merger are more fully
set forth in the Merger Agreement.
You have asked for our opinion as to whether the Exchange Ratio pursuant to
the Merger Agreement is fair from a financial point of view to holders of the
Company Common Stock.
For purposes of this opinion set forth herein, we have:
(i) reviewed certain publicly available financial statements and other
information of the Company and Parent, respectively;
(ii) reviewed certain internal financial statements and other financial
and operating data concerning the Company and Parent prepared by
the management of the Company and Parent, respectively;
(iii) analyzed certain summary financial projections concerning the
Company prepared by the management of the Company;
(iv) analyzed certain summary financial projections concerning Parent
prepared by the management of Parent;
(v) reviewed and discussed with senior executives of the Company the
past and current operations and financial condition and the
prospects of the Company;
(vi) reviewed and discussed with senior executives of Parent the past
and current operations and financial condition and the prospects of
Parent and analyzed the estimated pro forma impact of the Merger,
including on the combined company's earnings per share,
consolidated capitalization and financial ratios;
(vii) reviewed and discussed with senior executives of the Company and
Parent the strategic objectives of the Merger and the long-term
benefits expected to result from the Merger,
<PAGE> 171
MORGAN STANLEY
January 6, 1997
Page 2
including without limitation, certain estimates and timing of
synergies and other cost savings for the combined company;
(viii) reviewed the reported prices and trading activity for the Company
Common Stock and the Parent Common Stock;
(ix) compared the financial performance of the Company and Parent and
the prices and trading activity of the Company Common Stock and the
Parent Common Stock with that of certain other comparable publicly
traded companies and their securities;
(x) reviewed the financial terms, to the extent publicly available, of
certain comparable transactions;
(xi) reviewed the Merger Agreement and certain related documents; and
(xii) considered such other factors as we have deemed appropriate.
We have assumed and relied upon, without independent verification, the
accuracy and completeness of the information reviewed by us for the purpose of
this opinion. With respect to the financial projections, including estimates of
the long-term benefits expected to result from the Merger, we have assumed that
they have been reasonably prepared on bases reflecting the best currently
available estimates and judgments of the future financial performance of the
Company and Parent. Furthermore, we have not assumed responsibility for
conducting a physical inspection of the properties or facilities of the Company
or Parent or for making or obtaining any independent valuation or appraisal of
the assets or liabilities of the Company or Parent, nor have we been furnished
with any such valuations or appraisals. We have assumed, with your consent, that
the Merger will be treated as a tax-free reorganization and/or exchange, each
pursuant to the Internal Revenue Code of 1986 and that the Merger will be
accounted for as a "pooling of interest" business combination in accordance with
U.S. generally accepted accounting principles. We have also assumed that the
transactions described in the Merger Agreement will be consummated on the terms
set forth therein. Our opinion is necessarily based on economic, market and
other conditions as in effect on, and the information made available to us as
of, the date hereof.
We have acted as financial advisor to the Board of Directors of the Company
in connection with the Merger and will receive a fee for our services. Morgan
Stanley & Co. Incorporated and its affiliates in the past have provided
financial advisory and financing services to the Company and have received fees
for rendering these services.
It is understood that this opinion letter is for the information of the
Board of Directors of the Company, and we consent to the inclusion of this
opinion letter in its entirety in any filing with the Securities and Exchange
Commission in connection with the Merger. In addition, we express no opinion or
recommendation as to how the holders of Company Common Stock should vote at the
stockholders' meeting held in connection with the Merger.
Based upon and subject to the foregoing, we are of the opinion that as of
the date hereof, that the Exchange Ratio is fair from a financial point of view
to the holders of the Company Common Stock.
Very truly yours,
MORGAN STANLEY & CO. INCORPORATED
By: /s/ CHARLES R. CORY
Charles R. Cory
Managing Director
<PAGE> 172
APPENDIX V
SALOMON BROTHERS INC
Seven World Trade Center
New York, New York 10008
[SALOMON BROTHERS LOGO]
January 6, 1997
Board of Directors
Health Systems International, Inc.
21600 Oxnard St.
Suite 1700
Woodland Hills, CA 91367
Ladies and Gentlemen:
You have requested our opinion as investment bankers as to the fairness,
from a financial point of view, to the holders of Class A common stock, par
value $.001 (the "Company Class A Common Stock"), and the holders of Class B
common stock, par value $.001 per share (collectively, the "Company Common
Stock"), of Health Systems International, Inc., a Delaware corporation (the
"Company"), of the exchange ratio of shares of the Company's Class A Common
Stock which holders of shares of Common Stock, par value $.01 per share
("Foundation Common Stock"), of Foundation Health Corporation, a Delaware
corporation ("Foundation"), would receive in connection with the proposed
business combination pursuant to an Agreement and Plan of Merger dated October
1, 1996 (the "Merger Agreement") among the Company, Foundation Merger Sub
Corporation, a Delaware corporation and wholly owned subsidiary of the Company
("Merger Sub"), and Foundation (the "Combination").
In the Combination, Merger Sub would merge with and into Foundation and
Foundation would become a wholly owned subsidiary of the Company, and each
issued and outstanding share of Foundation Common Stock, other than shares
canceled in the merger, would be converted into the right to receive 1.3 shares
of Company Class A Common Stock (the "Exchange Ratio"). We understand that the
Company intends to account for the Combination as a pooling of interests in
accordance with generally accepted accounting principles as described in
Accounting Principles Board Opinion Number 16.
In arriving at our opinion, we have reviewed a draft of the Merger
Agreement and its related exhibits. We have reviewed certain publicly available
business and financial information relating to the Company and Foundation, as
well as certain other information, including financial projections, which the
Company and Foundation provided to us. We have discussed the past and current
operations and financial condition and prospects of the Company and Foundation,
including the possible benefits of operational synergies following the
completion of the Combination, with certain members of their respective senior
managements and independent outside auditors. We also have considered such other
information, financial studies and analyses, investigations and financial,
economic, market and trading criteria which we deemed relevant, including our
knowledge of the managed health care industry as well as our experience in
connection with similar transactions and securities valuation generally.
We have assumed and relied upon the accuracy and completeness of the
information which we have reviewed for the purpose of this opinion and we have
not assumed any responsibility for independent verification of such information
or for independent evaluation or appraisal of the assets of the Company and
Foundation. With respect to the financial projections of the Company and
Foundation, we have assumed that
---------------------------------------
SALOMON BROTHERS INC & WORLDWIDE AFFILIATES
---------------------------------------
Atlanta - Bangkok - Beijing - Boston - Chicago - Frankfurt - Hong
Kong - London - Los Angeles - Madrid - Melbourne
Mexico City - Milan - New York - Osaka - Paris - San
Francisco - Seoul - Singapore - Sydney - Taipei - Tokyo - Tunisia - Zurich
<PAGE> 173
SALOMON BROTHERS INC
Health Systems International Inc.
Board of Directors
January 6, 1997
Page 2 [SALOMON BROTHERS LOGO]
they have been prepared on bases reflecting the best currently available
estimates and judgments of the managements of the Company and Foundation, as the
case may be, as to the future performance of such entity, and we express no
opinion with respect to such forecasts or the assumptions on which they are
based. We have also assumed that the parties will complete the Combination in
accordance with the terms of the Merger Agreement. We have also assumed that the
definitive Merger Agreement and related exhibits will not, when executed,
contain any terms or conditions that differ materially from the terms and
conditions contained in the drafts of such documents we have reviewed.
Our opinion is necessarily based upon the business, market economic and
other conditions as they exist on, and can be evaluated as of, the date of this
letter, and does not address the Company's underlying business decision to enter
into the Combination or constitute a recommendation to any holder of Company
Common Stock as to how such holder should vote with respect to the Combination.
We were not requested to, and did not, solicit third party offers to acquire all
or any part of the Company. Our opinion as expressed below does not imply any
conclusion as to the likely trading range for Company Common Stock following the
completion of the Combination, which may vary depending on, among other factors,
changes in interest rates, dividend rates, market conditions, general economic
considerations and other factors that generally influence the price of
securities.
We have acted as financial advisor to the Board of Directors of the Company
in connection with the Combination and will receive a fee for our services. The
payment of a substantial portion of this fee is contingent upon the completion
of the Combination. Salomon Brothers has provided certain investment banking
services to the Company in the past and received customary compensation,
including acting as a managing underwriter in connection with the Company's
equity offering in 1995. We also provide investment banking services to
Foundation and in the past we have received customary compensation for such
services, including (i) acting as Foundation's financial advisor in connection
with its simultaneous acquisitions in 1994 of Thomas-Davis Medical Centers, P.C.
and related affiliate, Intergroup Healthcare Corporation and (ii) acting as
Foundation's lead manager in connection with its $125 million note offering in
1993. Also, in the ordinary course of our business, we actively trade the
securities of the Company and Foundation for our own account and for the
accounts of customers and accordingly, may at any time hold a long or short
position in such securities.
It is understood that this letter is for the information of the Board of
Directors of the Company and may not be used for any other purpose without our
prior written consent, except that this opinion may be included in any filing
which the Company makes with the Securities and Exchange Commission with respect
to the Combination (and included in a proxy statement relating to the
Combination).
Based upon the foregoing, it is our opinion that, as of the date of this
letter, the Exchange Ratio is fair, from a financial point of view, to the
holders of the Company Common Stock.
Very truly yours,
SALOMON BROTHERS INC
<PAGE> 174
APPENDIX VI
[Shattuck Hammond Partners Letterhead]
January 6, 1997
Board of Directors
Health Systems International, Inc.
21600 Oxnard Street
Suite 1700
Woodland Hills, CA 91367
Ladies and Gentlemen:
You have requested our opinion as investment bankers as to the fairness,
from a financial point of view, to the holders of Class A Common Stock, par
value $.001 per share (the "Company Class A Common Stock"), and the holders of
Class B common stock, par value $.0001 per share (collectively the "Company
Common Stock"), of Health Systems International, Inc., a Delaware corporation
(the "Company"), of the exchange ratio of shares of the Company Class A Common
Stock, which holders of shares of Common Stock, par value $.01 per share
("Foundation Common Stock"), of Foundation Health Corporation, a Delaware
corporation ("Foundation"), would receive in connection with the proposed
business combination pursuant to an Agreement and Plan of Merger dated October
1, 1996 (the "Merger Agreement") among the Company, Foundation Merger Sub
Corporation, a Delaware corporation and wholly owned subsidiary of the Company
("Merger Sub"), and Foundation (the "Combination").
In the Combination, Merger Sub would merge into Foundation and Foundation
would become a wholly owned subsidiary of the Company, and each issued and
outstanding share of Foundation Common Stock, other than shares canceled in the
merger, would be converted into the right to receive 1.3 shares of Company Class
A Common Stock (the "Exchange Ratio"). We understand that the Company intends to
account for the combination as a pooling of interests in accordance with
generally accepted accounting principles as described in Accounting Principles
Board Opinion Number 16.
In arriving at our opinion, we have reviewed a draft of the Merger
Agreement and its related exhibits. We have reviewed certain publicly available
business and financial information relating to the Company and Foundation, as
well as certain other information, including financial projections, which the
Company and Foundation provided to us. We have discussed the past and current
operations and financial condition and prospects of the Company and Foundation,
including the possible benefits of operational synergies following the
completion of the Combination, with certain members of their respective senior
managements and independent outside auditors. We have also considered such other
information, financial studies and analyses, investigations and financial,
economic, market and trading criteria which we deemed relevant, including our
knowledge of the managed health care industry as well as our experience in
connection with similar transactions and securities valuation generally.
<PAGE> 175
Board of Directors
Health Systems International, Inc.
January 6, 1997
Page 2
We have assumed and relied upon the accuracy and completeness of the
information which we have reviewed for the purpose of this opinion and we have
not assumed any responsibility for independent verification of such information
or for independent evaluation or appraisal of the assets of the Company and
Foundation. With respect to the financial projections of the Company and
Foundation, we have assumed that they have been prepared on bases reflecting the
best currently available estimates and judgments of the managements of the
Company and Foundation, as the case may be, as to the future performance of such
entities, and we express no opinion with respect to such forecasts or the
assumptions on which they are based. We have also assumed that the parties will
complete the Combination in accordance with the terms of the Merger Agreement.
We have also assumed that the definitive Merger Agreement and related exhibits
will not, when executed, contain any terms or conditions that differ materially
from the terms and conditions contained in the drafts of such documents we have
reviewed.
Our opinion is necessarily based upon the business, market economic and
other conditions as they exist on, and can be evaluated as of, the date of this
letter and does not, address the Company's underlying business decision to enter
into the Combination or, constitute a recommendation to any holder of Company
Common Stock as to how such holder should vote with respect to the Combination.
We were not requested to, and did not, solicit third party offers to acquire all
or any part of the Company. Our opinion as expressed below does not imply a
conclusion as to the likely trading range for Company Common Stock following the
completion of the Combination, which may vary depending on, among other factors,
changes in interest rates, dividend rates, market conditions, general economic
considerations and other factors that generally influence the price of
securities.
We have acted as financial advisor to the Board of Directors of the Company
in connection with the Combination and will receive a fee for our services. The
payment of a substantial portion of this fee is contingent upon the completion
of the Combination. Shattuck Hammond Partners Inc. has provided certain
investment banking services to the Company in the past and received customary
compensation. Shattuck Hammond Partners Inc. is currently providing certain
other investment banking services to the Company which services are not related
to the Combination.
It is understood that this letter is for the information of the Board of
Directors of the Company and may not be used for any other purpose without prior
written consent, except that this opinion may be included in any filing which
the Company makes with the Securities and Exchange Commission with respect to
the Combination.
Based upon the foregoing, it is our opinion that, as of the date of this
letter, the Exchange Ratio is fair, from a financial point of view, to the
public stockholders of the Company.
Very truly yours,
SHATTUCK HAMMOND PARTNERS INC.
<PAGE> 176
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law (the "DGCL") permits a
corporation to indemnify any of its directors of officers who was or is a party,
or is threatened to be made a party to any third party proceeding by reason of
the fact that such person is or was a director or officer of the corporation,
against expenses (including attorney's fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding, if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reason to believe that such person's conduct was unlawful. In
a derivative action, i.e., one by or in the right of the corporation, the
corporation is permitted to indemnify directors and officers against expenses
(including attorney's fees) actually and reasonably incurred by them in
connection with the defense or settlement of an action or suit if they acted in
good faith and in a manner that they reasonably believed to be in or not opposed
to the best interests of the corporation, except that no indemnification shall
be made if such person shall have been adjudged liable to the corporation,
unless and only to the extent that the court in which the action or suit was
brought shall determine upon application that the defendant directors or
officers are fairly and reasonably entitled to indemnity for such expenses
despite such adjudication of liability.
HSI's Third Amended and Restated Certificate of Incorporation (the
"Certificate") and Bylaws contain provisions permitted by the DGCL (under which
HSI is organized) which, in general terms, provide that directors and officers
will be indemnified by HSI for all losses that may be incurred by them in
connection with any claim or legal action in which they may become involved by
reason of their service as a director or officer of HSI, if they meet certain
specified conditions. In addition, HSI's Certificate contains provisions
permitted by the DGCL, which limit the monetary liability of directors of HSI
for certain breaches of their fiduciary duty of care and provide for the
advancement by HSI to directors and officers of expenses incurred by them in
defending suits arising out of their services as such. HSI has also entered into
agreements with its directors and certain of its officers which essentially
provide that HSI will indemnify such directors and officers to the extent set
forth in the Certificate and Bylaws of HSI. In addition, HSI maintains a
directors' and officers' liability insurance policy.
Pursuant to Section 7.12 of the Merger Agreement, HSI has agreed that, for
a period of six years following the Effective Time, (a) HSI will continue and
guarantee the performance of the indemnification rights of present and former
directors and officers of HSI and FHC provided for in the Certificate of
Incorporation, Bylaws and Indemnification Agreements of HSI and FHC, with
respect to indemnification for acts and omissions occurring prior to the
Effective Time, and (b) HSI will cause to be maintained the current policies of
the officers' and directors' liability insurance maintained by HSI and FHC
covering persons who are presently covered by each company's officers' and
directors' liability insurance policies with respect to acts and omissions
occurring prior to the Effective Time; provided that policies with third party
insurers of similar or better A.M. Best rating whose terms, conditions and
coverage are no less advantageous may be substituted therefor, and provided
further that in no event shall HSI be required to expend to maintain or procure
insurance coverage an amount in excess of 150% of the current annual premiums
for the twelve-month period ended June 30, 1997.
II-1
<PAGE> 177
ITEM 21. EXHIBITS
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ---------------------
<S> <C>
2.5 -- Agreement and Plan of Merger, dated October 1, 1996, by and among
Health Systems International, Inc., FH Acquisition Corporation and
Foundation Health Corporation (included as Appendix I to the Joint
Proxy Statement/Prospectus).
3.1 -- Third Amended and Restated Certificate of Incorporation of HSI
(included as Exhibit 4.1 to the HSI Registration Statement on Form
S-8 (File no. 33-74780) which is incorporated by reference herein).
3.2 -- Third Amended and Restated By-Laws of HSI (included as Exhibit 4.1 to
HSI's Quarterly Report on Form 10-Q for the quarter ended September
30, 1995, which is incorporated by reference herein).
3.2.1 -- Amendment to Third Amended and Restated By-Laws of HSI (included as
Exhibit 3.2.1 to HSI's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996, which is incorporated by reference herein).
4.1 -- Form of Class A Common Stock Certificate of HSI (included as Exhibit
4.2 to HSI's Registration Statement 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 of HSI (included as Exhibit
4.3 to HSI's Registration Statement on Forms S-1 and S-4 (File nos.
33-72892 and 33-72892-01, respectively, which is incorporated by
reference herein).
4.3.1 -- Nonnegotiable Senior Secured Promissory Note in the original
principal amount of $150,000,000, dated January 28, 1992, made by
Health Net in favor of The California Wellness Foundation (filed as
Exhibit 4.8 to HSI's Registration Statement on Forms S-1 and S-4
(File nos. 33-72892 and 33-72892-01, respectively, which is
incorporated by reference herein).
4.3.2 -- Nonnegotiable Subordinated Secured Promissory Note in the original
principal amount of $75,000,000, dated January 28, 1992, made by
Health Net in favor of The California Wellness Foundation (filed as
Exhibit 4.9 to HSI's Registration Statement on Forms S-1 and S-4
(File nos. 33-72892 and 33-72892-01, respectively, which is
incorporated by reference herein).
4.3.3 -- Senior Security Agreement, dated January 28, 1992, between Health Net
and The California Wellness Foundation (filed as Exhibit 4.10 to
HSI'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).
4.3.4 -- Subordinated Security Agreement, dated January 28, 1992, between
Health Net and The California Wellness Foundation (filed as Exhibit
4.11 to HSI'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).
4.3.5 -- Cash Pledge Agreement, dated January 28, 1992, by and between Health
Net and The California Wellness Foundation (filed as Exhibit 4.12 to
HSI'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).
</TABLE>
II-2
<PAGE> 178
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ---------------------
<S> <C>
4.3.6 -- Sinking Fund Agreement, dated January 28, 1992, between Health Net
and The California Wellness Foundation (filed as Exhibit 4.13 to
HSI'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).
4.3.7 -- Charitable Contribution Grant and Subordination Agreement, dated
January 28, 1992, between Health Net and The California Wellness
Foundation (filed as Exhibit 4.14 to HSI'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).
4.3.8 -- Guaranty Agreement, dated January 28, 1992, between Health Net and
The California Wellness Foundation (filed as Exhibit 4.15 to HSI'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).
5.1 -- Opinion of Skadden, Arps, Slate, Meagher & Flom regarding the
validity of the securities being registered, a copy of which is filed
herewith.
8.1 -- Opinion of Pillsbury Madison & Sutro LLP regarding certain federal
income tax matters, a copy of which is filed herewith.
9.1 -- Voting Agreement, dated October 1, 1996, between Malik M. Hasan and
Foundation Health Corporation, a copy of which is filed herewith.
10.1 -- Amended and Restated Employment Agreement, dated December 16, 1996,
by and among HSI, Foundation Health Corporation and Daniel D.
Crowley, a copy of which is filed herewith. (Including, as Exhibit A,
the Consulting Agreement, dated October 1, 1996, by and among these
same parties.)
10.2 -- Amended and Restated Employment Agreement, dated December 16, 1996,
by and among HSI, Foundation Health Corporation and Kirk A. Bensen, a
copy of which is filed herewith. (Including, as Exhibit A, the
Consulting Agreement, dated October 1, 1996, by and among these same
parties.)
10.3 -- Amended and Restated Employment Agreement, dated December 16, 1996,
by and among HSI, Foundation Health Corporation and Steven D. Tough,
a copy of which is filed herewith. (Including, as Exhibit A, the
Consulting Agreement, dated October 1, 1996, by and among these same
parties.)
10.4 -- Amended and Restated Employment Agreement, dated December 16, 1996,
by and among HSI, Foundation Health Corporation and Jeffrey L. Elder,
a copy of which is filed herewith.
10.5 -- Amended and Restated Employment Agreement, dated December 16, 1996,
by and among HSI, Foundation Health Corporation and Allen J.
Marabito, a copy of which is filed herewith.
23.1 -- Consent of Deloitte & Touche LLP (HSI), a copy of which is filed
herewith.
23.2 -- Consent of Deloitte & Touche LLP (FHC), a copy of which is filed
herewith.
23.3 -- Consent of Ernst & Young LLP (FHC), a copy of which is filed
herewith.
23.4 -- Consent of Ernst & Young LLP (HSI), a copy of which is filed
herewith.
23.5 -- Consent of Coopers & Lybrand LLP, a copy of which is filed herewith.
23.6 -- Consent of Stevenson, Jones & Holmans, P.C., a copy of which is filed
herewith.
</TABLE>
II-3
<PAGE> 179
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ---------------------
<S> <C>
23.7 -- Consent of Skadden, Arps, Slate, Meagher & Flom (Included in the
Opinion filed as Exhibit 5.1 to this Registration Statement and
incorporated by reference herein.)
23.8 -- Consent of Pillsbury Madison & Sutro LLP (Included in the Opinion
filed as Exhibit 8.1 to this Registration Statement and incorporated
by reference herein).
23.9 -- Consent of Salomon Brothers Inc (Included in the Opinion filed as
Appendix V to the Joint Proxy Statement/Prospectus and incorporated
by reference herein.)
23.10 -- Consent of Shattuck Hammond Partners Inc. (Included in the Opinion
filed as Appendix VI to the Joint Proxy Statement/Prospectus and
incorporated by reference herein.)
23.11 -- Consent of Morgan Stanley & Co., Incorporated (Included in the
Opinion filed as Appendix IV to the Joint Proxy Statement/Prospectus
and incorporated by reference herein.)
24.1 -- Powers of attorney (included on the signature page contained in Part
II of this Registration Statement and incorporated by reference
herein).
99.1 -- HSI Proxy/Voting Instruction Card, a copy of which is filed herewith.
99.2 -- FHC Proxy/Voting Instruction Card, a copy of which is filed herewith.
99.3 -- Consent of Persons About to Become Directors, a copy of which is
filed herewith.
</TABLE>
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) to include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in the volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change
in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-4
<PAGE> 180
(4) That prior to any public reoffering of the securities registered
hereunder through use of prospectus which is a part of this Registration
Statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
(5) That every prospectus (i) that is filed pursuant to paragraph (4)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Securities Act and is used in connection with an
offering of securities subject to rule 415, will be filed as a part of an
amendment to the Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(6) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the registrant's annual report
pursuant to section 13(a) or section 15(d) of the Securities Exchange Act
of 1934 (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(7) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(b) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(c) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-5
<PAGE> 181
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Pueblo, state of Colorado
on January 5, 1997.
HEALTH SYSTEMS INTERNATIONAL, INC.
By: /s/ MALIK M. HASAN,
M.D.
------------------------------------
Malik M. Hasan, M.D.
Chairman of the Board of Directors,
Treasurer (Principal Financial and
Accounting Officer)
and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned officers and
directors of Health Systems International, Inc. ("HSI") hereby constitutes and
appoints Malik M. Hasan, M.D. and B. Curtis Westen, Esq., or either of them
(with full power to each of them to act alone), his true and lawful
attorney-in-fact and agent, with full power of substitution, for him and on his
behalf and in his name, place and stead, in any and all capacities, to sign,
execute and file this Registration Statement under the Securities Act of 1933,
as amended and any or all amendments (including, without limitation,
post-effective amendments and any amendment or amendments or additional
registration statements filed pursuant to Rule 462 of the Securities Act
increasing the amount of securities for which registration is being sought),
with all exhibits and any and all documents required to be filed with respect
thereto, with the Securities and Exchange Commission or any regulatory
authority, granting unto such attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises in order to
effectuate the same, as fully to all intents and purposes as he himself might or
could do if personally present, hereby ratifying and conforming all that such
attorneys-in-fact and agents, or any of them, or their substitute or
substitutes, may lawfully do or cause to be done.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------------- --------------------------------- ----------------
<S> <C> <C>
/s/ LAWRENCE E. Director January 5, 1997
AUSTIN
- -----------------------------------------
Lawrence E. Austin, M.D.
/s/ DALE T. BERKBIGLER, Director and Executive Vice January 5, 1997
M.D. President for Medical Affairs
- -----------------------------------------
Dale T. Berkbigler, M.D.
/s/ J. THOMAS Director January 5, 1997
BOUCHARD
- -----------------------------------------
J. Thomas Bouchard
/s/ CHARLES T. BRADEN Director January 5, 1997
- -----------------------------------------
Charles T. Braden
/s/ GOV. GEORGE DEUKMEJIAN Director January 5, 1997
- -----------------------------------------
Gov. George Deukmejian
</TABLE>
II-6
<PAGE> 182
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------------- --------------------------------- ----------------
<S> <C> <C>
/s/ THOMAS T. Director January 5, 1997
FARLEY
- -----------------------------------------
Thomas T. Farley
/s/ MICHAEL E. GALLAGHER Director January 5, 1997
- -----------------------------------------
Michael E. Gallagher
/s/ JAY M. Director, President and Chief January 5, 1997
GELLERT Operating Officer
- -----------------------------------------
Jay M. Gellert
/s/ ROGER F. Director January 5, 1997
GREAVES
- -----------------------------------------
Roger F. Greaves
/s/ MALIK M. HASAN, M.D. Director, Chairman of the Board January 5, 1997
- ----------------------------------------- of Directors, Treasurer
Malik M. Hasan, M.D. (Principal Financial and
Accounting Officer) and Chief
Executive Officer
/s/ KENNETH W. KIZER, M.D. Director January 5, 1997
- -----------------------------------------
Kenneth W. Kizer, M.D.
/s/ DOUGLAS M. MANCINO Director January 5, 1997
- -----------------------------------------
Douglas M. Mancino
/s/ ROBERT L. MONTGOMERY Director January 5, 1997
- -----------------------------------------
Robert L. Montgomery
Director
- -----------------------------------------
J. Kevin Murphy
</TABLE>
II-7
<PAGE> 183
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION PAGE
-------------- ------------------------------------------------------------------- ----
<C> <C> <S> <C>
2.5 -- Agreement and Plan of Merger, dated October 1, 1996, by and among
Health Systems International, Inc., FH Acquisition Corporation and
Foundation Health Corporation (included as Appendix I to the Joint
Proxy Statement/Prospectus)........................................
3.1 -- Third Amended and Restated Certificate of Incorporation of HSI
(included
as Exhibit 4.1 to the HSI Registration Statement on Form S-8 (File
no. 33-74780) which is incorporated by reference herein)...........
3.2 -- Third Amended and Restated By-Laws of HSI (included as Exhibit 4.1
to HSI's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995, which is incorporated by reference herein).....
3.2.1 -- Amendment to Third Amended and Restated By-Laws of HSI (included as
Exhibit 3.2.1 to HSI's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996, which is incorporated by
reference herein)..................................................
4.1 -- Form of Class A Common Stock Certificate of HSI (included as
Exhibit 4.2 to HSI's Registration Statement 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 of HSI (included as
Exhibit 4.3 to HSI's Registration Statement on Forms S-1 and S-4
(File nos. 33-72892 and 33-72892-01, respectively, which is
incorporated by reference herein)..................................
4.3.1 -- Nonnegotiable Senior Secured Promissory Note in the original
principal amount of $150,000,000, dated January 28, 1992, made by
Health Net in favor of The California Wellness Foundation (filed as
Exhibit 4.8 to HSI's Registration Statement on Forms S-1 and S-4
(File nos. 33-72892 and 33-72892-01, respectively, which is
incorporated by reference herein)..................................
4.3.2 -- Nonnegotiable Subordinated Secured Promissory Note in the original
principal amount of $75,000,000, dated January 28, 1992, made by
Health Net in favor of The California Wellness Foundation (filed as
Exhibit 4.9 to HSI's Registration Statement on Forms S-1 and S-4
(File nos. 33-72892 and 33-72892-01, respectively, which is
incorporated by reference herein)..................................
4.3.3 -- Senior Security Agreement, dated January 28, 1992, between Health
Net and The California Wellness Foundation (filed as Exhibit 4.10
to HSI'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)..................................................
4.3.4 -- Subordinated Security Agreement, dated January 28, 1992, between
Health Net and The California Wellness Foundation (filed as Exhibit
4.11 to HSI'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)...............................................
4.3.5 -- Cash Pledge Agreement, dated January 28, 1992, by and between
Health Net and The California Wellness Foundation (filed as Exhibit
4.12 to HSI'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)...............................................
4.3.6 -- Sinking Fund Agreement, dated January 28, 1992, between Health Net
and The California Wellness Foundation (filed as Exhibit 4.13 to
HSI'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)..................................................
</TABLE>
<PAGE> 184
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION PAGE
-------------- ------------------------------------------------------------------- ----
<C> <C> <S> <C>
4.3.7 -- Charitable Contribution Grant and Subordination Agreement, dated
January 28, 1992, between Health Net and The California Wellness
Foundation (filed as Exhibit 4.14 to HSI'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)...........
4.3.8 -- Guaranty Agreement, dated January 28, 1992, between Health Net and
The California Wellness Foundation (filed as Exhibit 4.15 to HSI'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)............................................................
5.1 -- Opinion of Skadden, Arps, Slate, Meagher & Flom regarding the
validity of the securities being registered, a copy of which is
filed herewith.....................................................
8.1 -- Opinion of Pillsbury Madison & Sutro LLP regarding certain federal
income tax matters, a copy of which is filed herewith..............
9.1 -- Voting Agreement, dated October 1, 1996, between Malik M. Hasan and
Foundation Health Corporation, a copy of which is filed
herewith...........................................................
10.1 -- Amended and Restated Employment Agreement, dated December 16, 1996,
by and among HSI, Foundation Health Corporation and Daniel D.
Crowley, a copy of which is filed herewith. (Including, as Exhibit
A, the Consulting Agreement, dated October 1, 1996, by and among
these same parties.)...............................................
10.2 -- Amended and Restated Employment Agreement, dated December 16, 1996,
by and among HSI, Foundation Health Corporation and Kirk A. Bensen,
a copy of which is filed herewith. (Including, as Exhibit A, the
Consulting Agreement, dated October 1, 1996, by and among these
same parties.).....................................................
10.3 -- Amended and Restated Employment Agreement, dated December 16, 1996,
by and among HSI, Foundation Health Corporation and Steven D.
Tough, a copy of which is filed herewith. (Including, as Exhibit A,
the Consulting Agreement, dated October 1, 1996, by and among these
same parties.).....................................................
10.4 -- Amended and Restated Employment Agreement, dated December 16, 1996,
by and among HSI, Foundation Health Corporation and Jeffrey L.
Elder, a copy of which is filed herewith...........................
10.5 -- Amended and Restated Employment Agreement, dated December 16, 1996,
by and among HSI, Foundation Health Corporation and Allen J.
Marabito, a copy of which is filed herewith........................
23.1 -- Consent of Deloitte & Touche LLP (HSI), a copy of which is filed
herewith...........................................................
23.2 -- Consent of Deloitte & Touche LLP (FHC), a copy of which is filed
herewith...........................................................
23.3 -- Consent of Ernst & Young LLP (FHC), a copy of which is filed
herewith...........................................................
23.4 -- Consent of Ernst & Young LLP (HSI), a copy of which is filed
herewith...........................................................
23.5 -- Consent of Coopers & Lybrand LLP, a copy of which is filed
herewith...........................................................
23.6 -- Consent of Stevenson, Jones & Holmans, P.C., a copy of which is
filed herewith.....................................................
23.7 -- Consent of Skadden, Arps, Slate, Meagher & Flom (Included in the
Opinion filed as Exhibit 5.1 to this Registration Statement and
incorporated by reference herein.).................................
23.8 -- Consent of Pillsbury Madison & Sutro LLP (Included in the Opinion
filed as Exhibit 8.1 to this Registration Statement and
incorporated by reference herein)..................................
</TABLE>
<PAGE> 185
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION PAGE
-------------- ------------------------------------------------------------------- ----
<C> <C> <S> <C>
23.9 -- Consent of Salomon Brothers Inc (Included in the Opinion filed as
Appendix V to the Joint Proxy Statement/Prospectus and incorporated
by reference herein.)..............................................
23.10 -- Consent of Shattuck Hammond Partners Inc. (Included in the Opinion
filed as Appendix VI to the Joint Proxy Statement/Prospectus and
incorporated by reference herein.).................................
23.11 -- Consent of Morgan Stanley & Co., Incorporated (Included in the
Opinion filed as Appendix IV to the Joint Proxy
Statement/Prospectus and incorporated by reference herein.)........
24.1 -- Powers of attorney (included on the signature page contained in
Part II of this Registration Statement and incorporated by
reference herein)..................................................
99.1 -- HSI Proxy/Voting Instruction Card, a copy of which is filed
herewith...........................................................
99.2 -- FHC Proxy/Voting Instruction Card, a copy of which is filed
herewith...........................................................
99.3 -- Consent of Persons About to Become Directors, a copy of which is
filed herewith.....................................................
</TABLE>
<PAGE> 1
Exhibit 5.1
[Skadden, Arps, Slate, Meagher & Flom (Illinois) letterhead]
January 6, 1997
Health Systems International, Inc.
225 North Main Street
Pueblo, Colorado 81003
Re: Health Systems International, Inc.
Registration on Form S-4
Dear Ladies and Gentlemen:
We have acted as special counsel to Health Systems International, Inc.,
a Delaware corporation (the "Company"), in connection with the preparation of
the Registration Statement (as defined below) for the registration under the
Securities Act of 1933, as amended (the "Act"), of 78,617,961 shares (the
"Shares") of Class A Common Stock, $.001 par value (the "Common Stock"), of the
Company, together with 78,617,961 Series A Participating Preferred Stock
Purchase Rights (the "Rights") associated therewith.
The Shares are to be issued pursuant to the terms of the Agreement and
Plan of Merger dated as of October 1, 1996 (the "Merger Agreement") among the
Company, FH Acquisition Corp., a Delaware corporation and a wholly owned
subsidiary of the Company ("Merger Sub"), and Foundation Health Corporation, a
Delaware corporation ("FHC"), which provides for the merger (the "Merger") of
Merger Sub with and into FHC, with FHC surviving as a wholly-owned subsidiary
of the Company.
This opinion is being delivered in accordance with the requirements of
Item 601(b)(5) of Regulation S-K under the Act. Capitalized terms used but not
otherwise defined herein have the meanings ascribed to them in the Registration
Statement.
<PAGE> 2
Health Systems International, Inc.
January 6, 1997
Page 2
In connection with this opinion, we have examined originals or copies,
certified or otherwise identified to our satisfaction, of (i) the Joint Proxy
Statement/Prospectus dated January 6,1997 which constitutes part of the
Registration Statement on Form S-4 (Registration No. 333- )(the
"Registration Statement") filed with the Securities and Exchange Commission
(the "Commission") on January 6, 1997 under the Act; (ii) the Registration
Statement; (iii) a specimen certificate representing the Common Stock; (iv) the
Merger Agreement; (v) the Certificate of Incorporation of the Company, as
presently in effect; (vi) the By-Laws of the Company, as presently in effect;
and (vii) certain resolutions of the Board of Directors of the Company relating
to the issuance of the Shares. We have also examined originals or copies,
certified or otherwise identified to our satisfaction, of such other documents,
certificates and records as we have deemed necessary or appropriate as a basis
for the opinions set forth herein.
In our examination, we have assumed the legal capacity of all natural
persons, the genuiness of all signatures, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified or photostatic copies and the
authenticity of the originals of such copies. in making our examination of
documents executed by the parties other than the Company, we have assumed that
such parties had the power, corporate or other, to enter into and perform all
obligations thereunder and have also assumed the due authorization by all
requisite action, corporate or other, and execution and delivery by such
parties of such documents and that such documents constitute the valid and
binding obligations of such parties. As to any facts material to the opinions
expressed herein which were not independently established or verified, we have
relied upon oral or written statements and representatives of officers,
trustees and other representatives of the Company and others.
Members of our firm are admitted to the practice of law in the State of
Illinois, and we do not express any opinion as to the laws of any jurisdiction
<PAGE> 3
Health Systems International, Inc.
January 6, 1997
Page 3
other than the General Corporation Law of the State of Delaware and the federal
laws of the United States.
Based on and subject to the foregoing and to the other qualifications
and limitations set forth herein, we are of the opinion that when (i) the
Registration Statement, as amended, becomes effective; (ii) the Merger shall
have become effective under the General Corporation Law of the State of
Delaware pursuant to the Merger Agreement; and (iii) certificates representing
the Shares have been duly executed by an authorized officer of the exchange
agent for the Common Stock and registered by such exchange agent and duly
delivered in accordance with the terms of the Merger Agreement:
1. The Shares will be validly issued, fully paid and
nonassessable.
2. Each Right associated with the Shares will be validly issued
when the associated Shares have been duly issued as set forth in paragraph 1.
We hereby consent to the use of our name under the heading "Legal
Matters" in the Joint Proxy Statement/Prospectus which forms a part of the
Registration Statement. We also hereby consent to the filing of this opinion
with the Commission as an exhibit to the Registration Statement. In giving
this consent, we do not thereby admit that we are within the category of
persons whose consent is required under the Section 7 of the Act or the rules
and regulations of the Commission promulgated thereunder. This opinion is
expressed as of the date hereof unless otherwise expressly stated and we
disclaim any undertaking to advise you of the facts stated or assumed herein or
any subsequent changes in applicable law.
Very truly yours,
/s/ SKADDEN, ARPS, SLATE, MEAGHER & FLOM (ILLINOIS)
<PAGE> 1
EXHIBIT 8.1
[PILLSBURY MADISON & SUTRO LLP LETTERHEAD]
January 6, 1997
Foundation Health Corporation
3400 Data Drive
Rancho Cordova, CA 95670
Ladies and Gentlemen:
This opinion is being delivered to you in connection with the filing
with the Securities and Exchange Commission of a Registration Statement on Form
S-4 (the "Registration Statement") through which Health Systems International,
Inc. ("HSI"), a Delaware corporation, is registering under the Securities Act
of 1933, as amended, shares of its class A common stock, and in which is
described the proposed (i) plan of reorganization that would result in the
merger (the "Merger") of FH Acquisition Corp. ("Acquisition"), a Delaware
corporation and a wholly owned subsidiary of HSI, with and into Foundation
Health Corporation, a Delaware corporation ("FHC"), and (ii) subsequent change
by HSI of its name to Foundation Health Systems, Inc. The proposed plan (the
"Plan") is set forth in the Agreement and Plan of Merger (the "Merger
Agreement") dated October 1, 1996, among HSI, Acquisition and FHC. We
understand, and the opinions rendered herein assume, that the facts surrounding
the Merger are and will be as follows.
FHC is an integrated managed care organization which, through its health
maintenance organization ("HMO"), insured preferred provider organization
("PPO") and government contracts subsidiaries, provides group, individual,
Medicare, Medicaid and CHAMPUS coverage for more than three million
individuals. In addition, FHC's subsidiaries offer managed healthcare products
related to workers' compensation, behavioral health, dental, vision and
prescription drugs and administrative services for medical groups and self-
funded benefit programs. The authorized capital stock of FHC consists of 100
million shares of common stock ("FHC Common Stock") and one million shares of
preferred stock. As of August 31, 1996 there were issued and outstanding
58,960,724 shares of FHC Common Stock and no shares of FHC preferred stock. As
of that date there were also outstanding options to acquire 3,754,665 shares of
FHC Common Stock ("FHC Options"). FHC Common Stock is traded on the New York
Stock Exchange ("NYSE"). Each share of FHC Common Stock carries with it a
right (an "FHC Right") to acquire additional
<PAGE> 2
Foundation Health Corporation
January 6, 1997
Page 2
FHC stock at a price which was at the time the FHC Rights were created and
remains substantially in excess of the fair market value of that FHC stock.
HSI is one of the largest managed healthcare organizations in the United
States. It serves more than 1.9 million members in California, Colorado,
Connecticut, Idaho, New Jersey, New Mexico, Pennsylvania, Oregon and
Washington. HSI owns an HMO subsidiary which is the second largest provider of
managed healthcare services in California with over 1.3 million members. HSI
also owns a PPO network providing access to more than 4.6 million individuals
in 38 states, coordinates managed healthcare products for multiregion employers
and owns two health and life insurance companies licensed to sell insurance in
33 states and the District of Columbia. The authorized capital stock of HSI
consists of 135 million shares of class A common stock ("New FHS Common
Stock"), 30 million shares of class B common stock and 10 million shares of
preferred stock. Each share of New FHS Common Stock entitles its holder to one
vote on all matters submitted to stockholders; except in limited circumstances
the class B common stock is nonvoting stock. As of September 27, 1996, there
were issued and outstanding 29,091,964 shares of New FHS Common Stock,
19,297,642 shares of Class B common stock and no shares of HSI preferred stock.
In addition, as of that date there were outstanding options to purchase
2,235,564 shares of New FHS Common Stock. New FHS Common Stock is traded on
the NYSE. Each share of New FHS Common Stock carries with it a right (a "New
FHS Right") to acquire additional HSI stock at a price which was at the time
the New FHS Rights were created and remains substantially in excess of the fair
market value of that HSI stock.
The authorized capital stock of Acquisition consists of 1,000 shares of
common stock, all of which are issued and outstanding and owned by HSI.
The managements of FHC and HSI have determined that the proposed Merger
will be in the best interests of their companies and stockholders. The Merger
will provide each of the companies with economies of scale needed to lower
costs and to compete more effectively in the managed healthcare industry. The
Merger will also create an entity with enhanced geographic diversity, which FHC
and HSI management each believes should improve the combined companies'
position with customers seeking healthcare providers with broad national
networks. FHC and HSI have complimentary product offerings and membership
composition. FHC and HSI management each believes that their respective HMO
businesses in California and the West will enhance the other's operations and
that HSI's medical management expertise will improve the performance of
commercial HMO services in markets in which FHC has government contracts. FHC
and HSI management
<PAGE> 3
Foundation Health Corporation
January 6, 1997
Page 3
each also believes that the Merger offers the potential to achieve significant
operational cost savings and efficiencies for the combined company.
Under the Plan, Acquisition will merge with and into FHC in accordance
with Delaware law. Upon the effectiveness of the Merger (the "Effective
Time"), the following will occur:
1. FHC will be the surviving corporation, and the separate
existence of Acquisition will cease.
2. Each issued and outstanding share of capital stock of
Acquisition will be converted into one share of common stock of FHC, the
corporation surviving the Merger.
3. Each share of FHC Common Stock which is outstanding
immediately prior to the Merger will be converted into 1.3 shares of New
FHS Common Stock (the "Exchange Ratio").
4. No fractional shares will be issued to holders of FHC
Common Stock; each holder of FHC Common Stock otherwise entitled to a
fractional interest in a share of New FHS Common Stock will receive an
amount of cash equal to the product obtained by multiplying the average
trading price of New FHS Common Stock on the NYSE for the three trading
days immediately preceding the Effective Time by the fractional share
interest to which such holder would otherwise be entitled.
5. Under Delaware law, no holder of shares of FHC Common
Stock will be entitled to exercise dissenters' rights with respect to
the Merger.
6. Each FHC Option which has not been exercised by its holder
prior to the Merger will be converted into an option to acquire, at a
price per share equal to the exercise price specified in such option
divided by the Exchange Ratio (with the resulting exercise price rounded
up to the nearest whole cent), that number of shares of New FHS Common
Stock equal to the product of the number of shares of FHC Common Stock
formerly subject to the option and the Exchange Ratio (with the
resulting number of shares rounded down to the nearest whole share).
<PAGE> 4
Foundation Health Corporation
January 6, 1997
Page 4
7. Following the Merger, HSI will change its name to
Foundation Health Systems, Inc.
With respect to the proposed Merger, we understand and assume the
following:
(a) The fair market value of the New FHS Common Stock to be
received by the FHC stockholders in the Merger will be approximately
equal to the fair market value of the shares of FHC Common Stock
surrendered in exchange therefor.
(b) To the best knowledge of FHC management there is no plan
or intention on the part of those FHC stockholders who individually own
less than five percent of the outstanding FHC Common Stock to sell,
exchange or otherwise dispose of a number of shares of New FHS Common
Stock received in the Merger (even assuming that each FHC stockholder
who individually owns five percent or more of the outstanding FHC Common
Stock has a plan or intent to dispose of all New FHS Common Stock
received by that stockholder in the Merger) that would reduce the number
of shares of New FHS Common Stock owned by all former FHC stockholders
to a number of shares of New FHS Common Stock having, in the aggregate,
a value as of the Effective Time of less than 50 percent of the value of
all of the formerly outstanding shares of FHC Common Stock as of the
Effective Time. For purposes of this assumption, (i) shares of FHC
Common Stock exchanged for cash or other property or exchanged for cash
in lieu of fractional shares of New FHS Common Stock will be treated as
outstanding shares of FHC Common Stock at the Effective Time and (ii)
shares of FHC Common Stock and shares of New FHS Common Stock held by
FHC stockholders and otherwise sold, redeemed or disposed of prior or
subsequent to the Merger will be similarly considered.
(c) Following the Merger, FHC will hold at least 90 percent of
the fair market value of its net assets and of the net assets of
Acquisition immediately prior to the Merger, and at least 70 percent of
the fair market value of its gross assets and of the gross assets of
Acquisition immediately prior to the Merger. For purposes of this
assumption, amounts paid by FHC or Acquisition to FHC stockholders who
receive cash or other property, amounts used by FHC or Acquisition to
pay reorganization expenses, and all redemptions and
<PAGE> 5
Foundation Health Corporation
January 6, 1997
Page 5
distributions (except for regular, normal dividends) made by FHC will be
included as assets of FHC or Acquisition, respectively, held immediately
prior to the Merger.
(d) HSI has no plan or intention to redeem or otherwise
reacquire any of the shares of New FHS Common Stock issued in the
Merger.
(e) Prior to the Merger, HSI will be in control of Acquisition
within the meaning of section 368(c) of the Internal Revenue Code (the
"Code").
(f) FHC has no plan or intention to issue, nor does HSI have
any plan or intention to cause FHC to issue additional shares of FHC
stock that would result in HSI losing control of FHC within the meaning
of section 368(c) of the Code.
(g) HSI has no plan or intention to liquidate FHC, to merge
FHC with or into another corporation, to sell or otherwise dispose of
the stock of FHC or to cause FHC to sell or otherwise dispose of any of
its assets or of any of the assets acquired from Acquisition, except for
dispositions made in the ordinary course of business; transfers described
in section 368(a)(2)(C) of the Code; and dispositions of certain assets
for their respective fair market values, all of the proceeds of which
will be retained by FHC for use in the ordinary course of its business.
(h) Following the Merger, FHC will continue its historic
business or use a significant portion of its historic business assets in
a business.
(i) HSI, Acquisition, FHC and the FHC stockholders will pay
their respective expenses, if any, incurred in connection with the
Merger.
(j) There is no intercorporate indebtedness existing between
HSI and FHC or between Acquisition and FHC that was issued or acquired
or will be settled at a discount.
(k) In the Merger, FHC stockholders will exchange shares of
FHC stock representing control of FHC within the meaning of section
368(c) of the Code solely for shares of New FHS Common Stock. For
purposes of this assumption, any shares of FHC stock exchanged for
<PAGE> 6
Foundation Health Corporation
January 6, 1997
Page 6
cash or other property originating with HSI will be treated as
outstanding FHC stock on the date of the Merger.
(l) At the Effective Time, FHC will not have outstanding any
warrants, options, convertible securities or other types of rights
pursuant to which any person could acquire stock of FHC that, if
exercised or converted, would affect HSI's acquisition or retention of
control of FHC.
(m) No two parties to the Merger are investment companies as
defined in Section 368(a)(2)(F)(iii) and (iv) of the Code.
(n) At the Effective Time, the fair market value of the assets
of FHC will exceed the sum of its liabilities, plus the amount of
liabilities, if any, to which such assets are subject.
(o) FHC is not under the jurisdiction of a court in a "title
11 or similar case" within the meaning of section 368(a)(3)(A) of the
Code.
(p) None of the shares of New FHS Common Stock received by
stockholder-employees of FHC will be separate consideration for or
allocable to past or future services or any employment agreement. None
of the compensation received by FHC stockholder-employees will be
separate consideration for or allocable to shares of FHC Common Stock
surrendered in the Merger and the compensation paid to stockholder-
employees will be commensurate with amounts paid to third parties
bargaining at arm's-length for similar services.
(q) Acquisition is a newly formed corporation which has
conducted no business activities and was created solely for the purpose
of facilitating the acquisition of FHC. Acquisition will have no
liabilities assumed by FHC, and will not transfer to FHC in the Merger
any assets subject to liabilities.
(r) The payment of cash in lieu of fractional shares of New
FHS Common Stock is solely for the purpose of avoiding the expense and
inconvenience to HSI of issuing fractional shares of New FHS Common
Stock and does not represent separately bargained-for consideration.
The total cash consideration that will be paid in the transaction to FHC
stockholders instead of issuing fractional shares of New FHS Common
Stock will not exceed one percent of the total
<PAGE> 7
Foundation Health Corporation
January 6, 1997
Page 7
consideration that will be issued in the transaction to FHC stockholders
in exchange for their shares of FHC Common Stock. The fractional shares
of New FHS Common Stock of each FHC stockholder will be aggregated, and
no FHC stockholder will receive cash in an amount equal to or greater
than the value of one full share of New FHS Common Stock.
(s) None of HSI, Acquisition or any other direct or indirect
subsidiary of HSI beneficially owns, or has owned within the past five
years, (i) any options or warrants to acquire FHC stock, (ii) more than
1,000 shares of FHC stock or (iii) any securities convertible into FHC
stock.
Based solely on the information, understandings and assumptions and
subject to the limitations contained herein, we are of the opinion that the
Merger will constitute a reorganization within the meaning of Internal Revenue
Code section 368(a)(1). Accordingly, and again based solely on the
information, understandings and assumptions and subject to the limitations
contained herein, we are further of the opinion that, for federal income tax
purposes:
(i) no gain or loss will be recognized by HSI, FHC or
Acquisition as a result of the formation of Acquisition or the Merger;
(ii) no gain or loss will be recognized as a result of the
Merger by holders of HSI common stock or by holders of unexercised
options to acquire HSI common stock;
(iii) no gain or loss will be recognized by holders of FHC
Common Stock who exchange their FHC Common Stock for New FHS Common
Stock pursuant to the Merger, except with respect to cash received in
lieu of fractional shares;
(iv) the aggregate tax basis of New FHS Common Stock received
as a result of the Merger will be the same as the stockholder's
aggregate tax basis in the FHC Common Stock surrendered in the exchange
(reduced by any basis allocable to fractional shares for which cash is
received);
(v) the holding period of New FHS Common Stock received in
exchange for FHC Common Stock in the Merger will include the holding
period of such FHC Common Stock, provided the shares of
<PAGE> 8
Foundation Health Corporation
January 6, 1997
Page 8
FHC Common Stock are capital assets in the hands of the holder thereof
at the Effective Time;
(vi) a holder of FHC Common Stock receiving cash in the Merger
in lieu of a fractional interest in New FHS Common Stock will be treated
as if such holder actually received such fractional share interest which
was subsequently redeemed by HSI, resulting in the recognition of gain
or loss (capital gain or loss if the FHC Common Stock giving rise to
such fractional interest is held as a capital asset within the meaning
of Section 1221 of the Code, and in that event, long term capital gain
or loss if such FHC Common Stock has been held for more than one year at
the Effective Time), measured by the difference between the amount of
cash received and the basis of the FHC Common Stock allocable to such
fractional interest;
(vii) no gain or loss will be recognized by a holder of an
unexercised FHC Option solely as a result of the conversion of the FHC
Options into options to purchase shares of New FHS Common Stock provided
that, as to any such FHC Option that is not an incentive stock option
within the meaning of section 422(b) of the Code (an "ISO"), such FHC
Option (a) was issued in connection with the performance of services and
(b) did not when issued and does not at the Effective Time have a
readily ascertainable fair market value (within the meaning of Income
Tax Regulations section 1.83-7(b)); and
(viii) to the extent any such unexercised FHC Option is an ISO
prior to the Merger, such FHC Option will remain an ISO after its
conversion into an option to purchase shares of New FHS Common Stock.
The opinion expressed herein is based upon laws, judicial decisions and
administrative regulations, rulings and practice, all as in effect on the date
hereof and all of which are subject to change, either on a prospective or
retroactive basis. New developments in any such administrative matters, court
decisions, legislative changes, or changes in the facts, assumptions or other
information upon which our opinion is based may have an adverse effect on the
legal or tax consequences described herein, and we do not accept any
responsibility for updating or revising our opinion in consequence of any such
new development or changes. No opinion is expressed about the federal tax
treatment of the proposed Merger under other provisions of the Internal Revenue
Code, about the federal income tax treatment of any conditions existing at the
time of, or effects resulting from, the proposed Merger
<PAGE> 9
Foundation Health Corporation
January 6, 1997
Page 9
that are not specifically covered by the above opinion, nor about tax effects
of the proposed Merger other than the federal income tax treatment thereof. In
particular, but not by way of limitation, we express no opinion regarding the
tax consequences of the proposed Merger (including the opinions set forth
above) as applied to specific stockholders or securityholders of FHC or that
may be relevant to particular classes of stockholders or securityholders.
This opinion is intended solely for the purpose of including this
opinion as an exhibit to the Registration Statement. It may not be relied upon
for any other purpose by any other person or entity, other than FHC and its
stockholders, and may not be made available to any other person or entity
without our written consent. We hereby consent to the filing of this opinion
as an exhibit to the Registration Statement and further consent to the use of
our name wherever appearing in the Registration Statement.
Very truly yours,
/s/ PILLSBURY MADISON & SUTRO LLP
<PAGE> 1
Exhibit 9.1
Voting Agreement
AGREEMENT, dated as of October 1, 1996 (this "Agreement"), between
Malik M. Hasan (the "Stockholder") and Foundation Health Corporation, a
Delaware corporation ("Foundation").
WHEREAS, Foundation, FH Acquisition Corp., a Delaware Corporation
("Merger Sub"), and Health Systems International, a Delaware corporation (the
"Company"), have, contemporaneously with the execution of this Agreement,
entered into an Agreement and Plan of Merger, dated as of the date hereof (the
"Merger Agreement"), which provides, among other things, that Merger Sub shall
be merged with and into the Company pursuant to the merger contemplated by the
Merger Agreement (the "Merger");
WHEREAS, as of the date hereof, the Stockholder is the Beneficial
Owner (as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) of 4,301,459 shares of Class A Common Stock, par
value $.001 per share, of the Company (the "Company Common Stock") and options
to purchase 730,000 shares of the Company Common Stock (collectively, the
"Options"); and
WHEREAS, as a condition to the willingness of Foundation to enter into
the Merger Agreement, Foundation has required that the Stockholder agree, and
in order to induce Foundation to enter into the Merger Agreement, the
Stockholder has agreed, to enter into this Agreement.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements contained herein, and intending to be legally bound
hereby, the parties hereto hereby agree as follows:
ARTICLE I
VOTING OF SHARES
SECTION 1.01. Voting Agreement. The Stockholder hereby agrees,
during the time this Agreement is in effect, at any meeting of the stockholders
of the Company relating to the Merger to: (a) appear, or cause the holder of
record on the applicable record date (the "Record Holder") to appear, at any
annual or special meeting of stockholders of the Company for the purpose of
obtaining a quorum; (b) vote, or cause the Record Holder to vote, in person or
by proxy, all of the shares of the Company Common Stock now owned or with
respect to which the Stockholder has or shares voting power and shares of
Company Common Stock which shall, or with respect to which voting power
<PAGE> 2
shall, hereafter be acquired by the Stockholder (collectively, the "Shares") in
favor of the Merger, the Merger Agreement (as in effect on the date hereof) and
the transactions contemplated by the Merger Agreement (including, without
limitation, the amendments to the Certificate of Incorporation of the Company
contemplated thereby); (c) vote, or cause the Record Holder to vote, the Shares
against any action, proposal or agreement that could reasonably be expected to
result in a breach in any material respect of any covenant, representation or
warranty or any other obligation of the Company under the Merger Agreement, or
which could reasonably be expected to result in any of the conditions to the
Company's obligations under the Merger Agreement not being fulfilled; and (d)
vote, or cause the Record Holder to vote, such Shares against any: (i) any
extraordinary corporate transaction (other than the Merger), such as a merger,
consolidation, business combination, reorganization, recapitalization or
liquidation involving the Company or any of its subsidiaries; and (ii) a sale
or transfer of a material amount of the assets of the Company or any of its
subsidiaries (each of the events described in (i) and (ii) above as an
"Alternative Transaction"). The Stockholder acknowledges receipt and review of
a copy of the Merger Agreement. Notwithstanding any other provision of this
Section 1.01, the provisions of such Section shall not prohibit or restrain the
Stockholder from complying with his fiduciary obligations as a director or
officer of the Company.
SECTION 1.02. Irrevocable Proxy. (a) In furtherance of the
transactions contemplated hereby, concurrently with the execution of this
Agreement, the Stockholder shall execute and deliver to Foundation a proxy in
the form attached hereto as Exhibit A (the "Proxy"). THE PROXY IS IRREVOCABLE
AND COUPLED WITH AN INTEREST.
(b) The Stockholder hereby revokes all other proxies and powers of
attorney with respect to the Shares which the Stockholder may have heretofore
appointed or granted, and no subsequent proxy or power of attorney shall be
given or written consent executed (and if given or executed, such proxy or
power of attorney shall not be effective) by such Stockholder with respect
thereto. All authority conferred by this Section 1.04 or agreed to be
conferred shall survive the death or incapacity of the Stockholder and any
obligation of the Stockholder under this Agreement shall be binding upon the
heirs, personal representatives, assigns and successors of the Stockholder.
SECTION 1.03. No Inconsistent Agreements. The Stockholder hereby
covenants and agrees that, except as contemplated by this Agreement and the
Merger Agreement, the Stockholder shall not
-2-
<PAGE> 3
enter into any voting agreement or grant a proxy or power of attorney with
respect to the Shares which is inconsistent with this Agreement.
ARTICLE II
RESTRICTIONS ON TRANSFER
SECTION 2.01 Transfer of Title. (a) The Stockholder hereby
covenants and agrees that the Stockholder will not, prior to the termination
of this Agreement, either directly or indirectly, offer, agree or otherwise
sell, assign, pledge, hypothecate, transfer, exchange, or dispose of any
Shares, any options or warrants to purchase any shares of Company Common Stock,
or any securities or rights convertible into or exchangeable for shares of
Company Common Stock, owned either directly or indirectly by the Stockholder or
with respect to which the Stockholder has the power of disposition, whether now
or hereafter acquired, other than pursuant to the Merger, without the prior
written consent of Foundation; provided, however, the Stockholder may dispose
of up to 250,000 Shares at the Stockholder's sole discretion.
(b) The Stockholder hereby agrees and consents to the entry of
stop transfer instructions with the Company's transfer agent against the
transfer of any Shares consistent with the terms of Section 2.01.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE
STOCKHOLDER
The Stockholder hereby represents and warrants to Foundation as
follows:
SECTION 3.01. Authority Relative to This Agreement. The Stockholder
is competent to execute and deliver this Agreement, to perform its obligations
hereunder and to consummate the transactions contemplated hereby. This
Agreement has been duly and validly executed and delivered by the Stockholder
and, assuming the due authorization, execution and delivery by Foundation,
constitutes a legal, valid and binding obligation of the Stockholder,
enforceable against the Stockholder in accordance with its terms except that
(i) the enforceability hereof may be subject to applicable bankruptcy,
insolvency or other similar laws, now or hereinafter in effect affecting
creditors' rights generally, and (ii) the availability of the remedy of
specific performance or injunctive or other forms of
-3-
<PAGE> 4
equitable relief may be subject to equitable defenses and would be subject to
the discretion of the court before which any proceeding therefor may be
brought.
SECTION 3.02. No Conflict. (a) The execution and delivery of this
Agreement by the Stockholder does not, and the performance of this Agreement by
the Stockholder shall not result in any breach of or constitute a default (or
an event that with notice or lapse of time or both would become a default)
under, or give to others any rights of termination, amendment, acceleration or
cancellation of, or result in the creation of a lien or encumbrance on any of
the Shares pursuant to, any note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, franchise or other instrument or obligation
to which the Stockholder is a party or by which the Stockholder or the Shares
are bound or affected, except, in the case of each of the foregoing, for any
such conflicts, violations, breaches, defaults or other occurrences which would
not prevent or delay the performance by the Stockholder of its obligations
under this Agreement.
SECTION 3.03. Title to the Shares. As of the date hereof, the
Stockholder is the record or Beneficial Owner of 4,301,459 shares of Company
Common Stock and 730,000 Options, which are all of the securities of the
Company owned, either of record or beneficially, by the Stockholder. The
Shares are owned free and clear of all security interests, liens, claims,
pledges, options, rights of first refusal, agreements, limitations on the
Stockholder's voting rights, charges and other encumbrances of any nature
whatsoever (other than as set forth on Exhibit A). Except as provided in this
Agreement, the Stockholder has not appointed or granted any proxy, which
appointment or grant is still effective, with respect to the Shares.
ARTICLE IV
MISCELLANEOUS
SECTION 4.01. Termination. This Agreement shall terminate upon the
earliest to occur of (a) the termination of the Merger Agreement in accordance
with its terms pursuant to Section 9.01 of the Merger Agreement or (b) the
Effective Time (as defined in the Merger Agreement), or (c) a determination by
the board of the Company to withdraw its recommendation for the Merger.
SECTION 4.02. Enforcement of Agreement. The parties hereto agree
that irreparable damage would occur in the event that any of the provisions of
this Agreement were not performed in accordance with its specific terms or were
otherwise
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<PAGE> 5
breached. It is accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement and to specific
performance of the terms and provisions hereof in addition to any other remedy
to which they are entitled at law or in equity.
SECTION 4.03. Successors and Affiliates. This Agreement shall inure
to the benefit of and shall be binding upon the parties hereto and their
respective heirs, legal representatives and assigns. If the Stockholder shall
acquire ownership of, or voting power with respect to, any additional Shares in
any manner, whether by the exercise of any Options or any securities or rights
convertible into or exchangeable for Company Common Stock, operation of law or
otherwise, such Shares shall be held subject to all of the terms of this
Agreement, and by taking and holding such Shares, the Stockholder shall be
conclusively deemed to have agreed to be bound by and to comply with all of the
terms and provisions of this Agreement. Without limiting the foregoing, the
Stockholder specifically agrees that the obligations of the Stockholder
hereunder shall not be terminated by operation of law, whether by the death or
incapacity of the Stockholder or otherwise.
SECTION 4.04. Entire Agreement. This Agreement constitutes the
entire agreement between Foundation and the Stockholder with respect to the
subject matter hereof and supersedes all prior agreements and understandings,
both written and oral, between Foundation and the Stockholder with respect to
the subject matter hereof.
SECTION 4.05. Amendment. This Agreement may not be amended except by
an instrument in writing signed by the parties hereto.
SECTION 4.06. Waivers. Except as provided in this Agreement, no
action taken pursuant to this Agreement, including, without limitation, any
investigation by or on behalf of any party, shall be deemed to constitute a
waiver by the party taking such action of compliance with any representations,
warranties, covenants or agreements contained in this Agreement. The waiver by
any party hereto of a breach of any provision hereunder shall not operate or be
construed as a waiver of any prior or subsequent breach of the same or any
other provision hereunder.
SECTION 4.07. Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of
law, or public policy, all other conditions and provisions of this Agreement
shall nevertheless
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<PAGE> 6
remain in full force and effect. Upon such determination that any term or
other provision is invalid, illegal or incapable of being enforced, the parties
hereto shall negotiate in good faith to modify this Agreement so as to effect
the original intent of the parties as closely as possible to the fullest extent
permitted by applicable law in a mutually acceptable manner in order that the
terms of this Agreement remain as originally contemplated to the fullest extent
possible.
SECTION 4.08. Notices. All notices and other communications given or
made pursuant hereto shall be in writing and shall be deemed to have been duly
given or made and shall be effective upon receipt, if delivered personally,
mailed by registered or certified mail (postage prepaid, return receipt
requested) to the parties at the following addresses (or at such other address
for a party as shall be specified by like changes of address) or sent by
electronic transmission (provided that a confirmation copy is sent by another
approved means) to the telecopier number specified below:
If to the Stockholder, to the Stockholder at:
Malik M. Hasan
1607 N. Elizabeth Street
Pueblo, Colorado 81003
If to Foundation, at:
Foundation Health Corporation
3400 Data Drive
Rancho Cordova, California 95670
Attention: General Counsel
With a copy to:
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, New York 10004
Attention: Paul M. Reinstein, Esq.
Telephone: (212) 859-8000
Facsimile: (212) 859-4000
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<PAGE> 7
With a copy to:
Pillsbury Madison & Sutro LLP
235 Montgomery Street
San Francisco, California 94104
Attention: Linda C. Williams, Esq.
Telephone: (415)983-1000
Facsimile: (415)983-1200
SECTION 4.09. Governing Law. This Agreement shall be governed by,
and construed in accordance with, the laws of the State of Delaware regardless
of the laws that might otherwise govern under applicable principles of
conflicts of law.
IN WITNESS WHEREOF, each of the parties hereto have caused this
Agreement to be duly executed on the date hereof.
/s/ MALIK M.HASAN
---------------------------------
Malik M. Hasan
Foundation Health Corporation
By: /s/ DANIEL D. CROWLEY
---------------------------------
Name: Daniel D. Crowley
Title: Chairman, President & CEO
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<PAGE> 8
EXHIBIT A
IRREVOCABLE PROXY
to Vote
HEALTH SYSTEMS INTERNATIONAL, INC.
COMMON STOCK
The undersigned stockholder of Health Systems International, Inc., a
Delaware corporation ("Parent"), hereby irrevocably (to the full extent
permitted by the General Corporation Law of the state of Delaware (the "Law"),
appoints the members of the Board of Directors of Foundation Health
Corporation, a Delaware corporation (the "Company"), and each of them, as the
sole and exclusive attorneys and proxies of the undersigned, with full power of
substitution and resubstitution, to vote and exercise all voting and related
rights (to the full extent that the undersigned is entitled to do so) with
respect to all of the shares of capital stock of Parent that now are or
hereafter may be beneficially owned or owned of record by the undersigned, and
any and all other shares or securities of Parent issued or issuable in respect
thereof on or after the date hereof (collectively, the "Shares") in accordance
with the terms of this Proxy. The Shares beneficially owned or owned of record
by the undersigned stockholder of Parent as of the date of this Proxy are
listed on the final page of this Proxy. Upon the undersigned's execution of
this Proxy, any and all prior proxies given by the undersigned with respect to
any Shares are hereby revoked and the undersigned agrees not to grant any
subsequent proxies with respect to the Shares until after the Expiration Date
(as defined below).
This Proxy is irrevocable (to the extent permitted by the Law), is
granted pursuant to that certain Voting Agreement, dated as of October 1,
1996, between the Company and the undersigned stockholder of Parent (the
"Voting Agreement"), and is granted in consideration of Parent, FH Acquisition
Corp., a Delaware corporation ("Merger Sub"), and the Company entering into
that certain Agreement and Plan of Merger dated as of October 1, 1996 (the
"Merger Agreement"). The Merger Agreement provides for the merger (the
"Merger") of Merger Sub with and into the Company, all in accordance with the
terms of the Merger Agreement. As used herein, the term "Expiration Date"
shall mean the earlier to occur of (i) the termination of the Voting Agreement
in accordance with its terms, or (ii) such date and time as the Merger shall
have become effective in accordance with the terms and provisions of the Merger
Agreement.
The attorneys and proxies named above, and each of them, are hereby
authorized and empowered by the undersigned, at any time prior to the
Expiration Date, to act as the undersigned's
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<PAGE> 9
attorney and proxy to vote the Shares (including, without limitation, the power
to execute and deliver written consents pursuant to the Law) at every annual,
special or adjourned meeting of the stockholders of Parent and in every written
consent in lieu of such meeting: (a) in favor of the Merger, the Merger
Agreement (as in effect on October 1, 1996) and the transactions contemplated
by the Merger Agreement (as in effect on October 1, 1996) (including, without
limitation, the amendments to the Certificate of Incorporation of the Parent
contemplated thereby); (b) against any action, proposal or agreement that could
reasonably be expected to result in a breach in any material respect of any
covenant, representation or warranty or any other obligation of the Parent
under the Merger Agreement, or which could reasonably be expected to result in
any of the conditions to the Parent's obligations under the Merger Agreement
not being fulfilled; and (c) against (i) any extraordinary corporate
transaction (other than the Merger), such as a merger, consolidation, business
combination, reorganization, recapitalization or liquidation involving the
Parent or any of its subsidiaries and (ii) a sale or transfer of a material
amount of the assets of the Parent or any of its subsidiaries. The attorneys
and proxies named above may not exercise this Proxy on any other matter except
as provided in clauses (a), (b) and (c) above. The undersigned stockholder may
vote the Shares on all other matters.
Notwithstanding any other provision of this Proxy, the provisions of
this Proxy shall not prohibit or restrain the undersigned from complying with
his fiduciary obligations as a director or officer of Parent.
Any obligation of the undersigned hereunder shall be binding upon the
successors and assigns of the undersigned.
Dated: October 1, 1996.
Signature of Stockholder /s/ MALIK M. HASAN
--------------------------------
Printed Name of Stockholder: Malik M. Hasan
Shares beneficially owned:
4,301,459 shares of Parent Class A Common
Stock and options to acquire 730,000 shares
of Class A Common Stock
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<PAGE> 1
EXHIBIT 10.1
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AGREEMENT is entered into as of December 16, 1996, by and among
DANIEL D. CROWLEY (the "Employee"), HEALTH SYSTEMS INTERNATIONAL, INC., a
Delaware corporation (the "Company") and FOUNDATION HEALTH CORPORATION, a
Delaware corporation ("FHC").
WHEREAS, FHC, the Company and the Employee entered into an Employment
Agreement dated October 1, 1996 (the "Existing Agreement"), which the parties
desire to amend and restate hereby;
WHEREAS, FHC and the Employee entered into an Employment Agreement,
dated April 22, 1994, as amended (the "Prior Agreement"), which was superseded
by the Existing Agreement; and
WHEREAS, each of the Company and FHC has determined that it is in its
best interest and the best interests of its stockholders to retain the services
of the Employee; and
WHEREAS, the Employee desires to perform services for the Company on
the terms set forth in this Agreement; and
WHEREAS, the Company and FHC have entered into an Agreement and Plan
of Merger, dated October 1, 1996 (such agreement, and as it may be amended from
time to time, the "Merger Agreement"), pursuant to which a wholly-owned
subsidiary of the Company will be merged with and into FHC (the "Merger"); and
NOW THEREFORE, the Company agrees to employ Employee and the Employee
agrees to perform services for the Company on the terms hereinbelow set forth.
1. Term of Employment.
(a) Term. The Company agrees to employ the Employee and the
Employee agrees to be employed by the Company for a one-year period commencing
as of the date of consummation of the Merger (the "Merger Date") (such one-year
period, the "Term"). The Term may only be extended by a resolution adopted by
at least eight members of the Company's Board of Directors (the "Board").
(b) Early Termination. Subject to Section 5, the Company may
terminate the Employee's employment by giving the Employee 30 days advance
notice in writing, provided, however, that the Employee may be terminated by
the Company during the Term only by a resolution adopted by at least eight
members of the Board. The Employee may terminate his employment by giving the
Company 30 days advance notice in writing. The Employee's employment shall
terminate automatically in the event of his death. Any waiver of notice shall
be valid only if it is made in writing and expressly refers to the applicable
notice requirement. Any such termination by the Company shall be in accordance
with the notice provision of this Section 1(b).
<PAGE> 2
(c) Termination of Agreement. All of the obligations of the
parties hereto which are required to be performed following the termination of
the Employee's employment hereunder shall survive the termination or expiration
of this Agreement.
2. Position and Duties.
(a) Position. The Company agrees to employ the Employee as its
Chairman of the Board. The Employee's duties as Chairman shall be to provide
strategic support to the Company's officers, advise the Company on personnel
and organizational matters, participate at the request of the Company's
officers in resolving key operational issues and preside at Board meetings.
The Employee shall perform such services primarily at the Company's
headquarters.
(b) Obligations. During the Term, the Employee shall devote his
full business efforts and time to the Company and its subsidiaries and shall
not render services to any other person or entity without the prior written
consent of the Board. The foregoing, however, shall not preclude the Employee
from engaging in appropriate civic, charitable or religious activities or from
devoting a reasonable amount of time to private investments that do not
interfere or conflict with his responsibilities to the Company.
3. Compensation.
The Company shall compensate Employee for the services rendered under
this Agreement as follows:
(a) A base salary (the "Base Compensation") at the annual rate of
$825,000 per year, payable in accordance with the customary payroll practices
of the Company for the payment of officers.
(b) Reimbursement for all reasonable expenses, including
first-class air travel and lodging expenses, incurred on behalf of the Company,
upon submission of appropriate documentation in accordance with the Company's
general policies, as they may be amended from time to time during the Term.
(c) In lieu of participation in the FHC Executive Incentive Plan
(and such other management incentive programs as may be adopted by the Board to
replace such Incentive Plan), $3,500,000 if the Employee remains employed as
Chairman for the entire Term or is terminated earlier by the Company without
Cause (as defined in Section 5(h) hereof) or by the Employee with Good Reason
(as defined in Section 5(i) hereof). Such amount shall be paid in a lump sum
in cash within ten (10) business days of the expiration of the Term or such
earlier termination, whichever is applicable.
4. Employee Benefits. During the Term (but without derogation of
any of Employee's other entitlements under this Agreement):
(a) Employee shall be entitled to full participation, on a basis
commensurate with his position with the Company, in all plans of accident,
medical, health, disability, pension, deferred
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<PAGE> 3
compensation, savings and similar benefits which generally are made available
to senior executives of the Company.
(b) The Company shall continue to fund, or cause FHC to continue
to fund, in either case, consistent with past practice, the premiums payable on
life insurance policy with a death benefit of $1,000,000 in Employee's name and
with a beneficiary of his choice.
(c) The Company shall provide Employee membership to a leisure
club, organization or affiliation of his choice. Such membership shall include
any initiation fee and periodic dues and other reasonable fees charged by such
organization.
(d) The Company shall provide Employee with an automobile of his
choice or an automobile allowance, which shall include payment of all
maintenance, insurance and related expenses, in accordance with FHC's practice
applicable to Employee immediately before the Merger.
(e) The Company shall promptly pay the reasonable cost of the
preparation of all of the Employee's tax returns upon the Employee's submission
of receipts for such services to the Company.
(f) Nothing in this Agreement shall limit in any way Employee's
participation in any other benefit plans or arrangements as are from time to
time approved by the Board or the Compensation Committee for senior executives
of the Company.
5. Termination of Employment.
(a) Severance Payment. Upon the Employee ceasing to be Chairman
of the Company for any reason other than termination by the Company for Cause,
the Employee shall receive a severance payment from the Company (the "Severance
Payment"). The Severance Payment shall be paid in a lump sum in cash not more
than five business days following such termination and shall be in an amount
determined under Subsection (b) below.
(b) Amount. The amount of the Severance Payment shall be
$8,372,000, which equals 2.99 times the sum of the Employee's annual rate of
Base Compensation plus the average of the annual bonuses awarded to the
Employee for the three fiscal years of FHC ending in 1994, 1995 and 1996.
(c) Benefits Programs. On the Merger Date, the Employee shall
become fully vested in all awards theretofore granted to him and/or
entitlements under the FHC 1990 Stock Option Plan and the FHC Supplemental
Executive Retirement Plan (the "SERP"). If the Employee notifies the Company
no later than the Merger Date that he elects to receive the SERP Amount (as
defined below), on the later of the Merger Date or two business days after such
notice is given, pursuant to and in full satisfaction of the Company's
obligations to the Employee under the SERP, the Company shall pay to the
Employee in a lump sum in cash $3,640,385 (the "SERP Amount"). The SERP Amount
equals 90% of the actuarial equivalent of the Employee's Retirement Benefit (as
defined in the SERP) as of December 31, 1996, as determined by FHC's
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<PAGE> 4
independent actuarial firm, Milliman & Robertson, Inc., using reasonable
assumptions. If the SERP Amount is not paid, the terms of the SERP as in
effect on the Merger Date shall remain in full force and effect; provided,
however, that the actuarial equivalents for purposes of calculating lump sum
payments under the SERP will be based on the 1983 group annuity mortality table
blended 50% male and 50% female, and the average 30 year Treasury yield rate
for the month prior to the month of the lump sum payment.
(d) Benefits Coverage. During the three-year period commencing
upon expiration of the Term or upon termination of Employee's employment during
the Term by the Company without Cause, by the Employee for Good Reason, the
Employee (and, where applicable, his dependents) shall be entitled to continue
participation in the basic group insurance plans maintained by the Company,
including (without limitation) life, disability, health and accident insurance
programs, as if he were still an employee of the Company. The Employee shall
also continue with those benefits outlined in Section 4(b), (c), (d), (e) and
(f). Where applicable, the Employee's salary for purposes of such plans shall
be deemed to be equal to his Base Compensation. To the extent that the Company
finds it impossible to cover the Employee under its group insurance policies
during such three-year period, the Company shall provide the Employee with the
same level of coverage under individual policies at the same cost to Employee.
In addition to the foregoing, the Company shall provide the Employee and his
dependents with health (including, but not limited to, medical, dental and
vision) insurance coverage for the remainder of his life, which coverage shall
be no less beneficial to the Employee and his dependents than the coverage
provided by FHC in effect immediately prior to the Merger. The Company shall
also continue or cause FHC to continue in full force and effect and pay the
premiums with respect to the FHC Split Dollar Insurance Plan for the benefit of
the Employee until the expiration or termination of the Consulting Agreement
(as defined below).
(e) No Mitigation. The Employee shall not be required to mitigate
the amount of any payment contemplated by this Agreement (whether by seeking
new employment or in any other manner), nor shall any such payment be reduced
by any earnings that the Employee may receive from any other source.
Furthermore, any amount payable to the Employee pursuant to this Section 5
shall not be in lieu of any benefits to which he is or may be entitled under
the FHC Deferred Compensation Plan and FHC Split Dollar Insurance Plan.
(f) Consulting and Non-Competition Periods. On the date following
termination of Employee's employment for any reason (other than for Cause or by
death), including upon expiration of the Term, the consulting agreement,
attached hereto as Exhibit A (the "Consulting Agreement"), shall become
effective.
(g) Rabbi Trust. Not later than the Merger Date, the Company
shall make a contribution to a trust, substantially in the form of Exhibit B
hereto (the "Trust"), in an amount equal to the sum of (i) $8,372,000 in
respect of the Severance Payment; (ii) $3,500,000 in respect of the Employee's
annual bonus; and (iii) $9,000,000 in respect of the consulting and
non-competition fees.
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<PAGE> 5
(h) Cause. For purposes of this Agreement, "Cause" shall mean (1)
a willful act by the Employee which constitutes gross misconduct or fraud and
which is materially injurious to the Company or (2) conviction of, or a plea of
"guilty" or "no contest" to, a felony. No act or failure to act by the
Employee shall be considered "willful" unless committed without good faith and
without a reasonable belief that the act or omission was in the Company's best
interest. No Cause shall be deemed to exist unless the Board has determined,
by a resolution adopted with the affirmative votes of at least eight of its
members, that Cause exists.
(i) Good Reason. For purposes of this Agreement, "Good Reason"
shall mean that the Employee has incurred a reduction in his Base Compensation
or a substantial reduction in his authority or responsibility (as such
authority and responsibility exists at the beginning of the Term), or has been
notified that his principal place of work will be relocated by a distance of
100 miles or more from FHC's headquarters on the Merger Date (other than a
relocation to San Francisco).
6. Limitation on Payments.
(a) Basic Rule. Any other provision of this Agreement
notwithstanding, the Company shall not be required to make any payment or
transfer any property to, or for the benefit of, the Employee (under this
Agreement or otherwise) that would be nondeductible by the Company by reason of
Section 280G of the Internal Revenue Code of 1986, as amended (the "Code") or
that would subject the Employee to the excise tax described in Section 4999 of
the Code. All mathematical calculations required by this section shall be
performed by the independent auditors retained by the Company most recently
prior to the Merger (the "Auditors"), based on information supplied by the
Company and the Employee, and shall be binding on the Company and the Employee.
All fees and expenses of the Auditors shall be paid by the Company.
(b) Reductions. If the amount of the aggregate payments or
property transfers to the Employee must be reduced under this section, then the
Employee shall direct in which order the payments or transfers are to be
reduced, but no change in the timing of any payment or transfer shall be made
without the Company's consent. As a result of uncertainty in the application
of Sections 280G and 4999 of the Code at the time of an initial determination
by the Auditors hereunder, it is possible that a payment will have been made by
the Company that should not have been made (an "Overpayment") or that an
additional payment that will not have been made by the Company could have been
made (an "Underpayment"). In the event that the Auditors, based upon the
assertion of a deficiency by the Internal Revenue Service against the Company
or the Employee that the Auditors believe has a high probability of success,
determine that an Overpayment has been made, such Overpayment shall be treated
for all purposes as a loan to the Employee that he shall repay to the Company,
together with interest at the applicable federal rate specified in Section
7872(f)(2) of the Code; provided, however, that no amount shall be payable by
the Employee to the Company if and to the extent that such payment would not
reduce the amount that is nondeductible under Section 280G of the Code or is
subject to an excise tax under Section 4999 of the Code. In the event that the
Auditors determine that an Underpayment has occurred, such Underpayment shall
promptly be paid or transferred by the Company to, or for the
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<PAGE> 6
benefit of, the Employee, together with interest at the applicable federal rate
specified in Section 7872(f)(2) of the Code.
7. Pooling-of-Interest Accounting Rules.
Any other provision of this Agreement (including the Exhibits hereto)
shall be invalid to the extent that the specific implementation of that
provision relating to the Employee would preclude the application of
pooling-of-interests accounting treatment to a transaction (including the
Merger) for which such treatment is to be adopted by the Company and which has
been approved by the Board. If the pooling-of-interests accounting rules
require the invalidation of one or more provisions of this Agreement (including
the Exhibits hereto), the Employee shall not be entitled to receive, or shall
be required to return to the Company, whichever is applicable, any compensation
payable or paid pursuant to the provisions of this Agreement (including the
Exhibits hereto) so deemed to be invalid. All determinations regarding the
pooling-of-interests accounting rules for these purposes shall be made by the
Board.
8. Successors.
(a) Company's Successors. The Company shall require any successor
(whether direct or indirect and whether by purchase, lease, merger,
consolidation, liquidation or otherwise) to all or substantially all of the
Company's business and/or assets and each entity that, directly or indirectly,
becomes a parent corporation of the Company, by an agreement in substance and
form satisfactory to the Employee, to assume this Agreement and to agree
expressly to perform this Agreement in the same manner and to the same extent
as the Company would be required to perform it in the absence of a succession.
The Company's failure to obtain such agreement prior to the effectiveness of a
succession shall be a breach of this Agreement and shall entitle the Employee
to all of the compensation and benefits to which he would have been entitled
hereunder if the Company had involuntarily terminated his employment
immediately after the Merger Date. For all purposes under this Agreement, the
term "Company" shall include any successor to the Company's business and/or
assets and each entity that, directly or indirectly, becomes a parent
corporation of the Company.
(b) Employee's Successors. 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.
9. Confidential Information.
During the Term and at all times thereafter, the Employee shall not,
without the prior written consent of the Board, disclose or use for any purpose
(except in the course of his employment under this Agreement and in furtherance
of the business of the Company) confidential information, proprietary data and
customer lists of the Company, except as required by applicable law or legal
process; provided, however, that "confidential information, proprietary data
and customer lists" shall not include any information known generally to the
public or ascertainable from public or published information (other than as a
result of unauthorized disclosure by the Employee) or any information of a type
not otherwise considered confidential
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<PAGE> 7
by persons engaged in the same business or a business similar to that conducted
by the Company. The Employee agrees to deliver to the Company at the
termination of the Consulting Period (as defined in the Consulting Agreement)
all memoranda, notes, plans, records, lists, reports and other documents (and
copies thereof) relating to the business of the Company which he may then
possess or have under his control.
10. Mutual Releases.
(a) The Employee hereby releases the Company and FHC, their
affiliates and subsidiaries and their respective officers, directors and
employees, from any and all liabilities and claims other than those arising out
of this Agreement or the Exhibits hereto which he may have against any of them,
including, without limitation, claims arising under any plan, program or policy
for employee benefits, out of Employee's termination or retirement or any
discrimination related claims. The provisions of this paragraph shall not
apply to any of the Employee's rights under the terms of this Agreement (or the
Exhibits hereto), including, without limitation, the plans described and the
indemnity referred to in Section 11(i) hereof.
(b) FHC, the Company, their affiliates and subsidiaries and their
respective officers, directors and employees hereby release the Employee from
any and all liabilities and claims other than those arising out of this
Agreement or the Exhibits hereto which FHC, the Company, their affiliates and
subsidiaries and their respective officers, directors and employees may have
against the Employee, including, without limitation, claims arising under any
plan, program or policy for employee benefits, or out of the Employee's
termination or retirement. The provisions of this paragraph shall not apply to
any of FHC's rights under the terms of this Agreement (or the Exhibits hereto).
11. Miscellaneous Provisions.
(a) Notice. Notices and all other communications contemplated by
this Agreement shall be in writing and shall be deemed to have been duly given
when personally delivered or when mailed by U.S. registered mail, return
receipt requested and postage prepaid. In the case of the Employee, mailed
notices shall be addressed to him at the home address which he most recently
communicated to the Company in writing. In the case of the Company, mailed
notices shall be addressed to its corporate headquarters, and all notices shall
be directed to the attention of its Secretary.
(b) Waiver. No provision of this Agreement shall be modified,
waived or discharged unless the modification, waiver or discharge is agreed to
in writing and signed by the Employee and by an authorized officer of the
Company (other than the Employee). No waiver by either party of any breach of,
or of compliance with, any condition or provision of this Agreement by the
other party shall be considered a waiver of any other condition or provision or
of the same condition or provision at another time.
(c) Whole Agreement. No agreements, representations or
understandings (whether oral or written and whether express or implied) which
are not expressly set forth in this Agreement, the Consulting Agreement or the
Trust have been made or entered into by either
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<PAGE> 8
party with respect to the subject matter hereof. This Agreement supersedes the
Existing Agreement and the Prior Agreement. The Company, FHC and the Employee
acknowledge and agree that subsequent to the Merger there would be deemed to be
"Good Reason" under the Prior Agreement in the absence of this Agreement, and
that the obligations of the Company hereunder are, in part, in consideration
for the Employee not terminating his employment for "Good Reason" under the
Prior Agreement immediately upon the Merger.
(d) No Setoff; Withholding Taxes. There shall be no right of
setoff or counterclaim with respect to any claim, debt or obligation against
payments to the Employee under this Agreement. All payments made under this
Agreement shall be subject to reduction to reflect taxes required to be
withheld by law.
(e) Choice of Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
California.
(f) Severability. The invalidity or unenforceability of any
provision or provisions of this Agreement and the Consulting Agreement shall
not affect the validity or enforceability of any other provision thereof, which
shall remain in full force and effect.
(g) Arbitration. In the event of any controversy or claim between
the Company or any of its affiliates and the Employee arising out of or
relating to this Agreement, the Consulting Agreement or the Trust, or the
breach thereof, the Employee may retain counsel of choice at the expense of the
Company. If either party delivers to the other party a written demand for
arbitration of a controversy or claim then such demand shall be submitted to
binding arbitration. The binding arbitration shall be administered by the
American Arbitration Association under its Commercial Arbitration Rules. The
arbitration shall take place in Sacramento, California. Each of the Company
and the Employee shall appoint one person to act as an arbitrator, and a third
arbitrator shall be chosen by the first two arbitrators (such three
arbitrators, the "Panel"). The Panel shall have no authority to award punitive
damages against the Company or the Employee. The arbitrator shall have no
authority to add to, alter, amend or refuse to enforce any portion of the
disputed agreements. The Company and the Employee each waive any right to a
jury trial or to petition for stay in any action or proceeding of any kind
arising out of or relating to this Agreement. The Company shall pay all fees,
expenses and costs, including reasonable attorney, consulting, accounting and
other fees, of the Employee relating to any controversy or claim as between
them in good faith.
(h) No Assignment. The rights of any person to payments or
benefits under this Agreement shall not be made subject to option or
assignment, either by voluntary or involuntary assignment or by operation of
law, including (without limitation) bankruptcy, garnishment, attachment or
other creditor's process, and any action in violation of this Subsection (h)
shall be void.
(i) Indemnification. The Employee is not required to pay for
expenditures associated with obtaining, enforcing or defending any rights or
benefits under this Agreement, the Consulting Agreement or the Trust, or any
other plan or arrangement maintained by the Company or its affiliates under
which the Employee is or may be entitled to receive
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<PAGE> 9
compensation or benefits. Consequently the Company shall indemnify and hold
harmless the Employee for all such expenditures and pay them as they become
due.
12. Effective Date. This Agreement shall be effective beginning
on the Merger Date.
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in
the case of the Company and FHC by their duly authorized officer, as of the day
and year first above written.
---------------------------------------
Daniel D. Crowley
HEALTH SYSTEMS INTERNATIONAL, INC.
By
-----------------------------------
Title
--------------------------------
FOUNDATION HEALTH CORPORATION
By
-----------------------------------
Title
--------------------------------
9
<PAGE> 10
EXHIBIT A
CONSULTING AGREEMENT
AGREEMENT (the "Agreement") made this 1st day of October, 1996, among
Health Systems International, Inc., a Delaware corporation (the "Company"),
Foundation Health Corporation, a Delaware corporation ("FHC") and Daniel D.
Crowley.
WHEREAS, the Company, FHC and Mr. Crowley have entered into an
employment agreement (the "Employment Agreement"), dated as of October 1, 1996;
WHEREAS, the Company and FHC entered into an Agreement and Plan of
Merger, dated as of October 1, 1996;
WHEREAS, the Company and FHC desire to continue to benefit from the
experience and ability of Mr. Crowley in the capacity of a consultant to the
Company upon termination of his employment;
WHEREAS, Mr. Crowley is willing to commit himself to serve as a
consultant to the Company, on the terms and conditions provided herein;
NOW, THEREFORE, in consideration of the premises and the respective
covenants and agreements of the parties contained herein, and intending to be
legally bound hereby, the parties hereto agree as follows:
1. Retention as a Consultant. The Company shall retain Mr. Crowley
and Mr. Crowley shall serve the Company as an independent consultant, on the
terms and conditions set forth herein.
<PAGE> 11
2. Term. This Agreement shall commence on the date following the
termination of Mr. Crowley's employment for any reason (other than for Cause or
death) after the Merger Date (as defined in the Employment Agreement) (the
"Effective Date"), and shall expire three (3) years from the Effective Date,
unless earlier terminated by reason of Mr. Crowley's death, by the Company for
Cause or by Mr. Crowley in accordance with the immediately following sentence
(the "Consulting Period"). At any time after the first anniversary of the
Effective Date, Mr. Crowley may terminate this Agreement on thirty days prior
written notice to the Company. After termination of this Agreement, the
Company's sole obligation hereunder shall be to pay Mr. Crowley any earned and
unpaid monthly payments attributable to prior portions of the Consulting Period.
"Cause" shall mean (i) a willful act by Mr. Crowley which constitutes gross
misconduct or fraud and which is materially injurious to the Company or (ii)
conviction of, or a plea of "guilty" or "no contest" to, a felony. No act, or
failure to act, by Mr. Crowley shall be considered "willful" unless committed
without good faith and without a reasonable belief that the act or omission
was in the Company's best interest. No Cause shall be deemed to exist unless
the Company's Board of Directors (the "Board") has determined, by a resolution
adopted with the affirmative votes of at least eight of its members, that Cause
exists. Following the termination of this Agreement, subject to the third
sentence of this Section 2 and the last sentence of Section 5(a) hereof, the
Company's and Mr. Crowley's obligations under this Agreement shall cease.
2
<PAGE> 12
3. Duties. During the Consulting Period, Mr. Crowley shall render
such consulting services to the Company as Mr. Crowley and the Company agree
upon from time to time; provided, however, that Mr. Crowley will not be
required to devote more than (a) 50% of his business time to the performance
of such services during the first year of the Consulting Period, (b) 25% of his
business time to the performance of such services during the second year of the
Consulting Period, and (c) 10% of his business time to the performance of such
services during the third year of the Consulting Period. In this regard, the
Company shall provide Mr. Crowley reasonable notice of such consulting
obligations and Mr. Crowley shall have the right to reschedule commitments to
the Company to accommodate the requirements of his other outside interests.
4. Place of Performance. Mr. Crowley shall perform his duties
hereunder at such locations as are acceptable to him and the Company or by
telephone consultation. To facilitate Mr. Crowley's performance during the
Consulting Period, the Company shall furnish Mr. Crowley, at no more than a
reasonable cost to the Company, an office and secretary reasonably satisfactory
to Mr. Crowley which is located off premises of the Company's headquarters.
Mr. Crowley shall be allowed full use of facilities and other clerical
assistance at the Company's offices of a quality, nature and to the extent made
available to senior executive employees of the Company from time to time.
3
<PAGE> 13
5. Compensation and Related Matters. As compensation for the
services to be rendered by Mr. Crowley hereunder and for providing the
non-competition covenant set forth in Section 6 hereof, the Company shall make
the following payments and provide the following benefits to Mr. Crowley:
(a) Consulting and Non-Competition Fees. Subject to Section
2 hereof, in consideration for Mr. Crowley providing consulting services
hereunder and the covenant not to compete set forth in Section 6 hereof, the
Company shall pay Mr. Crowley a total of $6,000,000 during the first twelve
months of the Consulting Period, $2,000,000 million during the second twelve
months of the Consulting Period and $1,000,000 million during the third twelve
months of the Consulting Period. Payments shall be made monthly in equal
amounts. Notwithstanding the foregoing, the Company shall not be required to
make any such payments if Mr. Crowley is not employed by the Company for one
full year following the Merger Date (as defined in the Employment Agreement),
unless Mr. Crowley's employment had been terminated earlier by the Company
without Cause or by Mr. Crowley with Good Reason (as defined in the Employment
Agreement). Mr. Crowley's obligations pursuant to Section 6 hereof shall
continue for one year after the Effective Date notwithstanding that the Company
is not required to make any payments hereunder.
(b) Reimbursement of Expenses. The Company shall reimburse
Mr. Crowley for reasonable business expenses incurred in the performance of
Mr. Crowley's
4
<PAGE> 14
duties hereunder, including, but not limited to reasonable and necessary
travel, entertainment or similar incidental expenses in connection with the
provision of consulting services; provided, that such expenses shall be
incurred and accounted for in accordance with the policies and procedures
established by the Company from time to time for its senior executives.
(c) Automobile. During the Consulting Period, the Company
shall provide Mr. Crowley with the same automobile benefits provided to Mr.
Crowley by FHC immediately prior to the Merger Date (as defined in the
Employment Agreement).
(d) Club Fees. During the Consulting Period, the Company
shall provide Mr. Crowley membership in the leisure club, organization or
affiliation of his choice in connection with Mr. Crowley' promotion of the
business of the Company and other duties set forth herein; provided, that such
expenses shall be incurred and accounted for in accordance with the policies
and procedures established by the Company from time to time for its senior
executives.
5
<PAGE> 15
6. Non-Competition.
(a) Subject to Section 2 hereof, for a period of three (3)
years after the Effective Date, Mr. Crowley shall not, directly or indirectly,
without the prior written consent of the Company, own, manage, operate, join,
control, be employed by or participate in the ownership, management, operation
or control of, or be connected with (as a stockholder, partner, or otherwise),
any business, individual, partner, firm, corporation, or other entity that is
in the health maintenance organization or group health insurance business (i)
of the kind conducted by the Company (or any affiliate of the Company) on the
Effective Date, and (ii) in the states where the Company (or any affiliate of
the Company) operates its business on the Effective Date; provided, however,
that the "beneficial ownership" by Mr. Crowley, either individually or as a
member of a "group," as such terms are used in Rule 13d of the General Rules
and Regulations under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), of not more than five percent (5%) of the voting stock of any
publicly held corporation shall not be a violation of this Agreement. It is
further expressly agreed that the Company and its affiliates would suffer
irreparable injury if Mr. Crowley were to compete with the Company or any
affiliate of the Company in violation of this Agreement and that the Company
and its affiliates would by reason of such
6
<PAGE> 16
competition be entitled to injunctive relief in a court of appropriate
jurisdiction, and Mr. Crowley further consents and stipulates to the entry of
such injunctive relief in such a court prohibiting Mr. Crowley from competing
with the Company or any affiliate of the Company in violation of this
Agreement.
(b) If it is determined by a court of competent jurisdiction
in any state that the non- competition covenant in this Section 6 is excessive
in duration or scope or is unreasonable or unenforceable under the laws of that
state, it is the intention of the parties that such restriction may be modified
or amended by the court to render it enforceable to the maximum extent permitted
by the law of that state.
7
<PAGE> 17
7. Successors; Binding Agreement.
(a) 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 and each entity
that, directly or indirectly, becomes a parent corporation of the Company, by
agreement in form and substance satisfactory to Mr. Crowley, 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 herein before defined and any successor to its business and/or assets and
each entity that, directly or indirectly, becomes a parent corporation of the
Company.
(b) This Agreement and all rights of Mr. Crowley hereunder
shall inure to the benefit of and be enforceable by Mr. Crowley's personal or
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If Mr. Crowley should die while any
amounts would still be payable or benefits would still be provided to him
and/or his family hereunder if he had continued to live, all such amounts and
benefits, unless otherwise provided herein, shall be paid
8
<PAGE> 18
or provided in accordance with the terms of this Agreement to Mr. Crowley's
devisees, legatees, or other designees or, if there be no such designee, to Mr.
Crowley's estate.
8. Notice. For the purposes of this Agreement, notices, demands
and all other communications provided for in this Agreement shall be in writing
and shall be deemed to have been duly given when delivered or (unless otherwise
specified) mailed by United States certified or registered mail, return receipt
requested, postage prepaid, addressed as follows:
If to Mr. Crowley:
2001 Idaho Mine Court
Gold River, California 95670
If to the Company:
Health Systems International, Inc.
225 North Main
Pueblo, Colorado 81003
Attn: General Counsel
or to such other address as either party may have furnished to the
other in writing in accordance herewith, except that notices of changes of
address shall be
9
<PAGE> 19
effective in accordance herewith, except that notices of change of address shall
be effective only upon receipt.
9. Modification of Agreement; Governing Law. No provisions of
this Agreement may be modified, waived or discharged unless such waiver,
modification or discharge is agreed to in writing and signed by Mr. Crowley and
such officer of the Company as may be specifically designated by the Board.
No waiver by either party hereto at any time of any breach by the other party
hereto or, or compliance with, any condition or provision of this Agreement to
be performed by such other party shall be deemed a waiver of similar of
dissimilar provisions or conditions at the same or at any prior or subsequent
time. No agreements or representations, oral or otherwise, express or implied,
with respect to the subject matter hereof have been made by either party which
are not set forth expressly in this Agreement. The validity, interpretation,
construction and performance of this Agreement shall be governed by the laws
of the State of California without regard to its conflicts of law principles.
10. Validity. The validity or enforceability of any provision or
provisions of this Agreement shall not be affected by the invalidity or
unenforceability of any other provision of this Agreement, and such valid and
enforceable provisions shall remain in full force and effect.
10
<PAGE> 20
11. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
together will constitute one and the same instrument.
12. Entire Agreement. This Agreement and the Employment Agreement
and the Exhibits attached thereto set forth the entire agreement of the parties
hereto with respect to the performance of consulting services and the covenant
not to compete contained herein and supersede all prior agreements, promises,
covenants, arrangements, communications, representations or warranties, whether
oral or written, by any officer, employee or representative of any party hereto
regarding such consulting services and covenant not to compete; and any prior
agreement of the parties hereto in respect of such subject matters is hereby
terminated and canceled.
11
<PAGE> 21
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and
year first above written.
HEALTH SYSTEMS INTERNATIONAL, INC.
By:
-------------------------------------
Name:
Title:
FOUNDATION HEALTH CORPORATION
By:
-------------------------------------
Name:
Title:
-------------------------------------
DANIEL D. CROWLEY
12
<PAGE> 1
EXHIBIT 10.2
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AGREEMENT is entered into as of December 16, 1996, by and among
KIRK A. BENSON (the "Employee"), HEALTH SYSTEMS INTERNATIONAL, INC., a Delaware
corporation (the "Company") and FOUNDATION HEALTH CORPORATION, a Delaware
corporation ("FHC").
WHEREAS, FHC, the Company and the Employee entered into an Employment
Agreement dated October 1, 1996 (the "Existing Agreement"), which the parties
desire to amend and restate hereby;
WHEREAS, FHC and the Employee entered into an Employment Agreement,
dated April 22, 1994, as amended (the "Prior Agreement"), which was superseded
by the Existing Agreement; and
WHEREAS, each of the Company and FHC has determined that it is in its
best interest and the best interests of its stockholders to retain the services
of the Employee; and
WHEREAS, the Employee desires to perform services for the Company on
the terms set forth in this Agreement; and
WHEREAS, the Company and FHC have entered into an Agreement and Plan
of Merger. dated October 1, 1996 (such agreement, and as it may be amended from
time to time, the "Merger Agreement"), pursuant to which a wholly-owned
subsidiary of the Company will be merged with and into FHC (the "Merger"); and
NOW THEREFORE, the Company agrees to employ Employee and the Employee
agrees to perform services for the Company on the terms hereinbelow set forth.
1. Term of Employment.
(a) Term. The Company agrees to employ the Employee and the
Employee agrees to be employed by the Company for a period of two years
commencing as of the date of consummation of the Merger (the "Merger Date")
(such two-year period, the "Term").
(b) Early Termination. Subject to Section 5, the Company may
terminate the Employee's employment by giving the Employee 30 days advance
notice in writing. The Employee may terminate his employment by giving the
Company 30 days advance notice in writing. The Employee's employment shall
terminate automatically in the event of his death. Any waiver of notice shall
be valid only if it is made in writing and expressly refers to the applicable
notice requirement.
(c) Termination of Agreement. All of the obligations of the
parties hereto which are required to be performed following the termination of
the Employee's employment hereunder shall survive the termination or expiration
of this Agreement.
<PAGE> 2
2. Position and Duties.
(a) Position. The Company agrees to employ the Employee as its
Senior Vice President. The Employee's duties as Senior Vice President shall be
to play a key role in the integration of the Company and FHC following the
Merger, advise the Company on personnel and organizational matters, and
participate at the request of the Company in resolving key operational issues.
(b) Obligations. During the Term, the Employee shall devote his
full business efforts and time to the Company and its subsidiaries and shall
not render services to any other person or entity without the prior written
consent of the Board of Directors of the Company (the "Board"). The foregoing,
however, shall not preclude the Employee from engaging in appropriate civic,
charitable or religious activities or from devoting a reasonable amount of time
to private investments that do not interfere or conflict with his
responsibilities to the Company.
3. Compensation.
The Company shall compensate Employee for the services rendered under
this Agreement as follows:
(a) A base salary (the "Base Compensation") at the annual rate of
$400,000 per year, payable in accordance with the customary payroll practices
of the Company for the payment of officers.
(b) Reimbursement for all reasonable expenses incurred on behalf
of the Company upon submission of appropriate documentation in accordance with
the Company's general policies, as they may be amended from time to time during
the Term.
(c) In lieu of participation in the FHC Executive Incentive Plan
(and such other management incentive programs adopted by the Board to replace
such Incentive Plan), $1,120,000 if the Employee remains employed by the
Company for one full year after the Merger Date or is terminated earlier by the
Company without Cause (as defined in Section 5(h) hereof) or by the Employee
with Good Reason (as defined in Section 5(i) hereof). Such amount shall be
paid in a lump sum in cash within ten (10) business days of the first
anniversary of the Merger Date or such earlier termination, whichever is
applicable.
4. Employee Benefits. During the Term (but without derogation of
any of Employee's other entitlements under this Agreement):
(a) Employee shall be entitled to full participation, on a basis
commensurate with his position with the Company, in all plans of accident,
medical, health, disability, pension, deferred compensation, savings and
similar benefits which generally are made available to senior executives of the
Company.
(b) The Company shall provide Employee with an automobile of his
choice or an automobile allowance, which shall include payment of all
maintenance, insurance and related
2
<PAGE> 3
expenses, in accordance with FHC's practice applicable to Employee immediately
before the Merger.
(c) Nothing in this Agreement shall limit in any way Employee's
participation in any other benefit plans or arrangements as are from time to
time approved by the Board or the Compensation Committee for senior executives
of the Company.
5. Termination of Employment.
(a) Severance Payment. Upon termination of Employee's employment
for any reason other than for Cause, the Employee shall be entitled to receive
a severance payment from the Company (the "Severance Payment"). The Severance
Payment shall be made in a lump sum not more than five business days following
the date of such termination and shall be in an amount determined under
Subsection (b) below.
(b) Amount. The amount of the Severance Payment shall be equal to
$2,208,488, which equals 2.99 times the sum of the Employee's annual rate of
Base Compensation plus the average of the annual bonuses awarded to the
Employee for the three fiscal years of FHC ending in 1994, 1995 and 1996.
(c) Benefits Programs. On the Merger Date, the Employee shall
become fully vested in all awards theretofore granted to him and/or
entitlements under the FHC 1990 Stock Option Plan and the FHC Supplemental
Executive Retirement Plan (the "SERP"). If the Employee notifies the Company
no later than the Merger Date that he elects to receive the SERP Amount (as
defined below), on the later of the Merger Date or two business days after such
notice is given, pursuant to and in full satisfaction of the Company's
obligations to the Employee under the SERP, the Company shall pay to the
Employee in a lump sum in cash $1,497,781 (the "SERP Amount"). The SERP Amount
equals 90% of the actuarial equivalent of the Employee's Retirement Benefit (as
defined in the SERP) as of December 31, 1996, as determined by FHC's
independent actuarial firm, Milliman & Robertson, Inc., using reasonable
assumptions. If the SERP Amount is not paid, the terms of the SERP as in
effect on the Merger Date shall remain in full force and effect; provided,
however, that the actuarial equivalents for purposes of calculating lump sum
payments under the SERP will be based on the 1983 group annuity mortality table
blended 50% male and 50% female, and the average 30 year Treasury yield rate
for the month prior to the month of the lump sum payment.
(d) Benefits Coverage. During the three-year period commencing
upon expiration of the Term, upon termination of Employee's employment during
the Term by the Company without Cause, by the Employee for Good Reason or by
the Employee for any reason during the 90-day period commencing on the first
anniversary of the Merger Date, the Employee (and, where applicable, his
dependents) shall be entitled to continue participation in the basic group
insurance plans maintained by the Company, including (without limitation) life,
disability, health and accident insurance programs, as if he were still an
employee of the Company. The Employee shall also continue with those benefits
outlined in Section 4 hereof. Where applicable, the Employee's salary for
purposes of such plans shall be deemed to be equal to his Base Compensation.
To the extent that the Company finds it impossible to cover the Employee under
3
<PAGE> 4
its group insurance policies during such three-year period, the Company shall
provide the Employee with the same level of coverage under individual policies
at the same cost to Employee. In addition to the foregoing, the Company shall
provide the Employee and his dependents with health (including but not limited
to, medical, dental and vision) insurance coverage for the remainder of his
life, which coverage shall be no less beneficial to the Employee and his
dependents than the coverage provided by FHC in effect immediately prior to the
Merger. The Company shall also continue or cause FHC to continue in full force
and effect and pay the premiums with respect to the FHC Split Dollar Insurance
Plan for the benefit of the Employee until the expiration or termination of the
Consulting Agreement (as defined below).
(e) No Mitigation. The Employee shall not be required to mitigate
the amount of any payment contemplated by this Agreement (whether by seeking
new employment or in any other manner), nor shall any such payment be reduced
by any earnings that the Employee may receive from any other source.
Furthermore, any amount payable to the Employee pursuant to this Section 5
shall not be in lieu of any benefits to which he is or may be entitled under
the FHC Deferred Compensation Plan and FHC Split Dollar Insurance Plan.
(f) Consulting and Non-Competition Periods. On the date following
the termination of Employee's employment for any reason (other than for Cause
or by death), including upon expiration of the Term, the consulting agreement,
attached hereto as Exhibit A (the "Consulting Agreement"), shall become
effective.
(g) Rabbi Trust. Not later than the Merger Date, the Company
shall make a contribution to a trust, substantially in the form of Exhibit B
hereto (the "Trust"), in an amount equal to the sum of (i) $2,208,488 in
respect of the Severance Payment; (ii) $1,120,000 in respect of the Employee's
annual bonus; and (iii) $3,500,000 in respect of the consulting and
non-competition fees.
(h) Cause. For purposes of this Agreement, "Cause" shall mean (1)
a willful act by the Employee which constitutes gross misconduct or fraud and
which is materially injurious to the Company or (2) conviction of, or a plea of
"guilty" or "no contest" to, a felony. No act or failure to act by the
Employee shall be considered "willful" unless committed without good faith and
without a reasonable belief that the act or omission was in the Company's best
interest. No Cause shall be deemed to exist unless the Board has determined,
by a resolution adopted with the affirmative votes of at least eight of its
members, that Cause exists.
(i) Good Reason. For purposes of this Agreement, "Good Reason"
shall mean that the Employee has incurred a reduction in his Base Compensation
or a substantial reduction in his authority or responsibility (as such
authority and responsibility exists at the beginning of the Term), or has been
notified that his principal place of work will be relocated by a distance of
100 miles or more from FHC's headquarters on the Merger Date (other than a
relocation to San Francisco).
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<PAGE> 5
6. Limitation on Payments.
(a) Basic Rule. Any other provision of this Agreement
notwithstanding, the Company shall not be required to make any payment or
transfer any property to, or for the benefit of, the Employee (under this
Agreement or otherwise) that would be nondeductible by the Company by reason of
Section 280G of the Internal Revenue Code of 1986, as amended (the "Code") or
that would subject the Employee to the excise tax described in Section 4999 of
the Code. All mathematical calculations required by this section shall be
performed by the independent auditors retained by the Company most recently
prior to the Merger (the "Auditors"), based on information supplied by the
Company and the Employee, and shall be binding on the Company and the Employee.
All fees and expenses of the Auditors shall be paid by the Company.
(b) Reductions. If the amount of the aggregate payments or
property transfers to the Employee must be reduced under this section, then the
Employee shall direct in which order the payments or transfers are to be
reduced, but no change in the timing of any payment or transfer shall be made
without the Company's consent. As a result of uncertainty in the application
of Sections 280G and 4999 of the Code at the time of an initial determination
by the Auditors hereunder, it is possible that a payment will have been made by
the Company that should not have been made (an "Overpayment") or that an
additional payment that will not have been made by the Company could have been
made (an "Underpayment"). In the event that the Auditors, based upon the
assertion of a deficiency by the Internal Revenue Service against the Company
or the Employee that the Auditors believe has a high probability of success,
determine that an Overpayment has been made, such Overpayment shall be treated
for all purposes as a loan to the Employee that he shall repay to the Company,
together with interest at the applicable federal rate specified in Section
7872(f)(2) of the Code; provided, however, that no amount shall be payable by
the Employee to the Company if and to the extent that such payment would not
reduce the amount that is nondeductible under Section 280G of the Code or is
subject to an excise tax under Section 4999 of the Code. In the event that the
Auditors determine that an Underpayment has occurred, such Underpayment shall
promptly be paid or transferred by the Company to, or for the benefit of, the
Employee, together with interest at the applicable federal rate specified in
Section 7872(f)(2) of the Code.
7. Pooling-of-Interest Accounting Rules.
Any other provision of this Agreement (including the Exhibits hereto)
shall be invalid to the extent that the specific implementation of that
provision relating to the Employee would preclude the application of
pooling-of-interests accounting treatment to a transaction (including the
Merger) for which such treatment is to be adopted by the Company and which has
been approved by the Board. If the pooling-of-interests accounting rules
require the invalidation of one or more provisions of this Agreement (including
the Exhibits hereto), the Employee shall not be entitled to receive, or shall
be required to return to the Company, whichever is applicable, any compensation
payable or paid pursuant to the provisions of this Agreement (including the
Exhibits hereto) so deemed to be invalid. All determinations regarding the
pooling-of-interests accounting rules for these purposes shall be made by the
Board.
5
<PAGE> 6
8. Successors.
(a) Company's Successors. The Company shall require any successor
(whether direct or indirect and whether by purchase, lease, merger,
consolidation, liquidation or otherwise) to all or substantially all of the
Company's business and/or assets and each entity that, directly or indirectly,
becomes a parent corporation of the Company, by an agreement in substance and
form satisfactory to the Employee, to assume this Agreement and to agree
expressly to perform this Agreement in the same manner and to the same extent
as the Company would be required to perform it in the absence of a succession.
The Company's failure to obtain such agreement prior to the effectiveness of a
succession shall be a breach of this Agreement and shall entitle the Employee
to all of the compensation and benefits to which he would have been entitled
hereunder if the Company had involuntarily terminated his employment
immediately after the Merger Date. For all purposes under this Agreement, the
term "Company" shall include any successor to the Company's business and/or
assets and each entity that, directly or indirectly, becomes a parent
corporation of the Company.
(b) Employee's Successors. 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.
9. Confidential Information.
During the Term and at all times thereafter, the Employee shall not,
without the prior written consent of the Board, disclose or use for any purpose
(except in the course of his employment under this Agreement and in furtherance
of the business of the Company) confidential information, proprietary data and
customer lists of the Company, except as required by applicable law or legal
process; provided, however, that "confidential information, proprietary data
and customer lists" shall not include any information known generally to the
public or ascertainable from public or published information (other than as a
result of unauthorized disclosure by the Employee) or any information of a type
not otherwise considered confidential by persons engaged in the same business
or a business similar to that conducted by the Company. The Employee agrees to
deliver to the Company at the termination of the Consulting Period (as defined
in the Consulting Agreement) all memoranda, notes, plans, records, lists,
reports and other documents (and copies thereof) relating to the business of
the Company which he may then possess or have under his control.
10. Mutual Releases.
(a) The Employee hereby releases the Company and FHC, their
affiliates and subsidiaries and their respective officers, directors and
employees, from any and all liabilities and claims other than those arising out
of this Agreement (or the Exhibits hereto) which he may have against any of
them, including, without limitation, claims arising under any plan, program or
policy for employee benefits, out of Employee's termination or retirement or
any discrimination related claims. The provisions of this paragraph shall not
apply to any of the Employee's rights under the terms of this Agreement (or the
Exhibits hereto), including, without limitation, the plans described and the
indemnity referred to in Section 11(i) hereof.
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<PAGE> 7
(b) FHC, the Company, their affiliates and subsidiaries and their
respective officers, directors and employees hereby release the Employee from
any and all liabilities and claims other than those arising out of this
Agreement (or the Exhibits hereto) which FHC, the Company, their affiliates and
subsidiaries and their respective officers, directors and employees may have
against the Employee, including, without limitation, claims arising under any
plan, program or policy for employee benefits, or out of the Employee's
termination or retirement. The provisions of this paragraph shall not apply to
any of FHC's rights under the terms of this Agreement (or the Exhibits hereto).
11. Miscellaneous Provisions.
(a) Notice. Notices and all other communications contemplated by
this Agreement shall be in writing and shall be deemed to have been duly given
when personally delivered or when mailed by U.S. registered mail, return
receipt requested and postage prepaid. In the case of the Employee, mailed
notices shall be addressed to him at the home address which he most recently
communicated to the Company in writing. In the case of the Company, mailed
notices shall be addressed to its corporate headquarters, and all notices shall
be directed to the attention of its Secretary.
(b) Waiver. No provision of this Agreement shall be modified,
waived or discharged unless the modification, waiver or discharge is agreed to
in writing and signed by the Employee and by an authorized officer of the
Company (other than the Employee). No waiver by either party of any breach of,
or of compliance with, any condition or provision of this Agreement by the
other party shall be considered a waiver of any other condition or provision or
of the same condition or provision at another time.
(c) Whole Agreement. No agreements, representations or
understandings (whether oral or written and whether express or implied) which
are not expressly set forth in this Agreement, the Consulting Agreement or the
Trust have been made or entered into by either party with respect to the
subject matter hereof. This Agreement supersedes the Existing Agreement and
the Prior Agreement. The Company, FHC and the Employee acknowledge and agree
that subsequent to the Merger there would be deemed to be "Good Reason" under
the Prior Agreement in the absence of this Agreement, and that the obligations
of the Company hereunder are, in part, in consideration for the Employee not
terminating his employment for "Good Reason" under the Prior Agreement
immediately upon the Merger.
(d) No Setoff; Withholding Taxes. There shall be no right of
setoff or counterclaim with respect to any claim, debt or obligation against
payments to the Employee under this Agreement. All payments made under this
Agreement shall be subject to reduction to reflect taxes required to be
withheld by law.
(e) Choice of Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
California.
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<PAGE> 8
(f) Severability. The invalidity or unenforceability of any
provision or provisions of this Agreement and the Consulting Agreement shall
not affect the validity or enforceability of any other provision thereof, which
shall remain in full force and effect.
(g) Arbitration. In the event of any controversy or claim between
the Company or any of its affiliates and the Employee arising out of or
relating to this Agreement, the Consulting Agreement or the Trust, or the
breach thereof, the Employee may retain counsel of choice at the expense of the
Company. If either party delivers to the other party a written demand for
arbitration of a controversy or claim then such demand shall be submitted to
binding arbitration. The binding arbitration shall be administered by the
American Arbitration Association under its Commercial Arbitration Rules. The
arbitration shall take place in Sacramento, California. Each of the Company
and the Employee shall appoint one person to act as an arbitrator, and a third
arbitrator shall be chosen by the first two arbitrators (such three
arbitrators, the "Panel"). The Panel shall have no authority to award punitive
damages against the Company or the Employee. The arbitrator shall have no
authority to add to, alter, amend or refuse to enforce any portion of the
disputed agreements. The Company and the Employee each waive any right to a
jury trial or to petition for stay in any action or proceeding of any kind
arising out of or relating to this Agreement. The Company shall pay all fees,
expenses and costs, including reasonable attorney, consulting, accounting and
other fees, of the Employee relating to any controversy or claim as between
them in good faith.
(h) No Assignment. The rights of any person to payments or
benefits under this Agreement shall not be made subject to option or
assignment, either by voluntary or involuntary assignment or by operation of
law, including (without limitation) bankruptcy, garnishment, attachment or
other creditor's process, and any action in violation of this Subsection (h)
shall be void.
(i) Indemnification. The Employee is not required to pay for
expenditures associated with obtaining, enforcing or defending any rights or
benefits under this Agreement, the Consulting Agreement or the Trust, or any
other plan or arrangement maintained by the Company or its affiliates under
which the Employee is or may be entitled to receive compensation or benefits.
Consequently the Company shall indemnify and hold harmless the Employee for all
such expenditures and pay them as they become due.
12. Effective Date. This Agreement shall be effective beginning
on the Merger Date.
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<PAGE> 9
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in
the case of the Company and FHC by their duly authorized officer, as of the day
and year first above written.
---------------------------------------
Kirk A. Benson
HEALTH SYSTEMS INTERNATIONAL, INC.
By
-----------------------------------
Title
--------------------------------
FOUNDATION HEALTH CORPORATION
By
-----------------------------------
Title
--------------------------------
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<PAGE> 10
EXHIBIT A
CONSULTING AGREEMENT
AGREEMENT (the "Agreement") made this 1st day of October, 1996, among
Health Systems International, Inc., a Delaware corporation (the "Company"),
Foundation Health Corporation, a Delaware corporation ("FHC") and Kirk A.
Benson.
WHEREAS, the Company, FHC and Mr. Benson have entered into an
employment agreement (the "Employment Agreement"), dated as of October 1, 1996;
WHEREAS, the Company and FHC have entered into an Agreement and Plan
of Merger, dated as of October 1, 1996;
WHEREAS, the Company desires to continue to benefit from the
experience and ability of Mr. Benson in the capacity of a consultant to the
Company upon termination of his employment;
WHEREAS, Mr. Benson is willing to commit himself to serve as a
consultant to the Company, on the terms and conditions provided herein;
NOW, THEREFORE, in consideration of the premises and the respective
covenants and agreements of the parties contained herein, and intending to be
legally bound hereby, the parties hereto agree as follows:
1. Retention as a Consultant. The Company shall retain Mr.
Benson and Mr. Benson shall serve the Company as an independent consultant, on
the terms and conditions set forth herein.
<PAGE> 11
2. Term. This Agreement shall commence upon the date following
the termination of Mr. Benson's employment for any reason (other than for Cause
or death) after the Merger Date (as defined in the Employment Agreement) (the
"Effective Date"), and shall expire three (3) years from the Effective Date,
unless earlier terminated by reason of Mr. Benson's death, by the Company for
Cause or by Mr. Benson in accordance with the immediately following sentence
(the "Consulting Period"). At any time after the first anniversary of the
Effective Date, Mr. Benson may terminate this Agreement on thirty days prior
written notice to the Company. After termination of this Agreement, the
Company's sole obligation hereunder shall be to pay Mr. Benson any earned and
unpaid monthly payments attributable to prior portions of the Consulting
Period. "Cause" shall mean (i) a willful act by Mr. Benson which constitutes
gross misconduct or fraud and which is materially injurious to the Company or
(ii) conviction of, or a plea of "guilty" or "no contest" to, a felony. No
act, or failure to act, by Mr. Benson shall be considered "willful" unless
committed without good faith and without a reasonable belief that the act or
omission was in the Company's best interest. No Cause shall be deemed to exist
unless the Company's Board of Directors (the "Board") has determined, by a
resolution adopted with the affirmative votes of at least eight of its members,
that Cause exists. Following termination of this Agreement, subject to the
third sentence of this Section 2 and the last sentence of Section 5(a) hereof,
the Company's and Mr. Benson's obligations under this Agreement shall cease.
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<PAGE> 12
3. Duties. During the Consulting Period, Mr. Benson shall render
such consulting services to the Company and its affiliates as Mr. Benson and
the Company agree upon from time to time; provided, however, that Mr. Benson
will not be required to devote more than (a) 50% of his business time to the
performance of such services during the first 12 months of the Consulting
Period, (b) 25% of his business time to the performance of such services during
the second 12 months of the Consulting Period, and (c) 10% of his business time
to the performance of such services during the third 12 months of the
Consulting Period. In this regard, the Company shall provide Mr. Benson
reasonable notice of such consulting obligations and Mr. Benson shall have the
right to reschedule commitments to the Company to accommodate the requirements
of his other outside interests.
4. Place of Performance. Mr. Benson shall perform his duties
hereunder at such locations as are acceptable to him and the Company or by
telephone consultation. Mr. Benson shall be allowed full use of facilities and
other clerical assistance at the Company's headquarters of a quality, nature
and to the extent made available to senior executive employees of the Company
from time to time.
5. Compensation and Related Matters. As compensation for the
services to be rendered by Mr. Benson hereunder and for providing the
non-competition covenant set forth in Section 6 hereof, the Company shall make
the following payments and provide the following benefits to Mr. Benson:
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<PAGE> 13
(a) Consulting and Non-Competition Fees. Subject to
Section 2 hereof, in consideration for Mr. Benson providing consulting
services hereunder and the covenant not to compete set forth in Section 6
hereof, the Company shall pay Mr. Benson a total of $2,000,000 during the first
twelve months of the Consulting Period and $750,000 during each of the second
and third twelve months of the Consulting Period. Payments shall be made
monthly in equal amounts. Notwithstanding the foregoing, the Company shall not
be required to make any such payments if Mr. Benson is not employed by the
Company for one full year following the Merger Date (as defined in the
Employment Agreement), unless Mr. Benson's employment had been terminated
earlier by the Company without Cause or by Mr. Benson with Good Reason (as
defined in the Employment Agreement). Mr. Benson's obligations pursuant to
Section 6 hereof shall continue for one year after the Effective Date
notwithstanding that the Company is not required to make any payments
hereunder.
(b) Reimbursement of Expenses. The Company shall
reimburse Mr. Benson for reasonable business expenses incurred in the
performance of Mr. Benson's duties hereunder, including, but not limited to
reasonable and necessary travel, entertainment or similar incidental expenses
in connection with the provision of consulting services; provided, that such
expenses shall be incurred and accounted for in accordance with the policies
and procedures established by the Company from time to time for its senior
executives.
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<PAGE> 14
(c) Automobile. During the Consulting Period, the
Company shall provide Mr. Benson with the same automobile benefits provided to
Mr. Benson by FHC immediately prior to the Merger Date (as defined in the
Employment Agreement).
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<PAGE> 15
6. Non-Competition.
(a) Subject to Section 2 hereof, for a period of three
(3) years after the Effective Date, Mr. Benson shall not, directly or
indirectly, without the prior written consent of the Company, own, manage,
operate, join, control, be employed by or participate in the ownership,
management, operation or control of, or be connected with (as a stockholder,
partner, or otherwise), any business, individual, partner, firm, corporation,
or other entity that is in the health maintenance organization or group health
insurance business (i) of the kind conducted by the Company or any affiliate of
the Company on the Effective Date, and (ii) in the states where the Company (or
any affiliate of the Company) operates its business on the Effective Date;
provided, however, that the "beneficial ownership" by Mr. Benson, either
individually or as a member of a "group," as such terms are used in Rule 13d of
the General Rules and Regulations under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), of not more than five percent (5%) of the voting
stock of any publicly held corporation shall not be a violation of this
Agreement. It is further expressly agreed that the Company and its affiliates
would suffer irreparable injury if Mr. Benson were to compete with the Company
or any affiliate of the Company in violation of this Agreement and that the
Company and its affiliates would by reason of such
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<PAGE> 16
competition be entitled to injunctive relief in a court of appropriate
jurisdiction, and Mr. Benson further consents and stipulates to the entry of
such injunctive relief in such a court prohibiting Mr. Benson from competing
with the Company or any affiliate of the Company in violation of this
Agreement.
(b) If it is determined by a court of competent
jurisdiction in any state that the non-competition covenant in this Section 6
is excessive in duration or scope or is unreasonable or unenforceable under the
laws of that state, it is the intention of the parties that such restriction
may be modified or amended by the court to render it enforceable to the maximum
extent permitted by the law of that state.
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<PAGE> 17
7. Successors; Binding Agreement.
(a) 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 and each entity
that, directly or indirectly, becomes a parent corporation of the Company, by
agreement in form and substance satisfactory to Mr. Benson, 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
herein before defined and any successor to its business and/or assets and each
entity that, directly or indirectly, becomes a parent corporation of the
Company.
(b) This Agreement and all rights of Mr. Benson hereunder
shall inure to the benefit of and be enforceable by Mr. Benson's personal or
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If Mr. Benson should die while any
amounts would still be payable or benefits would still be provided to him
and/or his family hereunder if he had continued to live, all such amounts and
benefits, unless otherwise provided herein, shall be paid
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<PAGE> 18
or provided in accordance with the terms of this Agreement to Mr. Benson's
devisees, legatees, or other designees or, if there be no such designee, to Mr.
Benson's estate.
8. Notice. For the purposes of this Agreement, notices, demands
and all other communications provided for in this Agreement shall be in writing
and shall be deemed to have been duly given when delivered or (unless otherwise
specified) mailed by United States certified or registered mail, return receipt
requested, postage prepaid, addressed as follows:
If to Mr. Benson:
4184 West Alpine Cove Drive
Alpine, Utah 84004
If to the Company:
Health Systems International, Inc.
225 North Main
Pueblo, Colorado 81003
Attn: General Counsel
or to such other address as either party may have furnished to the
other in writing in accordance herewith, except that notices of changes of
address shall be
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<PAGE> 19
effective in accordance herewith, except that notices of change of address
shall be effective only upon receipt.
9. Modification of Agreement; Governing Law. No provisions of
this Agreement may be modified, waived or discharged unless such waiver,
modification or discharge is agreed to in writing and signed by Mr. Benson and
such officer of the Company as may be specifically designated by the Board. No
waiver by either party hereto at any time of any breach by the other party
hereto or, or compliance with, any condition or provision of this Agreement to
be performed by such other party shall be deemed a waiver of similar of
dissimilar provisions or conditions at the same or at any prior or subsequent
time. No agreements or representations, oral or otherwise, express or implied,
with respect to the subject matter hereof have been made by either party which
are not set forth expressly in this Agreement. The validity, interpretation,
construction and performance of this Agreement shall be governed by the laws of
the State of California without regard to its conflicts of law principles.
10. Validity. The validity or enforceability of any provision or
provisions of this Agreement shall not be affected by the invalidity or
unenforceability of any other provision of this Agreement, and such valid and
enforceable provisions shall remain in full force and effect.
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<PAGE> 20
11. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
together will constitute one and the same instrument.
12. Entire Agreement. This Agreement and the Employment Agreement
and the Exhibits attached thereto set forth the entire agreement of the parties
hereto with respect to the performance of consulting services and the covenant
not to compete contained herein and supersede all prior agreements, promises,
covenants, arrangements, communications, representations or warranties, whether
oral or written, by any officer, employee or representative of any party hereto
regarding such consulting services and covenant not to compete; and any prior
agreement of the parties hereto in respect of such subject matters is hereby
terminated and canceled.
11
<PAGE> 21
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and
year first above written.
HEALTH SYSTEMS INTERNATIONAL, INC.
By:
-------------------------------------
Name:
Title:
FOUNDATION HEALTH CORPORATION
By:
-------------------------------------
Name:
Title:
-------------------------------------
KIRK A. BENSON
12
<PAGE> 1
EXHIBIT 10.3
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AGREEMENT is entered into as of December 16, 1996, among STEVEN
D. TOUGH (the "Employee"), HEALTH SYSTEMS INTERNATIONAL, INC., a Delaware
corporation (the "Company") and FOUNDATION HEALTH CORPORATION, a Delaware
corporation ("FHC").
WHEREAS, FHC, the Company and the Employee entered into an Employment
Agreement, dated October 1, 1996 (the "Existing Agreement"), which the parties
desire to amend and restate hereby;
WHEREAS, FHC and the Employee entered into an Employment Agreement,
dated April 22, 1994, as amended (the "Prior Agreement"), which was superseded
by the Existing Agreement; and
WHEREAS, each of the Company and FHC has determined that it is in its
best interest and the best interests of its stockholders to retain the services
of the Employee; and
WHEREAS, the Employee desires to perform services for the Company on
the terms set forth in this Agreement; and
WHEREAS, the Company and FHC have entered into an Agreement and Plan
of Merger, dated October 1, 1996 (such agreement, and as it may be amended from
time to time, the "Merger Agreement"), pursuant to which a wholly-owned
subsidiary of the Company will be merged with and into FHC (the "Merger"); and
NOW THEREFORE, the Company agrees to employ Employee and the Employee
agrees to perform services for the Company on the terms hereinbelow set forth.
1. Term of Employment.
(a) Term. The Company agrees to employ the Employee and the
Employee agrees to be employed by the Company for a period of two years
commencing as of the date of consummation of the Merger (the "Merger Date")
(such two-year period, the "Term").
(b) Early Termination. Subject to Section 5, the Company may
terminate the Employee's employment by giving the Employee 30 days advance
notice in writing. The Employee may terminate his employment by giving the
Company 30 days advance notice in writing. The Employee's employment shall
terminate automatically in the event of his death. Any waiver of notice shall
be valid only if it is made in writing and expressly refers to the applicable
notice requirement.
(c) Termination of Agreement. All of the obligations of the
parties hereto which are required to be performed following the termination of
the Employee's employment hereunder shall survive the termination or expiration
of this Agreement.
<PAGE> 2
2. Position and Duties.
(a) Position. The Company agrees to employ the Employee as its
President and Chief Operating Officer-- Government Operations during the Term.
(b) Obligations. During the Term, the Employee shall devote his
full business efforts and time to the Company and its subsidiaries and shall
not render services to any other person or entity without prior written consent
of the Board of Directors of the Company (the "Board"). The foregoing,
however, shall not preclude the Employee from engaging in appropriate civic,
charitable or religious activities or from devoting a reasonable amount of time
to private investments that do not interfere or conflict with his
responsibilities to the Company.
3. Compensation.
The Company shall compensate Employee for the services rendered under
this Agreement as follows:
(a) A base salary (the "Base Compensation") at the annual rate of
$350,000 per year, payable in accordance with the customary payroll practices
of the Company for the payment of officers.
(b) Reimbursement for all reasonable expenses incurred on behalf
of the Company upon submission of appropriate documentation in accordance with
the Company's general policies, as they may be amended from time to time during
the Term.
(c) In lieu of participation in the FHC Executive Incentive Plan
(and such other management incentive programs adopted by the Board to replace
such Incentive Plan) $1,000,000 if (i) the Employee remains employed by the
Company for one full year after the Merger Date, (ii) the Employee's employment
is terminated prior to the expiration of the Term by the Company without Cause
(as defined in Section 5(h) hereof) or by the Employee with Good Reason (as
defined in Section 5(i) hereof), or (iii) the Employee remains employed by the
Company for three (3) months after a full-time replacement for his position has
commenced employment. Such amount shall be paid in a lump sum in cash within
ten (10) business days of the first anniversary of the Merger Date, such
earlier termination or such commencement of employment, whichever is
applicable.
4. Employee Benefits. During the Term (but without derogation of
any of the Employee's other entitlements under this Agreement):
(a) Employee shall be entitled to full participation, on a basis
commensurate with his position with the Company, in all plans of accident,
medical, health, disability, pension, deferred compensation, savings and
similar benefits which generally are made available to senior executives of the
Company.
(b) The Company shall provide Employee with an automobile of his
choice or an automobile allowance, which shall include payment of all
maintenance, insurance and related
2
<PAGE> 3
expenses, in accordance with FHC's practice applicable to Employee immediately
before the Merger.
(c) Nothing in this Agreement shall limit in any way Employee's
participation in any other benefit plans or arrangements as are from time to
time approved by the Board or the Compensation Committee for senior executives
of the Company.
5. Termination of Employment.
(a) Severance Payment. Upon termination of Employee's employment
during the Term (i) by the Company without Cause or by the Employee for Good
Reason, (ii) by the Employee for any reason three months after a full-time
replacement for Employee's position has commenced employment, or (iii) by the
Employee for any reason during the 90-day period commencing on the first
anniversary of the Merger Date, the Employee shall receive a severance payment
from the Company (the "Severance Payment"). The Severance Payment shall be
made in a lump sum not more than five business days following the date of such
termination and shall be in an amount determined under Subsection (b) below.
(b) Amount. The amount of the Severance Payment shall be
$1,985,733, which equals 2.99 times the sum of the Employee's annual rate of
Base Compensation plus the average of the annual bonuses awarded to the
Employee for the three fiscal years of FHC ending in 1994, 1995 and 1996.
(c) Benefits Programs. On the Merger Date, the Employee shall
become fully vested in all awards theretofore granted to him and/or
entitlements under the FHC 1990 Stock Option Plan and the FHC Supplemental
Executive Retirement Plan (the "SERP"). If the Employee notifies the Company
no later than the Merger Date that he elects to receive the SERP Amount (as
defined below), on the later of the Merger Date or two business days after such
notice is given, pursuant to and in full satisfaction of the Company's
obligations to the Employee under the SERP, the Company shall pay to the
Employee in a lump sum in cash $1,318,000 (the "SERP Amount"). The SERP Amount
equals 90% of the actuarial equivalent of the Employee's Retirement Benefit (as
defined in the SERP) as of December 31, 1996, as determined by FHC's
independent actuarial firm, Milliman & Robertson, Inc., using reasonable
assumptions. If the SERP Amount is not paid, the terms of the SERP as in
effect on the Merger Date shall remain in full force and effect; provided,
however, that the actuarial equivalents for purposes of calculating lump sum
payments under the SERP will be based on the 1983 group annuity mortality table
blended 50% male and 50% female, and the average 30 year Treasury yield rate
for the month prior to the month of the lump sum payment.
(d) Benefits Coverage. During the three-year period commencing
upon expiration of the Term, or upon termination of Employee's employment
during the Term by the Company without Cause, by the Employee for Good Reason,
by the Employee for any reason during the 90-day period commencing on the first
anniversary of the Merger Date or by the Employee three (3) months after a
full-time replacement for his position has commenced employment, the Employee
(and, where applicable, his dependents) shall be entitled to continue
participation in the basic group insurance plans maintained by the Company,
including (without limitation) life,
3
<PAGE> 4
disability, health and accident insurance programs, as if he were still an
employee of the Company. The Employee shall also continue with those benefits
outlined in Section 4 hereof. Where applicable, the Employee's salary for
purposes of such plans shall be deemed to be equal to his Base Compensation.
To the extent that the Company finds it impossible to cover the Employee under
its group insurance policies during such three-year period, the Company shall
provide the Employee with the same level of coverage under individual policies
at the same cost to Employee. In addition to the foregoing, the Company shall
provide the Employee and his dependents with health (including, but not limited
to, medical, dental and vision) insurance coverage for the remainder of his
life, which coverage shall be no less beneficial to the Employee and his
dependents than the coverage provided by FHC in effect immediately prior to the
Merger. The Company shall also continue or cause FHC to continue in full force
and effect and pay the premiums with respect to the FHC Split Dollar Insurance
Plan for the benefit of the Employee until the expiration or termination of the
Consulting Agreement (as defined below).
(e) No Mitigation. The Employee shall not be required to mitigate
the amount of any payment contemplated by this Agreement (whether by seeking
new employment or in any other manner), nor shall any such payment be reduced
by any earnings that the Employee may receive from any other source.
Furthermore, any amount payable to the Employee pursuant to this Section 5
shall not be in lieu of any benefits to which he is or may be entitled under
the FHC Deferred Compensation Plan and FHC Split Dollar Insurance Plan.
(f) Consulting and Non-Competition Periods. On the date following
the termination of Employee's employment for any reason (other than for Cause
or by death), including expiration of the Term, the consulting agreement,
attached hereto as Exhibit A (the "Consulting Agreement"), shall become
effective.
(g) Rabbi Trust. Not later than the Merger Date, the Company
shall make a contribution to a trust, substantially in the form of Exhibit B
hereto (the "Trust"), in an amount equal to the sum of (i) $1,985,733 in
respect of the Severance Payment; (ii) $1,000,000 in respect of the Employee's
annual bonus; and (iii) $1,000,000 in respect of the consulting and
non-competition fees.
(h) Cause. For purposes of this Agreement, "Cause" shall mean (1)
a willful act by the Employee which constitutes gross misconduct or fraud and
which is materially injurious to the Company or (2) conviction of, or a plea of
"guilty" or "no contest" to, a felony. No act or failure to act by the
Employee shall be considered "willful" unless committed without good faith and
without a reasonable belief that the act or omission was in the Company's best
interest. No Cause shall be deemed to exist unless the Board has determined,
by a resolution adopted with the affirmative votes of at least eight of its
members, that Cause exists.
(i) Good Reason. For purposes of this Agreement, "Good Reason"
shall mean that the Employee has incurred a reduction in his Base Compensation
or a substantial reduction in his authority or responsibility (as such
authority and responsibility exists at the beginning of the Term), or has been
notified that his principal place of work will be relocated by a distance of
100 miles or more from Sacramento, California (other than a relocation to San
Francisco).
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<PAGE> 5
6. Limitation on Payments.
(a) Basic Rule. Any other provision of this Agreement
notwithstanding, the Company shall not be required to make any payment or
transfer any property to, or for the benefit of, the Employee (under this
Agreement or otherwise) that would be nondeductible by the Company by reason of
Section 280G of the Internal Revenue Code of 1986, as amended (the "Code") or
that would subject the Employee to the excise tax described in Section 4999 of
the Code. All mathematical calculations required by this section shall be
performed by the independent auditors retained by the Company most recently
prior to the Merger (the "Auditors"), based on information supplied by the
Company and the Employee, and shall be binding on the Company and the Employee.
All fees and expenses of the Auditors shall be paid by the Company.
(b) Reductions. If the amount of the aggregate payments or
property transfers to the Employee must be reduced under this section, then the
Employee shall direct in which order the payments or transfers are to be
reduced, but no change in the timing of any payment or transfer shall be made
without the Company's consent. As a result of uncertainty in the application
of Sections 280G and 4999 of the Code at the time of an initial determination
by the Auditors hereunder, it is possible that a payment will have been made by
the Company that should not have been made (an "Overpayment") or that an
additional payment that will not have been made by the Company could have been
made (an "Underpayment"). In the event that the Auditors, based upon the
assertion of a deficiency by the Internal Revenue Service against the Company
or the Employee that the Auditors believe has a high probability of success,
determine that an Overpayment has been made, such Overpayment shall be treated
for all purposes as a loan to the Employee that he shall repay to the Company,
together with interest at the applicable federal rate specified in Section
7872(f)(2) of the Code; provided, however, that no amount shall be payable by
the Employee to the Company if and to the extent that such payment would not
reduce the amount that is nondeductible under Section 280G of the Code or is
subject to an excise tax under Section 4999 of the Code. In the event that the
Auditors determine that an Underpayment has occurred, such Underpayment shall
promptly be paid or transferred by the Company to, or for the benefit of, the
Employee, together with interest at the applicable federal rate specified in
Section 7872(f)(2) of the Code.
7. Pooling-of-Interest Accounting Rules.
Any other provision of this Agreement (including the Exhibits hereto)
shall be invalid to the extent that the specific implementation of that
provision relating to the Employee would preclude the application of
pooling-of-interests accounting treatment to a transaction (including the
Merger) for which such treatment is to be adopted by the Company and which has
been approved by the Board. If the pooling-of-interests accounting rules
require the invalidation of one or more provisions of this Agreement (including
the Exhibits hereto), the Employee shall not be entitled to receive, or shall
be required to return to the Company, whichever is applicable, any compensation
payable or paid pursuant to the provisions of this Agreement (including the
Exhibits hereto) so deemed to be invalid. All determinations regarding the
pooling-of-interests accounting rules for these purposes shall be made by the
Board.
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<PAGE> 6
8. Successors.
(a) Company's Successors. The Company shall require any successor
(whether direct or indirect and whether by purchase, lease, merger,
consolidation, liquidation or otherwise) to all or substantially all of the
Company's business and/or assets and each entity that, directly or indirectly,
becomes a parent corporation of the Company, by an agreement in substance and
form satisfactory to the Employee, to assume this Agreement and to agree
expressly to perform this Agreement in the same manner and to the same extent
as the Company would be required to perform it in the absence of a succession.
The Company's failure to obtain such agreement prior to the effectiveness of a
succession shall be a breach of this Agreement and shall entitle the Employee
to all of the compensation and benefits to which he would have been entitled
hereunder if the Company had involuntarily terminated his employment
immediately after the Merger Date. For all purposes under this Agreement, the
term "Company" shall include any successor to the Company's business and/or
assets and each entity that, directly or indirectly, becomes a parent
corporation of the Company.
(b) Employee's Successors. 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.
9. Confidential Information.
During the Term and at all times thereafter, the Employee shall not,
without the prior written consent of the Board, disclose or use for any purpose
(except in the course of his employment under this Agreement and in furtherance
of the business of the Company) confidential information, proprietary data and
customer lists of the Company, except as required by applicable law or legal
process; provided, however, that "confidential information, proprietary data
and customer lists" shall not include any information known generally to the
public or ascertainable from public or published information (other than as a
result of unauthorized disclosure by the Employee) or any information of a type
not otherwise considered confidential by persons engaged in the same business
or a business similar to that conducted by the Company. The Employee agrees to
deliver to the Company at the termination of the Consulting Period (as defined
in the Consulting Agreement) all memoranda, notes, plans, records, lists,
reports and other documents (and copies thereof) relating to the business of
the Company which he may then possess or have under his control.
10. Mutual Releases.
(a) The Employee hereby releases the Company and FHC, their
affiliates and subsidiaries and their respective officers, directors and
employees, from any and all liabilities and claims other than those arising out
of this Agreement or the Exhibits hereto which he may have against any of them,
including, without limitation, claims arising under any plan, program or policy
for employee benefits, out of Employee's termination or retirement or any
discrimination related claims. The provisions of this paragraph shall not
apply to any of the Employee's rights under the terms of this Agreement (or the
Exhibits hereto), including, without limitation, the plans described and the
indemnity referred to in Section 11(i) hereof.
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<PAGE> 7
(b) FHC, the Company, their affiliates and subsidiaries and their
respective officers, directors and employees hereby release the Employee from
any and all liabilities and claims other than those arising out of this
Agreement or the Exhibits hereto which FHC, the Company, their affiliates and
subsidiaries and their respective officers, directors and employees may have
against the Employee, including, without limitation, claims arising under any
plan, program or policy for employee benefits, or out of the Employee's
termination or retirement. The provisions of this paragraph shall not apply to
any of FHC's rights under the terms of this Agreement (or the Exhibits hereto).
11. Miscellaneous Provisions.
(a) Notice. Notices and all other communications contemplated by
this Agreement shall be in writing and shall be deemed to have been duly given
when personally delivered or when mailed by U.S. registered mail, return
receipt requested and postage prepaid. In the case of the Employee, mailed
notices shall be addressed to him at the home address which he most recently
communicated to the Company in writing. In the case of the Company, mailed
notices shall be addressed to its corporate headquarters, and all notices shall
be directed to the attention of its Secretary.
(b) Waiver. No provision of this Agreement shall be modified,
waived or discharged unless the modification, waiver or discharge is agreed to
in writing and signed by the Employee and by an authorized officer of the
Company (other than the Employee). No waiver by either party of any breach of,
or of compliance with, any condition or provision of this Agreement by the
other party shall be considered a waiver of any other condition or provision or
of the same condition or provision at another time.
(c) Whole Agreement. No agreements, representations or
understandings (whether oral or written and whether express or implied) which
are not expressly set forth in this Agreement, the Consulting Agreement or the
Trust have been made or entered into by either party with respect to the
subject matter hereof. This Agreement supersedes the Existing Agreement and
the Prior Agreement. The Company, FHC and the Employee acknowledge and agree
that subsequent to the Merger there would be deemed to be "Good Reason" under
the Prior Agreement in the absence of this Agreement, and that the obligations
of the Company hereunder are, in part, in consideration for the Employee not
terminating his employment for "Good Reason" under the Prior Agreement
immediately upon the Merger.
(d) No Setoff; Withholding Taxes. There shall be no right of
setoff or counterclaim with respect to any claim, debt or obligation against
payments to the Employee under this Agreement. All payments made under this
Agreement shall be subject to reduction to reflect taxes required to be
withheld by law.
(e) Choice of Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
California.
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<PAGE> 8
(f) Severability. The invalidity or unenforceability of any
provision or provisions of this Agreement and the Consulting Agreement shall
not affect the validity or enforceability of any other provision thereof, which
shall remain in full force and effect.
(g) Arbitration. In the event of any controversy or claim between
the Company or any of its affiliates and the Employee arising out of or
relating to this Agreement, the Consulting Agreement or the Trust, or the
breach thereof, the Employee may retain counsel of choice at the expense of the
Company. If either party delivers to the other party a written demand for
arbitration of a controversy or claim then such demand shall be submitted to
binding arbitration. The binding arbitration shall be administered by the
American Arbitration Association under its Commercial Arbitration Rules. The
arbitration shall take place in Sacramento, California. Each of the Company
and the Employee shall appoint one person to act as an arbitrator, and a third
arbitrator shall be chosen by the first two arbitrators (such three
arbitrators, the "Panel"). The Panel shall have no authority to award punitive
damages against the Company or the Employee. The arbitrator shall have no
authority to add to, alter, amend or refuse to enforce any portion of the
disputed agreements. The Company and the Employee each waive any right to a
jury trial or to petition for stay in any action or proceeding of any kind
arising out of or relating to this Agreement. The Company shall pay all fees,
expenses and costs, including reasonable attorney, consulting, accounting and
other fees, of the Employee relating to any controversy or claim as between
them in good faith.
(h) No Assignment. The rights of any person to payments or
benefits under this Agreement shall not be made subject to option or
assignment, either by voluntary or involuntary assignment or by operation of
law, including (without limitation) bankruptcy, garnishment, attachment or
other creditor's process, and any action in violation of this Subsection (h)
shall be void.
(i) Indemnification. The Employee is not required to pay for
expenditures associated with obtaining, enforcing or defending any rights or
benefits under this Agreement, the Consulting Agreement or the Trust, or any
other plan or arrangement maintained by the Company or its affiliates under
which the Employee is or may be entitled to receive compensation or benefits.
Consequently the Company shall indemnify and hold harmless the Employee for all
such expenditures and pay them as they become due.
12. Effective Date. This Agreement shall be effective beginning
on the Merger Date.
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<PAGE> 9
IN WITNESS WHEREOF, each of the parties has executed this Agreement,
in the case of the Company and FHC by their duly authorized officer, as of the
day and year first above written.
---------------------------------------
Steven D. Tough
HEALTH SYSTEMS INTERNATIONAL, INC.
By
-----------------------------------
Title
--------------------------------
FOUNDATION HEALTH CORPORATION
By
-----------------------------------
Title
--------------------------------
9
<PAGE> 10
EXHIBIT A
CONSULTING AGREEMENT
AGREEMENT (the "Agreement") made this 1st day of October, 1996, among
Health Systems International, Inc., a Delaware corporation (the "Company"),
Foundation Health Corporation, a Delaware corporation ("FHC") and Steven D.
Tough.
WHEREAS, the Company, FHC and Mr. Tough have entered into an
employment agreement (the "Employment Agreement"), dated as of October 1, 1996;
WHEREAS, the Company and FHC have entered into an Agreement and Plan
of Merger, dated as of October 1, 1996;
WHEREAS, the Company desires to continue to benefit from the
experience and ability of Mr. Tough in the capacity of a consultant to the
Company upon termination of his employment;
WHEREAS, Mr. Tough is willing to commit himself to serve as a
consultant to the Company, on the terms and conditions provided herein;
NOW, THEREFORE, in consideration of the premises and the respective
covenants and agreements of the parties contained herein, and intending to be
legally bound hereby, the parties hereto agree as follows:
1. Retention as a Consultant. The Company shall retain Mr. Tough
and Mr. Tough shall serve the Company as an independent consultant, on the
terms and conditions set forth herein.
<PAGE> 11
2. Term. This Agreement shall commence upon the date following
the termination of Mr. Tough's employment for any reason (other than for Cause
or death) after the Merger Date (as defined in the Employment Agreement) (the
"Effective Date"), and shall expire one year from the Effective Date, unless
earlier terminated by reason of Mr. Tough's death or by the Company for Cause
(the "Consulting Period"). "Cause" shall mean (i) a willful act by Mr. Tough
which constitutes gross misconduct or fraud and which is materially injurious
to the Company or (ii) conviction of, or a plea of "guilty" or "no contest" to,
a felony. No act, or failure to act, by Mr. Tough shall be considered
"willful" unless committed without good faith and without a reasonable belief
that the act or omission was in the Company's best interest. No Cause shall be
deemed to exist unless the Company's Board of Directors (the "Board") has
determined, by a resolution adopted with the affirmative votes of at least
eight of its members, that Cause exists. Following the termination of this
Agreement, subject to the last sentence of Section 5(a) hereof, the Company's
and Mr. Tough's obligations under this Agreement shall cease.
3. Duties. During the Consulting Period, Mr. Tough shall render
such consulting services to the Company and its affiliates as Mr. Tough and the
Company agree upon from time to time; provided, however, that Mr. Tough will
not be required to devote more than 50% of his business time to the performance
of such services during the Consulting Period. In this regard, the Company
shall provide Mr. Tough reasonable notice of
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<PAGE> 12
such consulting obligations and Mr. Tough shall have the right to reschedule
commitments to the Company to accommodate the requirements of his other outside
interests.
4. Place of Performance. Mr. Tough shall perform his duties
hereunder at such locations as are acceptable to him and the Company or by
telephone consultation. To facilitate Mr. Tough's performance during the
Consulting Period, the Company shall furnish Mr. Tough with an office and
secretary at the Company's headquarters reasonably satisfactory to Mr. Tough
and Mr. Tough shall be allowed full use of facilities and other clerical
assistance at the Company's headquarters of a quality, nature and to the extent
made available to senior executive employees of the Company from time to time.
5. Compensation and Related Matters. As compensation for the
services to be rendered by Mr. Tough hereunder and for providing the
non-competition covenant set forth in Section 6 hereof, the Company shall make
the following payments and provide the following benefits to Mr. Tough:
(a) Consulting and Non-Competition Fees. Subject to
Section 2 hereof, in consideration for Mr. Tough providing consulting services
hereunder and the covenant not to compete set forth in Section 6 hereof, the
Company shall pay Mr. Tough a total of $1,000,000. Payments shall be made
monthly in equal amounts. Notwithstanding the foregoing, the Company shall not
be required to make any such payments if Mr. Tough is not employed by the
Company for one full year following the Merger Date (as defined in the
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<PAGE> 13
Employment Agreement), unless Mr. Tough's employment had been terminated
earlier by the Company without Cause, by Mr. Tough with Good Reason (as
defined in the Employment Agreement) or by Mr. Tough three months after his
replacement commenced employment. Mr. Tough's obligations pursuant to Section
6 hereof shall continue for one year after the Effective Date notwithstanding
that the Company is not required to make any payments hereunder.
(b) Reimbursement of Expenses. The Company shall
reimburse Mr. Tough for reasonable business expenses incurred in the
performance of Mr. Tough's duties hereunder, including, but not limited to
reasonable and necessary travel, entertainment or similar incidental expenses
in connection with the provision of consulting services; provided, that such
expenses shall be incurred and accounted for in accordance with the policies
and procedures established by the Company from time to time for its senior
executives.
(c) Automobile. During the Consulting Period, the
Company shall provide Mr. Tough with the same automobile benefits provided to
Mr. Tough by FHC immediately prior to the Merger Date (as defined in the
Employment Agreement).
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<PAGE> 14
6. Non-Competition.
(a) Subject to Section 2 hereof, for a period of one (1)
year after the Effective Date, Mr. Tough shall not, directly or indirectly,
without the prior written consent of the Company, own, manage, operate, join,
control, be employed by or participate in the ownership, management, operation
or control of, or be connected with (as a stockholder, partner, or otherwise),
any business, individual, partner, firm, corporation, or other entity that is
in the health maintenance organization or group health insurance business (i)
of the kind conducted by the Company or any of its affiliates on the Effective
Date, and (ii) in the states where the Company (or any affiliate of the
Company) operates its business on the Effective Date; provided, however, that
the "beneficial ownership" by Mr. Tough, either individually or as a member of
a "group," as such terms are used in Rule 13d of the General Rules and
Regulations under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), of not more than five percent (5%) of the voting stock of any
publicly held corporation shall not be a violation of this Agreement. It is
further expressly agreed that the Company and its affiliates would suffer
irreparable injury if Mr. Tough were to compete with the Company or any
affiliate of the Company in violation of this Agreement and that the Company
and its affiliates would by reason of such
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<PAGE> 15
competition be entitled to injunctive relief in a court of appropriate
jurisdiction, and Mr. Tough further consents and stipulates to the entry of
such injunctive relief in such a court prohibiting Mr. Tough from competing
with the Company or any affiliate of the Company in violation of this
Agreement.
(b) If it is determined by a court of competent
jurisdiction in any state that the non-competition covenant in this Section 6
is excessive in duration or scope or is unreasonable or unenforceable under the
laws of that state, it is the intention of the parties that such restriction
may be modified or amended by the court to render it enforceable to the maximum
extent permitted by the law of that state.
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<PAGE> 16
7. Successors; Binding Agreement.
(a) 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 and each entity
that, directly or indirectly, becomes a parent corporation of the Company, by
agreement in form and substance satisfactory to Mr. Tough, 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
herein before defined and any successor to its business and/or assets and each
entity that, directly or indirectly, becomes a parent corporation of the
Company.
(b) This Agreement and all rights of Mr. Tough hereunder
shall inure to the benefit of and be enforceable by Mr. Tough's personal or
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If Mr. Tough should die while any amounts
would still be payable or benefits would still be provided to him and/or his
family hereunder if he had continued to live, all such amounts and benefits,
unless otherwise provided herein, shall be paid
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<PAGE> 17
or provided in accordance with the terms of this Agreement to Mr. Tough's
devisees, legatees, or other designees or, if there be no such designee, to Mr.
Tough's estate.
8. Notice. For the purposes of this Agreement, notices, demands
and all other communications provided for in this Agreement shall be in writing
and shall be deemed to have been duly given when delivered or (unless otherwise
specified) mailed by United States certified or registered mail, return receipt
requested, postage prepaid, addressed as follows:
If to Mr. Tough:
9825 Carlton Court
Granite Bay, California 95746
If to the Company:
Health Systems International, Inc.
225 North Main
Pueblo, Colorado 81003
Attn: General Counsel
or to such other address as either party may have furnished to the
other in writing in accordance herewith, except that notices of changes of
address shall be
8
<PAGE> 18
effective in accordance herewith, except that notices of change of address
shall be effective only upon receipt.
9. Withholding. All amounts payable hereunder shall be subject
to such withholding taxes as may be required by law.
10. Modification of Agreement; Governing Law. No provisions of
this Agreement may be modified, waived or discharged unless such waiver,
modification or discharge is agreed to in writing and signed by Mr. Tough and
such officer of the Company as may be specifically designated by the Board. No
waiver by either party hereto at any time of any breach by the other party
hereto or, or compliance with, any condition or provision of this Agreement to
be performed by such other party shall be deemed a waiver of similar of
dissimilar provisions or conditions at the same or at any prior or subsequent
time. No agreements or representations, oral or otherwise, express or implied,
with respect to the subject matter hereof have been made by either party which
are not set forth expressly in this Agreement. The validity, interpretation,
construction and performance of this Agreement shall be governed by the laws of
the State of California without regard to its conflicts of law principles.
11. Validity. The validity or enforceability of any provision or
provisions of this Agreement shall not be affected by the invalidity or
unenforceability of any
9
<PAGE> 19
other provision of this Agreement, and such valid and enforceable provisions
shall remain in full force and effect.
12. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
together will constitute one and the same instrument.
13. Entire Agreement. This Agreement and the Employment Agreement
and the Exhibits attached thereto set forth the entire agreement of the parties
hereto with respect to the performance of consulting services and the covenant
not to compete contained herein and supersede all prior agreements, promises,
covenants, arrangements, communications, representations or warranties, whether
oral or written, by any officer, employee or representative of any party hereto
regarding such consulting services and covenant not to compete; and any prior
agreement of the parties hereto in respect of such subject matters is hereby
terminated and canceled.
10
<PAGE> 20
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and
year first above written.
HEALTH SYSTEMS INTERNATIONAL, INC.
By:
-------------------------------------
Name:
Title:
FOUNDATION HEALTH CORPORATION
By:
-------------------------------------
Name:
Title:
----------------------------------------
STEVEN D. TOUGH
11
<PAGE> 1
EXHIBIT 10.4
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AGREEMENT is entered into as of December 16, 1996, among JEFFREY
L. ELDER (the "Employee"), HEALTH SYSTEMS INTERNATIONAL, INC., a Delaware
corporation (the "Company") and FOUNDATION HEALTH CORPORATION, a Delaware
corporation ("FHC").
WHEREAS, FHC, the Company and the Employee entered into an Employment
Agreement dated October 1, 1996 (the "Existing Agreement"), which the parties
desire to amend and restate hereby;
WHEREAS, FHC and the Employee entered into an Employment Agreement,
dated April 22, 1994, as amended (the "Prior Agreement"), which was superseded
by the Existing Agreement; and
WHEREAS, each of the Company and FHC has determined that it is in its
best interest and the best interests of its stockholders to retain the services
of the Employee; and
WHEREAS, the Employee desires to perform services for the Company on
the terms set forth in this Agreement; and
WHEREAS, the Company and FHC have entered into an Agreement and Plan
of Merger, dated October 1, 1996 (such agreement, and as it may be amended from
time to time, the "Merger Agreement"), pursuant to which a wholly-owned
subsidiary of the Company will be merged with and into FHC (the "Merger"); and
NOW THEREFORE, the Company agrees to employ Employee and the Employee
agrees to perform services for the Company on the terms hereinbelow set forth.
1. Term of Employment.
(a) Term. The Company agrees to employ the Employee and the
Employee agrees to be employed by the Company for a period of two years
commencing as of the date of consummation of the Merger (the "Merger Date")
(such two-year period, the "Term").
(b) Early Termination. Subject to Section 5, the Company may
terminate the Employee's employment by giving the Employee 30 days advance
notice in writing. The Employee may terminate his employment by giving the
Company 30 days advance notice in writing. The Employee's employment shall
terminate automatically in the event of his death. Any waiver of notice shall
be valid only if it is made in writing and expressly refers to the applicable
notice requirement.
(c) Termination of Agreement. This Agreement shall terminate when
all obligations of the parties hereunder have been satisfied.
<PAGE> 2
2. Position and Duties.
(a) Position. The Company agrees to employ the Employee as its
Senior Vice President--Chief Financial Officer during the Term.
(b) Obligations. During the Term, the Employee shall devote his
full business efforts and time to the Company and its subsidiaries and shall
not render services to any other person or entity without prior written consent
of the Board of Directors of the Company (the "Board"). The foregoing,
however, shall not preclude the Employee from engaging in appropriate civic,
charitable or religious activities or from devoting a reasonable amount of time
to private investments that do not interfere or conflict with his
responsibilities to the Company.
3. Compensation.
The Company shall compensate Employee for the services rendered under
this Agreement as follows:
(a) A base salary (the "Base Compensation") at the annual rate of
$315,000 per year, payable in accordance with the customary payroll practices
of the Company for the payment of officers.
(b) Reimbursement for all reasonable expenses incurred on behalf
of the Company upon submission of appropriate documentation in accordance with
the Company's general policies, as they may be amended from time to time during
the Term.
(c) In lieu of participation in the FHC Executive Incentive Plan
(and such other management incentive programs adopted by the Board to replace
such Incentive Plan), a bonus of $250,000 if the Employee remains employed by
the Company for six months after the Merger Date, and an additional bonus of
$441,000 if the Employee remains employed by the Company for one full year
after the Merger Date; provided, however, that both bonuses shall be payable if
the Employee's employment is terminated by the Company without Cause (as
defined in Section 5(g) hereof) or by the Employee with Good Reason (as defined
in Section 5(h) hereof). Such amounts shall be paid in a lump sum in cash
within ten (10) business days of the expiration of the six-month and one year
periods or such earlier termination, whichever is applicable.
4. Employee Benefits. During the Term (but without derogation of
any of the Employee's other entitlements under this Agreement):
(a) Employee shall be entitled to full participation, on a basis
commensurate with his position with the Company, in all plans of accident,
medical, health, disability, pension, deferred compensation, savings and
similar benefits which generally are made available to senior executives of the
Company.
(b) The Company shall provide Employee with an automobile of his
choice or an automobile allowance, which shall include payment of all
maintenance, insurance and related
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<PAGE> 3
expenses, in accordance with FHC's practice applicable to Employee immediately
before the Merger.
(c) Nothing in this Agreement shall limit in any way Employee's
participation in any other benefit plans or arrangements as are from time to
time approved by the Board or the Compensation Committee for senior executives
of the Company.
5. Termination of Employment.
(a) Severance Payment. Upon termination of Employee's employment
during the Term (i) by the Company without Cause or by the Employee for Good
Reason, or (ii) by the Employee for any reason during the period commencing 90
days after and ending 450 days after the Merger Date, the Employee shall
receive a severance payment from the Company (the "Severance Payment"). The
Severance Payment shall be made in a lump sum not more than five business days
following the date of such termination and shall be in an amount determined
under Subsection (b) below.
(b) Amount. The amount of the Severance Payment shall be
$1,847,421, which equals 2.99 times the sum of the Employee's annual rate of
Base Compensation plus the average of the annual bonuses awarded to the
Employee for the three fiscal years of FHC ending in 1994, 1995 and 1996.
(c) Benefits Programs. On the Merger Date, the Employee shall
become fully vested in all awards theretofore granted to him and/or
entitlements under the FHC 1990 Stock Option Plan and the FHC Supplemental
Executive Retirement Plan (the "SERP"). If the Employee notifies the Company
no later than the Merger Date that he elects to receive the SERP Amount (as
defined below), on the later of the Merger Date or two business days after such
notice is given, pursuant to and in full satisfaction of the Company's
obligations to the Employee under the SERP, the Company shall pay to the
Employee in a lump sum in cash $1,374,315 (the "SERP Amount"). The SERP Amount
equals 90% of the actuarial equivalent of the Employee's Retirement Benefit (as
defined in the SERP) as of December 31, 1996, as determined by FHC's
independent actuarial firm, Milliman & Robertson, Inc., using reasonable
assumptions. If the SERP Amount is not paid, the terms of the SERP as in
effect on the Merger Date shall remain in full force and effect; provided,
however, that the actuarial equivalents for purposes of calculating lump sum
payments under the SERP will be based on the 1983 group annuity mortality table
blended 50% male and 50% female, and the average 30 year Treasury yield rate
for the month prior to the month of the lump sum payment.
(d) Benefits Coverage. During the three-year period commencing
upon termination of Employee's employment during the Term by the Company
without Cause, by the Employee for Good Reason or by the Employee for any
reason during the period commencing 90 days after and ending 450 days after the
Merger Date, the Employee (and, where applicable, his dependents) shall be
entitled to continue participation in the basic group insurance plans
maintained by the Company, including (without limitation) life, disability,
health and accident insurance programs, as if he were still an employee of the
Company. The Employee shall also continue with those benefits outlined in
Section 4 hereof. Where applicable, the Employee's
3
<PAGE> 4
salary for purposes of such plans shall be deemed to be equal to his Base
Compensation. To the extent that the Company finds it impossible to cover the
Employee under its group insurance policies during such three-year period, the
Company shall provide the Employee with the same level of coverage under
individual policies at the same cost to Employee. In addition to the
foregoing, the Company shall provide the Employee and his dependents with
health (including, but not limited to, medical, dental and vision) insurance
coverage for the remainder of his life, which coverage shall be no less
beneficial to the Employee and his dependents than the coverage provided by FHC
in effect immediately prior to the Merger.
(e) No Mitigation. The Employee shall not be required to mitigate
the amount of any payment contemplated by this Agreement (whether by seeking
new employment or in any other manner), nor shall any such payment be reduced
by any earnings that the Employee may receive from any other source.
Furthermore, any amount payable to the Employee pursuant to this Section 5
shall not be in lieu of any benefits to which he is or may be entitled under
the FHC Deferred Compensation Plan and FHC Split Dollar Insurance Plan.
(f) Rabbi Trust. Not later than the Merger Date, the Company
shall make a contribution to a trust, substantially in the form of Exhibit B
hereto (the "Trust"), in an amount equal to the sum of (i) $1,847,421 in
respect of the Severance Payment; and (ii) $691,000 in respect of the
Employee's annual bonus.
(g) Cause. For purposes of this Agreement, "Cause" shall mean (1)
a willful act by the Employee which constitutes gross misconduct or fraud and
which is materially injurious to the Company or (2) conviction of, or a plea of
"guilty" or "no contest" to, a felony. No act or failure to act by the
Employee shall be considered "willful" unless committed without good faith and
without a reasonable belief that the act or omission was in the Company's best
interest. No Cause shall be deemed to exist unless the Board has determined,
by a resolution adopted with the affirmative votes of at least eight of its
members, that Cause exists.
(h) Good Reason. For purposes of this Agreement, "Good Reason"
shall mean that the Employee has incurred a reduction in his Base Compensation
or a substantial reduction in his authority or responsibility (as such
authority and responsibility exists at the beginning of the Term), or has been
notified that his principal place of work will be relocated by a distance of
100 miles or more from FHC's headquarters on the Merger Date (other than a
relocation to San Francisco).
6. Limitation on Payments.
(a) Basic Rule. Any other provision of this Agreement
notwithstanding, the Company shall not be required to make any payment or
transfer any property to, or for the benefit of, the Employee (under this
Agreement or otherwise) that would be nondeductible by the Company by reason of
Section 280G of the Internal Revenue Code of 1986, as amended (the "Code") or
that would subject the Employee to the excise tax described in Section 4999 of
the Code. All mathematical calculations required by this section shall be
performed by the independent auditors retained by the Company most recently
prior to the Merger (the "Auditors"), based on information supplied by the
Company and the Employee, and shall be
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binding on the Company and the Employee. All fees and expenses of the Auditors
shall be paid by the Company.
(b) Reductions. If the amount of the aggregate payments or
property transfers to the Employee must be reduced under this section, then the
Employee shall direct in which order the payments or transfers are to be
reduced, but no change in the timing of any payment or transfer shall be made
without the Company's consent. As a result of uncertainty in the application
of Sections 280G and 4999 of the Code at the time of an initial determination
by the Auditors hereunder, it is possible that a payment will have been made by
the Company that should not have been made (an "Overpayment") or that an
additional payment that will not have been made by the Company could have been
made (an "Underpayment"). In the event that the Auditors, based upon the
assertion of a deficiency by the Internal Revenue Service against the Company
or the Employee that the Auditors believe has a high probability of success,
determine that an Overpayment has been made, such Overpayment shall be treated
for all purposes as a loan to the Employee that he shall repay to the Company,
together with interest at the applicable federal rate specified in Section
7872(f)(2) of the Code; provided, however, that no amount shall be payable by
the Employee to the Company if and to the extent that such payment would not
reduce the amount that is nondeductible under Section 280G of the Code or is
subject to an excise tax under Section 4999 of the Code. In the event that the
Auditors determine that an Underpayment has occurred, such Underpayment shall
promptly be paid or transferred by the Company to, or for the benefit of, the
Employee, together with interest at the applicable federal rate specified in
Section 7872(f)(2) of the Code.
7. Pooling-of-Interest Accounting Rules.
Any other provision of this Agreement (including the Exhibits hereto)
shall be invalid to the extent that the specific implementation of that
provision relating to the Employee would preclude the application of
pooling-of-interests accounting treatment to a transaction (including the
Merger) for which such treatment is to be adopted by the Company and which has
been approved by the Board. If the pooling-of-interests accounting rules
require the invalidation of one or more provisions of this Agreement (including
the Exhibits hereto) the Employee shall not be entitled to receive, or shall be
required to return to the Company, whichever is applicable, any compensation
payable or paid pursuant to the provisions of this Agreement (including the
Exhibits hereto) so deemed to be invalid. All determinations regarding the
pooling-of-interests accounting rules for these purposes shall be made by the
Board.
8. Successors.
(a) Company's Successors. The Company shall require any successor
(whether direct or indirect and whether by purchase, lease, merger,
consolidation, liquidation or otherwise) to all or substantially all of the
Company's business and/or assets and each entity that, directly or indirectly,
becomes a parent corporation of the Company, by an agreement in substance and
form satisfactory to the Employee, to assume this Agreement and to agree
expressly to perform this Agreement in the same manner and to the same extent
as the Company would be required to perform it in the absence of a succession.
The Company's failure to obtain such agreement prior
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to the effectiveness of a succession shall be a breach of this Agreement and
shall entitle the Employee to all of the compensation and benefits to which he
would have been entitled hereunder if the Company had involuntarily terminated
his employment immediately after the Merger Date. For all purposes under this
Agreement, the term "Company" shall include any successor to the Company's
business and/or assets and each entity that, directly or indirectly, becomes a
parent corporation of the Company.
(b) Employee's Successors. 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.
9. Confidential Information.
During the Term and at all times thereafter, the Employee shall not,
without the prior written consent of the Board, disclose or use for any purpose
(except in the course of his employment under this Agreement and in furtherance
of the business of the Company) confidential information, proprietary data and
customer lists of the Company, except as required by applicable law or legal
process; provided, however, that "confidential information, proprietary data
and customer lists" shall not include any information known generally to the
public or ascertainable from public or published information (other than as a
result of unauthorized disclosure by the Employee) or any information of a type
not otherwise considered confidential by persons engaged in the same business
or a business similar to that conducted by the Company. The Employee agrees to
deliver to the Company at the termination of his employment all memoranda,
notes, plans, records, lists, reports and other documents (and copies thereof)
relating to the business of the Company which he may then possess or have under
his control.
10. Mutual Releases.
(a) The Employee hereby releases the Company and FHC, their
affiliates and subsidiaries and their respective officers, directors and
employees, from any and all liabilities and claims other than those arising out
of this Agreement (or any Exhibits hereto) which he may have against any of
them, including, without limitation, claims arising under any plan, program or
policy for employee benefits, out of Employee's termination or retirement or
any discrimination related claims. The provisions of this paragraph shall not
apply to any of the Employee's rights under the terms of this Agreement,
including, without limitation, the plans described and the indemnity referred
to in Section 11(i) hereof.
(b) FHC, the Company, their affiliates and subsidiaries and their
respective officers, directors and employees hereby release the Employee from
any and all liabilities and claims other than those arising out of this
Agreement (or any Exhibits hereto) which FHC, the Company, their affiliates and
subsidiaries and their respective officers, directors and employees may have
against the Employee, including, without limitation, claims arising under any
plan, program or policy for employee benefits, or out of the Employee's
termination or retirement. The provisions of this paragraph shall not apply to
any of FHC's rights under the terms of this Agreement (or any Exhibits hereto).
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<PAGE> 7
11. Miscellaneous Provisions.
(a) Notice. Notices and all other communications contemplated by
this Agreement shall be in writing and shall be deemed to have been duly given
when personally delivered or when mailed by U.S. registered mail, return
receipt requested and postage prepaid. In the case of the Employee, mailed
notices shall be addressed to him at the home address which he most recently
communicated to the Company in writing. In the case of the Company, mailed
notices shall be addressed to its corporate headquarters, and all notices shall
be directed to the attention of its Secretary.
(b) Waiver. No provision of this Agreement shall be modified,
waived or discharged unless the modification, waiver or discharge is agreed to
in writing and signed by the Employee and by an authorized officer of the
Company (other than the Employee). No waiver by either party of any breach of,
or of compliance with, any condition or provision of this Agreement by the
other party shall be considered a waiver of any other condition or provision or
of the same condition or provision at another time.
(c) Whole Agreement. No agreements, representations or
understandings (whether oral or written and whether express or implied) which
are not expressly set forth in this Agreement have been made or entered into by
either party with respect to the subject matter hereof. This Agreement
supersedes the Existing Agreement and the Prior Agreement. The Company, FHC
and the Employee acknowledge and agree that subsequent to the Merger there
would be deemed to be "Good Reason" under the Prior Agreement in the absence of
this Agreement, and that the obligations of the Company hereunder are, in part,
in consideration for the Employee not terminating his employment for "Good
Reason" under the Prior Agreement immediately upon the Merger.
(d) No Setoff; Withholding Taxes. There shall be no right of
setoff or counterclaim with respect to any claim, debt or obligation against
payments to the Employee under this Agreement. All payments made under this
Agreement shall be subject to reduction to reflect taxes required to be
withheld by law.
(e) Choice of Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
California.
(f) Severability. The invalidity or unenforceability of any
provision or provisions of this Agreement shall not affect the validity or
enforceability of any other provision thereof, which shall remain in full force
and effect.
(g) Arbitration. In the event of any controversy or claim between
the Company or any of its affiliates and the Employee arising out of or
relating to this Agreement, or the breach thereof, the Employee may retain
counsel of choice at the expense of the Company. If either party delivers to
the other party a written demand for arbitration of a controversy or claim then
such demand shall be submitted to binding arbitration. The binding arbitration
shall be administered by the American Arbitration Association under its
Commercial Arbitration Rules. The arbitration shall take place in Sacramento,
California. Each of the Company and the
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<PAGE> 8
Employee shall appoint one person to act as an arbitrator, and a third
arbitrator shall be chosen by the first two arbitrators (such three
arbitrators, the "Panel"). The Panel shall have no authority to award punitive
damages against the Company or the Employee. The arbitrator shall have no
authority to add to, alter, amend or refuse to enforce any portion of the
disputed agreements. The Company and the Employee each waive any right to a
jury trial or to petition for stay in any action or proceeding of any kind
arising out of or relating to this Agreement. The Company shall pay all fees,
expenses and costs, including reasonable attorney, consulting, accounting and
other fees, of the Employee relating to any controversy or claim as between
them in good faith.
(h) No Assignment. The rights of any person to payments or
benefits under this Agreement shall not be made subject to option or
assignment, either by voluntary or involuntary assignment or by operation of
law, including (without limitation) bankruptcy, garnishment, attachment or
other creditor's process, and any action in violation of this Subsection (h)
shall be void.
(i) Indemnification. The Employee is not required to pay for
expenditures associated with obtaining, enforcing or defending any rights or
benefits under this Agreement or any other plan or arrangement maintained by
the Company or its affiliates under which the Employee is or may be entitled to
receive compensation or benefits. Consequently the Company shall indemnify and
hold harmless the Employee for all such expenditures and pay them as they
become due.
12. Effective Date. This Agreement shall be effective beginning
on the Merger Date.
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<PAGE> 9
IN WITNESS WHEREOF, each of the parties has executed this Agreement,
in the case of the Company and FHC by their duly authorized officer, as of the
day and year first above written.
---------------------------------------
Jeffrey L. Elder
HEALTH SYSTEMS INTERNATIONAL, INC.
By
-----------------------------------
Title
--------------------------------
FOUNDATION HEALTH CORPORATION
By
-----------------------------------
Title
--------------------------------
9
<PAGE> 1
EXHIBIT 10.5
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AGREEMENT is entered into as of December 16, 1996, among ALLEN
J. MARABITO (the "Employee"), HEALTH SYSTEMS INTERNATIONAL, INC., a Delaware
corporation (the "Company") and FOUNDATION HEALTH CORPORATION, a Delaware
corporation ("FHC").
WHEREAS, FHC, the Company and the Employee entered into an Employment
Agreement dated October 1, 1996 (the "Existing Agreement"), which the parties
desire to amend and restate hereby;
WHEREAS, FHC and the Employee entered into an Employment Agreement,
dated April 22, 1994, as amended (the "Prior Agreement"), which was superseded
by the Existing Agreement; and
WHEREAS, each of the Company and FHC has determined that it is in its
best interest and the best interests of its stockholders to retain the services
of the Employee; and
WHEREAS, the Employee desires to perform services for the Company on
the terms set forth in this Agreement; and
WHEREAS, the Company and FHC have entered into an Agreement and Plan
of Merger, dated October 1, 1996 (such agreement, and as it may be amended from
time to time, the "Merger Agreement"), pursuant to which a wholly-owned
subsidiary of the Company will be merged with and into FHC (the "Merger"); and
NOW THEREFORE, the Company agrees to employ Employee and the Employee
agrees to perform services for the Company on the terms hereinbelow set forth.
1. Term of Employment.
(a) Term. The Company agrees to employ the Employee and the
Employee agrees to be employed by the Company for a period of two years
commencing as of the date of consummation of the Merger (the "Merger Date")
(such two-year period, the "Term").
(b) Early Termination. Subject to Section 5, the Company may
terminate the Employee's employment by giving the Employee 30 days advance
notice in writing. The Employee may terminate his employment by giving the
Company 30 days advance notice in writing. The Employee's employment shall
terminate automatically in the event of his death. Any waiver of notice shall
be valid only if it is made in writing and expressly refers to the applicable
notice requirement.
(c) Termination of Agreement. This Agreement shall terminate when
all obligations of the parties hereunder have been satisfied.
<PAGE> 2
2. Position and Duties.
(a) Position. The Company agrees to employ the Employee as its
Senior Vice President--General Counsel during the Term.
(b) Obligations. During the Term, the Employee shall devote his
full business efforts and time to the Company and its subsidiaries and shall
not render services to any other person or entity without prior written consent
of the Board of Directors of the Company (the "Board"). The foregoing,
however, shall not preclude the Employee from engaging in appropriate civic,
charitable or religious activities or from devoting a reasonable amount of time
to private investments that do not interfere or conflict with his
responsibilities to the Company.
3. Compensation.
The Company shall compensate Employee for the services rendered under
this Agreement as follows:
(a) A base salary (the "Base Compensation") at the annual rate of
$265,000 per year, payable in accordance with the customary payroll practices
of the Company for the payment of officers.
(b) Reimbursement for all reasonable expenses incurred on behalf
of the Company upon submission of appropriate documentation in accordance with
the Company's general policies, as they may be amended from time to time during
the Term.
(c) In lieu of participation in the FHC Executive Incentive Plan
(and such other management incentive programs adopted by the Board to replace
such Incentive Plan), a bonus of $250,000 if the Employee remains employed by
the Company for six months after the Merger Date, and an additional bonus of
$371,000 if the Employee remains employed by the Company for one full year
after the Merger Date; provided, however, that both bonuses shall be payable if
the Employee's employment is terminated by the Company without Cause (as
defined in Section 5(g) hereof) or by the Employee with Good Reason (as defined
in Section 5(h) hereof). Such amounts shall be paid in a lump sum in cash
within ten (10) business days of the expiration of the six-month and one year
periods or such earlier termination, whichever is applicable.
4. Employee Benefits. During the Term (but without derogation of
any of the Employee's other entitlements under this Agreement):
(a) Employee shall be entitled to full participation, on a basis
commensurate with his position with the Company, in all plans of accident,
medical, health, disability, pension, deferred compensation, savings and
similar benefits which generally are made available to senior executives of the
Company.
(b) The Company shall provide Employee with an automobile of his
choice or an automobile allowance, which shall include payment of all
maintenance, insurance and related
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<PAGE> 3
expenses, in accordance with FHC's practice applicable to Employee immediately
before the Merger.
(c) Nothing in this Agreement shall limit in any way Employee's
participation in any other benefit plans or arrangements as are from time to
time approved by the Board or the Compensation Committee for senior executives
of the Company.
5. Termination of Employment.
(a) Severance Payment. Upon termination of Employee's employment
during the Term (i) by the Company without Cause or by the Employee for Good
Reason, or (ii) by the Employee for any reason during the period commencing 90
days after and ending 450 days after the Merger Date, the Employee shall
receive a severance payment from the Company (the "Severance Payment"). The
Severance Payment shall be made in a lump sum not more than five business days
following the date of such termination and shall be in an amount determined
under Subsection (b) below.
(b) Amount. The amount of the Severance Payment shall be
$1,601,643, which equals 2.99 times the sum of the Employee's annual rate of
Base Compensation plus the average of the annual bonuses awarded to the
Employee for the three fiscal years of FHC ending in 1994, 1995 and 1996.
(c) Benefits Programs. On the Merger Date, the Employee shall
become fully vested in all awards theretofore granted to him and/or
entitlements under the FHC 1990 Stock Option Plan and the FHC Supplemental
Executive Retirement Plan (the "SERP"). If the Employee notifies the Company
no later than the Merger Date that he elects to receive the SERP Amount (as
defined below), on the later of the Merger Date or two business days after such
notice is given, pursuant to and in full satisfaction of the Company's
obligations to the Employee under the SERP, the Company shall pay to the
Employee in a lump sum in cash $1,287,475 (the "SERP Amount"). The SERP Amount
equals 90% of the actuarial equivalent of the Employee's Retirement Benefit (as
defined in the SERP) as of December 31, 1996, as determined by FHC's
independent actuarial firm, Milliman & Robertson, Inc., using reasonable
assumptions. If the SERP Amount is not paid, the terms of the SERP as in
effect on the Merger Date shall remain in full force and effect; provided,
however, that the actuarial equivalents for purposes of calculating lump sum
payments under the SERP will be based on the 1983 group annuity mortality table
blended 50% male and 50% female, and the average 30 year Treasury yield rate
for the month prior to the month of the lump sum payment.
(d) Benefits Coverage. During the three-year period commencing
upon termination of Employee's employment during the Term by the Company
without Cause, by the Employee for Good Reason or by the Employee for any
reason during the period commencing 90 days after and ending 450 days after the
Merger Date, the Employee (and, where applicable, his dependents) shall be
entitled to continue participation in the basic group insurance plans
maintained by the Company, including (without limitation) life, disability,
health and accident insurance programs, as if he were still an employee of the
Company. The Employee shall also continue with those benefits outlined in
Section 4 hereof. Where applicable, the Employee's
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<PAGE> 4
salary for purposes of such plans shall be deemed to be equal to his Base
Compensation. To the extent that the Company finds it impossible to cover the
Employee under its group insurance policies during such three-year period, the
Company shall provide the Employee with the same level of coverage under
individual policies at the same cost to Employee. In addition to the
foregoing, the Company shall provide the Employee and his dependents with
health (including, but not limited to, medical, dental and vision) insurance
coverage for the remainder of his life, which coverage shall be no less
beneficial to the Employee and his dependents than the coverage provided by FHC
in effect immediately prior to the Merger.
(e) No Mitigation. The Employee shall not be required to mitigate
the amount of any payment contemplated by this Agreement (whether by seeking
new employment or in any other manner), nor shall any such payment be reduced
by any earnings that the Employee may receive from any other source.
Furthermore, any amount payable to the Employee pursuant to this Section 5
shall not be in lieu of any benefits to which he is or may be entitled under
the FHC Deferred Compensation Plan and FHC Split Dollar Insurance Plan.
(f) Rabbi Trust. Not later than the Merger Date, the Company
shall make a contribution to a trust, substantially in the form of Exhibit B
hereto (the "Trust"), in an amount equal to the sum of (i) $1,601,643 in
respect of the Severance Payment; and (ii) $621,000 in respect of the
Employee's annual bonus.
(g) Cause. For purposes of this Agreement, "Cause" shall mean (1)
a willful act by the Employee which constitutes gross misconduct or fraud and
which is materially injurious to the Company or (2) conviction of, or a plea of
"guilty" or "no contest" to, a felony. No act or failure to act by the
Employee shall be considered "willful" unless committed without good faith and
without a reasonable belief that the act or omission was in the Company's best
interest. No Cause shall be deemed to exist unless the Board has determined,
by a resolution adopted with the affirmative votes of at least eight of its
members, that Cause exists.
(h) Good Reason. For purposes of this Agreement, "Good Reason"
shall mean that the Employee has incurred a reduction in his Base Compensation
or a substantial reduction in his authority or responsibility (as such
authority or responsibility exists at the beginning of the Term), or has been
notified that his principal place of work will be relocated by a distance of
100 miles or more from FHC's headquarters on the Merger Date (other than a
relocation to San Francisco).
6. Limitation on Payments.
(a) Basic Rule. Any other provision of this Agreement
notwithstanding, the Company shall not be required to make any payment or
transfer any property to, or for the benefit of, the Employee (under this
Agreement or otherwise) that would be nondeductible by the Company by reason of
Section 280G of the Internal Revenue Code of 1986, as amended (the "Code") or
that would subject the Employee to the excise tax described in Section 4999 of
the Code. All mathematical calculations required by this section shall be
performed by the independent auditors retained by the Company most recently
prior to the Merger (the "Auditors"), based on information supplied by the
Company and the Employee, and shall be
4
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binding on the Company and the Employee. All fees and expenses of the Auditors
shall be paid by the Company.
(b) Reductions. If the amount of the aggregate payments or
property transfers to the Employee must be reduced under this section, then the
Employee shall direct in which order the payments or transfers are to be
reduced, but no change in the timing of any payment or transfer shall be made
without the Company's consent. As a result of uncertainty in the application
of Sections 280G and 4999 of the Code at the time of an initial determination
by the Auditors hereunder, it is possible that a payment will have been made by
the Company that should not have been made (an "Overpayment") or that an
additional payment that will not have been made by the Company could have been
made (an "Underpayment"). In the event that the Auditors, based upon the
assertion of a deficiency by the Internal Revenue Service against the Company
or the Employee that the Auditors believe has a high probability of success,
determine that an Overpayment has been made, such Overpayment shall be treated
for all purposes as a loan to the Employee that he shall repay to the Company,
together with interest at the applicable federal rate specified in Section
7872(f)(2) of the Code; provided, however, that no amount shall be payable by
the Employee to the Company if and to the extent that such payment would not
reduce the amount that is nondeductible under Section 280G of the Code or is
subject to an excise tax under Section 4999 of the Code. In the event that the
Auditors determine that an Underpayment has occurred, such Underpayment shall
promptly be paid or transferred by the Company to, or for the benefit of, the
Employee, together with interest at the applicable federal rate specified in
Section 7872(f)(2) of the Code.
7. Pooling-of-Interest Accounting Rules.
Any other provision of this Agreement (including the Exhibits hereto)
shall be invalid to the extent that the specific implementation of that
provision relating to the Employee would preclude the application of
pooling-of-interests accounting treatment to a transaction (including the
Merger) for which such treatment is to be adopted by the Company and which has
been approved by the Board. If the pooling-of-interests accounting rules
require the invalidation of one or more provisions of this Agreement (including
the Exhibits hereto), the Employee shall not be entitled to receive, or shall
be required to return to the Company, whichever is applicable, any compensation
payable or paid pursuant to the provisions of this Agreement (including the
Exhibits hereto) so deemed to be invalid. All determinations regarding the
pooling-of-interests accounting rules for these purposes shall be made by the
Board.
8. Successors.
(a) Company's Successors. The Company shall require any successor
(whether direct or indirect and whether by purchase, lease, merger,
consolidation, liquidation or otherwise) to all or substantially all of the
Company's business and/or assets and each entity that, directly or indirectly,
becomes a parent corporation of the Company, by an agreement in substance and
form satisfactory to the Employee, to assume this Agreement and to agree
expressly to perform this Agreement in the same manner and to the same extent
as the Company would be required to perform it in the absence of a succession.
The Company's failure to obtain such agreement prior
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<PAGE> 6
to the effectiveness of a succession shall be a breach of this Agreement and
shall entitle the Employee to all of the compensation and benefits to which he
would have been entitled hereunder if the Company had involuntarily terminated
his employment immediately after the Merger Date. For all purposes under this
Agreement, the term "Company" shall include any successor to the Company's
business and/or assets and each entity that, directly or indirectly, becomes a
parent corporation of the Company.
(b) Employee's Successors. 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.
9. Confidential Information.
During the Term and at all times thereafter, the Employee shall not,
without the prior written consent of the Board, disclose or use for any purpose
(except in the course of his employment under this Agreement and in furtherance
of the business of the Company) confidential information, proprietary data and
customer lists of the Company, except as required by applicable law or legal
process; provided, however, that "confidential information, proprietary data
and customer lists" shall not include any information known generally to the
public or ascertainable from public or published information (other than as a
result of unauthorized disclosure by the Employee) or any information of a type
not otherwise considered confidential by persons engaged in the same business
or a business similar to that conducted by the Company. The Employee agrees to
deliver to the Company at the termination of his employment all memoranda,
notes, plans, records, lists, reports and other documents (and copies thereof)
relating to the business of the Company which he may then possess or have under
his control.
10. Mutual Releases.
(a) The Employee hereby releases the Company and FHC, their
affiliates and subsidiaries and their respective officers, directors and
employees, from any and all liabilities and claims other than those arising out
of this Agreement or any Exhibits hereto which he may have against any of them,
including, without limitation, claims arising under any plan, program or policy
for employee benefits, out of Employee's termination or retirement or any
discrimination related claims. The provisions of this paragraph shall not
apply to any of the Employee's rights under the terms of this Agreement or any
Exhibits hereto, including, without limitation, the plans described and the
indemnity referred to in Section 11(i) hereof.
(b) FHC, the Company, their affiliates and subsidiaries and their
respective officers, directors and employees hereby release the Employee from
any and all liabilities and claims other than those arising out of this
Agreement or any Exhibits hereto which FHC, the Company, their affiliates and
subsidiaries and their respective officers, directors and employees may have
against the Employee, including, without limitation, claims arising under any
plan, program or policy for employee benefits, or out of the Employee's
termination or retirement. The provisions of this paragraph shall not apply to
any of FHC's rights under the terms of this Agreement or any Exhibits hereto.
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11. Miscellaneous Provisions.
(a) Notice. Notices and all other communications contemplated by
this Agreement shall be in writing and shall be deemed to have been duly given
when personally delivered or when mailed by U.S. registered mail, return
receipt requested and postage prepaid. In the case of the Employee, mailed
notices shall be addressed to him at the home address which he most recently
communicated to the Company in writing. In the case of the Company, mailed
notices shall be addressed to its corporate headquarters, and all notices shall
be directed to the attention of its Secretary.
(b) Waiver. No provision of this Agreement shall be modified,
waived or discharged unless the modification, waiver or discharge is agreed to
in writing and signed by the Employee and by an authorized officer of the
Company (other than the Employee). No waiver by either party of any breach of,
or of compliance with, any condition or provision of this Agreement by the
other party shall be considered a waiver of any other condition or provision or
of the same condition or provision at another time.
(c) Whole Agreement. No agreements, representations or
understandings (whether oral or written and whether express or implied) which
are not expressly set forth in this Agreement have been made or entered into by
either party with respect to the subject matter hereof. This Agreement
supersedes the Existing Agreement and the Prior Agreement. The Company, FHC
and the Employee acknowledge and agree that subsequent to the Merger there
would be deemed to be "Good Reason" under the Prior Agreement in the absence of
this Agreement, and that the obligations of the Company hereunder are, in part,
in consideration for the Employee not terminating his employment for "Good
Reason" under the Prior Agreement immediately upon the Merger.
(d) No Setoff; Withholding Taxes. There shall be no right of
setoff or counterclaim with respect to any claim, debt or obligation against
payments to the Employee under this Agreement. All payments made under this
Agreement shall be subject to reduction to reflect taxes required to be
withheld by law.
(e) Choice of Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
California.
(f) Severability. The invalidity or unenforceability of any
provision or provisions of this Agreement shall not affect the validity or
enforceability of any other provision thereof, which shall remain in full force
and effect.
(g) Arbitration. In the event of any controversy or claim between
the Company or any of its affiliates and the Employee arising out of or
relating to this Agreement, or the breach thereof, the Employee may retain
counsel of choice at the expense of the Company. If either party delivers to
the other party a written demand for arbitration of a controversy or claim then
such demand shall be submitted to binding arbitration. The binding arbitration
shall be administered by the American Arbitration Association under its
Commercial Arbitration Rules. The arbitration shall take place in Sacramento,
California. Each of the Company and the
7
<PAGE> 8
Employee shall appoint one person to act as an arbitrator, and a third
arbitrator shall be chosen by the first two arbitrators (such three
arbitrators, the "Panel"). The Panel shall have no authority to award punitive
damages against the Company or the Employee. The arbitrator shall have no
authority to add to, alter, amend or refuse to enforce any portion of the
disputed agreements. The Company and the Employee each waive any right to a
jury trial or to petition for stay in any action or proceeding of any kind
arising out of or relating to this Agreement. The Company shall pay all fees,
expenses and costs, including reasonable attorney, consulting, accounting and
other fees, of the Employee relating to any controversy or claim as between
them in good faith.
(h) No Assignment. The rights of any person to payments or
benefits under this Agreement shall not be made subject to option or
assignment, either by voluntary or involuntary assignment or by operation of
law, including (without limitation) bankruptcy, garnishment, attachment or
other creditor's process, and any action in violation of this Subsection (h)
shall be void.
(i) Indemnification. The Employee is not required to pay for
expenditures associated with obtaining, enforcing or defending any rights or
benefits under this Agreement or any other plan or arrangement maintained by
the Company or its affiliates under which the Employee is or may be entitled to
receive compensation or benefits. Consequently the Company shall indemnify and
hold harmless the Employee for all such expenditures and pay them as they
become due.
12. Effective Date. This Agreement shall be effective beginning
on the Merger Date.
8
<PAGE> 9
IN WITNESS WHEREOF, each of the parties has executed this Agreement,
in the case of the Company and FHC by their duly authorized officer, as of the
day and year first above written.
---------------------------------------
Allen J. Marabito
HEALTH SYSTEMS INTERNATIONAL, INC.
By
-----------------------------------
Title
--------------------------------
FOUNDATION HEALTH CORPORATION
By
-----------------------------------
Title
--------------------------------
9
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement of
Health Systems International, Inc. and Foundation Health Corporation on Form
S-4 of our report dated February 16, 1996 appearing in the Annual Report on
Form 10-K of Health Systems International, Inc. for the year ended December 31,
1995 and to the reference to us under the heading "Experts" in the Prospectus,
which is part of this Registration Statement. We also consent to the
incorporation by reference in this Registration Statement of our report, dated
March 4, 1994, on the consolidated financial statements of QualMed, Inc., for
the year ended December 31, 1993, included in the above-mentioned Annual Report
on Form 10-K.
/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Los Angeles, California
January 6, 1997
<PAGE> 1
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration
Statement of Health Systems International, Inc. and Foundation Health
Corporation on Form S-4 of our report dated July 25, 1996 (November 18, 1996 as
to Notes 1, 2, 6, 7, 8, 9, 10, 12, 13, and 14) appearing in the Annual Report
on Form 10-K/A (Amendment No. 3) of Foundation Health Corporation for the year
ended June 30, 1996 and to the reference to us under the heading "Experts"
in the Prospectus, which is a part of this Registration Statement.
/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Sacramento, California
January 3, 1997
<PAGE> 1
Exhibit 23.3
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Registration
Statement of Health Systems International, Inc. and Foundation Health
Corporation on Form S-4 (anticipated to be filed on or about January 6, 1997),
of our report dated February 16, 1994, except Note 17 as to which the date is
March 18, 1994, with respect to the consolidated financial statements of
Intergroup Healthcare Corporation for the year ended December 31, 1993,
appearing in and incorporated by reference in the Annual Report on Form 10-K/A
of Foundation Health Corporation for the year ended June 30, 1996 and to the
reference to us under the heading "Experts" in the Prospectus, which is a part
of this Registration Statement.
/s/ ERNST & YOUNG LLP
Ernst & Young LLP
Tucson, Arizona
January 3, 1997
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
incorporation by reference of our report dated March 7, 1994, in the Joint Proxy
Statement/Prospectus constituting part of this Registration Statement (Form S-4
No. 333-_____) of Health Systems International, Inc. (HSI) for the registration
of shares of HSI's common stock, which report relied on the opinion of Deloitte
& Touche LLP with respect to the information related to QualMed, Inc. included
in such financial statements and schedules, with respect to the 1993
consolidated financial statements and schedules of HSI included in its Annual
Report (Form 10-K) for the year ended December 31, 1995, filed with the
Securities and Exchange Commission.
ERNST & YOUNG LLP
January 6, 1997
Los Angeles, California
<PAGE> 1
Exhibit 23.6
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this Registration
Statement of Health Systems International, Inc. and Foundation Health
Corporation on Form S-4 (expected to be filed on or about January 6, 1997) of
our report dated April 27, 1994, with respect to the consolidated financial
statements of Thomas-Davis Medical Centers, P.C. and Subsidiaries for the year
ended December 31, 1993, appearing in and incorporated by reference in the
Annual Report on Form 10-K/A of Foundation Health Corporation for the year
ended June 30, 1996 and to the reference to us under the heading "Experts" in
the Prospectus, which is a part of this Registration Statement.
/s/ STEVENSON, JONES & HOLMAAS, PC
Stevenson, Jones & Holmaas, P.C.
Tucson, Arizona
January 3, 1997
<PAGE> 1
Exhibit 23.6
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this Registration
Statement of Health Systems International, Inc. and Foundation Health
Corporation on Form S-4 (expected to be filed on or about January 6, 1997) of
our report dated April 27, 1994, with respect to the consolidated financial
statements of Thomas-Davis Medical Centers, P.C. and Subsidiaries for the year
ended December 31, 1993, appearing in and incorporated by reference in the
Annual Report on Form 10-K/A of Foundation Health Corporation for the year
ended June 30, 1996 and to the reference to us under the heading "Experts" in
the Prospectus, which is a part of this Registration Statement.
/s/ STEVENSON, JONES & HOLMAAS, PC
Stevenson, Jones & Holmaas, P.C.
Tucson, Arizona
January 3, 1997
<PAGE> 1
Exhibit 99.1
HEALTH SYSTEMS INTERNATIONAL, INC.
21600 OXNARD STREET 225 NORTH MAIN STREET
WOODLAND HILLS, CALIFORNIA 91367 PUEBLO, COLORADO 81003
PROXY FOR THE SPECIAL MEETING OF STOCKHOLDERS -- FEBRUARY 7, 1997
SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
Malik M. Hasan, M.D., Jay M. Gellert and B. Curtis Westen, Esq., or any of
them, with full power of substitution to each, hereby are appointed proxies and
are authorized to vote, as hereinafter specified, all shares of Class A Common
Stock, $.001 par value, that the undersigned is entitled to vote at the Special
Meeting of Stockholders of HEALTH SYSTEMS INTERNATIONAL, INC., to be held at
Warner Center Marriott, 21850 Oxnard Street, Woodland Hills, California 91367 on
Friday, February 7, 1997, at 9:30 a.m., local time (the "Special Meeting").
Please mark, date and sign this proxy and return it promptly in the
accompanying business reply envelope. If you plan to attend the Special Meeting,
please so indicate in the space provided on the reverse side.
If no voting direction is given, this proxy will be voted FOR proposals 1,
2, 3 and 4. If you prefer to vote separately on each proposal, you may do so by
marking the appropriate boxes on the reverse side.
IMPORTANT: TO BE SIGNED AND DATED ON THE REVERSE SIDE.
PLEASE MARK YOUR
[X] PROXY AS IN THIS
EXAMPLE
<TABLE>
<CAPTION>
<S> <C> <C>
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSALS 1, 2, 3 AND 4.
1. To approve and adopt the Agreement and Plan of Merger among Health FOR AGAINST ABSTAIN
Systems International, Inc. ("HSI"), FH Acquisition Corp. ("Merger
Subsidiary") and Foundation Health Corporation ("FHC"), the merger of Merger
Subsidiary with and into FHC (the "Merger") and the transactions [ ] [ ] [ ]
contemplated thereby, including the issuance of shares of HSI Class A Common
Stock, par value $.001 per share. THE CONSUMMATION OF THE MERGER IS
CONDITIONED UPON APPROVAL OF PROPOSAL TWO BELOW.
2. To approve the proposal to amend and restate HSI's Certificate of
Incorporation to (i) increase the number of authorized shares of common
stock of HSI 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 HSI to "Foundation Health Systems,
Inc."
3. To vote in their discretion upon any proposed adjournment or postponement [ ] [ ] [ ]
of the Special Meeting.
4. To vote in their discretion upon such other matters as may properly come [ ] [ ] [ ]
before the Special Meeting.
MARK HERE FOR [ ] MARK HERE [ ]
ADDRESS CHANGE IF YOU
AND NOTE AT PLAN
LOWER LEFT TO ATTEND
THE
MEETING
The undersigned acknowledges receipt of the Notice of Special Meeting
of Stockholders to be held on February 7, 1997 and the related Joint
Proxy Statement/Prospectus.
Please sign below exactly as name appears hereon. Joint owners should
each sign. When signing as attorney, executor, administrator, trustee
or guardian, please give full title as such. If signing in the name of
a corporation or partnership, please sign full corporate or
partnership name and indicate title of authorized signatory.
Stockholder _____________________________ Dated _______ Signature(s) _______________________________ Dated _______
</TABLE>
<PAGE> 1
Exhibit 99.2
FOUNDATION HEALTH CORPORATION
3400 DATA DRIVE
RANCHO CORDOVA, CALIFORNIA 95670
PROXY FOR THE SPECIAL MEETING OF STOCKHOLDERS -- FEBRUARY 7, 1997
SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
Daniel D. Crowley, Kirk A. Benson and Allen J. Marabito, or any of them,
with full power of substitution to each, hereby are appointed proxies and are
authorized to vote, as hereinafter specified, all shares of Common Stock, $.01
par value, that the undersigned is entitled to vote at the Special Meeting of
Stockholders of Foundation Health Corporation ("FHC"), to be held at FHC's
headquarters on Friday, February 7, 1997, at 9:30 a.m., local time (the "Special
Meeting").
Please mark, date and sign this proxy and return it promptly in the
accompanying business reply envelope. If you plan to attend the Special Meeting,
please so indicate in the space provided on the reverse side.
If no voting direction is given, this proxy will be voted FOR proposals 1,
2 and 3. If you prefer to vote separately on each proposal, you may do so by
marking the appropriate boxes on the reverse side.
IMPORTANT: TO BE SIGNED AND DATED ON THE REVERSE SIDE.
<TABLE>
<S> <C> <C> <C> <C>
PLEASE MARK
X YOUR
VOTES AS IN
THIS
EXAMPLE.
</TABLE>
<TABLE>
<S> <C>
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSALS 1, 2 AND 3.
1. To approve and adopt the Agreement and Plan of Merger, dated as of October 1, 1996, among Health Systems International,
Inc., FH Acquisition
Corp. and Foundation Health Corporation, and the transactions contemplated thereby.
2. To vote in their discretion upon any proposed adjournment or postponement of the Special Meeting.
3. To vote in their discretion upon such other matters as may properly come before the Special Meeting.
MARK HERE FOR
ADDRESS CHANGE
AND NOTE AT
LOWER LEFT
FOR AGAINST ABSTAIN
MARK HERE
IF YOU
PLAN
TO ATTEND
THE
MEETING
The undersigned acknowledges receipt
of the Notice of Special Meeting of
Stockholders to be held on February
7, 1997 and the related Joint Proxy
Statement/Prospectus.
Please sign below exactly as name
appears hereon. Joint owners should
each sign. When signing as attorney,
executor, administrator, trustee or
guardian, please give full title as
such. If signing in the name of a
corporation or partnership, please
sign full corporate or partnership
name and indicate title of
authorized signatory.
Stockholder ______________________________________________ Dated _______ Signature(s) _______________________________ Dated
</TABLE>
<PAGE> 1
Exhibit 99.3
FOUNDATION HEALTH CORPORATION
Unanimous Written Consent
of the Board of Directors
October 18, 1996
The Board of Directors of Foundation Health Corporation, a Delaware
corporation (the "Corporation"), adopt the following resolutions by unanimous
written consent without a meeting in accordance with Section 141(f) of the
General Corporation Law of the State of Delaware.
WHEREAS, the Board of Directors of the Corporation has previously
approved an Agreement and Plan of Merger, dated as of October 1, 1996 (the
"Agreement"), between the Corporation and Health Systems International,
Inc., a Delaware corporation ("HSI") in which the combined company will
be named Foundation Health Systems, Inc., a Delaware corporation ("FHS");
and
WHEREAS, the Agreement specifies that the Board of Directors of FHS be
composed of eleven members, six of whom will be designated by the
Corporation and five of whom will be designated by HSI; and
WHEREAS, the Committee on Directors of the Board of Directors of the
Corporation, after due inquiry and discussion, has made its recommendation
to the Board of Directors as to whom the Corporation should designate as
members of the FHS Board of Directors;
NOW, THEREFORE, BE IT RESOLVED, that, in accordance with the
Agreement, the Board of Directors hereby designates the following
individuals to serve as directors of FHS effective on the Effective Date
(as defined in the Agreement) of the merger and until such time as their
successors have been elected and duly qualified:
Daniel D. Crowley
Patrick Foley
Earl B. Fowler
Richard W. Hanselman
Richard J. Stegemeier
Raymond S. Troubh
; and further
<PAGE> 2
RESOLVED, that all actions taken and expenses incurred by an officer
or director of the Corporation heretofore in furtherance of the action
authorized in the foregoing resolutions is hereby affirmed and expressly
ratified, confirmed, adopted and approved; and further
RESOLVED, that any officer of the Corporation is hereby authorized and
directed for and in the name and on behalf of the Corporation, to execute
and deliver any and all certificates, authorizations, documents and other
instruments or papers and to do any and all further things that may be
necessary or advisable to carry out the intent of the foregoing resolutions
and fully to perform the obligations of the Corporation under the
agreements executed and delivered on behalf of the Corporation pursuant to
such resolutions, all such action having heretofore been taken being hereby
ratified, confirmed and approved.
/s/ Daniel D. Crowley /s/ Richard W. Hanselman
- ---------------------------------- ----------------------------------
Daniel D. Crowley Richard W. Hanselman
/s/ David A. Boggs /s/ Ross D. Henderson, M.D.
- ---------------------------------- ----------------------------------
David A. Boggs Ross D. Henderson, M.D.
/s/ Jeffrey L. Elder /s/ Richard J. Stegemeier
- ---------------------------------- ----------------------------------
Jeffrey L. Elder Richard J. Stegemeier
/s/ Patrick Foley /s/ Steven D. Tough
- ---------------------------------- ----------------------------------
Patrick Foley Steven D. Tough
/s/ Earl B. Fowler /s/ Raymond S. Troubh
- ---------------------------------- ----------------------------------
Earl B. Fowler Raymond S. Troubh
-2-
