<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: June 30, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transaction period from ____________ to ____________
Commission File Number: 1-12718
FOUNDATION HEALTH SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-4288333
- ------------------------------- ------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
21600 Oxnard Street, Woodland Hills, CA 91367
---------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
(818) 719-6978
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No( )
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
As of August 12, 1997 109,808,213 shares of Class A Common Stock, $.001 par
value per share, were outstanding (exclusive of 3,194,374 shares held as
treasury stock) and 11,449,342 shares of Class B Common Stock, $.001 par value
per share were outstanding.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
FOUNDATION HEALTH SYSTEMS, INC.
INDEX TO FORM 10-Q
PAGE
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets - June 30, 1997
and December 31, 1996 3
Condensed Consolidated Statements of Operations for the Quarters
Ended June 30, 1997 and 1996 4
Condensed Consolidated Statements of Operations for the Six
Months Ended June 30, 1997 and 1996 5
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1997 and 1996 6
Notes to Condensed Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 25
Item 2 - Changes in Securities 27
Item 3 - Defaults Upon Senior Securities 29
Item 4 - Submission of Matters to a Vote of Security Holders 29
Item 5 - Other Information 29
Item 6 - Exhibits and Reports on Form 8-K 37
Signature 48
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FOUNDATION HEALTH SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 483,650 $ 514,000
Investments 1,118,748 1,336,801
Premiums receivable, net 249,346 239,027
Amounts receivable under government contracts 243,257 221,787
Property and equipment, net 360,141 346,311
Reinsurance receivable 201,565 149,582
Goodwill and other intangible assets, net 717,491 714,915
Other assets 654,362 561,618
----------- ------------
$ 4,028,560 $ 4,084,041
----------- ------------
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Reserves for claims, losses and loss adjustment expense $ 1,350,029 $ 1,362,342
Notes payable and capital leases 1,009,988 877,092
Amounts payable under government contracts 46,929 44,323
Accounts payable and other liabilities 682,177 616,873
----------- ------------
3,089,123 2,900,630
----------- ------------
Stockholders' Equity:
Common stock and additional paid-in capital 741,085 721,610
Retained earnings 416,125 557,478
Unrealized holding gains and losses, net of taxes (7,561) 3,201
Common stock held in treasury, at cost (210,212) (98,878)
----------- ------------
939,437 1,183,411
----------- ------------
$ 4,028,560 $ 4,084,041
----------- ------------
----------- ------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
3
<PAGE>
FOUNDATION HEALTH SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended June 30,
---------------------------
1997 1996
----------- -----------
<S> <C> <C>
Revenues:
Health plan premiums $1,408,317 $ 1,349,722
Government contracts 223,620 252,830
Workers' compensation revenue 134,476 151,484
Specialty services revenue 62,063 68,770
Investment and other income 41,249 32,805
----------- -----------
1,869,725 1,855,611
----------- -----------
Expenses:
Health plan services 1,183,993 1,119,757
Government health care services 166,488 200,877
Workers' compensation costs 131,219 130,183
Specialty services costs 56,102 63,519
Selling, general and administrative 190,869 213,434
Amortization and depreciation 25,716 28,622
Interest expense 17,254 9,904
Merger, restructuring and other costs 348,400 -
Gem reinsurance costs 57,500 -
----------- -----------
2,177,541 1,766,296
----------- -----------
Income (loss) from continuing operations before income taxes (307,816) 89,315
Income tax provision (benefit) (107,692) 29,127
----------- -----------
Income (loss) from continuing operations (200,124) 60,188
Gain from discontinued operations, net of tax - 6,300
----------- -----------
Net income (loss) $ (200,124) $ 66,488
----------- -----------
----------- -----------
Earnings (loss) per share:
Continuing operations ($1.59) $0.48
Discontinued operations - 0.05
----------- -----------
Net ($1.59) $0.53
----------- -----------
----------- -----------
Weighted average common and common
stock equivalent shares outstanding 125,783,672 125,381,721
----------- -----------
----------- -----------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
<PAGE>
FOUNDATION HEALTH SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------
1997 1996
----------- -----------
<S> <C> <C>
Revenues:
Health plan premiums $ 2,828,413 $ 2,660,904
Government contracts 469,654 400,177
Workers' compensation revenue 265,140 289,315
Specialty services revenue 125,886 124,780
Investment and other income 75,775 56,418
----------- -----------
3,764,868 3,531,594
----------- -----------
Expenses:
Health plan services 2,366,273 2,196,024
Government health care services 357,400 303,939
Workers' compensation costs 253,746 251,632
Specialty services costs 109,703 112,263
Selling, general and administrative 404,132 401,443
Amortization and depreciation 51,316 55,348
Interest expense 32,259 19,213
Merger, restructuring and other costs 348,400 -
Gem reinsurance costs 57,500 -
----------- -----------
3,980,729 3,339,862
----------- -----------
Income (loss) from continuing operations before income taxes (215,861) 191,732
Income tax provision (benefit) (74,214) 65,877
----------- -----------
Income (loss) from continuing operations (141,647) 125,855
Gain from discontinued operations, net of tax - 2,910
----------- -----------
Net income (loss) $ (141,647) $ 128,765
----------- -----------
----------- -----------
Earnings (loss) per share:
Continuing operations ($1.13) $1.01
Discontinued operations - 0.02
----------- -----------
Net ($1.13) $1.03
----------- -----------
----------- -----------
Weighted average common and common
stock equivalent shares outstanding 125,740,759 124,736,140
----------- -----------
----------- -----------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
5
<PAGE>
FOUNDATION HEALTH SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------
1997 1996
--------- ---------
<S> <C> <C>
Net cash provided (used) by operations $(298,574) $ 22,100
--------- ---------
INVESTING ACTIVITIES:
Sale or redemption of marketable securities held for sale 503,845 354,454
Purchases of marketable securities held for sale (298,613) (457,309)
Decrease (increase) in other assets 64,774 (45,009)
Purchases of property and equipment (44,228) (48,567)
Acquisition of subsidiaries, net of cash acquired 7,613 107
--------- ---------
Net cash provided (used) by investing activities 233,391 (196,324)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options and employee stock purchases 12,861 23,724
Proceeds from sale of stock - 96,230
Borrowings on credit facilities 264,979 116,189
Purchase of treasury stock (111,334) (105,417)
Repayment of debt and other non-current liabilities (131,673) (3,308)
--------- ---------
Net cash provided by financing activities 34,833 127,418
--------- ---------
Decrease in cash and cash equivalents (30,350) (46,806)
Cash and cash equivalents, beginning of period 514,000 376,749
--------- ---------
Cash and cash equivalents, end of period $ 483,650 $ 329,943
--------- ---------
--------- ---------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
6
<PAGE>
FOUNDATION HEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - MERGER
Effective April 1, 1997, Foundation Health Systems, Inc. (the "Company") was
formed pursuant to a merger transaction (the "Merger") involving Health
Systems International, Inc. ("HSI") and Foundation Health Corporation
("FHC"). Pursuant to the Merger, FHC merged into a newly created subsidiary
of HSI and each outstanding share of FHC capital stock was converted into 1.3
shares of HSI's Class A Common Stock. As part of the transaction HSI
remained as the ultimate parent company and changed its name to "Foundation
Health Systems, Inc." The Merger was tax-free and accounted for as a pooling
of interests. In accordance with the pooling of interests method of
accounting the Company's consolidated financial statements as of December 31,
1996 and for the six months ended June 30, 1997 and 1996 and the three months
ended June 30, 1996 and the notes thereto have been restated to include the
accounts of HSI and FHC for all periods presented. Although prior to the
merger HSI reported on a calendar year basis and FHC's final Annual Report
was reported on a fiscal year ended June 30 basis, the condensed consolidated
financial statements have been restated to reflect the Company's calendar
year basis.
NOTE 2 - BASIS OF PRESENTATION
In the opinion of management, the accompanying condensed consolidated financial
statements include all adjustments necessary for a fair presentation of the
consolidated financial position of the Company and the consolidated results of
its operations and its cash flows for the interim periods presented. Although
the Company believes that the disclosures in these financial statements are
adequate to make the information presented not misleading, certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission (the "SEC"). For further information please refer to the
consolidated financial statements and notes thereto in the HSI Annual Report on
Form 10-K for the year ended December 31, 1996 and the FHC Annual Report on Form
10-K/A Amendment No. 3 for the year ended June 30, 1996. Results of operations
for the interim periods are not necessarily indicative of results to be expected
for the full year.
NOTE 3 - MERGER, RESTRUCTURING AND OTHER COSTS
The Company recorded a charge for merger, restructuring and other costs of
$348.4 million in the quarter ended June 30, 1997. The components of this
charge include merger related costs, restructuring costs and other costs.
7
<PAGE>
MERGER RELATED COSTS
Merger costs totaling $74.0 million were incurred in the quarter ended June
30, 1997 and include $28.8 million of transaction costs, primarily consisting
of investment banking, legal, accounting, filing and printing fees.
Integration costs totaled $25.5 million and directors and officers liability
coverage required by the merger agreement totaled $3.1 million. Costs to
consolidate the debt facilities of the combining companies totaled $9.6
million. All other merger related costs totaled $7.0 million.
RESTRUCTURING COSTS
In connection with the Merger, the Company adopted a restructuring plan during
the quarter ended June 30, 1997, the principal elements of which include: a
workforce reduction of approximately 1,050 employees; the consolidation of
employee benefit plans; the consolidation of facilities in geographic locations
where office space is duplicated; the consolidation of overlapping provider
networks; and the consolidation of information systems at all locations to
standardized systems. The plan, which the Company anticipates will be
substantially completed by the end of the second quarter of 1998, resulted in a
restructuring charge of $188.1 million for the quarter ended June 30, 1997.
The following table summarizes the principal components of the charge in
millions:
Severance and benefit related costs $68.1
Provider network consolidation costs 43.2
Real estate lease termination costs 32.6
Asset impairment costs 44.2
------
$188.1
------
------
$143.9 million of this charge is expected to require outlays of cash. As of
June 30, 1997, $36.7 million of the total accrued restructuring charge had
been paid.
Severance and benefit related costs include a termination benefits plan and
contractually required change of control payments to certain senior
executives. Also included are the costs of settlements of benefit plans being
terminated as a result of the restructuring plan to conform benefits for the
combining companies.
Provider network consolidation costs include costs to consolidate overlapping
provider networks, primarily in California, and the costs of exiting existing
provider contracts as legally, regulatorily or administratively required.
Real estate lease termination costs include facilities consolidation costs
primarily in geographic regions where there is overlapping office space usage.
8
<PAGE>
Asset impairment costs are primarily a result of the Company's plan to be on
common operating systems and hardware platforms. These costs include impairment
of hardware, software and other systems related assets.
OTHER COSTS
Other costs totaling $86.3 million included non-recurring charges for the
quarter ended June 30, 1997. The primary components of these charges
included $30.5 million for IPA receivables related to provider contracts that
will not be renewed as a result of the Merger; $17.2 million for government
receivables related to prior contracts and adjustments on current contracts
being negotiated with the Department of Defense; $13.4 million for litigation
settlement estimates on claims primarily related to former FHC subsidiaries;
$12.6 million for the loss on disposal of the Company's United Kingdom
operations; and $5.2 million related to losses on certain subscriber
contracts.
NOTE 4 - GEM REINSURANCE COSTS
Gem Insurance Company ("Gem"), a subsidiary of the Company, has reached
definitive agreements regarding a Quota Share Reinsurance Agreement and an
Administration, Management and Transfer Agreement as of April 1, 1997 with
The Centennial Life Insurance Company and Centennial Management Services,
Inc. (collectively "Centennial"). Pursuant to these agreements, Centennial
will reinsure, administer and manage Gem's accident and health, life and
annuity policies in exchange for a reinsurance premium. The cost of the
reinsurance along with the write-off of certain Gem assets that are not
recoverable based on the terms of these agreements totaled $57.5 million.
NOTE 5 - INVESTMENTS
Investments are comprised of the following (in thousands):
June 30, 1997 December 31, 1996
------------- ------------------
Available for sale $ 1,089,186 $ 1,306,606
Held to maturity 29,562 30,195
------------- ------------------
Total investments $ 1,118,748 $ 1,336,801
------------- ------------------
------------- ------------------
For purposes of calculating realized gains and losses on sales of investments
available for sale, the amortized cost of each investment sold is used.
9
<PAGE>
NOTE 6 - BUSINESS SEGMENT INFORMATION
The Company operates principally in the following two segments: (i) providing
managed health care services to subscribers and (ii) the writing of workers'
compensation insurance. The following schedule sets forth information about
these two operating segments.
10
<PAGE>
FOUNDATION HEALTH SYSTEMS, INC.
SEGMENT REPORTING
(In millions)
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
------------------------ -------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1997 1996 1997 1996
---------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Net revenue from unaffiliated entities:
Managed health care (1) $ 1,722.5 $ 1,694.5 $ 3,474.7 $ 3,223.1
Managed workers' compensation 147.2 161.1 290.2 308.5
---------- --------- ---------- -----------
$ 1,869.7 $ 1,855.6 $ 3,764.9 $ 3,531.6
---------- --------- ---------- -----------
---------- --------- ---------- -----------
Income (loss) from continuing operations
before income taxes:
Managed health care (1) $ (297.2) $ 73.6 $ (208.7) $ 163.6
Managed workers' compensation 6.7 25.6 25.0 47.3
Interest expense (17.3) (9.9) (32.2) (19.2)
---------- --------- ---------- -----------
$ (307.8) $ 89.3 $ (215.9) $ 191.7
---------- --------- ---------- -----------
---------- --------- ---------- -----------
Depreciation and amortization:
Managed health care (1) $ 24.0 $ 27.2 $ 48.0 $ 52.2
Managed workers' compensation 1.7 1.4 3.3 3.1
---------- --------- ---------- -----------
$ 25.7 $ 28.6 $ 51.3 $ 55.3
---------- --------- ---------- -----------
---------- --------- ---------- -----------
Capital expenditures:
Managed health care (1) $ 20.4 $ 20.5 $ 38.4 $ 43.9
Managed workers' compensation 3.5 2.9 5.8 4.7
---------- --------- ---------- -----------
$ 23.9 $ 23.4 $ 44.2 $ 48.6
---------- --------- ---------- -----------
---------- --------- ---------- -----------
</TABLE>
AS OF
-------------------------
JUNE 30, DECEMBER 31,
1997 1996
---------- -----------
Total assets:
Managed health care (1) $ 2,813.6 $ 2,933.2
Managed workers' compensation 1,215.0 1,150.8
---------- -----------
$ 4,028.6 $ 4,084.0
---------- -----------
---------- -----------
(1) Includes general corporate balances net of eliminations
11
<PAGE>
NOTE 7 - STOCKHOLDERS' EQUITY
On June 27, 1997 the Company redeemed 4,550,000 shares of its Class B Common
Stock from The California Wellness Foundation, the charitable receipient of
the proceeds from the conversion of the Company's Health Net subsidiary to
for-profit status in 1992. The redemption price was approximately $111.3
million, or $24.47 a share.
NOTE 8 - ACQUISITIONS
ADVANTAGE HEALTH
On April 1, 1997 the Company completed the acquisition of Advantage Health, a
group of managed health care companies based in Pittsburgh, PA, for $12.5
million in cash. Advantage Health has approximately 40,000 full-risk
members. In 1996 Advantage Health recorded revenues of approximately $56
million, with about 90 percent from health plan operations. The Company
purchased Advantage Health from St. Francis Health System, which has a
short-term option to re-acquire a 20 percent interest in Advantage Health for
$2.5 million. Advantage Health remains a party to long-term provider
agreements with the St. Francis Health System.
PACC
On April 9, 1997 the Company announced that it had reached a definitive
agreement to acquire PACC, a 116,000 member health plan based in Oregon for
an undisclosed amount. The transaction is subject to receipt of all
applicable regulatory approvals. The Company expects the transaction to
close in the third quarter of 1997.
FIRST OPTION HEALTH PLAN
On April 30, 1997 the Company completed a $51.7 million investment in FOHP,
Inc. ("FOHP") based in Red Bank, New Jersey. FOHP is owned by physicians,
hospitals and other health care providers and is the sole shareholder of
First Option Health Plan of New Jersey, Inc. ("FOHP-NJ"), a managed care
company. The Company's investment is in the form of FOHP debentures
convertible into up to 71 percent of FOHP's outstanding equity at the
Company's discretion. In addition to the investment, the Company will
provide a variety of management services to FOHP in return for a percentage
of FOHP's premium revenue. The Company, at its option, may also provide
information systems and claims processing services to FOHP. First Option
currently has more than 250,000 members in New Jersey enrolled in its
commercial, Medicare, Medicaid and PPO programs.
12
<PAGE>
PHYSICIANS HEALTH SERVICES
On May 8, 1997 the Company entered into a definitive agreement to acquire
Physicians Health Services, Inc. ("PHS") for $29.25 per share, or a total
consideration of approximately $300 million. PHS is a 440,000 member health
plan with operations in the New York metropolitan area, including northern
New Jersey, and throughout the state of Connecticut. The consummation of the
transaction is subject to customary conditions, including approval by PHS
stockholders and the receipt of all necessary governmental authorizations.
In connection with entering into the definitive acquisition agreement, the
Greater Bridgeport Individual Practice Association, Inc., holding a majority
of the outstanding voting power of PHS stock, agreed to vote in favor of the
transaction. The Company will fund the acquisition with cash on hand and
existing bank credit lines. The Company presently expects that the
transaction will close in the third or fourth quarter of 1997.
CHRISTIANIA GENERAL INSURANCE CORPORATION
On May 14, 1997 the Business Insurance Group, Inc. ("BIG"), a subsidiary of
the Company, acquired the Christiania General Insurance Corporation of New
York ("CGIC"). CGIC was purchased by BIG to more effectively compete in the
workers' compensation and group accident and health markets outside of
California. CGIC is currently licensed in 47 states with 27 workers'
compensation licenses and 23 group accident and health licenses.
NOTE 9 - SUBSEQUENT EVENT
On July 8, 1997 the Company entered into a $1.5 billion revolving credit
facility with Bank of America as Administrative Agent for the lenders thereto.
All previously existing credit facilities were terminated and rolled into this
new facility. As of July 8, 1997 the amount outstanding on this line was $860
million.
NOTE 10 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February, 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, (EARNINGS PER SHARE) ("SFAS 128") which
requires changes in current earnings per share ("EPS") reporting requirements.
The Company is required to adopt SFAS 128 in the fourth quarter of 1997.
Management expects there to be no significant difference in the calculation and
reporting of EPS under the new statement, hence, SFAS 128 is not expected to
significantly affect historical or future EPS.
In June, 1997, the Financial Accounting Standards Board adopted Statements of
Financial Accounting Standards No. 130 (REPORTING COMPREHENSIVE INCOME), which
requires that an enterprise report, by major components and as a single total,
the change in its net assets during the period from nonowner sources; and No.
131 (DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION), which
establishes annual and interim reporting standards for an enterprise's business
segments and related disclosures about its products, services, geographic areas,
and major customers. Adoption of these statements will not impact the Company's
consolidated financial position, results of operations or cash flows. Both
statements are effective for fiscal years beginning after December 15, 1997.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
Foundation Health Systems, Inc. (the "Company") is an integrated managed care
organization which administers the delivery of managed health care services.
Through its subsidiaries, the Company offers group, Medicaid, individual and
Medicare health maintenance organization ("HMO") and preferred provider
organization ("PPO") plans; government sponsored managed care plans; and managed
care products related to workers' compensation insurance, administration and
cost-containment, behavioral health, dental, vision and pharmaceutical products
and services.
The current operations of the Company are a result of the April 1, 1997
merger transaction (the "Merger") involving Health Systems International,
Inc. ("HSI") and Foundation Health Corporation ("FHC"). Pursuant to the
Merger, FH Acquisition Corp., a wholly owned subsidiary of HSI ("Merger
Sub"), merged with and into FHC and FHC survived as a wholly owned subsidiary
of HSI, which changed its name to "Foundation Health Systems, Inc." and
thereby became the Company. Pursuant to the Agreement and Plan of Merger (the
"Merger Agreement") that evidenced the Merger, FHC stockholders received 1.3
shares of the Company's Class A Common Stock for every share of FHC common
stock held. The shares of the Company's Class A Common Stock issued to FHC's
stockholders in the Merger constituted approximately 61% of the outstanding
stock of the Company after the Merger and the shares held by the Company's
stockholders prior to the Merger (i.e., the prior stockholders of HSI)
constituted approximately 39% of the outstanding stock of the Company after
the Merger.
The Merger was accounted for as a pooling of interests for accounting and
financial reporting purposes. The pooling of interests method of accounting
is intended to present, as a single interest, two or more common stockholder
interests which were previously independent and assumes that the combining
companies have been merged from inception. Consequently, in this Quarterly
Report on Form 10-Q, the Company's condensed consolidated financial
statements have been prepared and/or restated as though HSI and FHC always
had been combined.
Commercial HMO and PPO operations are characterized by the assumption of
underwriting risk in return for premium revenue. Government contracts consist
of contractual services to state and federal government programs such as CHAMPUS
and Medicaid in which the Company receives revenues for administrative and
management services and, under most of the contracts, also accepts financial
responsibility for health care costs. Workers' compensation services consist of
operations in which the Company assumes risk in return for premium revenue and
operations in which the Company provides third party administration and bill
review services. Specialty services consists both of operations in which the
Company assumes underwriting risk in return for premium revenue, including
behavioral health, dental and vision HMO products, and
14
<PAGE>
operations in which the Company provides administrative services only,
including certain of the behavioral health and pharmacy benefits management
programs.
CONSOLIDATED OPERATING RESULTS
The Company experienced minimal growth in overall revenues for the quarter
ended June 30, 1997 as compared to the same period in calendar year 1996.
Growth in revenues from health plan premiums was partially offset by
decreases in revenues in the government contracts, workers' compensation and
specialty services businesses. The overall medical loss ratio ("MLR") for
the quarter and six months ended June 30, 1997 as compared to the same
periods in 1996 increased due to continued pricing pressures primarily in the
workers' compensation business in California and throughout the Company's
health plans as well as an increase in pharmacy costs in the Company's health
plans and higher estimated future costs of the claims reported and not yet
settled in the Company's California workers' compensation business. Revenues
for the six months ended June 30, 1997 increased by 6.6% as compared to
revenues for the same period in 1996. Revenue increases from new government
contracts and growth in health plan premiums contributed to this increase.
The Company's selling, general and administrative ("SG&A") expenses decreased
by 10.6% for the quarter ended June 30, 1997 compared to the same quarter in
1996, and increased 0.7% for the six months ended June 30, 1997 compared to
the same period in 1996. The administrative expense ratio (SG&A as a percent
of revenue) decreased from 11.5% for the quarter ended June 30, 1996 to 10.2%
for the quarter ended June 30, 1997. The administrative expense ratio
decreased from 11.4% for the six months ended June 30, 1996 to 10.7% for the
six months ended June 30, 1997. Favorable expense reductions have occurred
for the quarter and six months ended June 30, 1997 as a percent of revenues
due to the Company's ongoing efforts to aggressively control its selling and
administrative expenses and a change in the California health plans
commission structures. In addition, the disposition of the Company's United
Kingdom operations and the reinsurance and administrative contracts with its
Gem Insurance Company subsidiary ("Gem") in the quarter ended June 30, 1997
also contributed to the favorable changes.
The difference between the statutory combined federal and state income tax
rate of 40.4% and the Company's effective tax rate of 34.9% for the quarter
and 34.4% for the six months ended June 30, 1997 on income from continuing
operations is primarily due to health plan premiums not subject to income tax
in certain states, permanent differences associated with tax exempt interest
income, research and experimental tax credits, partially offset by
non-amortizable goodwill, non-deductible merger and restructuring costs and
other non-deductible items.
Merger, restructuring and other costs caused the net loss in the quarter and six
months ended June 30, 1997. Gem reinsurance costs incurred in the quarter ended
June 30, 1997 also contributed to the net loss. Income for the quarter ended
June 30, 1997 from continuing operations before taxes, excluding the Gem
reinsurance costs and merger, restructuring and other costs, increased slightly
compared to the same period a year ago. Income for the six months ended June
30, 1997 from continuing operations before taxes, excluding the Gem reinsurance
costs and merger, restructuring and other costs, decreased slightly compared to
the same period in 1996.
In connection with the Merger, the Company adopted a significant restructuring
plan which provides for a workforce reduction of approximately 1,050 employees,
the consolidation of employee benefit plans, the consolidation of certain office
locations, the
15
<PAGE>
consolidation of overlapping provider networks, and the consolidation of
information systems to standard systems. Management anticipates that
substantial payroll, rent and other cost savings will be obtained once the
plan is fully implemented. The restructuring charge for the quarter ended
June 30, 1997 totaled $188.1 million. The major components of this charge
include $68.1 million for severance and benefit related costs, $43.2 million
for provider network consolidation costs, $32.6 million for real estate lease
termination costs, and $44.2 million for asset impairment costs.
Merger related costs for the quarter ended June 30, 1997 totaling $74.0 million
consisted primarily of $28.8 million of transaction costs, $25.5 million of
integration costs, $3.1 million of directors and officers liability insurance
costs, and $9.6 million of debt facilities consolidation costs.
Other charges for the quarter ended June 30, 1997 consist primarily of $30.5
million for IPA receivables related to provider contracts that will not be
renewed, $17.2 for government receivables, $13.4 million for litigation
settlement estimates, $12.6 million for the loss on the disposal of the
United Kingdom operations, and $5.2 million for losses on subscriber
contracts.
The Company's ability to expand its business is dependent, in part, on
competitive premium pricing and its ability to secure cost-effective contracts
with providers. Achieving these objectives is becoming increasingly difficult
due to the competitive environment. In addition, the Company's profitability is
dependent, in part, on its ability to maintain effective control over health
care costs while providing members with quality care. Factors such as health
care reform, integration of acquired companies, regulatory changes, utilization,
new technologies, hospital costs, major epidemics and numerous other external
influences may affect the Company's operating results. Accordingly, past
financial performance is not necessarily a reliable indicator of future
performance, and investors should not use historical records to anticipate
results or future period trends.
Certain of the Company's HMO and insurance subsidiaries are required to
maintain reserves to cover their estimated ultimate liability for expenses
with respect to reported and unreported claims incurred. These reserves are
estimates of future costs based on various assumptions. Establishment of
appropriate reserves is an inherently uncertain process, and there can be no
certainty that currently established reserves will prove adequate in light of
subsequent actual experience, which in the past has resulted and in the
future could result in loss reserves being too high or too low. The accuracy
of these estimates may be affected by external forces such as changes in the
rate of inflation, the regulatory environment, the judicial administration of
claims, medical costs and other factors. Future loss development or
governmental regulators could require reserves for prior periods to be
increased, which would adversely impact earnings in future periods. In light
of present facts and current legal interpretations, management believes that
adequate provisions have been made for claims and loss reserves.
LINE OF BUSINESS REPORTING
The Company currently operates in two industry segments, managed health care and
managed workers' compensation. The managed health care segment's continuing
operations are in three primary lines of business (i) health plan services; (ii)
government contracts; and (iii) specialty services.
The following table presents financial information reflecting the Company's
continuing operations for both segments and its primary lines of business:
16
<PAGE>
FOUNDATION HEALTH SYSTEMS, INC.
LINE OF BUSINESS FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended
Quarter Ended June 30, 1997 June 30, 1996
------------------------------------------- -------------------------
Percent Percent Percent
Amount or of Total Increase Amount or of Total
Percent Revenue (Decrease) Percent Revenue
------------ -------- --------- ----------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
Health plan premiums $ 1,408,317 75.3% 4.3% $1,349,722 72.7%
Government contracts 223,620 12.0 (11.6) 252,830 13.6
Workers' compensation revenue 134,476 7.2 (11.2) 151,484 8.2
Specialty services revenue 62,063 3.3 (9.8) 68,770 3.7
Investment and other income 41,249 2.2 25.7 32,805 1.8
------------ -------- ----------- --------
1,869,725 100.0 0.8 1,855,611 100.0
------------ -------- ----------- --------
Expenses:
Health plan services 1,183,993 63.3 5.7 1,119,757 60.3
Government health care services 166,488 8.9 (17.1) 200,877 10.8
Workers' compensation costs 131,219 7.0 0.8 130,183 7.0
Specialty services costs 56,102 3.0 (11.7) 63,519 3.4
Selling, general and administrative (SG&A) 190,869 10.2 (10.6) 213,434 11.5
Amortization and depreciation 25,716 1.4 (10.2) 28,622 1.5
Interest expense 17,254 0.9 74.2 9,904 0.5
Merger, restructuring and other costs 348,400 18.6 - - -
Gem reinsurance costs 57,500 3.1 - - -
------------ -------- ----------- --------
2,177,541 116.5 23.3 1,766,296 95.2
------------ -------- ----------- --------
Income (loss) from continuing operations (307,816) (16.5) (444.6) 89,315 4.8
before income taxes
Income tax provision (benefit) (107,692) (5.8) (469.7) 29,127 1.6
------------ -------- ----------- --------
Income (loss) from continuing operations $ (200,124) (10.7)% (432.5) $ 60,188 3.2%
------------ -------- ----------- --------
------------ -------- ----------- --------
Earnings (loss) per share from continuing operations $ (1.59) (431.4) $ 0.48
------------ -----------
------------ -----------
Weighted average common and common
stock equivalent shares outstanding 125,783,672 0.3 125,381,721
------------ -----------
------------ -----------
Operating ratios:
Health plan loss ratio 84.1% 83.0%
Government contracts ratio 74.5 79.5
Workers' compensation ratio 97.6 85.9
Specialty services ratio 90.4 92.4
SG&A to total revenues 10.2 11.5
Effective tax rate (benefit) (34.9) 32.6
</TABLE>
17
<PAGE>
FOUNDATION HEALTH SYSTEMS, INC.
LINE OF BUSINESS FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
Six Months Ended June 30, 1997 June 30, 1996
------------------------------------------- -------------------------
Percent Percent Percent
Amount or of Total Increase Amount or of Total
Percent Revenue (Decrease) Percent Revenue
------------ -------- --------- ------------ --------
<S> <C> <C> <C> <C> <C>
Revenues:
Health plan premiums $ 2,828,413 75.1% 6.3% $ 2,660,904 75.3%
Government contracts 469,654 12.5 17.4 400,177 11.3
Workers' compensation revenue 265,140 7.0 (8.4) 289,315 8.2
Specialty services revenue 125,886 3.3 0.9 124,780 3.5
Investment and other income 75,775 2.0 34.3 56,418 1.6
----------- ------- ----------- -------
3,764,868 100.0 6.6 3,531,594 100.0
----------- ------- ----------- -------
Expenses:
Health plan services 2,366,273 62.9 7.8 2,196,024 62.2
Government health care services 357,400 9.5 17.6 303,939 8.6
Workers' compensation costs 253,746 6.7 0.8 251,632 7.1
Specialty services costs 109,703 2.9 (2.3) 112,263 3.2
Selling, general and administrative (SG&A) 404,132 10.7 0.7 401,443 11.4
Amortization and depreciation 51,316 1.4 (7.3) 55,348 1.6
Interest expense 32,259 0.9 67.9 19,213 0.5
Merger, restructuring and other costs 348,400 9.3 - - -
Gem reinsurance costs 57,500 1.5 - - -
----------- ------- ----------- -------
3,980,729 105.7 19.2 3,339,862 94.6
----------- ------- ----------- -------
Income (loss) from continuing operations (215,861) (5.7) (212.6) 191,732 5.4
before income taxes
Income tax provision (benefit) (74,214) (2.0) (212.7) 65,877 1.9
----------- ------- ----------- -------
Income (loss) from continuing operations $ (141,647) (3.8)% (212.5) $ 125,855 3.6%
----------- ------- ----------- -------
----------- ------- ----------- -------
Earnings (loss) per share from continuing operations $ (1.13) (211.6) $ 1.01
----------- -----------
----------- -----------
Weighted average common and common
stock equivalent shares outstanding 125,740,759 0.8 124,736,140
----------- -----------
----------- -----------
Operating ratios:
Health plan loss ratio 83.7% 82.5%
Government contracts ratio 76.1 76.0
Workers' compensation ratio 95.7 87.0
Specialty services ratio 87.1 90.0
SG&A to total revenues 10.7 11.4
Effective tax rate (benefit) (34.4) 34.4
Enrollment (in thousands):
Health Plan:
Commercial 2,701 (3.0) 2,784*
Medicare risk 252 10.0 229
Medicaid 353 9.0 324
----------- -------- ---------
3,306 (0.9) 3,337
----------- -------- ---------
Government:
CHAMPUS PPO and indemnity 933 (13.0) 1,072
CHAMPUS HMO 578 26.5 457
----------- -------- ---------
1,511 (1.2) 1,529
----------- -------- ---------
Combined 4,817 (1.0)% 4,866
----------- -------- ---------
----------- -------- ---------
</TABLE>
* Includes 197,000 from Gem Insurance Company and the U.K.
operations which are excluded in 1997.
18
<PAGE>
MANAGED HEALTH CARE SEGMENT
HEALTH PLAN OPERATIONS
Revenues generated by the Company's health plan operations increased 4.3% in
the quarter ended June 30, 1997 compared to the quarter ended June 30, 1996
and 6.3% for the six months ended June 30, 1997 compared to the same period
in 1996 primarily due to enrollment increases in the Medicare and Medicaid
lines of business in the California market, annual increases in Medicare
premiums, and commercial enrollment increases in markets outside of
California. The Company expects continued pressure from employer groups and
government agencies to reduce premiums.
Health care costs on a per member basis increased for the quarter and six
months ended June 30, 1997 as compared to the quarter and six months ended
June 30, 1996 primarily due to higher pharmacy costs. In the California
market, health care costs increased as a result of higher pharmacy costs for
both the commercial and Medicare lines of business, percentage of premium
provider contracting arrangements, increased utilization in the Medicare line
of business, and increased enrollment in the Medicaid line of business. The
health plans loss ratio increased from 83.0% for the quarter ended June 30,
1996 to 84.1% for the quarter ended June 30, 1997 and from 82.5% for the six
months ended June 30, 1996 to 83.7% for the six months ended June 30, 1997.
Continued downward pressure on pricing, coupled with increased pharmacy costs
and utilization contributed to the overall health plan loss ratio increase.
GOVERNMENT CONTRACTS
Government contract revenues decreased 11.6% in the quarter ended June 30, 1997
as compared to the same quarter in 1996 as a result of improved health care and
subcontractor performance on the California/Hawaii and Washington/Oregon
contracts, which lowered revenues due to the risk sharing features of these
government contracts. Revenues for the six months ended June 30, 1997 increased
17.4% compared to the same period in 1996 because the California/Hawaii
contract did not commence until April, 1996.
Government health care costs as a percentage of government contract revenues
decreased from 79.5% for the quarter ended June 30, 1996 to 74.5% for the
quarter ended June 30, 1997 as a result of the improved health care and
subcontractor cost performance on the California/Hawaii and Washington/Oregon
contracts. The cost percentage for the six months ended June 30, 1997
increased only 0.1% as compared to the same period in 1996, which is a
function of the addition of the California/Hawaii contract in 1997.
19
<PAGE>
SPECIALTY SERVICES
Specialty services operations are comprised of several companies including
behavioral health, pharmacy benefits management, dental, vision and a third
party health care administrator. Revenues generated by the Company's specialty
services operations decreased in the quarter ended June 30, 1997 compared to the
same period in 1996 primarily due to the sale of certain ancillary health care
service operations in the fourth quarter of 1996. Revenues for the six months
ended June 30, 1997 compared to the same period in 1996 increased due to the
acquisition of Managed Health Network, Inc. ("MHN") in March, 1996.
The Company expects continued pressure from employer groups to maintain
modest increases in premiums for behavioral health, dental and vision
products. Specialty services costs have decreased as a percent of specialty
services revenue from 92.4% for the quarter ended June 30, 1996 to 90.4% for
the quarter ended June 30, 1997. The decrease is due to the synergies in
operating costs created after the acquisition of MHN which was purchased in
the quarter ended March 31, 1996. Specialty services costs for the six
months ended June 30, 1997 decreased to 87.1% as a percent of revenue
compared to 90.0% for the same period in 1996. This decrease was also due to
the favorable benefits of the MHN acquisition.
MANAGED WORKERS' COMPENSATION SEGMENT
Business Insurance Group, Inc. ("BIG") is a leading national managed care
workers' compensation group and a subsidiary of the Company. BIG owns the
following seven affiliate companies: California Compensation Insurance
Company, a specialty workers' compensation carrier writing primarily in
California; Business Insurance Company, a national workers' compensation
specialty carrier; Christiania General Insurance of New York, licensed to
write multiple lines of business in approximately 47 states; Combined
Benefits Insurance Company, writing single source workers' compensation and
employee health insurance primarily in California; Reviewco, which provides
bill review, utilization management and PPO network services nationally; FIRM
Solutions, a national risk management and TPA company; and Claims Technical
Services, a wholly owned subsidiary of FIRM Solutions, specializing in
providing temporary employees to the workers' compensation and health
insurance industry (collectively referred to as the "Workers' Compensation
Companies").
The Workers' Compensation Companies entered into a quota share reinsurance
agreement ("quota share treaty") with a non-affiliated national reinsurance
company, effective July 1, 1996, and also entered into an aggregate excess of
loss treaty ("aggregate treaty") with the same reinsurer as of January 1, 1997.
20
<PAGE>
The Workers' Compensation Companies previously utilized a quota share treaty
from January 1990 through June 1994, at ceding rates ranging from 5% to 40%.
Under the current quota share treaty, the percentage of premiums earned, losses
and loss adjustment expenses incurred ceded to the reinsurer was 30% from July
1, 1996 to December 31, 1996, and 7.5% for the period of January 1, 1997 to June
30, 1997. A ceding commission is accrued based on actual loss experience
reported for the subject period.
Under the aggregate treaty, during the six months ended June 30, 1997, $29.8
million of premium revenue and $37.2 million of losses and loss adjustment
expenses were ceded to the reinsurer.
Net premiums earned before quota share and aggregate excess of loss reinsurance
ceded increased by 7.6% for the quarter ended June 30, 1997 to $151.0 million
from $140.3 million for the quarter ended June 30, 1996. The growth in premiums
is due primarily to national expansion through the Company's multi-state
insurance workers' compensation subsidiary in states outside of California.
Premiums earned on workers' compensation policies issued in California continue
to be affected by severe price competition since the start of competitive rating
in January, 1995. Due to the premiums ceded in the quota share and the
aggregate reinsurance treaties, net premiums earned in the current quarter
declined by 11% compared to 1996.
Net investment income, excluding realized capital gains, increased by 63.6% in
the quarter ended June 30, 1997 compared to the comparable quarter last year.
The growth in investment income is due to an increase in investable assets from
operational cash flow, as well as capital contributions to the workers'
compensation companies of $75 million in May, 1996 and $55 million in August,
1996 from borrowings BIG made from its parent.
Three primary ratios are used to measure underwriting performance of the
workers' compensation companies: the loss and loss adjustment expense ratio and
the underwriting expense ratio, which when added together constitute the
combined ratio. A combined ratio of greater than 100% reflects an underwriting
loss, while a combined ratio of less than 100% indicates an underwriting profit.
These ratios are all calculated as a percentage of net premiums earned.
The following sets forth the workers' compensation companies underwriting
experience as measured by its combined ratio and its components for the quarters
ended June 30, 1997 and 1996:
The loss and loss adjustment expense ratio for the current quarter increased to
74.0% from 63.4% for the comparable quarter in 1996. The increase in the ratio
is due to an increase in the estimated ultimate cost of workers' compensation
claims that have not yet been settled as of June 30, 1997. While the frequency
of new claims reported in the quarter is consistent with 1996, and the average
loss cost of closed claims has also remained unchanged from last year, the
estimated future cost of those claims reported but not yet settled has
increased. In addition, $5.6 million of favorable prior accident year
21
<PAGE>
loss development was recognized in the quarter ended June 30, 1996, which is
4.0% of net premiums earned for the 1996 quarter. During the quarter ended
June 30, 1997, there was no favorable prior year development for accident
years 1996 and prior.
The underwriting expense ratio increased in the current quarter to 26.4% from
25.5% for the comparable quarter in 1996. The increase is affected by the
reduction in net premiums earned due to the aggregate reinsurance treaty,
effective January 1, 1997, and the ceded commission accrued on the quota share
treaty, which is based on the loss and loss expense experience during the
quarter.
LIQUIDITY AND CAPITAL RESOURCES
Cash used by operating activities was $298.6 million for the six months ended
June 30, 1997 as compared to cash provided by operating activities of $22.1
million for the comparable period in fiscal year 1996 due to timing of the
accrual for and payment of operating payables and due to the timing of
receipt or payment of amounts under government contracts and from government
agencies. The Company's cash and investments decreased from $1,850.8 million
at December 31, 1996 to $1,602.5 million at June 30, 1997 primarily due to
the repurchase of stock from The California Wellness Foundation for $111.3
million, the Company's investment in FOHP, Inc. in April, 1997 of $51.7
million and the timing of certain government receipts for health plan
services.
Certain of the Company's subsidiaries must comply with minimum capital and
surplus requirements under applicable state HMO and insurance laws and
regulations, and must have adequate reserves for claims incurred but not yet
reported and claims payments. Certain subsidiaries must maintain ratios of
current assets to current liabilities of 1:1 pursuant to certain government
contracts. The Company believes it is in compliance with these contractual and
regulatory requirements in all material respects.
The Company believes that cash from operations, existing working capital and
lines of credit are adequate to fund existing obligations, introduce new
products and services, complete its pending acquisitions and continue to
develop health care-related businesses. The Company regularly evaluates cash
requirements for current operations and commitments, and for capital
acquisitions and other strategic transactions. The Company may elect to
raise additional funds for these purposes, either through additional debt or
equity, the sale of investment securities or otherwise, as appropriate.
22
<PAGE>
Management of the Company continually evaluates opportunities to expand the
Company's commercial, government, insurance and specialty services operations;
however, the Company currently has no material commitments for future use of its
current or expected levels of available cash resources except as described
above. The Company's expansion options may include additional acquisitions and
internal development of new products and programs.
As of June 30, 1997 the Company and FHC had three separate revolving credit
facilities totaling $1.2 billion. The Company's credit facility dated April 4,
1996 for $700 million with Bank of America as Administrative Agent for the
lenders thereto had $556.5 million outstanding as of June 30, 1997. FHC had two
credit facilities; the first a $300 million facility dated December 5, 1994 with
Citicorp USA, Inc. as Administrative Agent for the lenders thereto, had $300
million outstanding as of June 30, 1997. The other, a $200 million facility
dated December 17, 1996 with Citicorp USA, Inc. as Administrative Agent for the
lenders thereto, had $105 million outstanding as of June 30, 1997. The total
outstanding on the three facilities as of June 30, 1997 was $961.5 million.
On July 8, 1997 the Company entered into a $1.5 billion revolving credit
facility with Bank of America as Administrative Agent for the lenders
thereto. All previously existing credit facilities were terminated and
rolled into this new facility. As of July 8, 1997 the amount outstanding on
this line was $860 million.
On June 16, 1997 FHC, a wholly owned subsidiary of the Company, announced a
tender offer to repurchase all of its $125 million outstanding principal amount
of 7-3/4% Senior Notes due 2003. The purchase price per $1,000 principal amount
of notes was $1,054.77. As of June 30, 1997 $124 million of principal amount
had been tendered and repurchased. On July 15, 1997 the remaining $1 million of
principal amount had been tendered and repurchased.
During the quarter ended June 30, 1997, FHC sold 4,076,087 shares of common
stock of FPA Medical Management, Inc. that it had received as consideration in
its sale of the affiliated physician-owned Medical Practices and its physician
management subsidiary. The proceeds from the sale of stock was about $79
million, or an average of $19.45 per share. In addition, as of June 30, 1997
FPA Medical Management, Inc. prepaid about $98.7 million due on a promissory
note received as consideration in the Company's sale of its Medical Practices.
On June 27, 1997 the Company redeemed 4,550,000 shares of its Class B Common
Stock from The California Wellness Foundation, the charitable receipient of
the proceeds from the conversion of the Company's Health Net subsidiary to
for-profit status in 1992. The redemption price was approximately
$111.3 million, or $24.47 a share.
IMPACT OF INFLATION AND OTHER ELEMENTS
The managed health care industry is labor intensive and its profit margin is
low. Hence, it is especially sensitive to inflation. Increases in medical
expenses without corresponding increases in premiums could have a material
adverse effect on the Company.
23
<PAGE>
Various federal and state legislative initiatives regarding the health care
industry have been proposed during recent legislative sessions, and health care
reform and similar issues continue to be in the forefront of social and
political discussion. If health care reform or similar legislation is enacted,
such legislation could impact the Company. Management cannot at this time
predict whether any such initiative will be enacted and, if enacted, the impact
on the financial condition or operations of the Company.
Reference is also made to the disclosures contained under the headings "Risk
Factors" and "Cautionary Statements" included in the Company's various
filings with the Securities and Exchange Commission and the documents
incorporated by reference therein, which could cause the Company's actual
results to differ from those projected in forward looking statements of the
Company made on behalf of the Company. In addition, certain of these factors
may have affected the Company's past results and may affect future results.
24
<PAGE>
PART II. OTHER INFORMATION
INTRODUCTION
As referenced in Part I above, the current operations of Foundation
Health Systems, Inc. (the "Company") are a result of the April 1, 1997 merger
transaction (the "Merger") involving Health Systems International, Inc.
("HSI") and Foundation Health Corporation ("FHC"). Pursuant to the Merger,
FH Acquisition Corp., a wholly owned subsidiary of HSI ("Merger Sub"), merged
with and into FHC and FHC survived as a wholly owned subsidiary of HSI, which
changed its name to "Foundation Health Systems, Inc." and thereby became the
Company. Pursuant to the Agreement and Plan of Merger (the "Merger
Agreement") that evidenced the Merger, FHC stockholders received 1.3 shares
of the Company's Class A Common Stock for every share of FHC common stock
held. The shares of the Company's Class A Common Stock issued to FHC's
stockholders in the Merger constituted approximately 61% of the outstanding
stock of the Company after the Merger and shares held by the Company's
stockholders prior to the Merger (i.e., the prior stockholders of
HSI) constituted approximately 39% of the outstanding stock of the Company
after the Merger.
In connection with the Merger, the Company amended its Certificate of
Incorporation to change the name of the Company as referenced above and to
increase the number of authorized shares of the Company's Common Stock to
380,000,000 shares consisting of 350,000,000 shares of Class A Common Stock and
30,000,000 shares of Class B Common Stock.
In connection with the Merger, the Company also, among other things,
amended the Company's By-Laws to effect certain changes to the governance
provisions of the Company following the Merger, including provisions related
to the structure of the Company's Board of Directors and the committees of
the Company's Board of Directors. Except in certain circumstances, during a
transaction period following the consummation of the Merger and up to, but
not including, the election of directors at the Company's May 2000 Annual
Meeting of Stockholders, the Company's Board of Directors is to consist of 11
members to be designated as set forth in the Company's Certificate of
Incorporation and By-Laws. Pursuant to such designations the Company's Board
of Directors is currently comprised of the following ten members (see
disclosure below relative to the current vacancy on the Board of Directors):
J. Thomas Bouchard, George Deukmejian, Thomas T. Farley, Patrick Foley, Earl
B. Fowler, Roger F. Greaves, Richard W. Hanselman, Malik M. Hasan, M.D.,
Richard J. Stegemeier and Raymond S. Troubh.
ITEM 1. LEGAL PROCEEDINGS
MEDAPHIS CORPORATION
On November 7, 1996 the Company filed a lawsuit against Medaphis
Corporation ("Medaphis") and its former Chairman and Chief Executive Officer
Randolph G. Brown entitled
25
<PAGE>
HEALTH SYSTEMS INTERNATIONAL, INC. V. MEDAPHIS CORPORATION, RANDOLPH G. BROWN
AND DOES 1-50, case number BC 160414, Superior Court of California, County of
Los Angeles. The lawsuit arises out of the acquisition of Health Data
Sciences Corporation ("HDS") by Medaphis. In June 1996, the Company, the
owner of 1,234,544 shares (or 77%) of Series F Preferred Stock of HDS,
representing over sixteen percent of the total outstanding equity of HDS,
voted its shares in favor of the acquisition of HDS by Medaphis. The Company
received as the result of the acquisition 976,771 shares of Medaphis Common
Stock in exchange for its Series F Preferred Stock.
In its complaint, the Company alleges that Medaphis was actually a poorly
run company with sagging earnings in its core businesses, and had artificially
maintained its stock prices through a series of acquisitions and accounting
maneuvers which provided the illusion of growth while hiding the reality of its
weakening financial and business condition. The Company alleges that Medaphis,
Brown, and other insiders deceived the Company by failing to reveal that
Medaphis would shortly reveal a "write off" of up to $40,000,000 in
reorganization costs and would lower its earnings estimate for the following
year, thereby more than halving the value of the Medaphis shares received by the
Company. The Company alleges that these false and misleading statements were
contained in oral communications with the Company, as well as in the prospectus
provided by Medaphis to all HDS shareholders in connection with the HDS
acquisition. Further, despite knowing of the Company's discussions to form a
strategic alliance of its own with HDS, Medaphis and the individual defendants
wrongfully interfered with that prospective business relationship by proposing
to acquire HDS using Medaphis stock whose market price was artificially inflated
by false and misleading statements. These allegations of the Company constitute
violations of both federal and state securities laws, as well as constituting
fraud and other torts under state law. The Company is seeking either rescission
of the transaction or damages in excess of $38,000,000. The defendants have
denied the allegations in the complaint, and the Company is vigorously pursuing
its claims against Medaphis.
MONACELLI VS. GEM INSURANCE COMPANY
On December 29, 1994, a lawsuit entitled MARIO AND CHRISTIAN MONACELLI V.
GEM INSURANCE COMPANY, ET AL (Case No. CV94-20715) was initiated in Maricopa
County (Arizona) Superior Court against Gem Insurance Company, a subsidiary
of the Company ("Gem"), for bad faith and misrepresentation. Plaintiffs
subsequently asserted claims in the same action against their insurance
agent, Mark Davis, for negligence and misrepresentation. The Plaintiffs'
claims arose from the rescission of their health insurance policy based on
their alleged failure to disclose an X-ray, taken one year before the
Plaintiffs filled out their insurance application, which revealed an
undiagnosed mass on Mr. Monacelli's lung. Plaintiffs incurred approximately
$70,000 in medical expenses in connection therewith. Prior to trial, the
agent recanted certain portions of his deposition testimony and admitted that
the Plaintiffs had told him that Mr. Monacelli had undergone certain tests
which were not revealed on the application. Based on this new information,
Gem paid the Plaintiffs' medical expenses with interest.
The case went to trial in April of 1997 against Gem and the agent. A jury
verdict was ultimately rendered awarding the Plaintiffs $1 million in
compensatory damages and assessing fault 97% to Gem and 3% to the agent, Mark
Davis. In addition, the jury awarded $15 million in punitive damages against
Gem. The Monacellis subsequently filed a motion seeking $4 million in
attorneys' fees. Post-trial motions (including Gem's motion for judgment
notwithstanding the verdict and motion for new trial/motion for remittitur)
and the Plaintiffs' motion for an award of attorneys' fees are currently
pending. In addition, on July 15, 1997 Gem filed a complaint against Mr.
Davis and his spouse in Maricopa County (Arizona) Superior Court (Case No.
CV97-13053) asserting a claim for indemnity against Mr. Davis with respect to
the MONACELLI case.
MISCELLANEOUS PROCEEDINGS
The Company and certain of its subsidiaries are also parties to various
legal proceedings, many of which involve claims for coverage encountered in
the ordinary course of its business. Based in part on advice from litigation
counsel to the Company and upon information presently available, management
of the Company is of the opinion that the final outcome of all such
proceedings should not have a material adverse effect upon the Company's
results of operations or financial condition.
26
<PAGE>
ITEM 2. CHANGES IN SECURITIES
REVOLVING CREDIT FACILITY
On July 8, 1997, the Company entered into a Credit Agreement (the "Credit
Agreement") among the Company, the banks identified therein (the "Banks") and
Bank of America National Trust and Savings Association (the "Bank of America"),
in its capacity as the Administrative Agent, pursuant to which the Company
obtained an unsecured five-year $1.5 billion revolving credit facility. The
Credit Agreement replaced (i) the Company's prior Amended and Restated Credit
Agreement, dated as of April 26, 1996, with Bank of America, as agent, providing
for a $700 million unsecured revolving credit facility and (ii) Foundation
Health Corporation's ("FHC's") prior (A) Revolving Credit Agreement, dated as of
December 5, 1994, with Citicorp USA, Inc., as agent, providing for a $300
million unsecured revolving credit facility (the "Old FHC Credit Agreement") and
(B) Revolving Credit Agreement, dated as of December 17, 1996, with Citibank,
N.A., as administrative agent, providing for a $200 million unsecured revolving
credit facility.
The Credit Agreement contains customary representations and warranties,
affirmative and negative covenants and events of default. Specifically, Section
7.11 of the Credit Agreement provides that the Company and its subsidiaries may,
so long as no event of default exists: (i) declare and distribute stock as a
dividend; (ii) purchase, redeem or acquire its stock, options and warrants with
the proceeds of concurrent public offerings; and (iii) declare and pay dividends
or purchase, redeem or otherwise acquire its capital stock, warrants, options or
similar rights with cash so long as the sum of such dividends, redemptions and
acquisitions does not exceed $300 million plus 25% of the net income of the
Company and its subsidiaries in fiscal year 1998 plus 50% of the net income of
the Company and its subsidiaries in fiscal year 1999 and subsequent years
(calculated on a cumulative consolidated basis).
Under the Credit Agreement, the Company is: (i) obligated to maintain at
all times a Total Leverage Ratio (as such term is defined in the Credit
Agreement) not to exceed 3 to 1, a Fixed Coverage Charge (as such term is
defined in the Credit Agreement) of not less than 2.75 to 1 and to preserve its
combined net worth at not less than the sum of 85% of the combined net worth on
June 30, 1997 plus 50% of the net income of the Company and its subsidiaries
arising after June 30, 1997 (calculated on a cumulative consolidated basis);
(ii) obligated to limit liens on its assets to those incurred in the normal
course and for taxes and other similar obligations; and (iii) subject to
customary covenants, to (A) dispose of assets only in the ordinary course and
generally at fair value and (B) restrict acquisitions, mergers, consolidations,
loans, leases, joint ventures, contingent obligations and certain transactions
with affiliates to those permitted under the Credit Agreement.
In connection with entering into the Credit Agreement, FHC obtained a
waiver under a Guaranty Agreement, dated as of May 25, 1997 (the "FHC
Guaranty"), until August 15, 1997 in order to enable the Company to negotiate
the replacement by the Company of FHC as the guarantor
27
<PAGE>
under the FHC Guaranty. The FHC Guaranty incorporates the representations,
warranties and covenants of the Old FHC Credit Agreement, as amended from
time to time, and it further provides that to the extent the Old FHC Credit
Agreement is terminated and is replaced with a similar credit facility, the
representations, warranties and covenants of such new credit facility are
automatically incorporated into the FHC Guaranty. Since the Old FHC Credit
Agreement was replaced with a similar credit facility, i.e., the Credit
Agreement, and FHC is not a party to the Credit Agreement, the replacement by
the Company of FHC as the guarantor under the FHC Guaranty was required.
Upon replacement by the Company of FHC as the guarantor, FHC will be relieved
of all of its obligations under the FHC Guaranty and all other agreements
relating thereto.
The guarantor under the FHC Guaranty guarantees certain obligations of
Foundation Health Facilities, Inc., a California corporation ("FHF"), under:
(i) a Lease Agreement, dated as of May 25, 1995, between First Security Bank,
National Association (f/k/a First Security Bank of Utah, N.A.) (the "Owner
Trustee"), as lessor, and FHF, as lessee, providing for the leasing of certain
real property; (ii) an Agency Agreement, dated as of May 25, 1995, between the
Owner Trustee and FHF, providing for FHF to act as agent for the Owner Trustee
in the acquisition, development and construction of certain real property; and
(iii) any other agreement entered into by FHF in connection with the
Participation Agreement, dated as of May 25, 1997, among FHF, FHC, the Owners
Trustee, and NationsBank of Texas, N.A., as the administrative agent for certain
financial institutions parties to a Credit Agreement, dated as of May 25, 1995,
with the Owner Trustee, as the borrower.
SHAREHOLDER RIGHTS PLAN
On May 20, 1996, the Board of Directors of the Company declared a dividend
distribution of one right (a "Right") for each outstanding share of the
Company's Class A Common Stock and Class B Common Stock (collectively, the
"Common Stock"), to stockholders of record at the close of business on July 31,
1996 (the "Record Date"). The Board of Directors of the Company also authorized
the issuance of one Right for each share of Common Stock issued after the Record
Date and prior to the earliest of the Distribution Date (as defined below), the
redemption of the Rights and the expiration of the Rights and in certain other
circumstances. Rights will attach to all Common Stock certificates representing
shares then outstanding and no separate Rights Certificates will be distributed.
Subject to certain exceptions contained in the Rights Agreement dated as of June
1, 1996 by and between the Company and Harris Trust and Savings Bank, as Rights
Agent (the "Rights Agreement"), the Rights will separate from the Common Stock
in the event any person acquires 15% or more of the outstanding Class A Common
Stock, the Board of Directors of the Company declares a holder of 10% or more of
the outstanding Class A Common Stock to be an "Adverse Person," or any person
commences a tender offer for 15% of the Class A Common Stock (each event causing
a "Distribution Date").
28
<PAGE>
Except as set forth below and subject to adjustment as provided in the
Rights Agreement, each Right entitles its registered holder, upon the
occurrence of a Distribution Date, to purchase from the Company one
one-thousandth of a share of Series A Junior Participating Preferred Stock,
at a price of $170.00 per one-thousandth share. However, in the event any
person acquires 15% or more of the outstanding Class A Common Stock, or the
Board of Directors of the Company declares a holder of 10% or more of the
outstanding Class A Common Stock to be an "Adverse Person," the Rights
(subject to certain exceptions contained in the Rights Agreement) will
instead become exercisable for Class A Common Stock having a market value at
such time equal to $340.00. The Rights are redeemable under certain
circumstances at $.01 per Right and will expire, unless earlier redeemed, on
July 31, 2006.
In connection with the Merger, the Company entered into Amendment No. 1
(the "Amendment") to the Rights Agreement to exempt the Merger and related
transactions from triggering the Rights. In addition, the Amendment modifies
certain terms of the Rights Agreement applicable to the determination of certain
"Adverse Persons," which modifications became effective upon consummation of the
Merger.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the quarter ended June 30, 1997.
ITEM 5. OTHER INFORMATION
REVOLVING CREDIT FACILITY
As indicated in Item 2 above, on July 8, 1997 the Company executed the
Credit Agreement, which provides for an unsecured five-year $1.5 billion
revolving credit facility, to replace (i) the Company's prior $700 million
unsecured revolving credit facility with Bank of America, as agent and (ii)
FHC's prior (A) $300 million unsecured revolving credit facility with Citicorp
USA, Inc., as agent and (B) $200 million unsecured revolving credit facility
with Citibank, N.A., as administrative agent.
The facility is available to the Company and its subsidiaries for general
corporate purposes, including Permitted Acquisitions and Joint Ventures. As
of July 31, 1997, the Company had drawn approximately $860 million under the
facility.
29
<PAGE>
Bank of America is the administrative agent and co-lead bank with
Citibank N.A. for the other participating banks named in the Credit
Agreement. At the election of the Company, and subject to customary
covenants, loans can be initiated on a bid or committed basis and will carry
interest at offshore or domestic rates, but subject to the applicable LIBOR
Rate or the Base Rate (which is the higher of .50% above the Federal Funds
Rate or the Bank of America "reference rate"). Actual rates on borrowings
under the facility will vary based on competitive bidding and the Company's
long-term senior unsecured debt rating and Total Leverage Ratio (as such term
is defined in the Credit Agreement) at the time of the borrowing. The
facility is available for five years, until July 2002, but may be extended,
under certain circumstances, for two additional years until July 2004.
Loans under the facility are unsecured but the Company and its
subsidiaries are subject to affirmative and negative covenants. As described
in Item 2 above, these include limitations on the payment of cash dividends
on the Company's capital stock and, in certain cases, the redemption or
repurchase of capital stock or securities. In addition to obligations
incurred under the facility, the Company and its subsidiaries are entitled to
incur certain types of Indebtedness in an aggregate amount of up to $500
million.
Under the Credit Agreement, the Company is: (i) obligated to maintain at
all times a Total Leverage Ratio not to exceed 3 to 1, a Fixed Charge Coverage
of not less than 2.75 to 1 and to preserve its combined net worth at not less
than the sum of 85% of the combined net worth on June 30, 1997 plus 50% of the
net income of the Company and its subsidiaries arising after June 30, 1997
(calculated on a cumulative consolidated basis); (ii) obligated to limit liens
on its assets to those incurred in the normal course and for taxes and other
similar obligations; and (iii) subject to customary covenants, to (A) dispose of
assets only in the ordinary course and generally at fair value and (B) restrict
acquisitions, mergers, consolidations, loans, leases, joint ventures, contingent
obligations and certain transactions with affiliates to those permitted under
the Credit Agreement.
CAUTIONARY STATEMENTS
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, HSI has previously filed with its Annual
Report on Form 10-K for the year ended December 31, 1996 and FHC has
previously filed with its Annual Report on Form 10-K/A Amendment No. 3 for
the year ended June 30, 1996 certain cautionary statements identifying
important risk factors that could cause the Company's actual results to
differ materially from those projected in forward-looking statements of the
Company made by or on behalf of the Company.
The Company wishes to caution readers that these factors, among others,
could cause the Company's actual financial or enrollment results to differ
materially from those expressed in any projected, estimated or forward-looking
statements relating to the Company. The factors should be considered in
conjunction with any discussion of operations or results by the Company or its
representatives, including any forward-looking discussion, as well as comments
contained in press releases, presentations to securities analysts or investors,
or other communications by the Company.
30
<PAGE>
In making these statements, the Company was not and is not undertaking to
address or update each factor in future filings or communications regarding the
Company's business or results, and is not undertaking to address how any of
these factors may have caused changes to discussions or information contained in
previous filings or communications. In addition, certain of these matters may
have affected the Company's past results and may affect future results.
RECENT DEVELOPMENTS
RECENT MANAGEMENT CHANGES
On May 8, 1997, the Company announced that Daniel D. Crowley had been
replaced by Malik M. Hasan, M.D. as the Chairman of the Board of Directors of
the Company, and that Mr. Crowley would remain as a director and serve as a
consultant to the Company for three years. It was also announced that Dr. Hasan
would retain the office of Chief Executive Officer of the Company, and that Jay
M. Gellert was elected to the offices of President and Chief Operating Officer
of the Company.
Effective July 16, 1997, Mr. Crowley resigned as a director of the Company.
As a result, there currently exists a vacancy in the Class I directors which
will be filled pursuant to the Merger Agreement after an appropriate
recommendation from the Committee on Directors. The Committee on Directors
intends to conduct a process of screening qualified individuals for this
vacancy.
Allen J. Marabito resigned as Senior Vice President and General Counsel of
the Company as of May 1, 1997 and entered into a Consulting Agreement with the
Company as of such date for a two year term. Pursuant to such Consulting
Agreement, the Company and Mr. Marabito also entered into a mutual general
release.
FIRST OPTION HEALTH PLAN
On April 30, 1997, the Company purchased convertible debentures (the "FOHP
Debentures") of FOHP, Inc., a New Jersey corporation ("FOHP"), in the aggregate
principal amount of approximately $51.7 million. The FOHP Debentures are
convertible into up to 71 percent of the outstanding equity of FOHP at the
Company's discretion. At any time during the 1999 calendar year, the Company
may acquire the remaining shares of FOHP not owned thereby pursuant to a tender
offer, merger, combination or other business combination transaction for
consideration (to be paid in cash or stock of the Company) equal to the value of
such FOHP stock based on appraiser determinations.
FOHP (headquartered in Red Bank, New Jersey) is owned by physicians,
hospitals and other health care providers and is the sole shareholder of
First Option Health Plan of New Jersey, Inc. a New Jersey corporation and a
wholly-owned subsidiary of FOHP ("FOHP-NJ"). FOHP-NJ is a managed health
care company providing commercial products for businesses and
31
<PAGE>
individuals, along with Medicare, Medicaid and Workers' Compensation
programs. FOHP-NJ currently has more than 250,000 members in New Jersey
enrolled in its commercial, Medicare, Medicaid and PPO programs.
As part of the transaction, the Company also provides a variety of
management services to FOHP, including provider contracting, utilization review
and quality assurance and employee relations, sales and marketing and strategic
planning. The Company receives monthly management fees from FOHP for such
services in an amount equal to two percent of FOHP's premium revenue. The
Company, at its option, may also provide information systems and claims
processing services to FOHP. Approximately $1,700,000 of the $51.7 million
principal amount of the FOHP Debentures reflected fees paid to the Company by
FOHP for such management services provided by the Company prior to the closing
of the sale of the FOHP Debentures; such principal amount was immediately
converted into FOHP common stock.
ADVANTAGE HEALTH
On April 1, 1997, the Company completed the acquisition from St. Francis
Health System of Advantage Health, a group of managed health care companies with
approximately 40,000 full-risk members in Western Pennsylvania, Ohio and West
Virginia, for $12.5 million in cash. In 1996 Advantage Health recorded revenue
of approximately $56 million. St. Francis has a short-term option to reacquire
a 20% interest in Advantage Health for $2.5 million.
Advantage Health remains a party to long-term provider agreements with the
St. Francis Health System and a management agreement with the Company. The
Company will operate Advantage Health under combined management with its
Philadelphia-based plan, QualMed Plans for Health, Inc.
PACC
Pursuant to the Agreement and Plan of Reorganization, dated as of March 20,
1997 and effective on April 9, 1997 (the "Reorganization Agreement"), among the
Company, QualMed Health Plan, Inc., an Oregon corporation and an indirect
wholly-owned subsidiary of the Company ("QMO"), and PACC HMO and PACC Health
Plans, each an Oregon non-profit corporation (PACC HMO and PACC Health Plans
being referred to herein, collectively, as "PACC"), the Company agreed to
acquire PACC for an undisclosed amount.
PACC (based in Clackamas, Oregon) has health plan operations in Oregon and
Washington, with approximately 116,000 medical members (approximately 108,000 of
which are located in the Portland, Oregon area). Approximately 67,000 of such
members are in PACC HMO (a commercial health maintenance organization), with the
balance in PACC Health Plans (primarily a preferred provider organization).
PACC recorded more than $133 million in revenues in 1996.
32
<PAGE>
The transaction is structured as a merger of PACC into QMO, with QMO as the
surviving corporation to be renamed FHS of Oregon, Inc. or a similar-type name.
Such merger will be immediately preceded by an acquisition and assumption by
QualMed Washington Health Plan, Inc. (a Washington corporation and indirect
wholly-owned subsidiary of the Company) of various contracts of PACC relating to
PACC's health care service contractor business in the State of Washington and
the acquisition and assumption by QualMed Health and Life Insurance Company (an
insurance company domesticated under the laws of the State of Colorado and an
indirect wholly-owned subsidiary of the Company) of various contracts of PACC
relating to PACC's health maintenance organization business in the State of
Washington.
The Reorganization Agreement contemplates that PACC will organize
Northwest Health Foundation (the "PACC Foundation") as an Oregon nonprofit
public benefit corporation which will receive the net acquisition consideration
proceeds. The PACC Foundation will assume certain of PACC's obligations under
the Reorganization Agreement (including indemnification obligations) at closing.
Consummation of the PACC acquisition transaction is subject to approvals
from regulatory authorities and other customary conditions of closing.
PHYSICIANS HEALTH SERVICES, INC.
On May 8, 1997, the Company entered into a definitive agreement to
acquire Physicians Health Services, Inc. ("PHS") for $29.25 per share, or a
total consideration of approximately $300 million. PHS is a 440,000-member
health plan with operations in the New York metropolitan area, including
northern New Jersey, and throughout the state of Connecticut. Consummation of
the transaction is subject to customary conditions, including approval by
PHS's stockholders and the receipt of all necessary governmental
authorizations. In connection with entering into the definitive acquisition
agreement, the Greater Bridgeport Individual Practice Association, Inc.,
holding a majority of the outstanding voting power of PHS stock, has agreed
to vote in favor of the transaction. The Company will fund the acquisition
with cash on hand and existing bank credit lines. The Company presently
expects that the transaction will close in the third quarter or fourth
quarter of 1997.
GEM INSURANCE COMPANY
Gem Insurance Company ("Gem") was acquired by the Company as a result of
FHC's acquisition of Intergroup Healthcare Corporation and the Thomas Davis
Medical Center in 1994. Gem is a Utah-domiciled life and health insurance
company, admitted to write group and individual medical and life insurance in
nine states and it has policies in force in the following seven states:
Arizona, Colorado, Nebraska, Nevada, New Mexico, Texas and Utah. It is
licensed but not active in Oregon and Washington.
33
<PAGE>
As referenced at Part I above, the Company has reached definitive
agreements relating to a reinsurance transaction with The Centennial Life
Insurance Company ("Centennial") involving Gem to be effective as of April 1,
1997.
In this connection, pursuant to a Quota Share Reinsurance Agreement (the
"Reinsurance Agreement"), Gem will cede to Centennial on an indemnity basis
one hundred percent (100%) of the policy liabilities of Gem in return for all
of Gem's premium income, policy reserves and a cash payment by the Company.
In addition, pursuant to an Administration, Management and Transfer Agreement
(the "Administration Agreement"), Centennial will: (i) provide complete
administration of the policies subject to the Reinsurance Agreement; (ii)
offer employment to all Gem employees; (iii) sublet the office space of Gem;
and (iv) purchase all the furniture, equipment, computer hardware and
software owned of Gem.
Although the transaction is subject to receipt of appropriate regulatory
approvals, such approval is imminent and will authorize the retroactive April 1,
1997 effective date referenced above.
CHRISTIANIA GENERAL INSURANCE CORPORATION
On May 14, 1997, the Business Insurance Group, Inc., a subsidiary of the
Company ("BIG"), acquired the Christiania General Insurance Corporation of
New York ("CGIC"). CGIC was purchased by BIG to more effectively compete in
the workers' compensation and group accident and health markets outside of
California. CGIC is currently licensed in 47 states, with 27 workers'
compensation licenses and 23 group accident and health licenses.
THE CALIFORNIA WELLNESS FOUNDATION
Pursuant to the Amended Foundation Shareholder Agreement, dated as of
January 28, 1992 (the "CWF Shareholder Agreement"), by and among the Company,
The California Wellness Foundation (the "CWF") and certain stockholders (the
"HNMH Stockholders") of HN Management Holdings, Inc. (a predecessor to the
Company) ("HNMH") named therein, the CWF is subject to various volume and manner
of sale restrictions specified in the CWF Shareholder Agreement which limit the
number of shares that the CWF may dispose of prior to December 31, 1998.
Under the relevant provisions of California law, when a corporation
converts from nonprofit to for-profit corporate status, the equivalent of the
fair market value of the nonprofit corporation must be contributed to a
successor charity that has a charitable purpose consistent with the purposes of
the nonprofit entity. The CWF was formed to be the charitable recipient of the
conversion settlement when Health Net (a subsidiary of the company) effected a
conversion from nonprofit to for-profit status, which occurred in February 1992
(the "Conversion"). In connection with the Conversion, Health Net issued to the
CWF promissory notes in the original principal amount of $225 million (the "CWF
Notes") and shares of Class B Common Stock (which immediately prior to the
business combination involving HNMH and QualMed, Inc. were split to become
25,684,152 shares of Class B Common Stock then held by the CWF). While such
shares are held by the CWF, they are entitled to the same economic benefit of
Class A Common Stock, but are non-voting in nature. If the CWF sells or
transfers such shares to an unrelated third party, they automatically convert to
Class A Common Stock.
In addition, the CWF Shareholder Agreement, in conjunction with the Letter
Agreement executed by the Company and the Trustees of a Trust (holding shares on
behalf of the HNMH
34
<PAGE>
Stockholders) on March 9, 1995 and ratified by the Company's Board of
Directors on March 16, 1995 (the "Letter Agreement") requires the CWF to
offer its shares of Class B Common Stock to the Company prior to selling such
shares to any other person. In this respect, the CWF Shareholder Agreement
permits the CWF to offer and sell up to 80% of the CWF's interest in the
Class B Common Stock (or all but 5,136,830 of such shares) to the Company
prior to December 31, 1998. The CWF Shareholder Agreement, in conjunction
with the Letter Agreement, requires the CWF to provide the Company with
notice on or before January 31 of each year setting forth the number of
shares, if any, being offered to the Company. The Company then has 45 days
following receipt of such notice to notify the CWF of its intention to
purchase such number of shares. On January 27, 1997, the CWF provided the
Company with notice of its offer to sell 3,852,653 shares of Class B Common
Stock, provided that at the Company's option the number of shares could be
increased to not more than 5,000,000 shares. Pursuant to such offer and
subsequent letter agreements (collectively, the "1997 Notice Materials") the
CWF agreed to extend until June 20, 1997 the time by which the Company could
notify the CWF of its intention to purchase or redeem such number of shares
of Class B Common Stock. Accordingly, after appropriate notice was given and
effective June 27, 1997, the Company redeemed 4,550,000 shares of Class B
Common Stock from the CWF at a price of $24.469 per share.
In addition, on June 18, 1997, the Company provided its consent under the
CWF Shareholder Agreement to permit the CWF to sell 3,000,000 shares of Class
B Common Stock to an unrelated third party. Pursuant to the 1997 Notice
Materials, the CWF also retained the right to sell the balance of the
5,000,000 shares not redeemed by the Company (or up to 450,000 shares) to
unrelated third parties. Sales of 298,300 of such 450,000 shares to
unrelated third parties had been consummated as of August 12, 1997. Pursuant
to the Company's Certificate of Incorporation, such 3,000,000 shares and
298,300 shares of Class B Common Stock automatically converted into shares of
Class A Common Stock in the hands of such third parties.
As a result of such transactions, the CWF now holds 11,449,342 shares of
Class B Common Stock and, as of June 30, 1997, approximately $19 million in
principal of the CWF Notes remained outstanding.
REDEMPTION OF FHC PUBLIC DEBT
FHC, a subsidiary of the Company, consummated a cash tender offer on June
27, 1997 of all of its $125 million outstanding principal amount of 7 3/4%
Senior Notes due 2003 (the "FHC Notes"). As part of this repurchase, FHC and
the trustee for the FHC Notes also executed a supplemental indenture which
removed substantially all of the restrictive covenants contained in the
Indenture for the FHC Notes.
The price paid for each tendered FHC Note was based on a fixed spread of 25
basis points over the reference yield of the 6 1/4% U.S. Treasury Notes due
February 15, 2003, plus accrued and unpaid interest to the applicable settlement
date. Accordingly, the reference yield was
35
<PAGE>
6.365%, the reference yield plus the fixed spread was 6.615% and the purchase
price per $1,000 principal amount of the FHC Notes was $1,054.77, plus
accrued and unpaid interest.
36
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following exhibits are filed as part of this Quarterly Report on Form
10-Q or are incorporated herein by reference:
2.1 Agreement and Plan of Merger, dated October 1, 1996, by and among
Health Systems International, Inc., FH Acquisition Corp. and
Foundation Health Corporation (filed as Exhibit 2.5 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996,
which is incorporated by reference herein).
2.2 Agreement and Plan of Merger, dated May 8, 1997, by and among the
Company, PHS Acquisition Corp. and Physicians Health Services, Inc.
(filed as Exhibit 2.2 to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1997, which is incorporated by
reference herein).
3.1 Fourth Amended and Restated Certificate of Incorporation of the
Registrant (filed as Exhibit 4.1 to the Company's Registration
Statement on Form S-8 (File No. 333-24621), which is incorporated by
reference herein).
*3.2 Fifth Amended and Restated Bylaws of the Registrant, a copy of which
is filed herewith.
4.1 Form of Class A Common Stock Certificate (included as Exhibit 4.2 to
the Company's Registration Statements on Forms S-1 and S-4 (File
nos. 33-72892 and 33-72892-01, respectively) which is incorporated
by reference herein).
4.2 Form of Class B Common Stock Certificate (included as Exhibit 4.3 to
the Company's Registration Statements on Forms S-1 and S-4 (File
nos. 33-72892 and 33-72892-01, respectively) which is incorporated
by reference herein).
4.3 Form of Indenture of Foundation Health Corporation ("FHC") (filed as
an exhibit to FHC's Registration Statement on Form S-3 (File No.
33-68684), which is incorporated by reference herein).
4.4 Form of Senior Notes of FHC (filed as an exhibit to FHC's
Registration Statement on Form S-3 (File No. 33-68684), which is
incorporated by reference herein).
37
<PAGE>
10.1 Employment Agreement, dated August 28, 1993, by and among QualMed,
Inc., HN Management Holdings, Inc. and Malik M. Hasan, M.D. (filed
as Exhibit 10.18 to the Company's Registration Statements on Forms
S-1 and S-4 (File nos. 33-72892 and 33-72892-01, respectively) which
is incorporated by reference herein).
10.2 Employment Agreement, dated August 28, 1993, by and among QualMed,
Inc., HN Management Holdings, Inc. and Dale T. Berkbigler, M.D.
(filed as Exhibit 10.20 to the Company's Registration Statements on
Forms S-1 and S-4 (File nos. 33-72892 and 33-72892-01, respectively)
which is incorporated by reference herein).
10.3 Severance Payment Agreement, dated as of April 25, 1994, among the
Company, Health Net and James J. Wilk (filed as Exhibit 10.9 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1994, which is incorporated by reference herein).
10.4 Severance Payment Agreement dated March 31, 1997 between the Company
and Health Net and James J. Wilk (filed as Exhibit 10.4 to the
Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1997, which is incorporated by reference herein).
10.5 Severance Payment Agreement, dated as of April 25, 1994, among the
Company, QualMed, Inc. and B. Curtis Westen (filed as Exhibit 10.10
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1994, which is incorporated by reference herein).
10.6 Letter Agreement dated April 23, 1997 between B. Curtis Westen and
the Company (filed as Exhibit 10.6 to the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1997, which is
incorporated by reference herein).
10.7 Amendment No. 1 to Employment Agreement dated as of April 25, 1994,
by and among the Company, QualMed, Inc. and Malik Hasan, M.D. (filed
as Exhibit 10.16 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1994, which is incorporated by reference
herein).
10.8 Amended and Restated Employment Agreement, dated March 10, 1997, by
and between the Company and Malik M. Hasan, M.D. (Filed as Exhibit
10.3 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996, which is incorporated by reference herein).
38
<PAGE>
10.9 Amendment No. 1 to Employment Agreement dated as of April 27,
1994, by and among the Company, QualMed, Inc. and Dale T.
Berkbigler, M.D. (filed as Exhibit 10.17 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1994, which is
incorporated by reference herein).
10.10 Office Lease, dated as of January 1, 1992, by and between Warner
Properties III and Health Net (filed as Exhibit 10.23 to the
Company's Registration Statements on Forms S-1 and S-4 (File Nos.
33-72892 and 33-72892-01, respectively) which is incorporated by
reference herein).
10.11 The Company's Second Amended and Restated 1991 Stock Option Plan
(filed as Exhibit 10.30 to Registration Statement on Form S-4
(File No. 33-86524) which is incorporated by reference herein).
10.12 The Company's Second Amended and Restated Non-Employee Director
Stock Option Plan (filed as Exhibit 10.31 to Registration
Statement on Form S-4 (File No. 33-86524) which is incorporated by
reference herein).
10.13 The Company's Employee Stock Purchase Plan (filed as Exhibit 10.33
to the Company's Registration Statements on Forms S-1 and S-4
(File nos. 33-72892 and 33-72892-01, respectively) which is
incorporated by reference herein).
10.14 The Company's Performance-Based Annual Bonus Plan (filed as
Exhibit 10.35 to Registration Statement on Form S-4
(File No. 33-86524) which is incorporated by reference herein).
10.15 Deferred Compensation Agreement dated as of March 3, 1995, by and
among Malik M. Hasan, M.D., the Company and the Compensation and
Stock Option Committee of the Board of Directors of the Company
(filed as Exhibit 10.31 to the Company's Annual Report on Form
10-K for the year ended December 31, 1994, which is incorporated by
reference herein).
10.16 Trust Agreement for Deferred Compensation Arrangement for Malik M.
Hasan, M.D., dated as of March 3, 1995, by and between the Company
and Norwest Bank Colorado N.A. (filed as Exhibit 10.32 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1994, which is incorporated by reference herein).
10.17 Registration Rights Agreement dated as of March 2, 1995 between
the Company and the Foundation (filed as Exhibit No. 28.2 to the
Company's Current Report on Form 8-K dated March 2, 1995, which is
incorporated by reference herein).
39
<PAGE>
10.18 The Company's 1995 Stock Appreciation Right Plan (filed as Exhibit
10.12 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1995, which is incorporated by
reference herein).
10.19 Amended and Restated Credit Agreement dated as of April 26, 1996
among the Company, Bank of America National Trust and Savings
Association, as Agent, and financial institutions party thereto
(filed as Exhibit 10.1 to the Company's Current Report on Form 8-K
dated May 3, 1996, which is incorporated by reference herein).
10.20 Amendment No. 1 to Credit Agreement dated as of May 10, 1996 among
the Company, Bank of America National Trust and Savings
Association, as Agent, and financial institutions party thereto
(filed as Exhibit 10.32 to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1996, which is incorporated
by reference herein).
10.21 Amendment No. 2 to Credit Agreement dated as of May 28, 1996 among
the Company, Bank of America National Trust and Savings
Association, as Agent, and financial institutions party thereto
(filed as Exhibit 10.33 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1996, which is incorporated by
reference herein).
10.22 Amendment No. 3 to Credit Agreement dated as of January 31, 1997
among the Company, Bank of America National Trust and Savings
Association, as Agent, and financial institutions party thereto
(filed as Exhibit 10.33 to the Company's Annual Report on Form
10-K for the year ended December 31, 1996, which is incorporated by
reference herein).
*10.23 Credit Agreement dated July 8, 1997 among the Company, the banks
identified therein and Bank of America National Trust and Savings
Association in its capacity as Administrative Agent (providing for
an unsecured $1.5 billion revolving credit facility), a copy of
which is filed herewith.
10.24 Employment Letter Agreement dated May 28, 1996 between Michael D.
Pugh and QualMed, Inc. (filed as Exhibit 10.35 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996,
which is incorporated by reference herein).
10.25 Employment Letter Agreement dated June 4, 1996 between Arthur M.
Southam and the Company and Health Net (filed as Exhibit 10.36 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996, which is incorporated by reference herein).
40
<PAGE>
10.26 Employment Letter Agreement dated July 3, 1996 between Jay M.
Gellert and the Company (filed as Exhibit 10.37 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1996, which is incorporated by reference herein).
10.27 Employment Letter Agreement dated September 30, 1996 between
Douglas C. Werner and the Company (filed as Exhibit 10.38 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996, which is incorporated by reference herein).
10.28 Rights Agreement dated as of June 1, 1996 by and between the
Company and Harris Trust and Savings Bank, as Rights Agent (filed
as Exhibit 99.1 to the Company's Registration Statement on Form
8-A (File No. 001-12718) which is incorporated by reference
herein).
10.29 First Amendment to the Rights Agreement dated as of October 1,
1996, by and between the Company and Harris Trust and Savings
Bank, as Rights Agent (filed as Exhibit 10.40 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996,
which is incorporated by reference herein).
10.30 Amended and Restated Employment Agreement, dated December 16,
1996, by and among the Company, Foundation Health Corporation and
Daniel D. Crowley (filed as Exhibit 10.1 to the Company's
Registration Statement on Form S-4 (File No. 333-19273), which is
incorporated by reference herein).
10.31 Employment Agreement Termination Agreement, dated as of May 1,
1997, by and between Daniel D. Crowley, the Company and FHC (filed
as Exhibit 10.32 to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1997).
10.32 Amended and Restated Employment Agreement, dated December 16,
1996, by and among the Company, Foundation Health Corporation and
Kirk A. Benson (filed as Exhibit 10.2 to the Company's
Registration Statement on Form S-4 (File No. 333-19273), which is
incorporated by reference herein).
10.33 Amended and Restated Employment Agreement, dated December 16,
1996, by and among the Company, Foundation Health Corporation and
Jeffrey L. Elder (filed as Exhibit 10.4 to the Company's
Registration Statement on Form S-4 (File No. 333-19273), which is
incorporated by reference herein).
41
<PAGE>
10.34 Amended and Restated Employment Agreement, dated December 16,
1996, by and among the Company, Foundation Health Corporation and
Allen J. Marabito (filed as Exhibit 10.5 to the Company's
Registration Statement on Form S-4 (File No. 333-19273), which is
incorporated by reference herein).
*10.35 Consulting Agreement, dated as of May 1, 1997, between the
Company, FHC and Allen J. Marabito, a copy of which is filed
herewith.
10.36 Foundation Health Corporation Employee Stock Purchase Plan (filed
as Exhibit 4.3 to the Company's Registration Statement on Form S-8
(File No. 333-24621), which is incorporated by reference herein).
10.37 Foundation Health Corporation Profit Sharing and 401(k) Plan
(Amended and Restated effective January 1, 1994) (filed as Exhibit
4.4 to the Company's Registration Statement on Form S-8 (File No.
333-24621), which is incorporated by reference herein).
10.38 1990 Stock Option Plan of Foundation Health Corporation (filed as
Exhibit 4.5 to the Company's Registration Statement on Form S-8
(File No. 333-24621), which is incorporated by reference herein).
10.39 1992 Nonstatutory Stock Option Plan of Foundation Health
Corporation (filed as Exhibit 4.6 to the Company's Registration
Statement on Form S-8 (File No. 333-24621), which is incorporated
by reference herein).
10.40 1989 Stock Plan of Business Insurance Corporation (as Amended and
Restated Effective September 22, 1992) (filed as Exhibit 4.7 to
the Company's Registration Statement on Form S-8 (File No.
333-24621), which is incorporated by reference herein).
10.41 Managed Health Network, Inc. Incentive Stock Option Plan (filed as
Exhibit 4.8 to the Company's Registration Statement on Form S-8
(File No. 333-24621), which is incorporated by reference herein).
10.42 Managed Health Network, Inc. Amended and Restated 1991 Stock
Option Plan (filed as Exhibit 4.9 to the Company's Registration
Statement on Form S-8 (File No. 333-24621), which is incorporated
by reference herein).
10.43 1993 Nonstatutory Stock Option Plan of Foundation Health
Corporation (as amended and restated September 7, 1995) (filed as
Exhibit 4.10 to the Company's Registration Statement on Form S-8
(File No. 333-24621), which is incorporated by reference herein).
42
<PAGE>
10.44 FHC Directors Retirement Plan (filed as an exhibit to FHC's Form
10-K for the year ended June 30, 1994 filed with the Commission on
September 24, 1994, which is incorporated by reference herein).
*10.45 Foundation Health Systems, Inc. 1997 Stock Option Plan, a copy of
which is filed herewith.
*10.46 Foundation Health Systems, Inc. Third Amended and Restated
Non-Employee Director Stock Option Plan, a copy of which is filed
herewith.
*10.47 Foundation Health Systems, Inc. Employee Stock Purchase Plan, a
copy of which is filed herewith.
*10.48 Foundation Health Systems, Inc. Performance-Based Annual Bonus
Plan, a copy of which is filed herewith.
10.49 Participation Agreement dated as of May 25, 1995 among Foundation
Health Medical Services, as Construction Agent and Lessee, FHC, as
Guarantor, First Security Bank of Utah, N.A., as Owner Trustee,
Sumitomo Bank Leasing and Finance, Inc., The Bank of Nova Scotia
and NationsBank of Texas, N.A., as Holders and NationsBank of
Texas, N.A., as Administrative Agent for the Lenders; and Guaranty
Agreement dated as of May 25, 1995 by FHC for the benefit of First
Security Bank of Utah, N.A. (filed as an exhibit to FHC's Form 10-K
for the year ended June 30, 1995, filed with the Commission on
September 27, 1995, which is incorporated by reference herein).
10.50 FHC's Deferred Compensation Plan, as amended and restated (filed
as an exhibit to FHC's Form 10-K for the year ended June 30, 1995,
filed with the Commission on September 27, 1995, which is
incorporated by reference herein).
10.51 FHC's Supplemental Executive Retirement Plan, as amended and
restated (filed as an exhibit to FHC's Form 10-K for the year
ended June 30, 1995, filed with the Commission on September 27,
1995, which is incorporated by reference herein).
10.52 FHC's Executive Retiree Medical Plan, as amended and restated
(filed as an exhibit to FHC's Form 10-K for the year ended June
30, 1995, filed with the Commission on September 27, 1995, which
is incorporated by reference herein).
10.53 Agreement and Plan Reorganization dated January 9, 1996 by and
between FHC and Managed Health Network, Inc. (filed as Annex 1 of
Proxy Statement/Prospectus contained in FHC's Registration
Statement on Form S-4 (File No. 333-00517), which is incorporated
by reference herein).
43
<PAGE>
10.54 Stock and Note Purchase Agreement by and between FHC, Jonathan H.,
Schoff, M.D., FPA Medical Management, Inc., FPA Medical Management
of California, Inc. and FPA Independent Practice Association dated
as of June 28, 1996 (filed as Exhibit 10.109 to FHC's Annual
Report on Form 10-K for the year ended June 30, 1996, which is
incorporated by reference herein).
10.55 $300 Million Revolving Credit Agreement (the "FHC Credit
Agreement") dated as of December 5, 1994, among FHC, as Borrower,
Citicorp USA, Inc., as Administrative Agent, Wells Fargo Bank,
N.A. and NationsBank of Texas, N.A., as Co-Agents and Citicorp
Securities, Inc., as Arranger, and the Other Banks and Financial
Institutions Party thereto (filed as an Exhibit to FHC's quarterly
report on Form 10-Q for the quarter ended December 31, 1994 filed
with the Commission on February 14, 1994, which is incorporated by
reference herein).
10.56 First Amendment Agreement (to the FHC Credit Agreement) dated as
of August 9, 1995 among FHC, as Borrower, the Lenders parties to
the FHC Credit Agreement, Citicorp USA, Inc., as Administrative
Agent, Wells Fargo Bank, N.A. and NationsBank of Texas, N.A., as
Co-Agents, and Citicorp Securities, Inc., as Arranger (filed as
Exhibit 10.52 to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1997, which is incorporated by
reference herein).
10.57 Second Amendment Agreement (to the FHC Credit Agreement), dated as
of June 28, 1996 among FHC, the Lenders and Citicorp USA, Inc.
(filed as Exhibit 10.53 to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1997, which is incorporated
by reference herein).
10.58 Third Amendment Agreement and Waiver (to the FHC Credit Agreement)
dated December 13, 1996 among FHC, the Lenders and Citibank, N.A.
(as successor to Citicorp USA, Inc.), as Administrative Agent
(filed as Exhibit 10.54 to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1997, which is incorporated
by reference herein).
10.59 Fourth Amendment Agreement and Waiver (to the FHC Credit
Agreement) dated January 28, 1997 among FHC, the Lenders and
Citibank, N.A. (as successor to Citicorp USA, Inc.), as
Administrative Agent (filed as Exhibit 10.55 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1997, which is incorporated by reference herein).
44
<PAGE>
10.60 Fifth Amendment Agreement (to the FHC Credit Agreement) dated
April 1, 1997 among FHC, the Lenders and Citibank, N.A. (as
successor to Citicorp USA, Inc.), as Administrative Agent (filed
as Exhibit 10.56 to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1997, which is incorporated by
reference herein).
10.61 $200 million Revolving Credit Agreement (the "FHC Revolving Credit
Agreement") dated as of December 17, 1996 among FHC, the Lenders
and Citibank, N.A., as Administrative Agent for the Lenders (filed
as Exhibit 10.57 to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1997, which is incorporated by
reference herein).
10.62 First Amendment Agreement and Waiver (to the FHC Revolving Credit
Agreement) dated as of January 28, 1997 among FHC, the Lenders and
Citibank, N.A., as Administrative Agent for the Lenders (filed as
Exhibit 10.58 to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1997, which is incorporated by
reference herein).
10.63 Second Amendment Agreement and Waiver (to the FHC Revolving Credit
Agreement) among FHC, the Lenders and Citibank, N.A., as
Administrative Agent for the Lenders (filed as Exhibit 10.59 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997, which is incorporated by reference herein).
10.64 Lease Agreement between HAS-First Associates and FHC dated August
1, 1998 and form of amendment thereto (filed as an exhibit to
FHC's Registration Statement on Form S-1 (File No. 33-34963),
which is incorporated by reference herein).
10.65 Agreement and Plan of Reorganization dated as of June 27, 1994 by
and among FHC, CareFlorida Health Systems, Inc., and the other
parties signatory thereto (filed as an exhibit to FHC's Current
Report on Form 8-K filed with the Commission on June 28, 1994,
which is incorporated by reference herein).
10.66 Agreement and Plan of Merger dated as of July 28, 1994 between FHC
and Intergroup Healthcare Corporation (filed as an exhibit to
FHC's Current Report on Form 8-K filed with the Commission on
August 9, 1994, which is incorporated by reference herein).
10.67 Agreement and Plan of Merger dated as of July 28, 1994 between FHC
and Thomas-Davis Medical Centers, P.C. (filed as an exhibit to
FHC's Current Report on Form 8-K filed with the Commission on
August 9, 1994, which is incorporated by reference herein).
45
<PAGE>
*11.1 Statement relative to computation of earnings per share of the
Company, a copy of which is filed herewith.
21.1 Subsidiaries of the Company's (filed as Exhibit 21.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997, which is incorporated by reference herein).
*27.1 Financial Data Schedule, a copy of which is filed with the EDGAR
version of this filing.
* A copy of the Exhibit is filed herewith.
46
<PAGE>
(b) REPORTS ON FORM 8-K
The following Current Reports on Form 8-K were filed by the Company during
the quarterly period ended June 30, 1997:
1. A Current Report on Form 8-K dated April 1, 1997 was filed by the
Company on April 3, 1997 announcing consummation of the merger
transaction (the "Merger") involving the Company and Foundation Health
Corporation ("FHC").
2. A Current Report on Form 8-K/A was filed by the Company on May 9,
1997 providing the financial information required by Item 7(a) and
Item 7(b) of Form 8-K with respect to the Merger referenced above. In
this connection, the following financial statements were incorporated
by reference into the Form 8-K/A: (i) audited consolidated financial
statements for each of the years in the three year period ended June
30, 1996 (contained in the Annual Report on Form 10-K/A Amendment No.
3 of FHC (File No. 1-10540) for the year ended June 30, 1996 filed
with the Commission on January 10, 1997); (ii) unaudited condensed
consolidated financial statements for the three month periods ended
September 30, 1996 and 1995 (contained in the Quarterly Report on Form
10-Q of FHC (File No. 1-10540) for the quarter ended September 30,
1996 filed with the Commission on November 19, 1996); and (iii)
unaudited pro forma combined condensed financial statements of the
Company (and the notes thereto) contained on pages 49 through 56 of
the Prospectus contained in the Company's Amendment No. 1 to the
Registration Statement on Form S-4 (File No. 333-19273) filed with the
Commission on January 10, 1997.
3. A Current Report on Form 8-K dated June 16, 1997 was filed by the
Company on June 18, 1997 announcing: (i) the commencement by FHC on
June 16, 1997 of a cash tender offer for any and all of the $125
million outstanding principal amount of the 7 3/4% Senior Notes due
2003 of FHC and (ii) the Company's financial results for the month of
April 1997.
No other Current Reports on Form 8-K were filed by the Company during such
quarter.
47
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FOUNDATION HEALTH SYSTEMS, INC.
(Registrant)
Date: August 13, 1997 /s/ Jay M. Gellert
-------------------------------------
Jay M. Gellert
President and Chief Operating Officer
Date: August 13, 1997 /s/ Jeffrey L. Elder
--------------------------------------
Jeffrey L. Elder, Senior Vice President
and Chief Financial Officer
48
<PAGE>
FIFTH AMENDED AND
RESTATED BYLAWS
OF
FOUNDATION HEALTH SYSTEMS, INC.
<PAGE>
ARTICLE I
OFFICES
Section 1 REGISTERED OFFICE. The registered office of Foundation
Health Systems, 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 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 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 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 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 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
<PAGE>
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 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 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.
Section 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.
2
<PAGE>
Section 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 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 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
3
<PAGE>
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 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.
Section 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 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
4
<PAGE>
not by law or by the Certificate of Incorporation directed or required to be
exercised or done by the Stockholders.
Section 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 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 Committee on Directors 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
5
<PAGE>
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
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 Committee on Directors 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.
6
<PAGE>
Section 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 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 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 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 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.
7
<PAGE>
Section 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 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.
Section 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 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 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 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 Committee on Directors. The director elected to fill a vacancy shall
hold office for the unexpired
8
<PAGE>
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 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 1 COMMITTEES. The standing committees of the Board of
Directors of the Corporation shall be a Compensation and Stock Option Committee,
an Audit Committee, a Finance Committee and a Committee on Directors. 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 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;
9
<PAGE>
(b) To approve the compensation, including direct regular compensation,
stock options or other appropriate incentive plans, and perquisites, if any, of
up to thirty-five senior officers of the Corporation and its subsidiaries
including the two Corporate Officers covered in Subsection (a) above, which
senior officers shall be designated by the Committee in consultation with
management;
(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
covered in (a) and (b) above, based on management's presentation of all relevant
factors of proposed actions in totality, and advise the Board of Directors of
actions taken; 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"), including the review and approval of all
grants thereunder;
(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 3 AUDIT COMMITTEE. The Audit Committee shall have the
following responsibilities:
10
<PAGE>
(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 COMMITTEE ON DIRECTORS. Subject to the terms of Article
XIII, the Committee on Directors 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
11
<PAGE>
(d) To recommend to the Board of Directors the actual assignments of
individual directors (by name) to Board of Directors committees; and
(e) To be responsible for implementing a process for the Board of
Directors to perform a self-evaluation of its performance on at least an annual
basis.
Section 5 FINANCE COMMITTEE. The Finance 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 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 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
12
<PAGE>
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 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
13
<PAGE>
vacancy occurring in any office of the Corporation shall be filled by the
Board of Directors or by President and Chief Executive Officer in accordance
with this Section 5.1.
Section 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 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 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 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.
14
<PAGE>
Section 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 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 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 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 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
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
fthe 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
15
<PAGE>
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 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 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
16
<PAGE>
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 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.
ARTICLE VII
CAPITAL STOCK
Section 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
17
<PAGE>
with the same effect as if the officer, transfer agent or registrar were
still such at the date of its issue.
Section 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 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 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
18
<PAGE>
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 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 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 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.
19
<PAGE>
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 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,
20
<PAGE>
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 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 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 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 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.
21
<PAGE>
Section 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), and 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:
22
<PAGE>
(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;
(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 Finance 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 Committee on Directors 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 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.
23
<PAGE>
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) a 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. A
FHC Replacement Designee shall mean an Independent Director designated to
replace a 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;
(ii) during the Transition Period, except as provided in clause (i)
above, the Committee on Directors shall nominate for election to the board of
directors at the 1997, 1998 and 1999 Annual Meetings of Stockholders, the FHC
24
<PAGE>
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 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 or nomination shall
be filled with a 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 a 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.
25
<PAGE>
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.
26
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
CREDIT AGREEMENT
DATED AS OF JULY 8, 1997
AMONG
FOUNDATION HEALTH SYSTEMS, INC.,
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION,
AS ADMINISTRATIVE AGENT,
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
AND
CITICORP USA, INC.,
AS SYNDICATION AGENTS
AND
THE OTHER FINANCIAL INSTITUTIONS PARTY HERETO
ARRANGED BY
BANCAMERICA SECURITIES, INC.
AND
CITICORP SECURITIES, INC.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
ARTICLE I DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.01 Certain Defined Terms. . . . . . . . . . . . . . . . . . . . . . . . 1
1.02 Other Interpretive Provisions. . . . . . . . . . . . . . . . . . . . 24
1.03 Accounting Principles. . . . . . . . . . . . . . . . . . . . . . . . 25
ARTICLE II THE CREDITS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
2.01 Amounts and Terms of Commitments . . . . . . . . . . . . . . . . . . 25
2.02 Loan Accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
2.03 Procedure for Committed Borrowing. . . . . . . . . . . . . . . . . . 26
2.04 Conversion and Continuation Elections. . . . . . . . . . . . . . . . 27
2.05 Bid Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
2.06 Procedure for Bid Borrowings . . . . . . . . . . . . . . . . . . . . 29
2.07 Voluntary Termination or Reduction of Commitments. . . . . . . . . . 33
2.08 Optional Prepayments . . . . . . . . . . . . . . . . . . . . . . . . 34
2.09 Repayment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
(a) The Revolving Credit. . . . . . . . . . . . . . . . . . . . . . 34
(b) Bid Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
2.10 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
2.11 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
(a) Arrangement, Agency Fees. . . . . . . . . . . . . . . . . . . . 35
(b) Upfront Fees. . . . . . . . . . . . . . . . . . . . . . . . . . 35
(c) Facility Fees . . . . . . . . . . . . . . . . . . . . . . . . . 35
(d) Bid Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
2.12 Computation of Fees and Interest . . . . . . . . . . . . . . . . . . 36
2.13 Payments by the Company. . . . . . . . . . . . . . . . . . . . . . . 36
2.14 Payments by the Banks to the Administrative Agent. . . . . . . . . . 37
2.15 Sharing of Payments, Etc.. . . . . . . . . . . . . . . . . . . . . . 38
2.16 Extension of Revolving Termination Date. . . . . . . . . . . . . . . 39
ARTICLE III TAXES, YIELD PROTECTION AND ILLEGALITY . . . . . . . . . . . . . . . 39
3.01 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
3.02 Illegality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
3.03 Increased Costs and Reduction of Return. . . . . . . . . . . . . . . 42
3.04 Funding Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
3.05 Inability to Determine Rates . . . . . . . . . . . . . . . . . . . . 43
3.06 Certificates of Banks. . . . . . . . . . . . . . . . . . . . . . . . 44
3.07 Substitution of Banks. . . . . . . . . . . . . . . . . . . . . . . . 44
3.08 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
ARTICLE IV CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . . . . 44
4.01 Conditions of Initial Loans. . . . . . . . . . . . . . . . . . . . . 44
(a) Credit Agreement. . . . . . . . . . . . . . . . . . . . . . . . 45
(b) Resolutions; Incumbency . . . . . . . . . . . . . . . . . . . . 45
(c) Organization Documents; Good Standing . . . . . . . . . . . . . 45
(d) Legal Opinions. . . . . . . . . . . . . . . . . . . . . . . . . 45
</TABLE>
-i-
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
(e) Payment of Fees . . . . . . . . . . . . . . . . . . . . . . . . 45
(f) Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . 46
(g) Termination of Existing Credit Agreements . . . . . . . . . . . 46
(h) Regulatory Compliance . . . . . . . . . . . . . . . . . . . . . 46
(k) Other Documents . . . . . . . . . . . . . . . . . . . . . . . . 47
4.02 Conditions to All Borrowings . . . . . . . . . . . . . . . . . . . . 47
(a) Notice of Borrowing . . . . . . . . . . . . . . . . . . . . . . 47
(b) Continuation of Representations and Warranties. . . . . . . . . 47
(c) No Existing Default . . . . . . . . . . . . . . . . . . . . . . 47
(d) Other Documents . . . . . . . . . . . . . . . . . . . . . . . . 47
ARTICLE V REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . 48
5.01 Corporate Existence and Power. . . . . . . . . . . . . . . . . . . . 48
5.02 Corporate Authorization; No Contravention. . . . . . . . . . . . . . 48
5.03 Governmental Authorization . . . . . . . . . . . . . . . . . . . . . 48
5.04 Binding Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
5.05 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
5.06 No Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
5.07 ERISA Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . 49
5.08 Use of Proceeds; Margin Regulations. . . . . . . . . . . . . . . . . 50
5.09 Title to Properties. . . . . . . . . . . . . . . . . . . . . . . . . 50
5.10 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
5.11 Financial Condition. . . . . . . . . . . . . . . . . . . . . . . . . 51
5.12 Environmental Matters. . . . . . . . . . . . . . . . . . . . . . . . 51
5.13 Regulated Entities . . . . . . . . . . . . . . . . . . . . . . . . . 51
5.14 No Burdensome Restrictions . . . . . . . . . . . . . . . . . . . . . 52
5.15 Copyrights, Patents, Trademarks and Licenses, etc. . . . . . . . . . 52
5.16 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
5.17 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
5.18 Business Activity. . . . . . . . . . . . . . . . . . . . . . . . . . 52
5.19 Accreditation, Etc.. . . . . . . . . . . . . . . . . . . . . . . . . 52
5.20 Accuracy of Information. . . . . . . . . . . . . . . . . . . . . . . 53
ARTICLE VI AFFIRMATIVE COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . 53
6.01 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . 53
6.02 Certificates; Other Information. . . . . . . . . . . . . . . . . . . 54
6.03 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
6.04 Preservation of Corporate Existence, Etc . . . . . . . . . . . . . . 56
6.05 Maintenance of Property. . . . . . . . . . . . . . . . . . . . . . . 56
6.06 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
6.07 Payment of Obligations . . . . . . . . . . . . . . . . . . . . . . . 56
6.08 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . 57
6.09 Compliance with ERISA. . . . . . . . . . . . . . . . . . . . . . . . 57
6.10 Inspection of Property and Books and Records . . . . . . . . . . . . 57
6.11 Environmental Laws . . . . . . . . . . . . . . . . . . . . . . . . . 58
</TABLE>
-ii-
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
6.12 Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . 58
6.13 Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
ARTICLE VII NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . 59
7.01 Limitation on Liens. . . . . . . . . . . . . . . . . . . . . . . . . 59
7.02 Disposition of Assets. . . . . . . . . . . . . . . . . . . . . . . . 60
7.03 Consolidations and Mergers . . . . . . . . . . . . . . . . . . . . . 61
7.04 Loans and Investments. . . . . . . . . . . . . . . . . . . . . . . . 62
7.05 Limitation on Indebtedness . . . . . . . . . . . . . . . . . . . . . 63
7.06 Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . 63
7.07 Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . 63
7.08 Contingent Obligations . . . . . . . . . . . . . . . . . . . . . . . 64
7.09 Joint Ventures . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
7.10 Lease Obligations. . . . . . . . . . . . . . . . . . . . . . . . . . 65
7.11 Restricted Payments. . . . . . . . . . . . . . . . . . . . . . . . . 65
7.12 Financial Covenants. . . . . . . . . . . . . . . . . . . . . . . . . 66
7.13 ERISA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
7.14 Limitation on Payment Restrictions Affecting Significant
Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
7.15 Accounting Changes . . . . . . . . . . . . . . . . . . . . . . . . . 67
7.16 Change in Business . . . . . . . . . . . . . . . . . . . . . . . . . 67
7.17 Certain Obligations Respecting Significant Subsidiaries. . . . . . . 67
ARTICLE VIII EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . 68
8.01 Event of Default . . . . . . . . . . . . . . . . . . . . . . . . . . 68
(a) Non-Payment . . . . . . . . . . . . . . . . . . . . . . . . . . 68
(b) Representation or Warranty. . . . . . . . . . . . . . . . . . . 68
(c) Specific Defaults . . . . . . . . . . . . . . . . . . . . . . . 68
(d) Other Defaults. . . . . . . . . . . . . . . . . . . . . . . . . 68
(e) Cross-Default . . . . . . . . . . . . . . . . . . . . . . . . . 68
(f) Insolvency; Voluntary Proceedings . . . . . . . . . . . . . . . 69
(g) Involuntary Proceedings . . . . . . . . . . . . . . . . . . . . 70
(h) ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
(i) Monetary Judgments. . . . . . . . . . . . . . . . . . . . . . . 70
(j) Non-Monetary Judgments. . . . . . . . . . . . . . . . . . . . . 71
(k) Change of Control . . . . . . . . . . . . . . . . . . . . . . . 71
(l) Loss of Licenses. . . . . . . . . . . . . . . . . . . . . . . . 71
(m) HMO Event . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
(n) Prospective Premium Default . . . . . . . . . . . . . . . . . . 71
(o) Material Adverse Effect . . . . . . . . . . . . . . . . . . . . 71
8.02 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
8.03 Rights Not Exclusive . . . . . . . . . . . . . . . . . . . . . . . . 72
ARTICLE IX THE ADMINISTRATIVE AGENT . . . . . . . . . . . . . . . . . . . . . . 72
9.01 Appointment and Authorization. . . . . . . . . . . . . . . . . . . . 72
9.02 Delegation of Duties . . . . . . . . . . . . . . . . . . . . . . . . 72
</TABLE>
-iii-
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
9.03 Liability of Administrative Agent. . . . . . . . . . . . . . . . . . 72
9.04 Reliance by Administrative Agent . . . . . . . . . . . . . . . . . . 73
9.05 Notice of Default. . . . . . . . . . . . . . . . . . . . . . . . . . 74
9.06 Credit Decision. . . . . . . . . . . . . . . . . . . . . . . . . . . 74
9.07 Indemnification of Administrative Agent. . . . . . . . . . . . . . . 75
9.08 Administrative Agent in Individual Capacity. . . . . . . . . . . . . 75
9.09 Successor Administrative Agent . . . . . . . . . . . . . . . . . . . 75
9.10 Withholding Tax. . . . . . . . . . . . . . . . . . . . . . . . . . . 76
9.11 Syndication Agents . . . . . . . . . . . . . . . . . . . . . . . . . 78
ARTICLE X MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
10.01 Amendments and Waivers . . . . . . . . . . . . . . . . . . . . . . . 78
10.02 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
10.03 No Waiver; Cumulative Remedies . . . . . . . . . . . . . . . . . . . 80
10.04 Costs and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . 80
10.05 Company Indemnification. . . . . . . . . . . . . . . . . . . . . . . 81
10.06 Payments Set Aside . . . . . . . . . . . . . . . . . . . . . . . . . 81
10.07 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . 81
10.08 Assignments, Participations, etc.. . . . . . . . . . . . . . . . . . 82
10.09 Confidentiality. . . . . . . . . . . . . . . . . . . . . . . . . . . 84
10.10 Set-off. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
10.11 Notification of Addresses, Lending Offices, Etc. . . . . . . . . . . 85
10.12 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
10.13 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
10.14 No Third Parties Benefited . . . . . . . . . . . . . . . . . . . . . 85
10.15 Governing Law and Jurisdiction . . . . . . . . . . . . . . . . . . . 85
10.16 Waiver of Jury Trial . . . . . . . . . . . . . . . . . . . . . . . . 86
10.17 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . 86
</TABLE>
-iv-
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
SCHEDULES
Schedule 2.01 Commitments
Schedule 5.05 Litigation
Schedule 5.07 ERISA
Schedule 5.12 Environmental Matters
Schedule 5.13 Regulatory Restrictions
Schedule 5.16 Subsidiaries and Minority Interests
Schedule 5.17 Insurance Matters
Schedule 5.20 Information
Schedule 7.01 Permitted Liens
Schedule 7.02 Disposition of Assets
Schedule 7.04 Existing Investments
Schedule 7.05 Permitted Indebtedness
Schedule 7.08 Contingent Obligations
Schedule 7.17 Specified Significant Subsidiaries
Schedule 8.01(i) Monetary Judgments
Schedule 10.02 Lending Offices, Addresses for Notices
EXHIBITS
Exhibit A Form of Notice of Borrowing
Exhibit B Form of Notice of Conversion/Continuation
Exhibit C Form of Compliance Certificate
Exhibit D Form of Legal Opinion of Company's Counsel
Exhibit E Form of Assignment and Acceptance
Exhibit F Form of Invitation for Competitive Bids
Exhibit G Form of Competitive Bid Request
Exhibit H Form of Competitive Bid
Exhibit I Form of Committed Loan Note
Exhibit J Form of Bid Loan Note
Exhibit K Investment Guidelines
Exhibit L Form of Legal Opinion of Administrative Agent's Counsel
</TABLE>
-v-
<PAGE>
CREDIT AGREEMENT
This CREDIT AGREEMENT is entered into as of July 8, 1997, among FOUNDATION
HEALTH SYSTEMS, INC., a Delaware corporation formerly known as Health Systems
International, Inc. (the "COMPANY"), the several financial institutions from
time to time party to this Agreement (collectively, the "BANKS"; individually, a
"BANK"), and Bank of America National Trust and Savings Association, as
administrative agent for the Banks (the "ADMINISTRATIVE AGENT").
WHEREAS, the Banks have agreed to make available to the Company a revolving
credit facility upon the terms and conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the mutual agreements, provisions and
covenants contained herein, the parties agree to amend and restate the Original
Credit Agreement in its entirety as follows:
ARTICLE I
DEFINITIONS
1.01 CERTAIN DEFINED TERMS. The following terms have the following
meanings:
"ABSOLUTE RATE" has the meaning specified in Section 2.06(c).
"ABSOLUTE RATE AUCTION" means a solicitation of Competitive Bids
setting forth Absolute Rates pursuant to Section 2.06.
"ABSOLUTE RATE BID LOAN" means a Bid Loan that bears interest at a
rate determined with reference to the Absolute Rate.
"ACQUISITION" means any transaction or series of related transactions
for the purpose of or resulting, directly or indirectly, in (a) the
acquisition of all or substantially all of the assets of a Person, or of
any line or segment of business or division of a Person, (b) the
acquisition of in excess of 50% of the capital stock, partnership
interests, membership interests or equity (or securities convertible into
or exchangeable for such capital stock, partnership interests, membership
interests or equity) of any Person, or otherwise causing any Person to
become a Subsidiary, or (c) a merger or consolidation or any
-1-
<PAGE>
other combination with another Person (other than a Person that is a
Subsidiary) provided that (i) the Company or the Subsidiary is the surviving
entity or (ii) after giving effect to such merger or consolidation, such
other Person has become a Subsidiary of the Company.
"ADJUSTED EBITDA" means, for any period of four consecutive fiscal
quarters, the sum of the Company's and its Subsidiaries' (i) earnings
before Interest Expense, taxes, depreciation, amortization, any Specified
Charges and all one-time acquisition related costs and expenses incurred by
the Company in connection with a Permitted Acquisition plus (ii) investment
income during such period.
"ADMINISTRATIVE AGENT" means BofA in its capacity as administrative
agent for the Banks hereunder, and any successor administrative agent
arising under Section 9.09.
"ADMINISTRATIVE AGENT'S PAYMENT OFFICE" means Agency Management
Services, #5596, 1455 Market Street, 12th Floor, San Francisco, California
94103, or such other address as the Administrative Agent may from time to
time specify.
"AFFECTED BANK" has the meaning specified in Section 3.07.
"AFFILIATE" means, as to any Person, any other Person which, directly
or indirectly, is in control of, is controlled by, or is under common
control with, such Person. A Person shall be deemed to control another
Person if the controlling Person possesses, directly or indirectly, the
power to direct or cause the direction of the management and policies of
the other Person, whether through the ownership of voting securities,
membership interests, by contract, or otherwise; PROVIDED that no Person
shall be deemed to be an Affiliate of the Company or any of its
Subsidiaries solely as a result of management or consulting agreements
between such Person and the Company or any of its Subsidiaries executed by
the Company or any of its Subsidiaries in the ordinary course of business
and pursuant to which the Company or its Subsidiaries provide such
services.
"AGENT-RELATED PERSONS" means BofA and any successor administrative
agent arising under Section 9.09, Bancamerica Securities, Inc. and Citicorp
Securities, Inc., together with their respective Affiliates and the
officers, directors, employees, agents and attorneys-in-fact of such
Persons and Affiliates.
"AGREEMENT" means this Credit Agreement.
-2-
<PAGE>
"APPLICABLE LEVEL" means one of the levels set forth below determined
by the Senior Unsecured Debt Rating as follows:
"LEVEL 1" means any period during which the Senior Unsecured Debt
Rating is better than or equal to at least one of the following
ratings: (i) A- by S&P and/or (ii) A3 by Moody's.
"LEVEL 2" means any period (other than a Level 1 Period) during
which the Senior Unsecured Debt Rating is better than or equal to at
least one of the following ratings: (i) BBB+ by S&P and/or (ii) Baa1
by Moody's.
"LEVEL 3" means any period (other than a Level 1 Period or Level
2 Period) during which the Senior Unsecured Debt Rating is better than
or equal to at least one of the following ratings: (i) BBB by S&P
and/or (ii) Baa2 by Moody's.
"LEVEL 4" means any period (other than a Level 1 Period, Level 2
Period or Level 3 Period) during which the Senior Unsecured Debt
Rating is better than or equal to at least one of the following
ratings: (i) BBB- by S&P and/or (ii) Baa3 by Moody's.
"LEVEL 5" means any period (other than a Level 1 Period, Level 2
Period, Level 3 Period or Level 4 Period) during which the Senior
Unsecured Debt Rating is better than or equal to at least one of the
following ratings: (i) BB+ by S&P and/or (ii) Ba1 by Moody's.
"LEVEL 6" means any period other than a Level 1 Period, Level 2
Period, Level 3 Period, Level 4 Period or Level 5 Period.
For purposes of the foregoing, (a) if the Senior Unsecured Debt
Ratings fall within different Levels, the Applicable Level shall be based
upon the higher (numerically lower) of the available Levels unless (i) such
Levels are more than one Level apart, in which case, except as provided in
clause (ii) below, the Applicable Level shall be one Level higher than the
lower Level or (ii) one of such Levels is Level 5 or Level 6, in which case
the Applicable Level shall be based upon the lower (numerically higher) of
the Levels; (b) if only one Senior Unsecured Debt Rating exists, the
Applicable Level shall be based upon the Level in which such rating falls;
and (c) if no Senior Unsecured Debt
-3-
<PAGE>
Rating shall be available, the Applicable Level shall be Level 6.
"APPLICABLE MARGIN" means, in the case of Facility Fees or Offshore
Rate Committed Loans, a rate per annum determined by reference to the
Applicable Level or Total Leverage Ratio as follows:
From the Closing Date until the delivery of the first Compliance
Certificate, the Applicable Margin shall be based on either the Total
Leverage Ratio as of March 31, 1997 or the Applicable Level, as designated
by the Company. Thereafter, the Company, in each Compliance Certificate,
may designate whether the Applicable Margin shall be based on its Total
Leverage Ratio or on the Applicable Level. Such Applicable Margin shall be
effective from and including the date on which the Administrative Agent
receives such Compliance Certificate to but excluding the date on which the
Administrative Agent receives the next Compliance Certificate; PROVIDED,
HOWEVER, that if the Administrative Agent does not receive a Compliance
Certificate by the date required by Section 6.01, the Applicable Margin
shall, effective as of such date, be determined by reference to the
Applicable Level. The Applicable Margin for all Base Rate Loans shall be
zero.
"ARRANGERS" means Bancamerica Securities, Inc., a Delaware
corporation, and Citicorp Securities, Inc., a Delaware corporation.
"ASSIGNEE" has the meaning specified in Section 10.08(a).
"ASSIGNMENT AND ACCEPTANCE" has the meaning specified in Section
10.08(a).
"ATTORNEY COSTS" means and includes all reasonable fees and
disbursements of any law firm or other external counsel, the allocated cost
of internal legal services and all disbursements of internal counsel.
-4-
<PAGE>
"BANK" has the meaning specified in the introductory clause hereto.
"BANKRUPTCY CODE" means the Federal Bankruptcy Reform Act of 1978 (11
U.S.C. Section 101, ET SEQ.).
"BASE AMOUNT" has the meaning specified in Section 7.11(c).
"BASE RATE" means, for any day, the higher of: (a) 0.50% per annum
above the latest Federal Funds Rate; and (b) the rate of interest in
effect for such day as publicly announced from time to time by BofA in San
Francisco, California, as its "reference rate." (The "reference rate" is a
rate set by BofA based upon various factors including BofA's costs and
desired return, general economic conditions and other factors, and is used
as a reference point for pricing some loans, which may be priced at, above,
or below such announced rate.)
Any change in the reference rate announced by BofA shall take effect
at the opening of business on the day specified in the public announcement
of such change.
"BASE RATE COMMITTED LOAN" means a Committed Loan that bears interest
based on the Base Rate.
"BID BORROWING" means a Borrowing hereunder consisting of one or more
Bid Loans made to the Company on the same day by one or more Banks.
"BID LOAN" means a Loan by a Bank to the Company under Section 2.05,
which may be a LIBOR Bid Loan or an Absolute Rate Bid Loan.
"BID LOAN LENDER" means, in respect of any Bid Loan, the Bank making
such Bid Loan to the Company.
"BID LOAN NOTE" means a promissory note executed by the Company in
favor of a Bank at its request pursuant to Section 2.02(b) substantially in
the form of EXHIBIT J and evidencing such Bank's Bid Loans.
"BOFA" means Bank of America National Trust and Savings Association, a
national banking association.
"BORROWING" means a borrowing hereunder consisting of Loans of the
same Type made to the Company on the same day by the Banks under Article
II, and may be a Committed Borrowing or a Bid Borrowing and, other than in
the case of Base Rate Committed Loans, having the same Interest Period.
-5-
<PAGE>
"BORROWING DATE" means any date on which a Borrowing occurs under
Sections 2.03 or 2.06.
"BUSINESS DAY" means any day other than a Saturday, Sunday or other
day on which commercial banks in New York City or San Francisco are
authorized or required by law to close and, if the applicable Business Day
relates to any Offshore Rate Loan, means, in addition to the foregoing,
such a day on which dealings are carried on in the applicable offshore
dollar interbank market.
"CAPITAL ADEQUACY REGULATION" means any guideline, request or
directive of any central bank or other Governmental Authority, or any other
law, rule or regulation, whether or not having the force of law, in each
case, regarding capital adequacy of any bank or of any corporation
controlling a bank.
"CAPITAL EXPENDITURES" means, for any period, the sum of
(a) the aggregate amount of all expenditures of the Company and
its Subsidiaries for fixed or capital assets made during such period
which, in accordance with GAAP, would be classified as capital
expenditures; and
(b) without duplication, the aggregate amount of all monetary
obligations of the Company or any of its Subsidiaries under any
Capital Lease paid during such period.
"CAPITAL LEASE" means any lease of property which in accordance with
GAAP should be capitalized on the lessee's balance sheet or disclosed in a
footnote thereto as a capitalized lease.
"CHAMPUS" means the Civilian Health and Medical Program of the
Uniformed Services.
"CHANGE OF CONTROL" means the acquisition by any Person other than
Malik M. Hasan, M.D., or by two or more Persons acting in concert, other
than Malik M. Hasan, M.D., of beneficial ownership (within the meaning of
Rule 13d-3 of the SEC under the Exchange Act) of 20% or more of the
outstanding shares of voting stock of the Company.
"CITICORP" means Citicorp USA, Inc.
"CLOSING DATE" means the date on which all conditions precedent set
forth in Section 4.01 are satisfied or waived
-6-
<PAGE>
by all Banks (or, in the case of Section 4.01(e), waived by the Person
entitled to receive such payment).
"CODE" means the Internal Revenue Code of 1986, as amended, and
regulations promulgated thereunder.
"COMMERCIAL PAPER DEBT" means unsecured Indebtedness of the Company
evidenced by commercial paper notes bearing fixed interest rates, having
maturities not in excess of 270 days from the date of their issuance and
supported by any Commitment hereunder.
"COMMITMENT", as to each Bank, has the meaning specified in Section
2.01.
"COMMITTED BORROWING" means a Borrowing hereunder consisting of
Committed Loans made on the same day by the Banks ratably according to
their respective Pro Rata Shares and, in the case of Offshore Rate
Committed Loans, having the same Interest Periods.
"COMMITTED LOAN" means a Loan by a Bank to the Company under
Section 2.01, and may be an Offshore Rate Committed Loan or a Base Rate
Committed Loan (each, a "TYPE" of Committed Loan).
"COMMITTED LOAN NOTE" means a promissory note executed by the Company
in favor of a Bank at its request pursuant to Section 2.02(b) substantially
in the form of EXHIBIT I and evidencing such Bank's Committed Loans.
"COMPANY" has the meaning specified in the introductory clause hereto.
"COMPETITIVE BID" means an offer by a Bank to make a Bid Loan in
accordance with Section 2.06(c).
"COMPETITIVE BID REQUEST" has the meaning specified in
subsection 2.06(a).
"COMPLIANCE CERTIFICATE" means a certificate substantially in the form
of EXHIBIT C.
"CONTINGENT OBLIGATION" means, as to any Person, any contingent
liability, as such term is defined under GAAP, other than Guaranty
Obligations; PROVIDED, HOWEVER, that notwithstanding the foregoing
"Contingent Obligations" shall not include any direct or indirect liability
of the Company to any Subsidiary of the Company or of any Subsidiary of the
Company owed to the Company or another Subsidiary of the
-7-
<PAGE>
Company. The amount of any Contingent Obligation shall be calculated
in accordance with GAAP.
"CONTRACTUAL OBLIGATION" means, as to any Person, any provision of any
security issued by such Person or of any agreement, undertaking, contract,
indenture, mortgage, deed of trust or other instrument, document or
agreement to which such Person is a party or by which it or any of its
property is bound.
"CONVERSION/CONTINUATION DATE" means any date on which, under Section
2.04, the Company (a) converts Committed Loans of one Type to another Type,
or (b) continues as Committed Loans of the same Type, but with a new
Interest Period, Committed Loans having Interest Periods expiring on such
date.
"DEFAULT" means any event or circumstance which, with the giving of
notice, the lapse of time, or both, would (if not cured or otherwise
remedied during such time) constitute an Event of Default.
"DOLLARS", "DOLLARS" and "$" each mean lawful money of the United
States.
"ELIGIBLE ASSIGNEE" means (i) a commercial bank organized under the
laws of the United States, or any state thereof, and having a combined
capital and surplus of at least $100,000,000; (ii) a commercial bank
organized under the laws of any other country which is a member of the
Organization for Economic Cooperation and Development (the "OECD"), or a
political subdivision of any such country, and having a combined capital
and surplus of at least $100,000,000, PROVIDED that such bank is acting
through a branch or agency located in the United States; and (iii) a Person
that is primarily engaged in the business of commercial banking and that is
(A) a Subsidiary of a Bank, (B) a Subsidiary of a Person of which a Bank is
a Subsidiary, or (C) a Person of which a Bank is a Subsidiary.
"ENVIRONMENTAL CLAIMS" means all claims asserted by any Governmental
Authority or other Person alleging potential liability or responsibility
for violation of any Environmental Law, or for release or injury to the
environment.
"ENVIRONMENTAL LAWS" means all federal, state or local laws, statutes,
rules, regulations, ordinances and codes, together with all administrative
orders, directed duties, requests, licenses, authorizations and permits of,
and agreements with, any Governmental Authorities, in each case
-8-
<PAGE>
relating to environmental, health, safety and land use matters.
"ERISA" means the Employee Retirement Income Security Act of 1974, and
regulations promulgated thereunder.
"ERISA AFFILIATE" means any trade or business (whether or not
incorporated) under common control with the Company within the meaning of
Section 414(b) or (c) of the Code (and Sections 414(m) and (o) of the Code
for purposes of provisions relating to Section 412 of the Code).
"ERISA EVENT" means (a) a Reportable Event with respect to a Pension
Plan; (b) a withdrawal by the Company or any ERISA Affiliate from a Pension
Plan subject to Section 4063 of ERISA during a plan year in which it was a
substantial employer (as defined in Section 4001(a)(2) of ERISA) or a
cessation of operations which is treated as such a withdrawal under Section
4062(e) of ERISA; (c) a complete or partial withdrawal by the Company or
any ERISA Affiliate from a Multiemployer Plan or notification that a
Multiemployer Plan is in reorganization; (d) the filing of a notice of
intent to terminate, the treatment of a Plan amendment as a termination
under Section 4041 or 4041A of ERISA, or the commencement of proceedings by
the PBGC to terminate a Pension Plan or Multiemployer Plan; (e) an event or
condition which might reasonably be expected to constitute grounds under
Section 4042 of ERISA for the termination of, or the appointment of a
trustee to administer, any Pension Plan or Multiemployer Plan; or (f) the
imposition of any liability under Title IV of ERISA, other than PBGC
premiums due but not delinquent under Section 4007 of ERISA, upon the
Company or any ERISA Affiliate.
"EVENT OF DEFAULT" means any of the events or circumstances specified
in Section 8.01.
"EXCHANGE ACT" means the Securities and Exchange Act of 1934, as
amended, and regulations promulgated thereunder.
"EXISTING CREDIT AGREEMENTS" means, collectively, the Amended and
Restated Credit Agreement dated as of April 26, 1996 among, INTER ALIA, the
Company and BofA, as agent, as amended prior to the Closing Date, the
$300,000,000 Revolving Credit Agreement dated as of December 5, 1994 among,
INTER ALIA, FHC and Citicorp, as administrative agent, as amended prior to
the Closing Date and the Revolving Credit Agreement dated as of December
17, 1996 among, INTER ALIA, FHC and Citibank, N.A., as administrative
agent, as amended prior to the Closing Date.
-9-
<PAGE>
"FEDERAL FUNDS RATE" means, for any day, the rate set forth in the
weekly statistical release designated as H.15(519), or any successor
publication, published by the Federal Reserve Bank of New York (including
any such successor, "H.15(519)") on the preceding Business Day opposite the
caption "Federal Funds (Effective)"; or, if for any relevant day such rate
is not so published on any such preceding Business Day, the rate for such
day will be the arithmetic mean as determined by the Administrative Agent
of the rates for the last transaction in overnight Federal funds arranged
prior to 9:00 a.m. (New York City time) on that day by each of three
leading brokers of Federal funds transactions in New York City selected by
the Administrative Agent.
"FEE LETTERS" has the meaning specified in Section 2.11(b).
"FHC" means Foundation Health Corporation, a Delaware corporation and
wholly-owned Subsidiary of the Company.
"FIXED CHARGES" means, for any period and without duplication, the sum
of (i) Interest Expense and fees paid on, and amortization of debt discount
in respect of, all Indebtedness PLUS (ii) Operating Lease Rentals paid
during such period PLUS (iii) the aggregate principal amount of all current
maturities of long term Indebtedness (including the principal portion of
rentals under Capital Leases) scheduled to be paid by the Company and its
Subsidiaries during such period (excluding payments of principal of the
Obligations and payments of principal not required under the loan documents
relating to such Indebtedness).
"FIXED CHARGES COVERAGE RATIO" means, at any date, the ratio of (i)
Net Cash Flow for the period of four consecutive fiscal quarters ending on
or most recently ended prior to such date, to (ii) Fixed Charges for such
period.
"FOUNDATION" means The California Wellness Foundation, a charitable
foundation organized under the laws of the State of California.
"FRB" means the Board of Governors of the Federal Reserve System, and
any Governmental Authority succeeding to any of its principal functions.
"GAAP" means generally accepted accounting principles set forth from
time to time in the opinions and pronouncements of the Accounting
Principles Board and the American Institute of Certified Public Accountants
and statements and pronouncements of the Financial Accounting
-10-
<PAGE>
Standards Board (or agencies with similar functions of comparable stature
and authority within the U.S. accounting profession), in each case, which
are applicable to the circumstances as of the Closing Date.
"GOVERNMENTAL APPROVALS" shall mean any authorization, consent,
approval, license, lease, ruling, permit, waiver, exemption, filing,
registration or notice by or with any Governmental Authority.
"GOVERNMENTAL AUTHORITY" means any nation or government, any state or
other political subdivision thereof, any central bank (or similar monetary
or regulatory authority) thereof, any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or
pertaining to government, and any corporation or other entity owned or
controlled, through stock or capital ownership or otherwise, by any of the
foregoing.
"GUARANTY OBLIGATION" means, as to any Person, any direct or indirect
liability of that Person, whether or not contingent, with or without
recourse, with respect to any Indebtedness of another Person (the "primary
obligor"). The amount of any Guaranty Obligation shall be deemed equal to
the stated amount of the primary obligation in respect of which such
Guaranty Obligation is made.
"HEALTHCARE BUSINESS" shall mean (a) the provision, administration or
arrangement of health care services, worker's compensation insurance,
related ancillary products or both directly or through an HMO, a provider,
a regulated healthcare service contractor or any other business which in
the ordinary course provides, administers or arranges for such services,
products or both, (b) the provision, administration or arrangement of
health, life and related insurance, (c) the management of health care
services (including medical management claims services and management
through medical information services), and (d) any business activities
related and incidental to any of the foregoing.
"HMO" shall mean any Person which operates as a health maintenance
organization.
"HMO EVENT" shall mean (a) the failure by the Company or any of its
HMO Subsidiaries to comply in any material respect with any of the terms
and provisions of any applicable HMO Regulation pertaining to the fiscal
soundness, solvency or financial condition of the Company or any of its HMO
Subsidiaries if such failure is reasonably likely to have a Material
Adverse Effect; or (b) the
-11-
<PAGE>
assertion in writing, after the Closing Date, by an HMO Regulator that
it intends to take administrative action against the Company or any of
its HMO Subsidiaries to revoke or modify any Governmental Approval of,
or to enforce the fiscal soundness, solvency or financial provisions or
requirements of such HMO Regulations against, the Company or any of its
HMO Subsidiaries, if such action, modification or enforcement is
reasonably likely to have a Material Adverse Effect.
"HMO REGULATIONS" shall mean all Requirements of Law applicable to any
HMO Subsidiary under federal or state law and any regulations, orders and
directives promulgated or issued pursuant to the foregoing.
"HMO REGULATOR" means any Person charged with the administration,
oversight or enforcement of an HMO Regulation, whether primarily,
secondarily, or jointly.
"HMO SUBSIDIARY" shall mean any current or future Subsidiary of the
Company that is either an HMO or a regulated healthcare service contractor.
"INDEBTEDNESS" of any Person means, without duplication, (a) all
indebtedness for borrowed money; (b) all obligations issued, undertaken or
assumed as the deferred purchase price of property or services (other than
trade payables entered into in the ordinary course of business on ordinary
terms and deferred compensation arrangements with officers, directors and
employees); (c) all obligations (contingent or otherwise) with respect to
Surety Instruments; PROVIDED, HOWEVER, that from the Closing Date through
the fiscal quarter ending June 30, 1998, $15,000,000 of such obligations of
the Company or FHC with respect to letters of credit issued for the account
of its Subsidiaries shall be excluded from this clause (c); (d) all
obligations evidenced by notes, bonds, debentures or similar instruments,
including obligations so evidenced incurred in connection with the
acquisition of property, assets or businesses; (e) all indebtedness created
or arising under any conditional sale or other title retention agreement,
or incurred as financing, in either case with respect to property acquired
by the Person (even though the rights and remedies of the seller or bank
under such agreement in the event of default are limited to repossession or
sale of such property); (f) all obligations with respect to Capital Leases;
(g) all net obligations with respect to Swap Contracts other than Swap
Contracts that are Permitted Market Investments; (h) all indebtedness
referred to in clauses (a) through (g) above secured by (or for which the
holder of such Indebtedness has an existing right,
-12-
<PAGE>
contingent or otherwise, to be secured by) any Lien upon or in property
(including accounts and contracts rights) owned by such Person, even
though such Person has not assumed or become liable for the payment of
such Indebtedness; and (i) all Guaranty Obligations in respect of
indebtedness or obligations of other Persons (exclusive of the Company
and its Subsidiaries) of the kinds referred to in clauses (a) through
(g) above.
"INDEMNIFIED LIABILITIES" has the meaning specified in Section 10.05.
"INDEMNIFIED PERSON" has the meaning specified in Section 10.05.
"INDEPENDENT AUDITOR" has the meaning specified in Section 6.01(a).
"INSOLVENCY PROCEEDING" means (a) any case, action or proceeding
before any court or other Governmental Authority relating to bankruptcy,
reorganization, insolvency, liquidation, receivership, dissolution,
winding-up or relief of debtors, or (b) any general assignment for the
benefit of creditors, composition, marshaling of assets for creditors, or
other, similar arrangement in respect of its creditors generally or any
substantial portion of its creditors; undertaken under U.S. Federal, state
or foreign law, including the Bankruptcy Code.
"INTEREST EXPENSE" of the Company and its Subsidiaries for any period
means the aggregate amount of interest paid, accrued or scheduled to be
paid or accrued in respect of any Indebtedness (including the interest
portion of rentals under Capital Leases) and all but the principal
component of payments in respect of conditional sales, equipment trust or
other title retention agreements or under a Capital Lease paid, accrued or
scheduled to be paid or accrued by the Company and its Subsidiaries during
such period, in each case determined in accordance with GAAP and excluding
periodic maintenance, insurance, taxes and similar charges not properly
characterized as interest expense under GAAP.
"INTEREST PAYMENT DATE" means, as to any Loan other than a Base Rate
Committed Loan, the last day of each Interest Period applicable to such
Loan and, as to any Base Rate Committed Loan, the last Business Day of each
calendar quarter, PROVIDED, HOWEVER, that (a) if any Interest Period for an
Offshore Rate Committed Loan exceeds three months, the date that falls
three months after the beginning of such Interest Period and every three
months thereafter is also an Interest Payment Date, and (b) as to any Bid
Loan, such
-13-
<PAGE>
intervening dates prior to the maturity thereof as may be specified
by the Company and agreed to by the applicable Bid Loan Lender in
the applicable Competitive Bid shall also be Interest Payment Dates.
"INTEREST PERIOD" means, (a) as to any Offshore Rate Loan, the period
commencing on the Borrowing Date on which such Loan is disbursed, or (in
the case of any Offshore Rate Committed Loan) on the
Conversion/Continuation Date on which the Loan is converted into or
continued as an Offshore Rate Committed Loan, and ending on the date one,
two, three or six months thereafter (and any other period that is 9 or 12
months and is consented to by all Banks in case of Committed Loans or the
bidding Banks in the case of Bid Loans) as selected by the Company in its
Notice of Borrowing, Notice of Conversion/Continuation or Competitive Bid
Request, as the case may be; and (b) as to any Absolute Rate Bid Loan, a
period of not less than 7 days and not more than 365 days as selected by
the Company in the applicable Competitive Bid Request; PROVIDED that:
(i) if any Interest Period would otherwise end on a day that is
not a Business Day, that Interest Period shall be extended to the
following Business Day unless, in the case of an Offshore Rate Loan,
the result of such extension would be to carry such Interest Period
into another calendar month, in which event such Interest Period shall
end on the preceding Business Day;
(ii) any Interest Period pertaining to an Offshore Rate Loan
that begins on the last Business Day of a calendar month (or on a day
for which there is no numerically corresponding day in the calendar
month at the end of such Interest Period) shall end on the last
Business Day of the calendar month at the end of such Interest Period;
and
(iii) no Interest Period for any Loan shall extend beyond the
Revolving Termination Date.
"INVESTMENT GUIDELINES" means those investment guidelines adopted by
the Finance Committee of the Company's board of directors on June 10, 1997,
as more particularly set forth on EXHIBIT K.
"INVITATION FOR COMPETITIVE BIDS" means a solicitation for Competitive
Bids, substantially in the form of EXHIBIT F.
-14-
<PAGE>
"IRS" means the Internal Revenue Service, and any Governmental
Authority succeeding to any of its principal functions under the Code.
"JOINT VENTURE" means a single-purpose corporation, partnership,
limited liability company, joint venture or other similar legal arrangement
(whether created by contract or conducted through a separate legal entity)
in which the Company or any of its Subsidiaries participates with another
Person in order to conduct a common venture or enterprise with such Person.
"LENDING OFFICE" means, as to any Bank, the office or offices of such
Bank specified as its "Lending Office" or "Domestic Lending Office" or
"Offshore Lending Office", as the case may be, on SCHEDULE 10.02, or such
other office or offices as such Bank may from time to time notify the
Company and the Administrative Agent.
"LIBO RATE" means, for any Interest Period with respect to an Offshore
Rate Committed Loan, the rate per annum (rounded, if necessary, to the
nearest 1/16th of 1% or, if there is no nearest 1/16th of 1%, upward to the
next 1/16 of 1%) determined by the Administrative Agent to be equal to the
LIBOR Base Rate for such Loan for such Interest Period divided by (1 minus
the Reserve Requirement) for such Loan for such Interest Period.
"LIBOR BASE RATE" means, for any Interest Period with respect to an
Offshore Rate Committed Loan or LIBOR Bid Loan, the rate of interest per
annum determined by the Administrative Agent to be the arithmetic mean
(rounded, if necessary, to the nearest 1/16th of 1% or, if there is no
nearest 16th of 1%, upward to the next 1/16th of 1%) of the rates of
interest per annum notified to the Administrative Agent by the Reference
Bank as the rate of interest at which dollar deposits in the approximate
amount of, in the case of LIBOR Bid Loans, the LIBOR Bid Loans to be
borrowed in such Bid Borrowing, and, in the case of Offshore Rate Committed
Loans, the Offshore Rate Committed Loan to be made by the Reference Bank,
and having a maturity comparable to such Interest Period, would be offered
to major banks in the London interbank market at their request at
approximately 11:00 a.m. (London time) two Business Days prior to the
commencement of such Interest Period.
"LIBOR AUCTION" means a solicitation of Competitive Bids setting forth
a LIBOR Bid Margin pursuant to Section 2.06.
-15-
<PAGE>
"LIBOR BID LOAN" means any Bid Loan that bears interest at a rate
based upon the LIBOR Base Rate.
"LIBOR BID MARGIN" has the meaning specified in Section
2.06(c)(ii)(C).
"LIEN" means any security interest, mortgage, deed of trust, pledge,
hypothecation, assignment, charge or deposit arrangement, encumbrance, lien
(statutory or other) or preferential arrangement of any kind or nature
whatsoever in respect of any property (including those created by, arising
under or evidenced by any conditional sale or other title retention
agreement, the interest of a lessor under a capital lease, any financing
lease having substantially the same economic effect as any of the
foregoing, or the filing of any financing statement naming the owner of the
asset to which such lien relates as debtor, under the Uniform Commercial
Code or any comparable law) and any contingent or other agreement to
provide any of the foregoing, but not including the interest of a lessor
under an operating lease.
"LOAN" means an extension of credit by a Bank to the Company under
Article II, and may be a Committed Loan or a Bid Loan.
"LOAN DOCUMENTS" means this Agreement, any Notes, the Fee Letters and
all other documents delivered to the Administrative Agent or any Bank in
connection herewith.
"MAJORITY BANKS" means (a) at any time prior to the Revolving
Termination Date, or after the Revolving Termination Date if no Loans are
then outstanding, Banks then holding more than 50% of the Commitments, and
(b) otherwise, Banks then holding more than 50% of the then aggregate
unpaid principal amount of the Loans.
"MARGIN STOCK" means "margin stock" as such term is defined in
Regulation G, T, U or X of the FRB.
"MATERIAL ADVERSE EFFECT" means (a) a material adverse change in, or a
material adverse effect upon, the operations, business, properties or
condition (financial or otherwise) of the Company and its Subsidiaries
taken as a whole; (b) a material impairment of the ability of the Company
to perform under any Loan Document and to avoid any Event of Default; or
(c) a material adverse effect upon the legality, validity, binding effect
or enforceability against the Company of any Loan Document.
"MOODY'S" means Moody's Investor Services, Inc.
-16-
<PAGE>
"MULTIEMPLOYER PLAN" means a "multiemployer plan", within the meaning
of Section 4001(a)(3) of ERISA, to which the Company or any ERISA Affiliate
makes, is making, or is obligated to make contributions or, during the
preceding three calendar years, has made, or been obligated to make,
contributions.
"NET CASH FLOW" means, for any period, the Company's and its
Subsidiaries' (i) consolidated net income (before the Specified Charges,
extraordinary gains and losses and all one-time acquisition-related costs
and expenses incurred by the Company in connection with a Permitted
Acquisition) for such period PLUS (ii) Interest Expense, depreciation,
amortization and Operating Lease Rentals (all to the extent deducted in
determining net income) for such period MINUS (iii) Capital Expenditures
for such period, all determined on a consolidated basis in accordance with
GAAP.
"NET WORTH" of the Company on any date of determination means an
amount equal to the excess of Total Assets over Total Liabilities.
"NOTES" means the Committed Loan Notes and the Bid Loan Notes.
"NOTICE OF BORROWING" means a notice in substantially the form of
EXHIBIT A.
"NOTICE OF CONVERSION/CONTINUATION" means a notice in substantially
the form of EXHIBIT B.
"OBLIGATIONS" means all advances, debts, liabilities, obligations,
covenants and duties arising under any Loan Document, owing by the Company
to any Bank, the Administrative Agent, or any Indemnified Person, whether
direct or indirect (including those acquired by assignment), absolute or
contingent, due or to become due, now existing or hereafter arising.
"OFFSHORE RATE COMMITTED LOAN" means any Committed Loan that bears
interest based on the LIBO Rate.
"OFFSHORE RATE LOAN" means a Loan that bears interest based on the
LIBO Rate or the LIBOR Base Rate.
"OPERATING LEASE" means any noncancellable lease of property (real,
personal or mixed) which does not constitute a Capital Lease.
"OPERATING LEASE RENTALS" means all rents and other amounts paid or
accrued by the Company and its Subsidiaries
-17-
<PAGE>
under and with respect to Operating Leases during and for the relevant
period, but excluding periodic maintenance, insurance, taxes and similar
charges not properly characterized as rent under GAAP.
"ORGANIZATION DOCUMENTS" means, for any corporation, the certificate
or articles of incorporation, the bylaws, any certificate of determination
or instrument relating to the rights of preferred shareholders of such
corporation, any shareholder rights agreement, and all applicable
resolutions of the board of directors (or any committee thereof) of such
corporation.
"OTHER TAXES" means any present or future stamp or documentary taxes
or any other excise or property taxes, charges or similar levies which
arise from any payment made hereunder or from the execution, delivery or
registration of, or otherwise with respect to, this Agreement or any other
Loan Documents.
"PARTICIPANT" has the meaning specified in Section 10.08(d).
"PBGC" means the Pension Benefit Guaranty Corporation, or any
Governmental Authority succeeding to any of its principal functions under
ERISA.
"PENSION PLAN" means a pension plan (as defined in Section 3(2) of
ERISA) subject to Title IV of ERISA which the Company sponsors, maintains,
or to which it makes, is making, or is obligated to make contributions, or
in the case of a multiple employer plan (as described in Section 4064(a) of
ERISA) has made contributions at any time during the immediately preceding
five (5) plan years.
"PERMITTED ACQUISITIONS" means Acquisitions by the Company or any of
its Subsidiaries of Persons and/or assets involved (or to be used) in
connection with the Healthcare Business; PROVIDED, that (i) immediately
before and after giving effect to the consummation of each Acquisition, no
Default has occurred and is continuing or will exist; (ii) for each such
Acquisition, the prior, effective written consent or approval to such
Acquisition of the board of directors or equivalent governing body of the
other party or parties has been obtained, and (iii) the Company shall have
complied with the requirements of Section 6.13, if applicable.
"PERMITTED LIENS" has the meaning specified in Section 7.01.
-18-
<PAGE>
"PERMITTED MARKET INVESTMENTS" shall mean any security that satisfies
the Company's Investment Guidelines.
"PERSON" means an individual, partnership, corporation, limited
liability company, business trust, joint stock company, trust,
unincorporated association, joint venture or Governmental Authority.
"PLAN" means an employee benefit plan (as defined in Section 3(3) of
ERISA) which the Company sponsors or maintains or to which the Company
makes, is making, or is obligated to make contributions and includes any
Pension Plan.
"PRO RATA SHARE" means, as to any Bank at any time, the percentage
equivalent (expressed as a decimal, rounded to the ninth decimal place) at
such time of such Bank's Commitment divided by the combined Commitments of
all Banks.
"PROSPECTIVE PREMIUM DEFAULT" shall mean the institution, with respect
to the Company or any of its Subsidiaries by an HMO Regulator pursuant to
applicable HMO Regulations, of a restriction on the fees or premiums that
any HMO Subsidiary of the Company may charge that is likely to cause the
Company to be in default of one or more of the financial covenants in
Section 7.12 of this Agreement during one or more of the four fiscal
quarters of the Company following the effective date of such restriction;
PROVIDED that, in determining such likelihood, due consideration shall be
given of actions the Company proposes to take, or to have any HMO
Subsidiary take, in response to such restriction to the extent such actions
have been communicated to the Banks within 30 days after the date the
Company first learns of such restriction and so long as no other Default
(whether or not related to such restriction) shall then have occurred and
be continuing.
"PUBLIC NOTES" means the promissory notes issued by FHC pursuant to,
and as described in, the indenture referred to in FHC's registration
statement on Form S-3 (registration statement number 33061684), and on Form
T-1 (registration statement number 220-24210), in each case as amended,
supplemented and modified from time to time.
"REFERENCE BANK" means BofA.
"REGULATORY TANGIBLE NET EQUITY" shall mean, for any HMO, "tangible
net equity," "net worth" or such similar financial concept as defined by
any HMO Regulation promulgated by any HMO Regulator as shall be applicable
to HMOs.
-19-
<PAGE>
"REGULATORY TANGIBLE NET EQUITY REQUIREMENT" shall mean, as to any
HMO, the minimum level at which an HMO is required by any applicable HMO
Regulation or HMO Regulator to maintain its Regulatory Tangible Net Equity.
"REPLACEMENT BANK" has the meaning specified in Section 3.07.
"REPORTABLE EVENT" means any of the events set forth in Section
4043(b) of ERISA or the regulations thereunder, other than any such event
for which the 30-day notice requirement under ERISA has been waived in
regulations issued by the PBGC.
"REQUIREMENT OF LAW" means, as to any Person, any law (statutory or
common), treaty, rule or regulation or binding determination of an
arbitrator or of a Governmental Authority, in each case applicable to or
binding upon the Person or any of its property or to which the Person or
any of its property is subject.
"RESERVE REQUIREMENT" shall mean, for any Interest Period with respect
to an Offshore Rate Committed Loan, the average maximum rate in effect at
which reserves (including any marginal, supplemental or emergency reserves)
are required to be maintained during such Interest Period under Regulation
D by member banks of the Federal Reserve System in New York City with
deposits exceeding one billion Dollars against "Eurocurrency liabilities"
(as such term is used in Regulation D). Without limiting the effect of the
foregoing, the Reserve Requirement shall include any other reserves
required to be maintained by such member banks by reason of any regulatory
change with respect to (i) any category of liabilities that includes
deposits by reference to which the LIBO Rate is to be determined as
provided in the definition of "LIBO Rate" in this Section 1.01 or (ii) any
category of extensions of credit or other assets that includes Offshore
Rate Committed Loans.
"RESPONSIBLE OFFICER" means a chief executive officer or a president
of the Company, or any other officer having substantially the same
authority and responsibility; or, with respect to compliance with financial
covenants, the chief financial officer or the treasurer of the Company, or
any other officer having substantially the same authority and
responsibility.
-20-
<PAGE>
"REVOLVING TERMINATION DATE" means the earlier to occur of:
(a) July 8, 2002, as such date may be extended pursuant to
Section 2.16; and
(b) the date on which the Commitments terminate in accordance
with the provisions of this Agreement.
"S&P" means Standard & Poor's Ratings Group.
"SEC" means the Securities and Exchange Commission, or any
Governmental Authority succeeding to any of its principal functions.
"SENIOR UNSECURED DEBT RATING" means, as of any date, the highest
rating, actual or implicit, that has been most recently announced by any
of S&P or Moody's, as the case may be, for the Company or any class of
long-term senior unsecured debt issued by the Company or FHC. For
purposes of the foregoing, (a) if any rating established by S&P or
Moody's shall be changed, such change shall be effective as of the date
on which such change is first announced publicly by the rating agency
making such change; and (b) if S&P or Moody's shall change the basis on
which ratings are established, each reference to the Senior Unsecured
Debt Rating announced by S&P or Moody's, as the case may be, shall refer
to the then equivalent rating by S&P or Moody's, as the case may be.
"SIGNIFICANT SUBSIDIARY" means each Subsidiary of the Company that
(a) accounted for at least 5% of consolidated revenues of the
Company and its Subsidiaries or 5% of consolidated earnings of the
Company and its Subsidiaries before interest and taxes, in each case
ending on the last day of the last fiscal quarter immediately
preceding the date as of which any such determination is made; or
(b) has assets which represent at least 5% of the consolidated
assets of the Company and its Subsidiaries as of the last day of the
last fiscal quarter immediately preceding the date as of which any
such determination is made;
all of which, with respect to CLAUSES (A) and (B), shall be as reflected on
the financial statements of the Company for the period, or as of the date,
in question.
-21-
<PAGE>
"SPECIFIED CHARGES" means the $44,100,000 of restructuring charges
taken by the Company and the $130,000,000 of "special reserve adjustment"
charges taken by FHC in the quarter ending December 31, 1996 and up to
$350,000,000 of merger and restructuring charges (including the charges
related to the redemption of the Public Notes) taken by the Company in the
fiscal year ending December 31, 1997 plus one-time, merger-related expenses
that are recognized by the Company in the fiscal year ending December 31,
1998 and that do not meet the definition of "restructuring charges" under
FASB Emerging Issues Task Force 94-3, but only to the extent that the
aggregate amount of such merger-related expenses does not exceed the lesser
of (i) $52,500,000 or (ii) $350,000,000 minus the amount of merger and
restructuring charges that are taken by the Company in the fiscal year
ending December 31, 1997.
"SUBSIDIARY" of a Person means any corporation, association,
partnership, limited liability company, joint venture or other business
entity of which more than 50% of the voting stock, membership interests or
other equity interests (in the case of Persons other than corporations), is
owned or controlled directly or indirectly by the Person, or one or more of
the Subsidiaries of the Person, or a combination thereof. Unless the
context otherwise clearly requires, references herein to a "Subsidiary"
refer to a Subsidiary of the Company.
"SURETY INSTRUMENTS" means all letters of credit (including standby
and commercial), banker's acceptances, bank guaranties, shipside bonds,
surety bonds and similar instruments.
"SWAP CONTRACT" means any agreement (including any master agreement
and any agreement, whether or not in writing, relating to any single
transaction) that is an interest rate swap agreement, basis swap, forward
rate agreement, commodity swap, commodity option, equity or equity index
swap or option, bond option, interest rate option, forward foreign exchange
agreement, rate cap, collar or floor agreement, currency swap agreement,
cross-currency rate swap agreement, swaption, currency option or any other,
similar agreement (including any option to enter into any of the
foregoing).
"TAXES" means any and all present or future taxes, levies, imposts,
deductions, charges or withholdings, and all liabilities with respect
thereto, excluding, in the case of each Bank and the Administrative Agent,
such taxes (including income taxes, gross receipts taxes or franchise
taxes) as are imposed on or measured by each Bank's net
-22-
<PAGE>
income by the jurisdiction (or any political subdivision thereof) under the
laws of which such Bank or the Administrative Agent, as the case may be, is
organized or maintains a lending office.
"TOTAL ASSETS" of the Company means all property, whether real,
personal, tangible, intangible or otherwise, that, in accordance with GAAP,
should be included in determining total assets as shown on the assets
portion of a balance sheet.
"TOTAL LEVERAGE RATIO" means, as of the last day of any fiscal quarter
of the Company, the ratio of (i) the sum of (x) the aggregate principal
amount of Indebtedness (including the principal portion of rentals under
Capital Leases) of the Company and its Subsidiaries which matures more than
one year from the date of determination PLUS (y) the aggregate principal
amount of all Indebtedness (including the principal portion of rentals
under Capital Leases) which is scheduled to be paid by the Company and its
Subsidiaries within one year from the date of determination to (ii)
Adjusted EBITDA for the period of four consecutive fiscal quarters ending
on such date.
"TOTAL LIABILITIES" of the Company means all obligations that, in
accordance with GAAP, would be included in determining total liabilities as
shown on the liabilities side of a balance sheet of the Company.
"TYPE" has the meaning specified in the definition of "Committed
Loan."
"UNFUNDED PENSION LIABILITY" means the excess of a Plan's benefit
liabilities under Section 4001(a)(16) of ERISA, over the current value of
that Plan's assets, determined in accordance with the assumptions used for
funding the Pension Plan pursuant to Section 412 of the Code for the
applicable plan year.
"UNITED STATES" and "U.S." each means the United States of America.
"WHOLLY-OWNED SUBSIDIARY" means any corporation in which (other than
directors' qualifying shares required by law) 100% of the capital stock of
each class having ordinary voting power, and 100% of the capital stock of
every other class, in each case, at the time as of which any determination
is being made, is owned, beneficially and of record, by the Company, or by
one or more of the other Wholly-Owned Subsidiaries, or both.
-23-
<PAGE>
1.02 OTHER INTERPRETIVE PROVISIONS.
(a) The meanings of defined terms are equally applicable to the
singular and plural forms of the defined terms.
(b) The words "hereof", "herein", "hereunder" and similar words refer
to this Agreement as a whole and not to any particular provision of this
Agreement; and subsection, Section, Schedule and Exhibit references are to this
Agreement unless otherwise specified.
(c) (i) The term "documents" includes any and all instruments,
documents, agreements, certificates, indentures, notices and other writings,
however evidenced.
(ii) The term "including" is not limiting and means "including
without limitation."
(iii) In the computation of periods of time from a specified
date to a later specified date, the word "from" means "from and including"; the
words "to" and "until" each mean "to but excluding", and the word "through"
means "to and including."
(d) Unless otherwise expressly provided herein, (i) references to
agreements (including this Agreement) and other contractual instruments shall be
deemed to include all subsequent amendments and other modifications thereto
(including, in the case of this Agreement, all amendments and modifications
validly entered into pursuant to Section 10.01 hereof), but only to the extent
such amendments and other modifications to agreements other than this Agreement
and the other Loan Documents are not prohibited by the terms of any Loan
Document, and (ii) references to any statute or regulation are to be construed
as including all statutory and regulatory provisions consolidating, amending,
replacing, supplementing or interpreting the statute or regulation.
(e) The captions and headings of this Agreement are for convenience
of reference only and shall not affect the interpretation of this Agreement.
(f) This Agreement and other Loan Documents may use several different
limitations, tests or measurements to regulate the same or similar matters. All
such limitations, tests and measurements are cumulative and shall each be
performed in accordance with their terms.
(g) This Agreement and the other Loan Documents are the result of
negotiations among and have been reviewed by counsel to the Administrative
Agent, the Company and the other parties, and are the products of all parties.
Accordingly, they
-24-
<PAGE>
shall not be construed against the Banks or the Administrative Agent merely
because of the Administrative Agent's or Banks' involvement in their
preparation.
1.03 ACCOUNTING PRINCIPLES.
(a) Unless the context otherwise clearly requires, all accounting
terms not expressly defined herein shall be construed, and all financial
computations required under this Agreement shall be made, in accordance with
GAAP, consistently applied.
(b) References herein to "fiscal year" and "fiscal quarter" refer to
such fiscal periods of the Company.
ARTICLE II
THE CREDITS
2.01 AMOUNTS AND TERMS OF COMMITMENTS. Each Bank severally agrees, on the
terms and conditions set forth herein, to make loans to the Company from time to
time on any Business Day during the period from the Closing Date to the
Revolving Termination Date, in an aggregate amount not to exceed at any time
outstanding the amount set forth on SCHEDULE 2.01 (such amount as the same may
be reduced under Section 2.07 or as a result of one or more assignments under
Section 10.08, the Bank's "COMMITMENT"); PROVIDED, HOWEVER, that, after giving
effect to any Committed Borrowing, the aggregate principal amount of all
outstanding Committed Loans, together with the aggregate principal amount of all
Bid Loans outstanding, shall not at any time exceed the combined Commitments
MINUS the outstanding principal amount of Commercial Paper Debt. Within the
limits of each Bank's Commitment, and subject to the other terms and conditions
hereof, the Company may borrow under this Section 2.01, prepay under Section
2.08 and reborrow under this Section 2.01.
2.02 LOAN ACCOUNTS.
(a) The Loans made by each Bank shall be evidenced by one or more
loan accounts or records maintained by such Bank in the ordinary course of
business. The loan accounts or records maintained by the Administrative Agent
and each Bank shall be conclusive absent manifest error of the amount of the
Loans made by the Banks to the Company and the interest and payments thereon.
Any failure so to record or any error in doing so shall not, however, limit or
otherwise affect the obligation of the Company hereunder to pay any amount owing
with respect to the Loans.
-25-
<PAGE>
(b) Upon the request of any Bank made through the Administrative
Agent, the Loans made by such Bank may be evidenced by one or more Notes,
instead of loan accounts. Each such Bank shall endorse on the schedules annexed
to its Note(s) the date, amount and maturity of each Loan made by it and the
amount of each payment of principal made by the Company with respect thereto.
Each such Bank is irrevocably authorized by the Company to endorse its Note(s)
and each Bank's record shall be conclusive absent manifest error; PROVIDED,
HOWEVER, that the failure of a Bank to make, or an error in making, a notation
thereon with respect to any Loan shall not limit or otherwise affect the
obligations of the Company hereunder or under any such Note to such Bank.
2.03 PROCEDURE FOR COMMITTED BORROWING.
(a) Each Committed Borrowing shall be made upon the Company's
irrevocable telephonic notice (such notice to be immediately confirmed in
writing) delivered to the Administrative Agent in the form of a Notice of
Borrowing (which notice must be received by the Administrative Agent prior to
9:00 a.m. (San Francisco time) (i) three Business Days prior to the requested
Borrowing Date, in the case of Offshore Rate Committed Loans (except for the
initial Committed Borrowing, which may be made on two Business Days' prior
notice), and (ii) on the requested Borrowing Date, in the case of Base Rate
Committed Loans, specifying:
(A) the amount of the Committed Borrowing, which shall be
in an aggregate minimum amount of $10,000,000 or any multiple of $5,000,000 in
excess thereof;
(B) the requested Borrowing Date, which shall be a Business
Day;
(C) the Type of Loans comprising the Committed Borrowing;
and
(D) with respect to the Offshore Rate Committed Loans only,
the duration of the Interest Period applicable to such Committed Loans included
in such notice. If the Notice of Borrowing fails to specify the duration of the
Interest Period for any Committed Borrowing comprised of Offshore Rate Committed
Loans, such Interest Period shall be one month.
(b) The Administrative Agent will promptly notify each Bank of its
receipt of any Notice of Borrowing and of the amount of such Bank's Pro Rata
Share of that Committed Borrowing.
(c) Each Bank will make the amount of its Pro Rata Share of each
Committed Borrowing available to the Administrative
-26-
<PAGE>
Agent for the account of the Company at the Administrative Agent's Payment
Office by 12:00 noon (San Francisco time) on the Borrowing Date requested by
the Company in funds immediately available to the Administrative Agent. The
proceeds of all such Committed Loans will then be made available to the
Company or the Company's designee by the Administrative Agent by wire
transfer in accordance with written instructions provided to the
Administrative Agent by the Company in like funds as received by the
Administrative Agent.
(d) After giving effect to any Committed Borrowing, there may not be
more than 10 different Interest Periods in effect in respect of all Committed
Loans and Bid Loans together then outstanding.
2.04 CONVERSION AND CONTINUATION ELECTIONS FOR COMMITTED BORROWINGS.
(a) The Company may, upon irrevocable telephonic notice (such notice
to be immediately confirmed in writing), to the Administrative Agent in
accordance with Section 2.04(b):
(i) elect, as of any Business Day, in the case of Base Rate
Committed Loans, or as of the last day of the applicable Interest Period, in the
case of any other Type of Committed Loans, to convert any such Committed Loans
(or any part thereof in an amount not less than $10,000,000, or that is in an
integral multiple of $5,000,000 in excess thereof) into Committed Loans of any
other Type; or
(ii) elect, as of the last day of the applicable Interest Period,
to continue any Committed Loans having Interest Periods expiring on such day (or
any part thereof in an amount not less than $10,000,000, or that is in an
integral multiple of $5,000,000 in excess thereof);
PROVIDED, that if at any time the aggregate amount of Offshore Rate Committed
Loans in respect of any Committed Borrowing is reduced, by payment, prepayment,
or conversion of part thereof to be less than $10,000,000, such Offshore Rate
Committed Loans shall automatically convert into Base Rate Committed Loans, and
on and after such date the right of the Company to continue such Committed Loans
as, and convert such Committed Loans into, Offshore Rate Committed Loans shall
terminate.
(b) The Company shall deliver a Notice of Conversion/Continuation to
be received by the Administrative Agent not later than 9:00 a.m. (San Francisco
time) at least (i) three Business Days in advance of the Conversion/Continuation
Date, if the Committed Loans are to be converted into or continued as Offshore
Rate Committed Loans; and (ii) on the Conversion/Continuation
-27-
<PAGE>
Date, if the Loans are to be converted into Base Rate Committed Loans,
specifying:
(A) the proposed Conversion/Continuation Date;
(B) the aggregate amount of Committed Loans to be converted
or continued;
(C) the Type of Committed Loans resulting from the proposed
conversion or continuation; and
(D) other than in the case of conversions into Base Rate
Committed Loans, the duration of the requested Interest Period.
(c) If upon the expiration of any Interest Period applicable to
Offshore Rate Committed Loans, the Company has failed to select timely a new
Interest Period to be applicable to such Offshore Rate Committed Loans, or if
any Default or Event of Default then exists, the Company shall be deemed to have
elected to convert such Offshore Rate Committed Loans into Base Rate Committed
Loans effective as of the expiration date of such Interest Period.
(d) The Administrative Agent will promptly notify each Bank of its
receipt of a Notice of Conversion/Continuation, or, if no timely notice is
provided by the Company, the Administrative Agent will promptly notify each Bank
and the Company of the details of any automatic conversion. All conversions and
continuations shall be made ratably according to the respective outstanding
principal amounts of the Committed Loans with respect to which the notice was
given held by each Bank.
(e) Unless the Majority Banks otherwise agree, during the existence
of a Default or Event of Default, the Company may not elect to have a Committed
Loan be made as or converted into or continued as an Offshore Rate Committed
Loan.
(f) After giving effect to any conversion or continuation of
Committed Loans, there may not be more than ten different Interest Periods in
effect in respect of all Committed Loans and Bid Loans together then
outstanding.
2.05 BID BORROWINGS. In addition to Committed Borrowings pursuant to
Section 2.03, each Bank severally agrees that the Company may, as set forth in
Section 2.06, from time to time request the Banks prior to the Revolving
Termination Date to submit offers to make Bid Loans to the Company; PROVIDED,
HOWEVER, that the Banks may, but shall have no obligation to,
-28-
<PAGE>
submit such offers and the Company may, but shall have no obligation to,
accept any such offers; and PROVIDED, FURTHER, that at no time shall (a) the
outstanding aggregate principal amount of all Bid Loans made by all Banks,
plus the outstanding aggregate principal amount of all Committed Loans made
by all Banks exceed the combined Commitments MINUS the outstanding principal
amount of Commercial Paper Debt; or (b) the number of Interest Periods for
Bid Loans then outstanding plus the number of Interest Periods for Committed
Loans then outstanding exceed ten.
2.06 PROCEDURE FOR BID BORROWINGS.
(a) When the Company wishes to request the Banks to submit offers to
make Bid Loans hereunder, it shall transmit to the Administrative Agent by
telephone call followed promptly by facsimile transmission a notice in
substantially the form of EXHIBIT G (a "COMPETITIVE BID REQUEST") so as to be
received no later than 9:00 a.m. (San Francisco time) (x) four Business Days
prior to the date of a proposed Bid Borrowing in the case of a LIBOR Auction, or
(y) one Business Day prior to the date of a proposed Bid Borrowing in the case
of an Absolute Rate Auction, specifying:
(i) the date of such Bid Borrowing, which shall be a Business
Day;
(ii) the aggregate amount of such Bid Borrowing, which shall be a
minimum amount of $10,000,000 or in multiples of $5,000,000 in excess thereof;
(iii) whether the Competitive Bids requested are to be for LIBOR
Bid Loans or Absolute Rate Bid Loans or both; and
(iv) the duration of the Interest Period applicable thereto,
subject to the provisions of the definition of "Interest Period" herein.
Subject to Section 2.06(c), the Company may not request Competitive Bids for
more than three Interest Periods in a single Competitive Bid Request and may not
request Competitive Bids more than once in any period of five Business Days.
(b) Upon receipt of a Competitive Bid Request, the Administrative
Agent will promptly send to the Banks by facsimile transmission an Invitation
for Competitive Bids, which shall constitute an invitation by the Company to
each Bank to submit Competitive Bids offering to make the Bid Loans to which
such Competitive Bid Request relates in accordance with this Section 2.06.
-29-
<PAGE>
(c) (i) Each Bank may at its discretion submit a Competitive Bid
containing an offer or offers to make Bid Loans in response to any Invitation
for Competitive Bids. Each Competitive Bid must comply with the requirements of
this Section 2.06(c) and must be submitted to the Administrative Agent by
facsimile transmission at the Administrative Agent's office for notices set
forth on SCHEDULE 10.02 not later than 7:00 a.m. (San Francisco time) three
Business Days prior to the proposed date of Borrowing, in the case of a LIBOR
Auction or (2) 7:00 a.m. (San Francisco time) on the proposed date of Borrowing,
in the case of an Absolute Rate Auction; PROVIDED that Competitive Bids
submitted by BofA (or any Affiliate of BofA) in the capacity of a Bank may be
submitted, and may only be submitted, if BofA or such Affiliate notifies the
Administrative Agent of the terms of the offer or offers contained therein not
later than (A) 6:45 a.m. (San Francisco time) three Business Days prior to the
proposed date of Borrowing, in the case of a LIBOR Auction or (B) 6:45 a.m. (San
Francisco time) on the proposed date of Borrowing, in the case of an Absolute
Rate Auction.
(ii) Each Competitive Bid shall be in substantially the form of
EXHIBIT H, specifying therein:
(A) the proposed date of Borrowing;
(B) the principal amount of each Bid Loan for which such
Competitive Bid is being made, which principal amount (x) may be equal to,
greater than or less than the Commitment of the quoting Bank, (y) must be
$10,000,000 or in multiples of $5,000,000 in excess thereof, and (z) may not
exceed the principal amount of Bid Loans for which Competitive Bids were
requested;
(C) in case the Company elects a LIBOR Auction, the margin
above or below the applicable LIBOR Base Rate (the "LIBOR BID MARGIN") offered
for each such Bid Loan, expressed in multiples of 1/100th of one percent to be
added to or subtracted from the applicable LIBOR Base Rate and the Interest
Period applicable thereto;
(D) in case the Company elects an Absolute Rate Auction,
the rate of interest per annum expressed in multiples of 1/100th of one percent
(the "ABSOLUTE RATE") offered for each such Bid Loan; and
(E) the identity of the quoting Bank.
A Competitive Bid may contain up to three separate offers by the
quoting Bank with respect to each Interest Period specified in the
related Invitation for Competitive Bids.
-30-
<PAGE>
(iii) Any Competitive Bid shall be disregarded if it:
(A) is not substantially in conformity with EXHIBIT H or
does not specify all of the information required by subsection (c)(ii) of this
Section;
(B) contains qualifying, conditional or similar language;
(C) proposes terms other than or in addition to those set
forth in the applicable Invitation for Competitive Bids; or
(D) arrives after the time set forth in subsection (c)(i).
(d) Promptly on receipt and not later than 7:30 a.m. (San Francisco
time) three Business Days prior to the proposed date of Borrowing in the case of
a LIBOR Auction, or 7:30 a.m. (San Francisco time) on the proposed date of
Borrowing, in the case of an Absolute Rate Auction, the Administrative Agent
will notify the Company of the terms (i) of any Competitive Bid submitted by a
Bank that is in accordance with Section 2.06(c), and (ii) of any Competitive Bid
that amends, modifies or is otherwise inconsistent with a previous Competitive
Bid submitted by such Bank with respect to the same Competitive Bid Request.
Any such subsequent Competitive Bid shall be disregarded by the Administrative
Agent unless such subsequent Competitive Bid is submitted solely to correct a
manifest error in such former Competitive Bid and only if received within the
times set forth in Section 2.06(c). The Administrative Agent's notice to the
Company shall specify (1) the aggregate principal amount of Bid Loans for which
offers have been received for each Interest Period specified in the related
Competitive Bid Request; and (2) the respective principal amounts and LIBOR Bid
Margins or Absolute Rates, as the case may be, so offered. Subject only to the
provisions of Sections 3.02, 3.05 and 4.02 hereof and the provisions of this
subsection (d), any Competitive Bid shall be irrevocable except with the written
consent of the Administrative Agent given on the written instructions of the
Company.
(e) Not later than 8:00 a.m. (San Francisco time) three Business Days
prior to the proposed date of Borrowing, in the case of a LIBOR Auction, or
8:00 a.m. (San Francisco time) on the proposed date of Borrowing, in the case of
an Absolute Rate Auction, the Company shall notify the Administrative Agent of
its acceptance or non-acceptance of the offers so notified to it pursuant to
Section 2.06(d). The Company shall be under no obligation to accept any offer
and may choose to reject all offers. In the case of acceptance, such notice
shall specify the
-31-
<PAGE>
aggregate principal amount of offers for each Interest Period that is
accepted. The Company may accept any Competitive Bid in whole or in part;
PROVIDED that:
(i) the aggregate principal amount of each Bid Borrowing may not
exceed the applicable amount set forth in the related Competitive Bid Request;
(ii) the principal amount of each Bid Borrowing must be
$10,000,000 or in any multiple of $5,000,000 in excess thereof;
(iii) acceptance of offers may only be made on the basis of
ascending LIBOR Bid Margins or Absolute Rates within each Interest Period, as
the case may be; and
(iv) the Company may not accept any offer that is described in
Section 2.06(c)(iii) or that otherwise fails to comply with the requirements of
this Agreement.
(f) If offers are made by two or more Banks with the same LIBOR Bid
Margins or Absolute Rates, as the case may be, for a greater aggregate principal
amount than the amount in respect of which such offers are accepted for the
related Interest Period, the principal amount of Bid Loans in respect of which
such offers are accepted shall be allocated by the Administrative Agent among
such Banks as nearly as possible (in such multiples, not less than $1,000,000,
as the Administrative Agent may deem appropriate) in proportion to the aggregate
principal amounts of such offers. Determination by the Administrative Agent of
the amounts of Bid Loans shall be conclusive in the absence of manifest error.
(g) (i) The Administrative Agent will promptly notify each Bank
having submitted a Competitive Bid if its offer has been accepted and, if its
offer has been accepted, of the amount of the Bid Loan or Bid Loans to be made
by it on the date of the Bid Borrowing.
(ii) Each Bank which has received notice pursuant to Section
2.06(g)(i) that its Competitive Bid has been accepted shall make the amounts of
such Bid Loans available to the Administrative Agent for the account of the
Company at the Administrative Agent's Payment Office, by 11:00 a.m. (San
Francisco time) in the case of Absolute Rate Bid Loans, and by 11:00 a.m. (San
Francisco time) in the case of LIBOR Bid Loans, on such date of Bid Borrowing,
in funds immediately available to the Administrative Agent for the account of
the Company at the Administrative Agent's Payment Office. The Administrative
Agent will then make such funds immediately available to the Company.
-32-
<PAGE>
(iii) Promptly following each Bid Borrowing, the Administrative
Agent shall notify each Bank of the ranges of bids submitted and the highest and
lowest Bids accepted for each Interest Period requested by the Company and the
aggregate amount borrowed pursuant to such Bid Borrowing.
(iv) From time to time, the Company and the Banks shall furnish
such information to the Administrative Agent as the Administrative Agent may
request relating to the making of Bid Loans, including the amounts, interest
rates, dates of borrowings and maturities thereof, for purposes of the
allocation of amounts received from the Company for payment of all amounts owing
hereunder.
(h) If, on or prior to the proposed date of Borrowing, the
Commitments have not been terminated and if, on such proposed date of Borrowing
all applicable conditions to funding referenced in Sections 3.02, 3.05 and 4.02
hereof are satisfied, the Banks whose offers the Company has accepted will fund
each Bid Loan so accepted. Nothing in this Section 2.06 shall be construed as a
right of first offer in favor of the Banks or to otherwise limit the ability of
the Company to request and accept credit facilities from any Person (including
any of the Banks), provided that no Default or Event of Default would otherwise
arise or exist as a result of the Company executing, delivering or performing
under such credit facilities.
2.07 VOLUNTARY TERMINATION OR REDUCTION OF COMMITMENTS. The Company may,
upon not less than five Business Days' prior notice to the Administrative Agent,
terminate the Commitments, or permanently reduce the Commitments by an aggregate
minimum amount of $10,000,000 or any multiple of $5,000,000 in excess thereof;
UNLESS, after giving effect thereto and to any prepayments of Committed Loans
made on the effective date thereof, the then-outstanding principal amount of the
Loans would exceed the amount of the combined Commitments then in effect. Once
reduced in accordance with this Section, the Commitments may not be increased.
Any reduction of the Commitments shall be applied to each Bank according to its
Pro Rata Share. All accrued facility fees and utilization fees due and owing,
pursuant to Section 2.11 hereof, to, but not including the effective date of any
reduction or termination of Commitments, shall be paid on the effective date of
such reduction or termination.
2.08 OPTIONAL PREPAYMENTS. (a) Subject to Section 3.04, the Company may,
at any time or from time to time, upon not less than three Business Days'
irrevocable notice to the Administrative Agent, ratably prepay Committed Loans
in whole or in part, in minimum amounts of $10,000,000 or any multiple of
$5,000,000 in excess thereof. Such notice of prepayment shall specify the date
and amount of such prepayment and the Type(s) of
-33-
<PAGE>
Committed Loans to be prepaid. The Administrative Agent will promptly notify
each Bank of its receipt of any such notice, and of such Bank's Pro Rata
Share of such prepayment. If such notice is given by the Company, the
Company shall make such prepayment and the payment amount specified in such
notice shall be due and payable on the date specified therein, together with,
in the case of Offshore Rate Committed Loans only, accrued interest to each
such date on the amount prepaid and any amounts required pursuant to Section
3.04.
(b) Bid Loans may not be voluntarily prepaid other than with the
consent of the applicable Bid Loan Lender.
2.09 REPAYMENT.
(a) THE REVOLVING CREDIT. The Company shall repay to the Banks on
the Revolving Termination Date the aggregate principal amount of Committed Loans
outstanding on such date.
(b) BID LOANS. The Company shall repay each Bid Loan on the last day
of the relevant Interest Period.
2.10 INTEREST.
(a) Each Committed Loan shall bear interest on the outstanding
principal amount thereof from the applicable Borrowing Date at a rate per annum
equal to the LIBO Rate or the Base Rate, as the case may be (and subject to the
Company's right to convert to other Types of Loans under Section 2.04), PLUS the
Applicable Margin. Each Bid Loan shall bear interest on the outstanding
principal amount thereof from the relevant Borrowing Date at a rate per annum
equal to the LIBOR Base Rate plus (or minus) the LIBOR Bid Margin, or at the
Absolute Rate, as the case may be.
(b) Interest on each Loan shall be paid in arrears on each Interest
Payment Date. Interest shall also be paid on the date of any prepayment of
Offshore Rate Committed Loans under Section 2.08 for the portion of the Loans so
prepaid and upon payment (including prepayment) in full thereof and, during the
existence of any Event of Default, interest shall be paid on demand of the
Administrative Agent at the request or with the consent of the Majority Banks.
(c) Notwithstanding subsection (a) of this Section, while any Event
of Default exists or after acceleration, the Company shall pay interest (after
as well as before entry of judgment thereon to the extent permitted by law) on
the principal amount of all other outstanding Obligations, at a rate per annum
which is determined by adding 2% per annum to the Applicable Margin then in
effect for such Loans and, in the case of
-34-
<PAGE>
Obligations not subject to an Applicable Margin, at a rate per annum equal to
the Base Rate plus 2%; PROVIDED, HOWEVER, that, on and after the expiration
of any Interest Period applicable to any Offshore Rate Loan outstanding on
the date of occurrence of such Event of Default or acceleration, the
principal amount of such Loan shall, during the continuation of such Event of
Default or after acceleration, bear interest at a rate per annum equal to the
Base Rate plus 2%.
(d) Anything herein to the contrary notwithstanding, the obligations
of the Company to any Bank hereunder shall be subject to the limitation that
payments of interest shall not be required for any period for which interest is
computed hereunder, to the extent (but only to the extent) that contracting for
or receiving such payment by such Bank would be contrary to the provisions of
any law applicable to such Bank limiting the highest rate of interest that may
be lawfully contracted for, charged or received by such Bank, and in such event
the Company shall pay such Bank interest at the highest rate permitted by
applicable law.
2.11 FEES.
(a) ARRANGEMENT, AGENCY FEES. The Company shall pay an arrangement
fee to each Arranger for such Arranger's own account, and shall pay an agency
fee to the Administrative Agent for the Administrative Agent's own account, as
required by the letter agreement among the Company, the Arrangers and
Administrative Agent dated May 13, 1997.
(b) UPFRONT FEES. On the Closing Date, the Company shall pay to the
Administrative Agent for the account of each Bank an upfront fee in an amount as
more particularly set forth in certain letter agreements between the Company and
the Arrangers (such letters and the letter described in Section 2.11(a) are
collectively called the "FEE LETTERS").
(c) FACILITY FEES. The Company shall pay to the Administrative Agent
for the account of each Bank a facility fee on the average daily amount of such
Bank's Commitment (whether used or unused), for the period from and including
the Closing Date to but not including the Revolving Termination Date at a rate
per annum equal to the applicable amount set forth in the definition of
"Applicable Margin" for the facility fees. Accrued facility fees shall be
payable in arrears on the last Business Day of each calendar quarter and on the
Revolving Termination Date.
(d) BID FEES. In consideration of the Administrative Agent's
management of bidding procedures for Bid Loans, the Company shall pay to the
Administrative Agent for the
-35-
<PAGE>
Administrative Agent's own account on the date of each LIBOR Auction and
Absolute Rate Auction, bid agency fees in the amount of $150 for each offer
submitted by each Bank, but in no event less than $450 per auction.
2.12 COMPUTATION OF FEES AND INTEREST.
(a All computations of interest for Base Rate Committed Loans when
the Base Rate is determined by BofA's "reference rate" shall be made on the
basis of a year of 365 or 366 days, as the case may be, and actual days
elapsed. All other computations of fees and interest shall be made on the
basis of a 360-day year and actual days elapsed (which results in more
interest being paid than if computed on the basis of a 365-day year).
Interest and fees shall accrue during each period during which interest or
such fees are computed from the first day thereof to the last day thereof.
(b) Each determination of an interest rate by the Administrative
Agent shall be conclusive and binding on the Company and the Banks in the
absence of manifest error.
(c) If the Reference Bank's Commitment terminates (other than on
termination of all the Commitments), or for any reason whatsoever the Reference
Bank ceases to be a Bank hereunder, the Reference Bank shall thereupon cease to
be the Reference Bank, and (i) so long as no Default or Event of Default shall
be continuing, the Company, with the consent of the Majority Banks (which
consent shall not be unreasonably withheld), may select a replacement Reference
Bank and (ii) if a Default or Event of Default shall be continuing, the Majority
Banks, with the consent of the Company (which consent shall not be unreasonably
withheld), may select a replacement Reference Bank.
2.13 PAYMENTS BY THE COMPANY.
(a) All payments to be made by the Company shall be made without
set-off, recoupment or counterclaim. Except as otherwise expressly provided
herein, all payments by the Company shall be made to the Administrative Agent
for the account of the Banks to the Administrative Agent's account no.
12333-15584, regarding: Foundation Health Systems, Inc., Attention: Agency
Management Services, Number 5596, ABA No. 1210-0035-8, or at such other account
as the Administrative Agent may from time to time designate by notice to the
Company, and shall be made in dollars and in immediately available funds, no
later than 12:00 noon (San Francisco time) on the date specified herein. The
Administrative Agent will promptly distribute to each Bank its Pro Rata Share
(or other applicable share as expressly provided herein) of such payment in like
funds as received. Any payment received by the
-36-
<PAGE>
Administrative Agent later than 12:00 noon (San Francisco time) shall be
deemed to have been received on the following Business Day and any applicable
interest or fee shall continue to accrue.
(b) Subject to the provisions set forth in the definition of
"Interest Period" herein, whenever any payment is due on a day other than a
Business Day, such payment shall be made on the following Business Day, and such
extension of time shall in such case be included in the computation of interest
or fees, as the case may be.
(c) Unless the Administrative Agent receives notice from the Company
prior to the date on which any payment is due to the Banks that the Company will
not make such payment in full as and when required, the Administrative Agent may
assume that the Company has made such payment in full to the Administrative
Agent on such date in immediately available funds and the Administrative Agent
may (but shall not be so required), in reliance upon such assumption, distribute
to each Bank on such due date an amount equal to the amount then due such Bank.
If and to the extent the Company has not made such payment in full to the
Administrative Agent, each Bank shall repay to the Administrative Agent on
demand such amount distributed to such Bank, together with interest thereon at
the Federal Funds Rate for each day from the date such amount is distributed to
such Bank until the date repaid.
2.14 PAYMENTS BY THE BANKS TO THE ADMINISTRATIVE AGENT.
(a) Unless the Administrative Agent receives notice from a Bank on or
prior to the Closing Date or, with respect to any Borrowing after the Closing
Date, at least one Business Day prior to the date of such Committed Borrowing,
that such Bank will not make available as and when required hereunder to the
Administrative Agent for the account of the Company the amount of that Bank's
Pro Rata Share of the Committed Borrowing, the Administrative Agent may assume
that each Bank has made such amount available to the Administrative Agent in
immediately available funds on the Borrowing Date and the Administrative Agent
may (but shall not be so required), in reliance upon such assumption, make
available to the Company on such date a corresponding amount. If and to the
extent any Bank shall not have made its full amount available to the
Administrative Agent in immediately available funds and the Administrative Agent
in such circumstances has made available to the Company such amount, that Bank
shall on the Business Day following such Borrowing Date make such amount
available to the Administrative Agent, together with interest at the Federal
Funds Rate for each day during such period. A notice of the Administrative
Agent submitted to any Bank with respect to amounts owing under this subsection
(a) shall be conclusive, absent manifest error. If such amount is so
-37-
<PAGE>
made available, such payment to the Administrative Agent shall constitute
such Bank's Loan on the date of Borrowing for all purposes of this Agreement.
If such amount is not made available to the Administrative Agent on the
Business Day following the Borrowing Date, the Administrative Agent will
notify the Company of such failure to fund and, upon demand by the
Administrative Agent, the Company shall pay such amount to the Administrative
Agent for the Administrative Agent's account, together with interest thereon
for each day elapsed since the date of such Committed Borrowing, at a rate
per annum equal to the interest rate applicable at the time to the Committed
Loans comprising such Committed Borrowing.
(b) The failure of any Bank to make any Committed Loan on any
Borrowing Date shall not relieve any other Bank of any obligation hereunder to
make a Committed Loan on such Borrowing Date, but no Bank shall be responsible
for the failure of any other Bank to make the Committed Loan to be made by such
other Bank on any Borrowing Date. The Company reserves the right to seek
compensation from any Bank wrongfully failing to make a Committed Loan on a
Borrowing Date for any costs, losses and expenses incurred by the Company
resulting from such failure.
2.15 SHARING OF PAYMENTS, ETC. If, other than as expressly provided
elsewhere herein, any Bank shall obtain on account of the Committed Loans made
by it any payment (whether voluntary, involuntary, through the exercise of any
right of set-off, or otherwise) in excess of its Pro Rata Share, such Bank shall
immediately (a) notify the Administrative Agent of such fact, and (b) purchase
from the other Banks such participations in the Committed Loans made by them as
shall be necessary to cause such purchasing Bank to share the excess payment pro
rata with each of them; PROVIDED, HOWEVER, that if all or any portion of such
excess payment is thereafter recovered from the purchasing Bank, such purchase
shall to that extent be rescinded and each other Bank shall repay to the
purchasing Bank the purchase price paid therefor, together with an amount equal
to such paying Bank's ratable share (according to the proportion of (i) the
amount of such paying Bank's required repayment to (ii) the total amount so
recovered from the purchasing Bank) of any interest or other amount paid or
payable by the purchasing Bank in respect of the total amount so recovered. The
Company agrees that any Bank so purchasing a participation from another Bank
may, to the fullest extent permitted by law, exercise all its rights of payment
(including the right of set-off, but subject to Section 10.10) with respect to
such participation as fully as if such Bank were the direct creditor of the
Company in the amount of such participation. The Administrative Agent will keep
records (which shall be conclusive and binding in the absence of manifest error)
of participations purchased under this Section and will in each case notify the
Banks following any such purchases or repayments.
-38-
<PAGE>
Any Bank having outstanding both Committed Loans and Bid Loans at any time a
right of set-off is exercised by such Bank and applying such set-off to the
Loans shall apply the proceeds of such set-off first to such Bank's Committed
Loans, until its Committed Loans are reduced to zero, and thereafter to its
Bid Loans.
2.16 EXTENSION OF REVOLVING TERMINATION DATE. Not less than 30 days nor
more than 60 days before each anniversary of the Closing Date, the Company may,
by written request delivered to the Administrative Agent, request that the
Revolving Termination Date be extended by all of the Banks for a period of one
year from the then-current Revolving Termination Date; PROVIDED, HOWEVER, that
in no event shall the Revolving Termination Date extend beyond the seventh
anniversary of the Closing Date. The Administrative Agent shall promptly notify
the Banks of any such request. Such extension shall only be effective upon
approval thereof in writing by each of the Administrative Agent and all of the
Banks and the execution and delivery of such amendments to the Loan Documents as
the Administrative Agent may require in connection with such extension. The
Administrative Agent and each Bank may accept or reject any request for an
extension in its sole and absolute discretion. The Administrative Agent and
each Bank shall use best efforts to accept or reject any such request within 30
days after receiving notice thereof, PROVIDED that any failure by the
Administrative Agent or a Bank to respond to such a request shall be deemed to
be a rejection thereof.
ARTICLE III
TAXES, YIELD PROTECTION AND ILLEGALITY
3.01 TAXES. Any and all payments by the Company to each Bank or the
Administrative Agent under this Agreement and any other Loan Document shall be
made free and clear of, and without deduction or withholding for any Taxes. In
addition, the Company shall pay all Other Taxes.
(a) The Company agrees to indemnify and hold harmless each Bank and
the Administrative Agent for the full amount of Taxes or Other Taxes (including
any Taxes or Other Taxes imposed by any jurisdiction on amounts payable under
this Section) paid by the Bank or the Administrative Agent and any liability
(including penalties, interest, additions to tax and expenses) arising therefrom
or with respect thereto, whether or not such Taxes or Other Taxes were correctly
or legally asserted. Payment under this indemnification shall be made within 30
days after the date the Bank or the Administrative Agent makes written demand
therefor.
-39-
<PAGE>
(b) If the Company shall be required by law to deduct or withhold any
Taxes or Other Taxes from or in respect of any sum payable hereunder to any Bank
or the Administrative Agent, then:
(i) the sum payable shall be increased as necessary so that
after making all required deductions and withholdings (including deductions and
withholdings applicable to additional sums payable under this Section) such Bank
or the Administrative Agent, as the case may be, receives an amount equal to the
sum it would have received had no such deductions or withholdings been made;
(ii) the Company shall make such deductions and withholdings; and
(iii) the Company shall pay the full amount deducted or withheld
to the relevant taxing authority or other authority in accordance with
applicable law;
provided, that the foregoing obligation of the Company to pay such additional
amounts shall not apply
(A) to any payment to any Bank that is subject to deduction
for or withholding for taxes pursuant to the Code, unless, as of the
Closing Date or the date it becomes a Bank pursuant to Section 10.8, such
Bank is entitled to submit a Form 1001 (relating to such Bank and entitling
it to a complete exemption from withholding on all interest to be received
by it under this Agreement) or a Form 4224 (relating to all interest to be
received by such Bank under this Agreement in respect of the Loans) (and,
in that regard, each such Bank shall deliver to the Administrative Agent
and the Company the documentation required by Section 9.10), or
(B) to any taxes imposed solely by reason of the failure of
such Bank to comply with applicable certification, information,
documentation or other reporting requirements concerning the nationality,
residence, identity or connections with the United States of such Bank if
such compliance is required by statute or regulations of the United States
as a precondition to relief or exemption from such Taxes.
(c) Within 30 days after the date of any payment by the Company of
Taxes or Other Taxes, the Company shall furnish the Administrative Agent the
original or a certified copy of a receipt evidencing payment thereof, or other
evidence of payment satisfactory to the Administrative Agent.
-40-
<PAGE>
(d) If the Company is required to pay additional amounts to any Bank
or the Administrative Agent pursuant to subsection (c) of this Section, then
such Bank shall use reasonable efforts (consistent with legal and regulatory
restrictions) to change the jurisdiction of its Lending Office so as to
eliminate any such additional payment by the Company which may thereafter
accrue, if such change, in the judgment of such Bank, is not otherwise
disadvantageous to such Bank.
3.02 ILLEGALITY.
(a) If any Bank determines that the introduction of any Requirement
of Law, or any change in any Requirement of Law, or in the interpretation or
administration of any Requirement of Law, has made it unlawful, or that any
central bank or other Governmental Authority has asserted that it is unlawful,
for any Bank or its applicable Lending Office to make Offshore Rate Loans, then,
on notice thereof by the Bank to the Company through the Administrative Agent,
any obligation of that Bank to make Offshore Rate Loans (including in respect of
any LIBOR Bid Loan as to which the Company has accepted such Bank's Competitive
Bid, but as to which the Borrowing Date has not arrived) shall be suspended
until the Bank notifies the Administrative Agent and the Company that the
circumstances giving rise to such determination no longer exist.
(b) If a Bank determines that it is unlawful to maintain any Offshore
Rate Loan, the Company shall, upon its receipt of notice of such fact and demand
from such Bank (with a copy to the Administrative Agent), prepay in full such
Offshore Rate Loans of that Bank then outstanding, together with interest
accrued thereon and amounts required under Section 3.04, either on the last day
of the Interest Period thereof, if the Bank may lawfully continue to maintain
such Offshore Rate Loans to such day, or immediately, if the Bank may not
lawfully continue to maintain such Offshore Rate Loan. If the Company is
required to so prepay any Offshore Rate Committed Loan, then concurrently with
such prepayment, the Company shall borrow from the affected Bank, in the amount
of such repayment, a Base Rate Committed Loan.
(c) If the obligation of any Bank to make or maintain Offshore Rate
Committed Loans has been so terminated or suspended, the Company may elect, by
giving notice to the Bank through the Administrative Agent that all Loans which
would otherwise be made by the Bank as Offshore Rate Committed Loans shall be
instead Base Rate Committed Loans.
(d) Before giving any notice to the Administrative Agent under this
Section, the affected Bank shall designate a different Lending Office with
respect to its Offshore Rate Loans
-41-
<PAGE>
if such designation will avoid the need for giving such notice or making such
demand and will not, in the judgment of the Bank, be illegal or otherwise
disadvantageous to the Bank.
3.03 INCREASED COSTS AND REDUCTION OF RETURN.
(a) If any Bank determines that, due to either (i) the introduction
of or any change in or in the interpretation of any law or regulation or
(ii) the compliance by that Bank with any guideline or request from any central
bank or other Governmental Authority (whether or not having the force of law),
there shall be any increase in the cost to such Bank of agreeing to make or
making, funding or maintaining any Offshore Rate Committed Loans; then, in any
such case, such Bank shall notify the Company of any such event of which it has
knowledge and shall deliver to the Administrative Agent and the Company a
written statement specifying in reasonable detail the losses or expenses
sustained or incurred. The Company shall, within ten (10) days following demand
therefor, pay the amount sufficient to compensate such Bank for such increased
costs.
(b) If any Bank shall have determined that (i) the introduction of
any Capital Adequacy Regulation, (ii) any change in any Capital Adequacy
Regulation, (iii) any change in the interpretation or administration of any
Capital Adequacy Regulation by any central bank or other Governmental Authority
charged with the interpretation or administration thereof, or (iv) compliance by
the Bank (or its Lending Office) or any corporation controlling the Bank with
any Capital Adequacy Regulation, affects or would affect the amount of capital
required or expected to be maintained by the Bank or any corporation controlling
the Bank and (taking into consideration such Bank's or such corporation's
policies with respect to capital adequacy and such Bank's desired return on
capital) determines that the amount of such capital is increased as a
consequence of its Commitment, loans, credits or obligations under this
Agreement; then, in any such case, such Bank shall notify the Company of any
such event of which it has knowledge and shall deliver to the Administrative
Agent and the Company a written statement specifying in reasonable detail the
losses or expenses sustained or incurred. The Company shall, within ten (10)
days following demand therefor, pay the amount sufficient to compensate such
Bank for such increased costs.
3.04 FUNDING LOSSES. The Company shall reimburse each Bank and hold each
Bank harmless from any loss or expense which the Bank may sustain or incur as a
consequence of:
(a) the failure of the Company to make on a timely basis any payment
of principal of any Offshore Rate Loan;
-42-
<PAGE>
(b) the failure of the Company to borrow, continue or convert (i) a
Committed Loan after the Company has given (or is deemed to have given) a Notice
of Borrowing or a Notice of Conversion/Continuation or (ii) a LIBOR Bid Loan
after the Company has accepted a Competitive Bid with respect thereto;
(c) the failure of the Company to make any prepayment of any
Committed Loan in accordance with any notice delivered under Section 2.08;
(d) the prepayment or scheduled repayment (including pursuant to
Section 2.08, 2.09 or 3.07) or other payment (including after acceleration
thereof) of any Offshore Rate Loan or Absolute Rate Bid Loan on a day that is
not the last day of the relevant Interest Period; or
(e) the automatic conversion under Section 2.04 (a) of any Offshore
Rate Committed Loan to a Base Rate Committed Loan on a day that is not the last
day of the relevant Interest Period; including any such loss or expense arising
from the liquidation or reemployment of funds obtained by it to maintain its
Offshore Rate Loans or from fees payable to terminate the deposits from which
such funds were obtained.
For purposes of calculating amounts payable by the Company to the Banks under
this Section and under Section 3.03(a), each Offshore Rate Committed Loan made
by a Bank (and each related reserve, special deposit or similar requirement)
shall be conclusively deemed to have been funded at the LIBO Rate for such
Offshore Rate Loan by a matching deposit or other borrowing in the interbank
eurodollar market for a comparable amount and for a comparable period, whether
or not such Offshore Rate Loan is in fact so funded. Each Bank that claims
compensation under this Section shall deliver to the Administrative Agent and
the Company a written statement specifying in reasonable detail any amounts due
to the Banks as provided above.
3.05 INABILITY TO DETERMINE RATES. If the Administrative Agent determines
that for any reason adequate and reasonable means do not exist for determining
the LIBO Rate for any requested Interest Period with respect to a proposed
Offshore Rate Loan, or that the LIBO Rate for any requested Interest Period with
respect to a proposed Offshore Rate Loan does not adequately and fairly reflect
the cost to the Banks of funding such Loan, the Administrative Agent will
promptly so notify the Company and each Bank. Thereafter, the obligation of the
Banks to make or maintain Offshore Rate Loans hereunder shall be suspended until
the Administrative Agent revokes such notice in writing. Upon receipt of such
notice, the Company may revoke any Notice of Borrowing or Notice of
Conversion/Continuation then submitted by it. If the Company does not revoke
such Notice, the
-43-
<PAGE>
Banks shall make, convert or continue the Committed Loans, as proposed by the
Company, in the amount specified in the applicable notice submitted by the
Company, but such Committed Loans shall be made, converted or continued as
Base Rate Committed Loans instead of Offshore Rate Committed Loans.
3.06 CERTIFICATES OF BANKS. Any Bank claiming reimbursement or
compensation under this Article III shall deliver to the Company (with a copy to
the Administrative Agent) (a) a notice to the Company of any change in the
Requirement of Law giving rise to such reimbursement or compensation and (b) a
certificate setting forth in reasonable detail the amount payable to the Bank
hereunder and the calculations used to determine in good faith such amount, and
such certificate shall be conclusive and binding on the Company in the absence
of manifest error.
3.07 SUBSTITUTION OF BANKS. Upon the receipt by the Company from any Bank
(an "AFFECTED BANK") of a claim for reimbursement, compensation or other
adjustment under this Article III, the Company may: (i) request one or more of
the other Banks to acquire and assume all or part of such Affected Bank's Loans
and Commitment; (ii) designate a replacement bank or financial institution
satisfactory to the Company to acquire and assume all or a ratable part of all
of such Affected Bank's Loans and Commitment (a "REPLACEMENT BANK"); or (iii)
so long as there does not then exist a Default or an Event of Default, terminate
in whole or reduce in part the Commitment of the Affected Bank and prepay all or
part of the outstanding Loans owing to such Affected Bank in accordance with
Section 2.07. Any such designation of a Replacement Bank under clause (ii)
shall be subject to the prior written consent of the Administrative Agent (which
consent shall not be unreasonably withheld).
3.08 SURVIVAL. The agreements and obligations of the Company in this
Article III shall survive the payment of all other Obligations.
ARTICLE IV
CONDITIONS PRECEDENT
4.01 CONDITIONS OF INITIAL LOANS. The obligation of each Bank to make its
initial Committed Loan hereunder, and to receive through the Administrative
Agent the initial Competitive Bid Request, is subject to the condition that the
Administrative Agent has received on or before the Closing Date all of the
following, in form and substance satisfactory to the Administrative Agent and
each Bank, and, if requested by the Administrative Agent, in sufficient copies
for each Bank:
-44-
<PAGE>
(a) CREDIT AGREEMENT. This Agreement executed by each party hereto;
(b) RESOLUTIONS; INCUMBENCY.
(i) Copies of the resolutions of the board of directors of the
Company authorizing the transactions contemplated hereby, or resolutions of an
authorized committee of the board of directors authorizing the transactions
contemplated hereby together with evidence of such committee's authority,
certified as of the Closing Date by the Secretary or an Assistant Secretary of
the Company; and
(ii) A certificate of the Secretary or Assistant Secretary of the
Company certifying the names and true signatures of the officers of the Company
authorized to execute, deliver and perform, as applicable, this Agreement, and
all other Loan Documents to be delivered by it hereunder;
(c) ORGANIZATION DOCUMENTS; GOOD STANDING. Each of the following
documents:
(i) the articles or certificate of incorporation and the bylaws
of the Company as in effect on the Closing Date, certified by the Secretary or
Assistant Secretary of the Company as of the Closing Date; and
(ii) a good standing and tax good standing certificate for the
Company from the Secretary of State (or similar, applicable Governmental
Authority) of its state of incorporation and each state where the Company is
qualified to do business as a foreign corporation as of a recent date, together
with a bring-down certificate by facsimile, dated the Closing Date;
(d) LEGAL OPINIONS. An opinion of McDermott, Will & Emery, counsel
to the Company and addressed to the Administrative Agent and the Banks,
substantially in the form of EXHIBIT D and an opinion of Mayer, Brown & Platt,
special counsel to the Administrative Agent and the Banks, substantially in the
form of EXHIBIT M;
(e) PAYMENT OF FEES. Evidence of payment to the Administrative Agent
by the Company of all accrued and unpaid fees, costs and expenses to the extent
then due and payable on the Closing Date, together with Attorney Costs of BofA
to the extent invoiced prior to or on the Closing Date, plus such additional
amounts of Attorney Costs as shall constitute BofA's reasonable estimate of
Attorney Costs incurred or to be incurred by it through the closing proceedings
(provided that such estimate shall not thereafter preclude final settling of
accounts
-45-
<PAGE>
between the Company and BofA); including any such costs, fees and expenses
arising under or referenced in Section 2.11(a), Section 2.11(b) and Section
10.04;
(f) CERTIFICATE. A certificate signed by a Responsible Officer,
dated as of the Closing Date:
(i) stating that the representations and warranties contained in
Article V are true and correct on and as of such date, as though made on and as
of such date;
(ii) stating that no Default or Event of Default exists or would
result from the initial Borrowing;
(iii) stating that since December 31, 1996, there has occurred no
material adverse change in the condition (financial or otherwise), business,
operations or properties of (i) the Company and its Subsidiaries taken as a
whole or (ii) FHC and the Subsidiaries taken as a whole, in either case since
the date of the last audited financial statement;
(iv) stating that since December 31, 1996, there has occurred
no material adverse change in the Company's ability to perform its obligations
under any Loan Document; and
(v) certifying as to the Total Leverage Ratio, in effect on
March 31, 1997;
(g) TERMINATION OF EXISTING CREDIT AGREEMENTS. Such evidence as the
Administrative Agent shall require that concurrently herewith the Existing
Credit Agreements have been terminated and all Indebtedness outstanding
thereunder has been paid in full (including, to the extent necessary, from
proceeds of the initial Borrowing);
(h) REGULATORY COMPLIANCE. A certificate of a Responsible Officer on
behalf of each of the HMO Subsidiaries that, as of March 31, 1997, satisfies the
criteria under clause (b) of the definition of the term "Significant Subsidiary"
to the effect that such HMO Subsidiary is in compliance in all material respects
with the requirements of all applicable HMO Regulations, including such
Regulatory Tangible Net Equity Requirements as are applicable to such HMO
Subsidiary, and with all other material Requirements of Law;
(i) LITIGATION. Such evidence as the Administrative Agent shall
require that (i) there exists no material litigation challenging or seeking to
restrain or prohibit or impose material adverse conditions upon the making of
the Loans by the Banks or the performance of the Obligations, and (ii) there
exists no judgment, order, injunction, or other restraint of a Governmental
-46-
<PAGE>
Authority prohibiting or imposing material adverse conditions upon the making of
the Loans by the Banks or the performance of the Obligations;
(j) NOTES. Notes for those Banks requesting Notes; and
(k) OTHER DOCUMENTS. Such other approvals, opinions, documents or
materials as the Administrative Agent or any Bank may reasonably request.
4.02 CONDITIONS TO ALL BORROWINGS. The obligation of each Bank to make any
Committed Loan to be made by it, and the obligation of any Bank to make any Bid
Loan as to which the Company has accepted the relevant Competitive Bid
(including its initial Loan), is subject to the satisfaction of the following
conditions precedent on the relevant Borrowing Date:
(a) NOTICE OF BORROWING. As to any Committed Loan, the
Administrative Agent shall have received (with, in the case of the initial Loan
only, a copy for each Bank) a Notice of Borrowing;
(b) CONTINUATION OF REPRESENTATIONS AND WARRANTIES. The
representations and warranties in Article V shall be true and correct on and as
of such Borrowing Date with the same effect as if made on and as of such
Borrowing Date (except to the extent such representations and warranties
expressly refer to an earlier date, in which case they shall be true and correct
as of such earlier date);
(c) NO EXISTING DEFAULT. No Default or Event of Default shall exist
or shall result from such Borrowing; and
(d) OTHER DOCUMENTS. Such other approvals, opinions, documents or
materials as the Administrative Agent may reasonably request.
Each Notice of Borrowing and Competitive Bid Request submitted by the Company
hereunder shall constitute a representation and warranty by the Company
hereunder, as of the date of each such notice or request and as of each
Borrowing Date, that the conditions in Section 4.02 are satisfied.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
The Company represents and warrants to the Administrative Agent and each
Bank that:
-47-
<PAGE>
5.01 CORPORATE EXISTENCE AND POWER. The Company and each of its
Subsidiaries:
(a) is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation;
(b) has the power and authority and all material Governmental
Approvals to own its material assets, carry on its business and to execute,
deliver, and perform its obligations under the Loan Documents;
(c) is duly qualified as a foreign corporation and is licensed and in
good standing under the laws of each jurisdiction where its ownership, lease or
operation of property or the conduct of its business requires such qualification
or license (except for jurisdictions in which the failure to so qualify or
remain in good standing could not reasonably be expected to have a Material
Adverse Effect); and
(d) is in compliance with all material Requirements of Law.
5.02 CORPORATE AUTHORIZATION; NO CONTRAVENTION. The execution, delivery
and performance by the Company of this Agreement and each other Loan Document to
which the Company is party have been duly authorized by all necessary corporate
action, and do not and will not:
(a) contravene the terms of any of the Company's Organization
Documents;
(b) conflict with or result in any breach or contravention of, or the
creation of any Lien under, any document evidencing any material Contractual
Obligation to which the Company is a party or any material order, injunction,
writ or decree of any Governmental Authority to which the Company or its
property is subject; or
(c) violate any material Requirement of Law.
5.03 GOVERNMENTAL AUTHORIZATION. No material Governmental Approval is
necessary or required in connection with the execution, delivery or performance
by, or enforcement against, the Company or any of its Subsidiaries of this
Agreement or any other Loan Document.
5.04 BINDING EFFECT. This Agreement and each other Loan Document to which
the Company is a party constitute the legal, valid and binding obligations of
the Company, enforceable against the Company in accordance with their respective
terms, except as
-48-
<PAGE>
enforceability may be limited by applicable bankruptcy, insolvency, or
similar laws affecting the enforcement of creditors' rights generally or by
equitable principles relating to enforceability.
5.05 LITIGATION. Except as specifically disclosed in SCHEDULE 5.05, there
are no actions, suits, proceedings, investigations, claims or disputes pending,
or to the best knowledge of the Company, threatened or contemplated, at law, in
equity, in arbitration or before any Governmental Authority, against the
Company, or its Subsidiaries or any of their respective properties which:
(a) purport to affect or pertain to this Agreement or any other Loan
Document, or any of the transactions contemplated hereby or thereby; or
(b) if determined adversely to the Company or its Subsidiaries, would
reasonably be expected to have a Material Adverse Effect. No injunction, writ,
temporary restraining order or any order of any nature has been issued by any
court or other Governmental Authority purporting to enjoin or restrain the
execution, delivery or performance of this Agreement or any other Loan Document,
or directing that the transactions provided for herein or therein not be
consummated as herein or therein provided.
5.06 NO DEFAULT. No Default or Event of Default exists or would result
from the incurring of any Obligations by the Company. As of the Closing Date,
neither the Company nor any Subsidiary is in default under or with respect to
any Contractual Obligation in any respect which, individually or together with
all such defaults, could reasonably be expected to have a Material Adverse
Effect, or that would, if such default had occurred after the Closing Date,
create an Event of Default under Section 8.01(e).
5.07 ERISA COMPLIANCE. Except as specifically disclosed in SCHEDULE 5.07
or to the extent that the liability of the Company and its Subsidiaries in
respect of any of the following would reasonably be expected to exceed
$5,000,000:
(a) Each Plan is in compliance in all material respects with the
applicable provisions of ERISA, the Code and other federal or state law. Each
Plan which is intended to qualify under Section 401(a) of the Code has received
a favorable determination letter from the IRS and to the best knowledge of the
Company, nothing has occurred which would cause the loss of such qualification.
The Company and each ERISA Affiliate has made all required contributions to any
Plan subject to Section 412 of the Code, and no application for a funding waiver
or an
-49-
<PAGE>
extension of any amortization period pursuant to Section 412 of the Code has
been made with respect to any Plan.
(b) There are no pending or, to the best knowledge of Company,
threatened claims, actions or lawsuits, or action by any Governmental Authority,
with respect to any Plan which has resulted or could reasonably be expected to
result in a Material Adverse Effect. There has been no prohibited transaction
or violation of the fiduciary responsibility rules with respect to any Plan
which has resulted or could reasonably be expected to result in a Material
Adverse Effect.
(c) (i) No ERISA Event has occurred or is reasonably expected to
occur; (ii) no Pension Plan has any Unfunded Pension Liability; (iii) neither
the Company nor any ERISA Affiliate has incurred, or reasonably expects to
incur, any liability under Title IV of ERISA with respect to any Pension Plan
(other than premiums due and not delinquent under Section 4007 of ERISA); (iv)
neither the Company nor any ERISA Affiliate has incurred, or reasonably expects
to incur, any liability (and no event has occurred which, with the giving of
notice under Section 4219 of ERISA, would result in such liability) under
Section 4201 or 4243 of ERISA with respect to a Multiemployer Plan; and (v)
neither the Company nor any ERISA Affiliate has engaged in a transaction that
could be subject to Section 4069 or 4212(c) of ERISA.
5.08 USE OF PROCEEDS; MARGIN REGULATIONS. The proceeds of the Loans are to
be used solely for the purposes set forth in and permitted by Section 6.12 and
Section 7.07. Neither the Company nor any Subsidiary is generally engaged in
the business of purchasing or selling Margin Stock or extending credit for the
purpose of purchasing or carrying Margin Stock.
5.09 TITLE TO PROPERTIES. The Company and each Subsidiary have good record
and marketable title in fee simple to, or valid leasehold interests in, all real
property necessary or used in the ordinary conduct of their respective
businesses, except for such defects in title as could not, individually or in
the aggregate, have a Material Adverse Effect. As of the Closing Date, the
property of the Company and its Subsidiaries is subject to no Liens, other than
Permitted Liens.
5.10 TAXES. The Company and its Subsidiaries have filed all material
Federal and other material tax returns and reports required to be filed, and
have paid all Federal and other material taxes, assessments, fees and other
governmental charges levied or imposed upon them or their properties, income or
assets otherwise due and payable, except those which are being contested in good
faith by appropriate proceedings and for which adequate reserves have been
provided in accordance with GAAP. There is no
-50-
<PAGE>
proposed tax assessment against the Company or any Subsidiary that would, if
made, have a Material Adverse Effect.
5.11 FINANCIAL CONDITION.
(a) The audited consolidated financial statements of (I) the Company
and its Subsidiaries dated December 31, 1996 and (II) FHC and its Subsidiaries
dated June 30, 1996 and the related consolidated statements of income or
operations, shareholders' equity and cash flows for the fiscal year ended on
those dates:
(i) were prepared in accordance with GAAP consistently applied
throughout the period covered thereby, except as otherwise expressly noted
therein, subject to ordinary, good faith year end audit adjustments;
(ii) fairly present the financial condition of such Persons as of
the date thereof and results of operations for the period covered thereby; and
(iii) show all material indebtedness and other material
liabilities, direct or contingent, of the Company and its consolidated
Subsidiaries as of December 31, 1996 and FHC and its consolidated Subsidiaries
as of June 30, 1996, including liabilities for taxes, material commitments and
Contingent Obligations.
(b) Since December 31, 1996, there has been no Material Adverse
Effect.
5.12 ENVIRONMENTAL MATTERS. Except as specifically disclosed in SCHEDULE
5.12, Environmental Laws and Environmental Claims could not, individually or in
the aggregate, reasonably be expected to have a Material Adverse Effect.
5.13 REGULATED ENTITIES. None of the Company, any Person controlling the
Company, or any Subsidiary, is an "Investment Company" within the meaning of the
Investment Company Act of 1940. The Company is not subject to regulation under
the Public Utility Holding Company Act of 1935, the Federal Power Act, the
Interstate Commerce Act, any state public utilities code, or except as
specifically disclosed in SCHEDULE 5.13, any other Federal or state statute or
regulation limiting its ability to incur Indebtedness.
5.14 NO BURDENSOME RESTRICTIONS. Neither the Company nor any Subsidiary is
a party to or bound by any Contractual Obligation, or subject to any restriction
in any Organization Document, or any Requirement of Law, which could reasonably
be expected to have a Material Adverse Effect.
-51-
<PAGE>
5.15 COPYRIGHTS, PATENTS, TRADEMARKS AND LICENSES, ETC. The Company or its
Subsidiaries own or are licensed or otherwise have the right to use all material
patents, trademarks, service marks, trade names, copyrights, contractual
franchises, authorizations and other rights that are reasonably necessary for
the operation of their respective businesses as heretofore conducted, without
conflict with the rights of any other Person. To the best knowledge of the
Company, no slogan or other advertising device, product, process, method,
substance, part or other material now employed, or now contemplated to be
employed, by the Company or any Subsidiary infringes upon any rights held by any
other Person. Except as specifically disclosed in SCHEDULE 5.05, no claim or
litigation regarding any of the foregoing is pending or threatened, and no
patent, invention, device, application, principle or any statute, law, rule,
regulation, standard or code is pending or, to the knowledge of the Company,
proposed, which, in either case, could reasonably be expected to have a Material
Adverse Effect.
5.16 SUBSIDIARIES. As of the Closing Date, the Company has no Subsidiaries
other than those specifically disclosed in part (a) of SCHEDULE 5.16 hereto and,
except for Permitted Market Investments, has no equity investments in any other
corporation or entity other than those specifically disclosed and in the amounts
as set forth in part (b) of SCHEDULE 5.16.
5.17 INSURANCE. Except as specifically disclosed in SCHEDULE 5.17, the
properties of the Company and its Subsidiaries are insured or self-insured, in
such amounts, with such deductibles and covering such risks as are customary for
companies of like size and nature.
5.18 BUSINESS ACTIVITY. Neither the Company nor any of its Subsidiaries is
engaged in any line or lines of business activity other than the Healthcare
Business.
5.19 ACCREDITATION, ETC. Each HMO Subsidiary maintains (i) all licenses
and certifications required pursuant to any HMO Regulation; (ii) all
certifications and authorizations necessary to ensure that each of the HMO
Subsidiaries is eligible for all reimbursements available under the HMO
Regulations to the extent applicable to HMOs of their type; and (iii) all
licenses, permits, authorizations and qualifications required under the HMO
Regulations in connection with the ownership or operation of HMOs; except where
the failure to maintain the items described in any of the preceding three
clauses would not have a Material Adverse Effect.
5.20 ACCURACY OF INFORMATION. The information described on Schedule 5.20
that has been provided by the Company to the Administrative Agent and the Banks,
when taken as a whole, does
-52-
<PAGE>
not contain any untrue statement of a material fact or omit to state any
material fact or any fact necessary to make the statements contained therein,
in light of the circumstances under which such information is or is to be
used, not misleading. It is understood by the Administrative Agent and the
Banks that all of the estimates and assumptions on which any projections and
forecasts are based may not prove to be correct and that actual future
financial performance may vary from that projected.
ARTICLE VI
AFFIRMATIVE COVENANTS
So long as any Bank shall have any Commitment hereunder, or any Loan or
other Obligation shall remain unpaid or unsatisfied, unless the Majority Banks
waive compliance in writing:
6.01 FINANCIAL STATEMENTS. The Company shall deliver to the Administrative
Agent and the Banks, in form and detail reasonably satisfactory to the
Administrative Agent and the Majority Banks:
(a) as soon as available, but not later than 100 days after the end
of each fiscal year (commencing with the fiscal year ended December 31, 1997), a
copy of the audited consolidated balance sheet of the Company and its
Subsidiaries as at the end of such year and the related consolidated statements
of income or operations, shareholders' equity and cash flows for such year,
setting forth in each case in comparative form the figures for the previous
fiscal year, and accompanied by the opinion of Deloitte & Touche or another
nationally-recognized independent public accounting firm ("INDEPENDENT AUDITOR")
which report shall state that such consolidated financial statements present
fairly the financial position for the periods indicated in conformity with GAAP
applied on a basis consistent with prior years. Such opinion shall not be
qualified or limited because of a restricted or limited examination by the
Independent Auditor of any material portion of the Company's or any Subsidiary's
records; and
(b) as soon as available, but not later than 50 days after the end of
each of the first three fiscal quarters of each fiscal year (commencing with the
fiscal quarter ended June 30, 1997), a copy of the unaudited consolidated
balance sheet of the Company and its Subsidiaries as of the end of such quarter
and the related consolidated statements of income, shareholders' equity and cash
flows for the period commencing on the first day and ending on the last day of
such quarter, and certified by a Responsible Officer as fairly presenting, in
accordance with GAAP (subject to ordinary, good faith year-end audit
adjustments), the
-53-
<PAGE>
financial position and the results of operations of the Company and the
Subsidiaries.
6.02 CERTIFICATES; OTHER INFORMATION. The Company shall furnish to the
Administrative Agent and the Banks;
(a) concurrently with the delivery of the financial statements
referred to in Section 6.01(a), a certificate of the Independent Auditor stating
that in making the examination necessary therefor no knowledge was obtained of
any Default or Event of Default, except as specified in such certificate;
(b) concurrently with the delivery of the financial statements
referred to in Sections 6.01(a) and (b), a Compliance Certificate executed by a
Responsible Officer;
(c) promptly, copies of all financial statements and reports that the
Company sends to its shareholders, and copies of all financial statements and
regular, periodical or special reports (including Forms 10K, 10Q and 8K) that
the Company or any Subsidiary may make to, or file with, the SEC;
(d) promptly following the receipt of the same, a copy of each notice
relating to the loss by the Company or any HMO Subsidiary of any material
operating permit, license or certification by any HMO Regulator;
(e) promptly following the receipt of the same, all correspondence
received by the Company or any Subsidiary from an HMO Regulator which asserts
that the Company or any HMO Subsidiary is not in substantial compliance with any
material HMO Regulation or which threatens the taking of any action against the
Company or any Subsidiary under any material HMO Regulation;
(f) from time to time upon receipt of a request by any Bank through
the Administrative Agent specifying in reasonable detail the types of documents
to be provided, copies of any and all statements, audits, studies or reports
submitted by or on behalf of the Company or any HMO Subsidiary to any HMO
Regulator; and
(g) promptly, such additional information regarding the business,
financial or corporate affairs of the Company or any Subsidiary as the
Administrative Agent, at the request of any Bank, may from time to time
reasonably request.
6.03 NOTICES. The Company shall promptly, but in no event more than two
Business Days after the date upon which a Responsible Officer knew or reasonably
should have known of such circumstance, notify the Administrative Agent and each
Bank:
-54-
<PAGE>
(a) of the occurrence of any Default or Event of Default;
(b) of any matter that has resulted or would be reasonably likely to
result in a Material Adverse Effect, including (i) breach or non-performance of,
or any default under, a material Contractual Obligation of the Company or any
Subsidiary that has resulted or would be reasonably likely to result in a
Material Adverse Effect, (ii) any material dispute, litigation, investigation,
proceeding or suspension between the Company or any Subsidiary and any
Governmental Authority or that has resulted or would be reasonably likely to
result in a Material Adverse Effect, (iii) the commencement of, or any material
development in, any material litigation or proceeding affecting the Company or
any Subsidiary, including pursuant to any applicable Environmental Laws that has
resulted or would be reasonably likely to result in a Material Adverse Effect;
(c) of the occurrence of any of the following events affecting the
Company or any ERISA Affiliate, and deliver to the Administrative Agent and each
Bank a copy of any notice with respect to such event that is filed with a
Governmental Authority and any notice delivered by a Governmental Authority to
the Company or any ERISA Affiliate with respect to such event:
(i) an ERISA Event;
(ii) a material increase in the Unfunded Pension Liability of any
Pension Plan;
(iii) the adoption of, or the commencement of contributions to,
any Plan subject to Section 412 of the Code by the Company or any ERISA
Affiliate; or
(iv) the adoption of any amendment to a Plan subject to Section
412 of the Code, if such amendment results in a material increase in
contributions or Unfunded Pension Liability.
(d) of any material change in accounting policies or financial
reporting practices by the Company or any of its consolidated Subsidiaries not
otherwise permitted under SECTION 7.15.
Each notice under this Section shall be accompanied by a written
statement by a Responsible Officer setting forth details of the occurrence
referred to therein, and stating what action the Company or any affected
Subsidiary proposes to take with respect thereto and at what time. Each notice
under Section 6.03(a) shall describe with particularity any and all clauses or
-55-
<PAGE>
provisions of this Agreement or other Loan Document that have been (or
foreseeably will be) breached or violated.
6.04 PRESERVATION OF CORPORATE EXISTENCE, ETC. The Company shall, and
shall cause each Significant Subsidiary to:
(a) preserve and maintain in full force and effect its corporate
existence and good standing under the laws of its state or jurisdiction of
incorporation;
(b) except as otherwise expressly permitted by this Agreement,
preserve and maintain in full force and effect all material governmental rights,
privileges, qualifications, permits, licenses and franchises necessary or
desirable in the normal conduct of its business, including all material licenses
and certifications required pursuant to any HMO Regulation, all material
certifications and authorizations necessary to ensure that each of the HMO
Subsidiaries is eligible for all reimbursements available under the HMO
Regulation to the extent applicable to HMOs of their type, and all material
licenses, permits, authorization and qualifications required under the HMO
Regulations in connection with the ownership or operation of HMOs;
(c) except as otherwise expressly permitted by this Agreement, use
reasonable efforts, in the ordinary course of business, to preserve its business
organization and goodwill; and
(d) preserve or renew all of its registered patents, trademarks,
trade names and service marks, the non-preservation of which could reasonably be
expected to have a Material Adverse Effect.
6.05 MAINTENANCE OF PROPERTY. The Company shall maintain, and shall cause
each Subsidiary to maintain, and preserve all its property which is material to
its business in good working order and condition, ordinary wear and tear
excepted, except as permitted by SECTION 7.02 hereof.
6.06 INSURANCE. The Company shall maintain, and shall cause each
Subsidiary to maintain insurance or self-insurance with respect to its
properties and business against loss or damage of such types and in such amounts
as are customary for companies of like size and nature.
6.07 PAYMENT OF OBLIGATIONS. The Company shall, and shall cause each
Subsidiary to, pay and discharge as the same shall become due and payable, all
their respective obligations and liabilities, including:
-56-
<PAGE>
(a) all tax liabilities, assessments and governmental charges or
levies upon it or its properties or assets, unless the same are being contested
in good faith by appropriate proceedings and adequate reserves in accordance
with GAAP are being maintained by the Company or such Subsidiary; and
(b) all lawful claims which, if unpaid, would by law become a Lien
upon its property in violation of this Agreement, except for any such claims
that are being contested in good faith and by appropriate proceedings.
6.08 COMPLIANCE WITH LAWS. The Company shall comply, and shall cause each
Significant Subsidiary to comply, in all material respects with all material
Requirements of Law of any Governmental Authority having jurisdiction over it or
its business (including all HMO Regulations and the Federal Fair Labor Standards
Act), except such as may be contested in good faith or as to which a bona fide
dispute may exist.
6.09 COMPLIANCE WITH ERISA. The Company shall, and shall cause each of its
ERISA Affiliates to: (a) maintain each Plan in compliance in all material
respects with the applicable provisions of ERISA, the Code and other federal or
state law; (b) cause each Plan which is qualified under Section 401(a) of the
Code to maintain such qualification; and (c) make all required contributions to
any Plan subject to Section 412 of the Code, except to the extent that the
failure to so maintain compliance or qualification or make such contribution
could reasonably be expected to result in liability to the Company and its
Subsidiaries in excess of $20,000,000.
6.10 INSPECTION OF PROPERTY AND BOOKS AND RECORDS. The Company shall
maintain and shall cause each Subsidiary to maintain proper books of record and
account to the extent necessary to permit the preparation of the financial
statements in conformity with GAAP consistently applied. The Company shall
permit, and shall cause each Subsidiary to permit, representatives and
independent contractors of the Administrative Agent, at the request of any Bank,
or any Bank to visit and inspect any of their respective properties, to examine
their respective corporate, financial and operating records, and make copies
thereof or abstracts therefrom, and to discuss their respective affairs,
finances and accounts with their respective officers, and independent public
accountants, all at the expense of the Company and at such reasonable times
during normal business hours and as often as may be reasonably desired, upon
reasonable advance notice to the Company; PROVIDED, HOWEVER, when an Event of
Default exists the Administrative Agent or any Bank may do any of the foregoing
at the expense of the Company at any time during normal business hours and
without advance notice.
-57-
<PAGE>
6.11 ENVIRONMENTAL LAWS. The Company shall, and shall cause each
Subsidiary to, conduct its operations and keep and maintain its property in
material compliance with all material Environmental Laws.
6.12 USE OF PROCEEDS. The Company shall use the proceeds of the Loans for
general corporate purposes, including backup of Commercial Paper Debt, the
repayment of Indebtedness, Permitted Acquisitions and the repurchase or
redemption of its capital stock; PROVIDED, HOWEVER, that in no event may such
proceeds be used in contravention of any Requirement of Law or of any Loan
Document.
6.13 ACQUISITIONS. Prior to consummating any Permitted Acquisition with a
value in excess of $100,000,000, the Company shall have delivered to the
Administrative Agent (in form and detail satisfactory to each Bank and in
sufficient copies for each Bank) the following:
(i) Simultaneously with, or as soon as practicable after, the
first public announcement of the Company's intention to consummate a Permitted
Acquisition, a brief summary of the substantive terms thereof, or if available,
a copy of the executed purchase or merger agreement, together with a copy of
such announcement;
(ii) At least 10 days prior to the consummation of such Permitted
Acquisition (unless the first public announcement thereof occurs later, in which
case upon such later date), a certified copy of the executed purchase contract
or merger agreement relating to such Permitted Acquisition; and
(iii) An officer's certificate, executed by a Responsible Officer
of the Company, dated the date of consummation of such Permitted Acquisition,
certifying that immediately before and after giving effect to such Permitted
Acquisition (A) no Default has occurred and is continuing or will exist and (B)
that the Company will be in compliance on a pro forma basis with each of the
financial ratios specified in Section 7.12 as of the end of the fiscal quarter
immediately preceding such Acquisition for the twelve-month period preceding
such fiscal quarter end, together with a reasonably detailed worksheet setting
forth the calculation of such ratios.
-58-
<PAGE>
ARTICLE VII
NEGATIVE COVENANTS
So long as any Bank shall have any Commitment hereunder, or any Loan or
other Obligation shall remain unpaid or unsatisfied, unless the Majority Banks
waive compliance in writing:
7.01 LIMITATION ON LIENS. The Company shall not, and shall not suffer or
permit any Subsidiary to, directly or indirectly, make, create, incur, assume or
suffer to exist any Lien upon or with respect to any part of its property,
whether now owned or hereafter acquired, other than the following ("PERMITTED
LIENS"):
(a) any Lien existing on property of the Company or any Subsidiary on
the Closing Date and set forth in SCHEDULE 7.01 securing Indebtedness
outstanding on such date;
(b) any Lien created under any Loan Document;
(c) Liens for taxes, fees, assessments or other governmental charges
which are not delinquent or remain payable without penalty, or to the extent
that non-payment thereof is permitted by Section 6.07, provided that no notice
of lien has been filed or recorded under the Code;
(d) carriers', warehousemen's, mechanics', landlords', materialmen's,
repairmen's or other similar Liens arising in the ordinary course of business
which are not delinquent or remain payable without penalty or being contested in
good faith, PROVIDED that adequate reserves for the payment thereof have been
established in accordance with GAAP;
(e) Liens (other than any Lien imposed by ERISA) consisting of
pledges or deposits required in the ordinary course of business in connection
with HMO Regulations, workers' compensation, unemployment insurance and other
social security legislation, PROVIDED that all such Liens in the aggregate would
not (even if enforced) cause a Material Adverse Effect;
(f) Liens on the property of the Company or its Subsidiary securing
(i) the non-delinquent performance of bids, trade contracts (other than for
borrowed money), leases, statutory obligations, (ii) contingent obligations on
surety and appeal bonds, and (iii) other non-delinquent obligations of a like
nature; in each case, incurred in the ordinary course of business, provided all
such Liens in the aggregate would not (even if enforced) cause a Material
Adverse Effect;
(g) easements, rights-of-way, restrictions and other similar
encumbrances incurred in the ordinary course of business
-59-
<PAGE>
which, in the aggregate, are not substantial in amount, and which do not in
any case materially detract from the value of the property subject thereto or
interfere with the ordinary conduct of the businesses of the Company and its
Subsidiaries;
(h) Liens on assets of corporations which become Subsidiaries after
the date of this Agreement; PROVIDED, HOWEVER, that such Liens existed at the
time the respective corporations became Subsidiaries and were not created in
anticipation thereof and PROVIDED, FURTHER, that all such Liens in the aggregate
at any time outstanding do not exceed $75,000,000 in the aggregate;
(i) in addition to Liens that are otherwise permitted under this
Section 7.01, Liens securing Indebtedness that does not at any time exceed
$75,000,000 in the aggregate;
(j) Liens securing obligations in respect of Capital Leases on assets
subject to such leases, provided that such capital leases are otherwise
permitted hereunder;
(k) Liens arising solely by virtue of any statutory or common law
provision relating to banker's liens, rights of set-off or similar rights and
remedies as to deposit accounts or other funds maintained with a creditor
depository institution; PROVIDED THAT (i) such deposit account is not a
dedicated cash collateral account and is not subject to restrictions against
access by the Company in excess of those set forth by regulations promulgated by
the FRB, and (ii) such deposit account is not intended by the Company or any
Subsidiary to provide collateral to the depository institution; and
(l) any extension, renewal or replacement of the foregoing; PROVIDED,
however that the Liens permitted under this clause(l) shall not be spread to
cover any additional Indebtedness or property (other than a substitution of like
property).
7.02 DISPOSITION OF ASSETS. The Company shall not, and shall not suffer or
permit any Subsidiary to, directly or indirectly, sell, assign, lease, convey,
transfer or otherwise dispose of (whether in one or a series of transactions)
any property (including accounts and notes receivable, with or without recourse)
or enter into any agreement to do any of the foregoing, except:
(a) dispositions of inventory, equipment or operations, all in the
ordinary course of business;
(b) the sale of equipment or operations to the extent that such
assets are exchanged for credit against the purchase price of similar
replacement assets, or the proceeds of such sale
-60-
<PAGE>
are reasonably promptly applied to the purchase price of such replacement
assets;
(c) dispositions of accounts, inventory, equipment or discontinued
operations by the Company or any Subsidiary to the Company or any Subsidiary
pursuant to reasonable business requirements; and
(d) dispositions not otherwise permitted hereunder which are made
for fair market value; PROVIDED, that (i) at the time of any disposition, no
Event of Default shall exist or shall result from such disposition, (ii) the
aggregate sales price from such disposition shall be paid in cash, except
that non-cash proceeds may be received so long as all such non-cash proceeds
received from the Closing Date through the Revolving Termination Date does
not in the aggregate at any time outstanding exceed $150,000,000 MINUS the
aggregate amount of write-offs taken against all such non-cash proceeds
received after the Closing Date, and (iii) the aggregate value of all assets
so sold by the Company and its Subsidiaries exclusive of those assets
identified on Schedule 7.02, together, shall not exceed in any fiscal year
10% of the Company and its Subsidiaries' consolidated tangible assets as of
the last day of the preceding fiscal year. There shall be excluded from the
calculation of the value of all assets sold in any year, any sale or
disposition of any promissory notes or other non-cash proceeds received by
the Company and its Subsidiaries during such year in connection with a
disposition otherwise permitted under this clause (d).
7.03 CONSOLIDATIONS AND MERGERS. The Company shall not, and shall not
suffer or permit any Subsidiary to, merge, consolidate with or into, or convey,
transfer, lease or otherwise dispose of (whether in one transaction or in a
series of transactions, all or substantially all of its assets (whether now
owned or hereafter acquired) to or in favor of any Person, except:
(a) any Subsidiary may merge with the Company, provided that the
Company shall be the continuing or surviving corporation, or with any one or
more Subsidiaries, provided that if any transaction shall be between a
Subsidiary and a Wholly-Owned Subsidiary, the Wholly-Owned Subsidiary shall be
the continuing or surviving corporation;
(b) any Subsidiary may sell all or substantially all of its assets
(upon voluntary liquidation or otherwise), to the Company or another
Wholly-Owned Subsidiary;
(c) the Company or any of its Subsidiaries may make Permitted
Acquisitions;
-61-
<PAGE>
(d) any consolidation or merger which constitutes a Permitted
Acquisition;
(e) the Company or any of its Subsidiaries may make acquisitions of
Persons and/or assets not in the Healthcare Business so long as (i) the prior,
effective written consent or approval to such acquisition has been obtained from
the board of directors or equivalent governing body of the other party and (ii)
the aggregate value of the cash, stock or other consideration (including
Indebtedness assumed by the Company or its Subsidiaries in connection therewith)
expended in connection therewith, together with the amount of Joint Ventures
permitted pursuant to Section 7.09(c) and the amount of investments permitted
pursuant to Section 7.04(f) does not in the aggregate at any time outstanding
exceed $50,000,000 (exclusive of those Investments outstanding on the Closing
Date and described on Schedule 7.04); and
(f) any disposition permitted pursuant to Section 7.02 hereof.
7.04 LOANS AND INVESTMENTS. The Company shall not purchase or acquire, or
suffer or permit any Subsidiary to purchase or acquire, or make any commitment
with respect to, any capital stock, equity interest, or any obligations or other
securities of, or any interest in, any Person, or make or commit to make any
Acquisitions, or make or commit to make any advance, loan, extension of credit
or capital contribution to or any other investment in, any Person including any
Affiliate of the Company, except for:
(a) Permitted Market Investments;
(b) extensions of credit in the nature of accounts receivable or
notes receivable arising from the sale or lease of goods or services in the
ordinary course of business;
(c) extensions of credit from a Subsidiary to the Company or
extensions of credit or capital contributions by the Company to any of its
Subsidiaries or by any of its Subsidiaries to another of its Subsidiaries;
(d) Permitted Acquisitions;
(e) other investments in the Healthcare Business which comply with
clause (ii) of the definition of Permitted Acquisitions and are not listed on
part (b) of SCHEDULE 5.16, but which, together with the amount of Joint Ventures
permitted pursuant to Section 7.09(b), do not in the aggregate at any time
outstanding exceed the sum of (i) $150,000,000 plus (ii)
-62-
<PAGE>
$25,000,000 for each fiscal year commencing after December 31, 1997; or
(f) other investments outside of the Healthcare Business which comply
with clause (ii) of the definition of Permitted Acquisitions so long as the
aggregate amount thereof, together with the amount of expenditures permitted
pursuant to Section 7.03(e) and the amount of Joint Ventures permitted pursuant
to Section 7.09(c), does not in the aggregate at any time outstanding exceed
$50,000,000 (exclusive of those Investments outstanding on the Closing Date and
described on Schedule 7.04).
7.05 LIMITATION ON INDEBTEDNESS. The Company shall not, and shall not
suffer or permit any Subsidiary to, create, incur, assume, suffer to exist, or
otherwise become or remain directly or indirectly liable with respect to, any
Indebtedness, except:
(a) Indebtedness incurred pursuant to this Agreement;
(b) Indebtedness consisting of Contingent Obligations permitted
pursuant to Section 7.08;
(c) Indebtedness existing on the Closing Date and set forth in
SCHEDULE 7.05 and any renewals, extensions, replacements and refundings of such
Indebtedness;
(d) Indebtedness secured by Liens permitted by Sections 7.01(h) and
(i) in an aggregate amount outstanding not to exceed $150,000,000;
(e) other Indebtedness, which together with the Indebtedness
permitted under clauses (b) through (d) above, does not exceed $500,000,000 in
the aggregate; provided, however, not more than $150,000,000 of all Indebtedness
permitted under this Agreement may be Indebtedness of Subsidiaries (excluding
Indebtedness evidenced by the Public Notes); and
(f) Commercial Paper Debt.
7.06 TRANSACTIONS WITH AFFILIATES. The Company shall not, and shall not
suffer or permit any Subsidiary to, enter into any transaction with any
Affiliate of the Company, except upon fair and reasonable terms no less
favorable to the Company or such Subsidiary than would obtain in a comparable
arm's-length transaction with a Person not an Affiliate of the Company or such
Subsidiary and except for transactions between the Company and any Subsidiary
that is not a Significant Subsidiary.
7.07 USE OF PROCEEDS. Except as otherwise provided in Section 6.12, the
Company shall not, and shall not suffer or
-63-
<PAGE>
permit any Subsidiary to, use any portion of the Loan proceeds, directly or
indirectly, (i) to purchase or carry Margin Stock, (ii) to repay or otherwise
refinance indebtedness of the Company or others incurred to purchase or carry
Margin Stock, (iii) to extend credit for the purpose of purchasing or
carrying any Margin Stock, or (iv) to acquire any security in any transaction
that is subject to Section 13 or 14 of the Exchange Act, unless such
acquisition is a Permitted Acquisition or an acquisition of the Company's own
capital stock consistent with the terms hereof and in compliance with all
Requirements of Law. No part of the proceeds of the Loans will be used for
any purpose which violates the provisions of Regulations G, T, U or X of the
FRB.
7.08 CONTINGENT OBLIGATIONS. The Company shall not, and shall not suffer
or permit any Subsidiary to, create, incur, assume or suffer to exist any
Contingent Obligations except:
(a) endorsements for collection or deposit in the ordinary course of
business;
(b) Swap Contracts entered into in the ordinary course of business as
bona fide hedging transactions;
(c) Contingent Obligations of the Company and its Subsidiaries
existing as of the Closing Date and listed in SCHEDULE 7.08; and
(d) Contingent Obligations incurred by the Company or any Subsidiary
after the Closing Date in the ordinary course of business.
7.09 JOINT VENTURES. The Company shall not, and shall not suffer or permit
any Subsidiary to enter into any Joint Venture, except for (a) Joint Ventures in
the Healthcare Business entered in the ordinary course of business, (b) other
Joint Ventures in the Healthcare Business which require aggregate expenditures
by the Company or any of its Subsidiaries in an amount which, together with the
amount of investments permitted pursuant to Section 7.04(e), do not in the
aggregate at any time outstanding exceed the sum of (i) $150,000,000 plus (ii)
$25,000,000 for each fiscal year commencing after December 31, 1997 and (c)
Joint Ventures outside of the Healthcare Business which require aggregate
expenditures by the Company or any of its Subsidiaries in an amount which,
together with the amount of expenditures permitted pursuant to Section 7.03(e)
and the amount of investments permitted pursuant to Section 7.04(f) (exclusive
of those Investments outstanding on the Closing Date and described on Schedule
7.04), do not in the aggregate at any time outstanding exceed $50,000,000.
-64-
<PAGE>
7.10 LEASE OBLIGATIONS. The Company shall not, and shall not suffer or
permit any Subsidiary to, create or suffer to exist any obligations for the
payment of rent for any property under lease or agreement to lease, except for:
(a) leases of the Company and of Subsidiaries in existence on the
Closing Date;
(b) Operating Leases entered into by the Company or any Subsidiary
after the Closing Date in the ordinary course of business; and
(c) Capital Leases other than those permitted under clause (a) of
this Section, entered into by the Company or any Subsidiary after the Closing
Date in the ordinary course of business.
7.11 RESTRICTED PAYMENTS. The Company shall not (i) declare or make any
dividend payment or other distribution of assets, properties, cash, rights,
obligations or securities on account of any shares of any class of its capital
stock, or (ii) purchase, redeem or otherwise acquire for value any shares of its
capital stock or any warrants, rights or options to acquire such shares, now or
hereafter outstanding, except that the Company may:
(a) declare and make dividend payments or other distributions payable
solely in its common stock or make cash payments for the redemption of
fractional shares;
(b) purchase, redeem or otherwise acquire shares of its common stock
or warrants or options to acquire any such shares with the proceeds received
from the substantially concurrent issue of new shares of its common stock;
(c) subdivide its outstanding shares of common stock into a larger
number of shares of common stock, including, without limitation, by means of a
stock split; and
(d) declare or pay cash dividends to its stockholders and purchase,
redeem or otherwise acquire shares of its capital stock or warrants, rights or
options to acquire any such shares for cash; PROVIDED, that the cumulative
amount of such dividends, purchases, redemptions and acquisitions after June 30,
1997 shall not exceed the sum of (A) $300,000,000 plus (B) 25% of net income of
the Company and its Subsidiaries for the fiscal year ending December 31, 1998
and plus (C) 50% of net income of the Company and its Subsidiaries arising after
December 31, 1998, computed on a cumulative consolidated basis (collectively,
the "Base Amount"); and PROVIDED FURTHER that, in no event may any such payment,
purchase, redemption or acquisition be made if
-65-
<PAGE>
immediately after giving effect to any such proposed action, any Default or
Event of Default would exist. To the extent that the Company has paid
dividends or purchased, redeemed or otherwise acquired its stock or warrants,
rights or options to acquire such stock in compliance with the provisions of
this clause (d), the Base Amount may be replenished from time to time by an
amount equal to the aggregate net cash proceeds received by the Company from
the sale of common stock by the Company subsequent to June 30, 1997.
7.12 FINANCIAL COVENANTS. The Company shall not permit:
(a) the Total Leverage Ratio to exceed 3.0 to 1.00 at any time;
(b) the Fixed Charges Coverage Ratio to be less than 2.75 to 1.00 at
any time; or
(c) its Net Worth to be less than the sum of (x) 85% of Net Worth on
June 30, 1997 PLUS (y) 50% of the net income of the Company and its Subsidiaries
arising after June 30, 1997, computed on a cumulative consolidated basis.
7.13 ERISA. The Company shall not, and shall not suffer or permit any of
its ERISA Affiliates to: (a) engage in a prohibited transaction or violation of
the fiduciary responsibility rules with respect to any Plan which has resulted
or could reasonably expected to result in liability of the Company in an
aggregate amount in excess of $20,000,000; or (b) engage in a transaction that
could be subject to Section 4069 or 4212(c) of ERISA.
7.14 LIMITATION ON PAYMENT RESTRICTIONS AFFECTING SIGNIFICANT SUBSIDIARIES.
Except as set forth in this Agreement, the Company shall not, and shall not
permit any of its Significant Subsidiaries, directly or indirectly, to create or
suffer to exist or allow to become effective any consensual encumbrance or
restriction on the ability of (i) any of the Significant Subsidiaries of the
Company to (a) declare and pay dividends on such Significant Subsidiaries' stock
or pay any obligation, liability or any Indebtedness owed to the Company or any
of its other Subsidiaries, (b) make loans or advances to the Company or its
other Significant Subsidiaries or (c) transfer any of its properties or assets
to the Company or any of its other Significant Subsidiaries, or (ii) the Company
or any of its Significant Subsidiaries to receive or retain vis-a-vis the
transferor any such amounts set forth in clauses (i)(a), (i)(b) or (i)(c) above,
except for encumbrances or restrictions existing under or by reason of HMO
Regulations and other applicable law or any recommendation or requirement of any
Governmental Authority.
-66-
<PAGE>
7.15 ACCOUNTING CHANGES. The Company shall not, and shall not suffer or
permit any Subsidiary to, make any significant change in accounting treatment or
reporting practices, except as required by GAAP or as required to conform the
practices of a Person acquired in connection with a Permitted Acquisition, or
change the fiscal year of the Company or of any Subsidiary.
7.16 CHANGE IN BUSINESS. Except for expenditures pursuant to Joint
Ventures and investments permitted pursuant to Section 7.04(f) which do not in
the aggregate at any time exceed $50,000,000, the Company shall not, and shall
not suffer or permit any Subsidiary to, engage in any material line of business
other than the Healthcare Business.
7.17 CERTAIN OBLIGATIONS RESPECTING SIGNIFICANT SUBSIDIARIES. (a) Except
as otherwise provided in this Agreement and except for the sale by the Company
of up to 20% of the common stock of the Subsidiaries listed on Schedule 7.17,
the Company will, and will cause each of its Significant Subsidiaries to, take
such action from time to time as shall be necessary to ensure that the Company
or one of its Significant Subsidiaries at all times owns free and clear of any
lien, charge, or encumbrance at least the same percentage of the issued and
outstanding shares of each class of stock of, and enjoys the same degree of
voting control over, each of its Significant Subsidiaries as it owned or enjoyed
on the Closing Date or as was acquired in any Acquisition or merger. Except as
otherwise expressly provided in this Agreement, without limiting the generality
of the foregoing, none of the Company nor any of its Significant Subsidiaries
shall sell, transfer or otherwise dispose of any shares of stock in any
Significant Subsidiary owned by them, nor permit any Significant Subsidiary to
issue any shares of the stock of any class whatsoever to any Person (other than
to the Company, a wholly-owned Subsidiary or another Significant Subsidiary).
(b) The Company will not, nor permit any of its Significant
Subsidiaries to, enter into, after the Closing Date, any indenture, agreement,
instrument or other arrangement (other than pursuant to any Loan Document, any
Requirement of Law or any requirement or recommendation of a Governmental
Authority) that, directly or indirectly, prohibits or restrains, or has the
effect of prohibiting or restraining, or imposes materially adverse conditions
upon, the declaration or payment of dividends, the making of loans, advances or
investments or the sale, assignment, transfer or other disposition of property.
-67-
<PAGE>
ARTICLE VIII
EVENTS OF DEFAULT
8.01 EVENT OF DEFAULT. Any of the following shall constitute an "EVENT OF
DEFAULT":
(a) NON-PAYMENT. The Company fails to pay, (i) when and as required
to be paid herein, any amount of principal of any Loan or any amount of interest
on any Bid Loan, or (ii) within three Business Days after the same becomes due,
any other interest, any fee or any other amount payable hereunder or under any
other Loan Document; or
(b) REPRESENTATION OR WARRANTY. Any representation or warranty by
the Company made or deemed made herein, in any other Loan Document, or which is
contained in any certificate, document or financial or other statement by the
Company or any Responsible Officer, furnished at any time under this Agreement,
or in or under any other Loan Document, is incorrect in any material respect on
or as of the date made or deemed made; or
(c) SPECIFIC DEFAULTS. The Company fails to perform or observe any
term, covenant or agreement contained in (i) clause (a) or (b) of Section 6.03;
or (ii) any of Section 6.01, 6.02, 6.09 or Article VII and such default shall
continue unremedied for a period of 20 days after the earlier of (x) the date
upon which a Responsible Officer knew or reasonably should have known of such
failure or (y) the date upon which written notice thereof is given to the
Company by the Administrative Agent or any Bank; or
(d) OTHER DEFAULTS. The Company fails to perform or observe any
other term or covenant contained in this Agreement or any other Loan Document,
and such default shall continue unremedied for a period of 30 days after the
earlier of (i) the date upon which a Responsible Officer knew or reasonably
should have known of such failure or (ii) the date upon which written notice
thereof is given to the Company by the Administrative Agent or any Bank; or
(e) CROSS-DEFAULT. The Company or any Subsidiary (i) fails to make
any payment in respect of any Indebtedness or Contingent Obligation under a
single agreement or transaction having a principal amount outstanding of more
than $20,000,000 when due (whether by scheduled maturity, required prepayment,
acceleration, demand or otherwise) and such failure continues after any
applicable grace or notice period, if any; or (ii) fails to make any payment in
respect of any Indebtedness or Contingent Obligation having an aggregate
principal amount outstanding of more than $50,000,000 when due (whether by
-68-
<PAGE>
scheduled maturity, required prepayment, acceleration, demand, or otherwise) and
such failure continues after any applicable grace or notice period, if any; or
(iii) fails to perform or observe any other condition or covenant, or any other
event shall occur or condition exist, under any agreement or instrument relating
to any Indebtedness or Contingent Obligation under a single agreement or
transaction having a principal amount outstanding of more than $20,000,000, and
such failure continues after the applicable grace or notice period (which grace
period, if shorter than 30 days, shall be deemed extended to 30 days for
purposes of this clause if (A) such Indebtedness or Contingent Obligation was
assumed in connection with an Acquisition and is in an aggregate principal
amount of not in excess of $50,000,000 and (B) not more than 90 days have
elapsed since the consummation of such Acquisition), if any, specified in the
relevant document on the date of such failure if the effect of such failure,
event or condition is to cause, or to permit the holder or holders of such
Indebtedness or beneficiary or beneficiaries of such Indebtedness (or a trustee
or agent on behalf of such holder or holders or beneficiary or beneficiaries) to
cause such Indebtedness to be declared to be due and payable prior to its stated
maturity, or such Contingent Obligation to become payable or cash collateral in
respect thereof to be demanded; or (iv) fails to perform or observe any other
condition or covenant, or any other event shall occur or condition exist, under
one or more agreements or instruments relating to any Indebtedness or Contingent
Obligation having an aggregate principal amount outstanding of more than
$50,000,000, and such failure continues after the applicable grace or notice
period (which grace period, if shorter than 30 days, shall be deemed extended to
30 days for purposes of this clause if (A) such Indebtedness or Contingent
Obligation was assumed in connection with an Acquisition and is in an aggregate
principal amount of not in excess of $50,000,000 and (B) not more than 90 days
have elapsed since the consummation of such Acquisition), if any, specified in
the relevant document on the date of such failure if the effect of such failure,
event or condition is to cause, or to permit the holder or holders of such
Indebtedness or beneficiary or beneficiaries of such Indebtedness (or a trustee
or agent on behalf of such holder or holders or beneficiary or beneficiaries) to
cause such Indebtedness to be declared to be due and payable prior to its stated
maturity, or such Contingent Obligation to become payable or cash collateral in
respect thereof to be demanded; or
(f) INSOLVENCY; VOLUNTARY PROCEEDINGS. The Company or any
Significant Subsidiary (i) ceases or fails to be solvent, or generally fails to
pay, or admits in writing its inability to pay, its debts as they become due,
subject to applicable grace periods, if any, whether at stated maturity or
otherwise; (ii) except as otherwise expressly provided in this Agreement,
voluntarily ceases to conduct its business in the ordinary
-69-
<PAGE>
course; (iii) commences any Insolvency Proceeding with respect to itself; or
(iv) takes any action to effectuate or authorize any of the foregoing; or
(g) INVOLUNTARY PROCEEDINGS. (i) Any involuntary Insolvency
Proceeding is commenced or filed against the Company or any Significant
Subsidiary, or any writ, judgment, warrant of attachment, execution or similar
process, is issued or levied against a substantial part of the Company's or any
Significant Subsidiary's properties, and any such proceeding or petition shall
not be dismissed, or such writ, judgment, warrant of attachment, execution or
similar process shall not be released, vacated or fully bonded within 60 days
after commencement, filing or levy; (ii) the Company or any Significant
Subsidiary admits the material allegations of a petition against it in any
Insolvency Proceeding, or an order for relief (or similar order under non-U.S.
law) is ordered in any Insolvency Proceeding; or (iii) the Company or any
Significant Subsidiary acquiesces in the appointment of a receiver, trustee,
custodian, conservator, liquidator, mortgagee in possession (or agent therefor),
or other similar Person for itself or a substantial portion of its property or
business; or
(h) ERISA. (i) An ERISA Event shall occur with respect to a Pension
Plan or Multiemployer Plan which has resulted or could reasonably be expected to
result in liability of the Company under Title IV of ERISA to the Pension Plan,
Multiemployer Plan or the PBGC in an aggregate amount in excess of $20,000,000;
(ii) the aggregate amount of Unfunded Pension Liability among all Pension Plans
at any time exceeds $20,000,000; or (iii) the Company or any ERISA Affiliate
shall fail to pay when due, after the expiration of any applicable grace period,
any installment payment with respect to its withdrawal liability under Section
4201 of ERISA under a Multiemployer Plan in an aggregate amount in excess of
$20,000,000; or
(i) MONETARY JUDGMENTS. One or more final judgments, final orders,
decrees or arbitration awards is entered against the Company or any Subsidiary
involving in the aggregate a liability (to the extent not covered by independent
third-party insurance as to which the insurer does not dispute coverage) as to
any single or related series of transactions, incidents or conditions, of
$20,000,000 or more (or, in the case of the litigation described on Schedule
8.01(i), $25,000,000 or more), and the same shall remain unsatisfied, unvacated
and unstayed pending appeal for a period of 60 days after the entry thereof or
the Company shall not settle such judgment or award for less than $20,000,000
within 60 days after the entry thereof; or
-70-
<PAGE>
(j) NON-MONETARY JUDGMENTS. Any non-monetary judgment, order or
decree is entered against the Company or any Subsidiary which does or would
reasonably be expected to have a Material Adverse Effect, and there shall be any
period of 60 consecutive days during which a stay of enforcement of such
judgment or order, by reason of a pending appeal or otherwise, shall not be in
effect; or
(k) CHANGE OF CONTROL. There occurs any Change of Control; or
(l) LOSS OF LICENSES. Any HMO Regulator or any other Governmental
Authority revokes or fails to renew any material license, permit or franchise of
the Company or any Subsidiary, or the Company or any Subsidiary for any reason
loses any material license, permit or franchise, or the Company or any
Subsidiary suffers the imposition of any restraining order, escrow, suspension
or impound of funds in connection with any proceeding (judicial or
administrative) with respect to any material license, permit or franchise; or
(m) HMO EVENT. An HMO Event shall have occurred and remain
unremedied for the lesser of 90 days after the occurrence of such event or five
days after the duration of any cure period imposed for the cure of such HMO
Event by the HMO Regulator administering the pertinent HMO Regulations; or
(n) PROSPECTIVE PREMIUM DEFAULT. A Prospective Premium Default shall
have occurred; or
(o) MATERIAL ADVERSE EFFECT. An event occurs which constitutes a
Material Adverse Effect.
8.02 REMEDIES. If any Event of Default occurs, the Administrative Agent
shall, at the request of, or may, with the consent of, the Majority Banks,
(a) declare the commitment of each Bank to make Committed Loans to be
terminated, whereupon such commitments shall be terminated;
(b) declare the unpaid principal amount of all outstanding Loans, all
interest accrued and unpaid thereon, and all other amounts owing or payable
hereunder or under any other Loan Document to be immediately due and payable,
without presentment, demand, protest or other notice of any kind, all of which
are hereby expressly waived by the Company; and
(c) exercise on behalf of itself and the Banks all rights and
remedies available to it and the Banks under the Loan Documents or applicable
law;
-71-
<PAGE>
PROVIDED, HOWEVER, that upon the occurrence of any event specified in subsection
(f) or (g) of Section 8.01 (in the case of clause (i) of subsection (g) upon the
expiration of the 60-day period mentioned therein), the obligation of each Bank
to make Loans shall automatically terminate and the unpaid principal amount of
all outstanding Loans and all interest and other amounts as aforesaid shall
automatically become due and payable without further act of the Administrative
Agent or any Bank, without presentment, demand, protest or other notice of any
kind, all of which are hereby expressly waived by the Company.
8.03 RIGHTS NOT EXCLUSIVE. The rights provided for in this Agreement and
the other Loan Documents are cumulative and are not exclusive of any other
rights, powers, privileges or remedies provided by law or in equity, or under
any other instrument, document or agreement now existing or hereafter arising.
ARTICLE IX
THE ADMINISTRATIVE AGENT
9.01 APPOINTMENT AND AUTHORIZATION. Each Bank hereby irrevocably (subject
to Section 9.09) appoints, designates and authorizes the Administrative Agent to
take such action on its behalf under the provisions of this Agreement and each
other Loan Document and to exercise such powers and perform such duties as are
expressly delegated to it by the terms of this Agreement or any other Loan
Document, together with such powers as are reasonably incidental thereto.
Notwithstanding any provision to the contrary contained elsewhere in this
Agreement or in any other Loan Document, the Administrative Agent shall not have
any duties or responsibilities, except those expressly set forth herein, nor
shall the Administrative Agent have or be deemed to have any fiduciary
relationship with any Bank, and no implied covenants, functions,
responsibilities, duties, obligations or liabilities shall be read into this
Agreement or any other Loan Document or otherwise exist against the
Administrative Agent.
9.02 DELEGATION OF DUTIES. The Administrative Agent may execute any of its
duties under this Agreement or any other Loan Document by or through agents,
employees or attorneys-in-fact and shall be entitled to advice of counsel
concerning all matters pertaining to such duties. The Administrative Agent
shall not be responsible for the negligence or misconduct of any agent or
attorney-in-fact that it selects with reasonable care.
9.03 LIABILITY OF ADMINISTRATIVE AGENT. None of the Agent-Related Persons
shall (i) be liable for any action taken or omitted to be taken by any of them
under or in connection with this Agreement or any other Loan Document or the
transactions
-72-
<PAGE>
contemplated hereby (except for its own gross negligence or willful
misconduct), or (ii) be responsible in any manner to any of the Banks for any
recital, statement, representation or warranty made by the Company or any
Subsidiary or Affiliate of the Company, or any officer thereof, contained in
this Agreement or in any other Loan Document, or in any certificate, report,
statement or other document referred to or provided for in, or received by
the Administrative Agent under or in connection with, this Agreement or any
other Loan Document, or the validity, effectiveness, genuineness,
enforceability or sufficiency of this Agreement or any other Loan Document,
or for any failure of the Company or any other party to any Loan Document to
perform its obligations hereunder or thereunder. No Agent-Related Person
shall be under any obligation to any Bank to ascertain or to inquire as to
the observance or performance of any of the agreements contained in, or
conditions of, this Agreement or any other Loan Document, or to inspect the
properties, books or records of the Company or any of the Company's
Subsidiaries or Affiliates.
9.04 RELIANCE BY ADMINISTRATIVE AGENT.
(a) The Administrative Agent shall be entitled to rely, and shall be
fully protected in relying, upon any writing, resolution, notice, consent,
certificate, affidavit, letter, telegram, facsimile, telex or telephone message,
statement or other document or conversation reasonably believed by it to be
genuine and correct and to have been signed, sent or made by the proper Person
or Persons, and upon advice and statements of legal counsel (including counsel
to the Company), independent accountants and other experts selected by the
Administrative Agent. The Administrative Agent shall be fully justified in
failing or refusing to take any action under this Agreement or any other Loan
Document unless it shall first receive such advice or concurrence of the
Majority Banks as it deems appropriate and, if it so requests, it shall first be
indemnified to its satisfaction by the Banks against any and all liability and
expense which may be incurred by it by reason of taking or continuing to take
any such action. The Administrative Agent shall in all cases be fully protected
in acting, or in refraining from acting, under this Agreement or any other Loan
Document in accordance with a request or consent of the Majority Banks and such
request and any action taken or failure to act pursuant thereto shall be binding
upon all of the Banks.
(b) For purposes of determining compliance with the conditions
specified in Section 4.01, each Bank that has executed this Agreement shall be
deemed to have consented to, approved or accepted or to be satisfied with, each
document or other matter either sent by the Administrative Agent to such Bank
for consent, approval, acceptance or satisfaction, or required thereunder to
-73-
<PAGE>
be consented to or approved by or acceptable or satisfactory to the Bank.
9.05 NOTICE OF DEFAULT. The Administrative Agent shall not be deemed to
have knowledge or notice of the occurrence of any Default or Event of Default,
except with respect to defaults in the payment of principal, interest and fees
required to be paid to the Administrative Agent for the account of the Banks,
unless the Administrative Agent shall have received written notice from a Bank
or the Company referring to this Agreement, describing such Default or Event of
Default and stating that such notice is a "notice of default". The
Administrative Agent will notify the Banks of its receipt of any such notice.
The Administrative Agent shall take such action with respect to such Default or
Event of Default as may be requested by the Majority Banks in accordance with
Article VIII; PROVIDED, HOWEVER, that unless and until the Administrative Agent
has received any such request, the Administrative Agent may (but shall not be
obligated to) take such action, or refrain from taking such action, with respect
to such Default or Event of Default as it shall deem advisable or in the best
interest of the Banks.
9.06 CREDIT DECISION. Each Bank acknowledges that none of the
Agent-Related Persons has made any representation or warranty to it, and that no
act by the Administrative Agent hereinafter taken, including any review of the
affairs of the Company and its Subsidiaries, shall be deemed to constitute any
representation or warranty by any Agent-Related Person to any Bank. Each Bank
represents to the Administrative Agent that it has, independently and without
reliance upon any Agent-Related Person and based on such documents and
information as it has deemed appropriate, made its own appraisal of and
investigation into the business, prospects, operations, property, financial and
other condition and creditworthiness of the Company and its Subsidiaries, and
all applicable bank regulatory laws relating to the transactions contemplated
hereby, and made its own decision to enter into this Agreement and to extend
credit to the Company hereunder. Each Bank also represents that it will,
independently and without reliance upon any Agent-Related Person and based on
such documents and information as it shall deem appropriate at the time,
continue to make its own credit analysis, appraisals and decisions in taking or
not taking action under this Agreement and the other Loan Documents, and to make
such investigations as it deems necessary to inform itself as to the business,
prospects, operations, property, financial and other condition and
creditworthiness of the Company. Except for notices, reports and other
documents expressly herein required to be furnished to the Banks by the
Administrative Agent, the Administrative Agent shall not have any duty or
responsibility to provide any Bank with any credit or other information
concerning the business, prospects, operations, property, financial and other
condition or
-74-
<PAGE>
creditworthiness of the Company which may come into the possession of any of
the Agent-Related Persons.
9.07 INDEMNIFICATION OF ADMINISTRATIVE AGENT. Whether or not the
transactions contemplated hereby are consummated, the Banks shall indemnify upon
demand the Agent-Related Persons (to the extent not reimbursed by or on behalf
of the Company and without limiting the obligation of the Company to do so), pro
rata, from and against any and all Indemnified Liabilities; PROVIDED, HOWEVER,
that no Bank shall be liable for the payment to the Agent-Related Persons of any
portion of such Indemnified Liabilities resulting solely from such Person's
gross negligence or willful misconduct. Without limitation of the foregoing,
each Bank shall reimburse the Administrative Agent upon demand for its ratable
share of any costs or out-of-pocket expenses (including Attorney Costs) incurred
by the Administrative Agent in connection with the preparation, execution,
delivery, administration, modification, amendment or enforcement (whether
through negotiations, legal proceedings or otherwise) of, or legal advice in
respect of rights or responsibilities under, this Agreement, any other Loan
Document, or any document contemplated by or referred to herein, to the extent
that the Administrative Agent is not reimbursed for such expenses by or on
behalf of the Company. The undertaking in this Section shall survive the
payment of all Obligations hereunder and the resignation or replacement of the
Administrative Agent.
9.08 ADMINISTRATIVE AGENT IN INDIVIDUAL CAPACITY. BofA and its Affiliates
may make loans to, issue letters of credit for the account of, accept deposits
from, acquire equity interests in and generally engage in any kind of banking,
trust, financial advisory, underwriting or other business with the Company and
its Subsidiaries and Affiliates as though BofA were not the Administrative Agent
hereunder and without notice to or consent of the Banks. The Banks acknowledge
that, pursuant to such activities, BofA or its Affiliates may receive
information regarding the Company or its Affiliates (including information that
may be subject to confidentiality obligations in favor of the Company or such
Subsidiary) and acknowledge that the Administrative Agent shall be under no
obligation to provide such information to them. With respect to its Loans, BofA
shall have the same rights and powers under this Agreement as any other Bank and
may exercise the same as though it were not the Administrative Agent, and the
terms "Bank" and "Banks" include BofA in its individual capacity.
9.09 SUCCESSOR ADMINISTRATIVE AGENT. The Administrative Agent may, and at
the request of the Majority Banks shall, resign as Administrative Agent upon 30
days' notice to the Banks and the Company. If the Administrative Agent resigns
under this Agreement, (i) so long as no Default or Event of Default shall be
-75-
<PAGE>
continuing, the Company, with the consent of the Banks (which consent shall not
be unreasonably withheld), shall appoint from among the Banks a successor
administrative agent for the Banks and (ii) if a Default or Event of Default
shall be continuing, the Majority Banks, with the consent of the Company (which
consent shall not be unreasonably withheld), may appoint from among the Banks, a
successor administrative agent for the Banks. If no successor administrative
agent is appointed prior to the effective date of the resignation of the
Administrative Agent, the Administrative Agent may appoint, after consulting
with the Banks and the Company, a successor administrative agent from among the
Banks. Upon the acceptance of its appointment as successor administrative agent
hereunder, such successor administrative agent shall succeed to all the rights,
powers and duties of the retiring Administrative Agent and the term
"Administrative Agent" shall mean such successor administrative agent and the
retiring Administrative Agent's appointment, powers and duties as Administrative
Agent shall be terminated. After any retiring Administrative Agent's resignation
hereunder as Administrative Agent, the provisions of this Article IX and
Sections 10.04, 10.05 and 10.06 shall inure to its benefit as to any actions
taken or omitted to be taken by it while it was Administrative Agent under this
Agreement. If no successor administrative agent has accepted appointment as
Administrative Agent by the date which is 30 days following a retiring
Administrative Agent's notice of resignation, the retiring Administrative
Agent's resignation shall nevertheless thereupon become effective and the Banks
shall perform all of the duties of the Administrative Agent hereunder until such
time, if any, as the Majority Banks appoint a successor administrative agent as
provided for above.
9.10 WITHHOLDING TAX.
(a) If any Bank is a "foreign corporation, partnership or trust"
within the meaning of the Code and such Bank claims exemption from, or a
reduction of, U.S. withholding tax under Sections 1441 or 1442 of the Code, such
Bank agrees with and in favor of the Administrative Agent, to deliver to the
Administrative Agent:
(i) if such Bank claims an exemption from, or a reduction of,
withholding tax under a United States tax treaty, properly completed IRS Forms
1001 and W-8 prior to the Closing Date and prior to the first day of each
calendar year thereafter;
(ii) if such Bank claims that interest paid under this Agreement
is exempt from United States withholding tax because it is effectively connected
with a United States trade or business of such Bank, two properly completed and
executed copies
-76-
<PAGE>
of IRS Form 4224 prior to the Closing Date and prior to the first day of each
calendar year thereafter and IRS Form W-9; and
(iii) such other form or forms as may be required under the Code
or other laws of the United States as a condition to exemption from, or
reduction of, United States withholding tax.
Such Bank agrees to promptly notify the Administrative Agent of any
change in circumstances which would modify or render invalid any claimed
exemption or reduction.
(b) If any Bank claims exemption from, or reduction of, withholding
tax under a United States tax treaty by providing IRS Form 1001 and such Bank
sells, assigns, grants a participation in, or otherwise transfers all or part of
the Obligations of the Company to such Bank, such Bank agrees to notify the
Administrative Agent of the percentage amount in which it is no longer the
beneficial owner of Obligations of the Company to such Bank. To the extent of
such percentage amount, the Administrative Agent will treat such Bank's IRS Form
1001 as no longer valid.
(c) If any Bank claiming exemption from United States withholding tax
by filing IRS Form 4224 with the Administrative Agent sells, assigns, grants a
participation in, or otherwise transfers all or part of the Obligations of the
Company to such Bank, such Bank agrees to undertake sole responsibility for
complying with the withholding tax requirements imposed by Sections 1441 and
1442 of the Code.
(d) If any Bank is entitled to a reduction in the applicable
withholding tax, the Administrative Agent may withhold from any interest payment
to such Bank an amount equivalent to the applicable withholding tax after taking
into account such reduction. If the forms or other documentation required by
subsection (a) of this Section are not delivered to the Administrative Agent,
then the Administrative Agent may withhold from any interest payment to such
Bank not providing such forms or other documentation an amount equivalent to the
applicable withholding tax.
(e) If the IRS or any other Governmental Authority of the United
States or other jurisdiction asserts a claim that the Administrative Agent did
not properly withhold tax from amounts paid to or for the account of any Bank
(because the appropriate form was not delivered, was not properly executed, or
because such Bank failed to notify the Administrative Agent of a change in
circumstances which rendered the exemption from, or reduction of, withholding
tax ineffective, or for any other reason) such Bank shall indemnify the
Administrative Agent fully for all
-77-
<PAGE>
amounts paid, directly or indirectly, by the Administrative Agent as tax or
otherwise, including penalties and interest, and including any taxes imposed
by any jurisdiction on the amounts payable to the Administrative Agent under
this Section, together with all costs and expenses (including Attorney
Costs). The obligation of the Banks under this subsection shall survive the
payment of all Obligations and the resignation or replacement of the
Administrative Agent.
9.11 SYNDICATION AGENTS. None of the Banks identified on the facing page
or signature pages of this Agreement as a "syndication agent" shall have any
right, power, obligation, liability, responsibility or duty under this Agreement
other than those applicable to all Banks as such. Without limiting the
foregoing, none of the Banks so identified as a "syndication agent" shall have
or be deemed to have any fiduciary relationship with any Bank. Each Bank
acknowledges that it has not relied, and will not rely, on any of the Banks so
identified in deciding to enter into this Agreement or in taking or not taking
action hereunder.
ARTICLE X
MISCELLANEOUS
10.01 AMENDMENTS AND WAIVERS. No amendment or waiver of any provision of
this Agreement or any other Loan Document, and no consent with respect to any
departure by the Company therefrom, shall be effective unless the same shall be
in writing and signed by the Majority Banks (or by the Administrative Agent at
the written request of the Majority Banks) and the Company and acknowledged by
the Administrative Agent, and then any such waiver or consent shall be effective
only in the specific instance and for the specific purpose for which given;
PROVIDED, HOWEVER, that no such waiver, amendment, or consent shall, unless in
writing and signed by all the Banks and the Company and acknowledged by the
Administrative Agent, do any of the following:
(a) increase or extend the Commitment of any Bank (or reinstate any
Commitment terminated pursuant to Section 8.02);
(b) postpone or delay any date fixed by this Agreement or any other
Loan Document for any payment of principal, interest, fees or other amounts due
to the Banks (or any of them) hereunder or under any other Loan Document;
(c) reduce the principal of, or the rate of interest specified herein
on any Loan, or (subject to clause (ii) below)
-78-
<PAGE>
any fees or other amounts payable hereunder or under any other Loan Document;
(d) change the percentage of the Commitments or of the aggregate
unpaid principal amount of the Loans which is required for the Banks or any of
them to take any action hereunder or amend the definition of the term "Majority
Banks";
(e) amend this Section, Section 2.13 or Section 7.01, or any
provision herein providing for consent or other action by all Banks; or
(f) amend the definition of "Change of Control" or waive any Event of
Default under Subsection 8.01(k).
and, PROVIDED FURTHER, that (i) no amendment, waiver or consent shall, unless in
writing and signed by the Administrative Agent in addition to the Majority Banks
or all the Banks, as the case may be, affect the rights or duties of the
Administrative Agent under this Agreement or any other Loan Document, and (ii)
the Fee Letters may be amended, or rights or privileges thereunder waived, in a
writing executed by the parties thereto.
10.02 NOTICES.
(a) All notices, requests and other communications shall be in
writing (including, unless the context expressly otherwise provides, by
facsimile transmission, provided that any matter transmitted by the Company by
facsimile (i) shall be immediately confirmed by a telephone call to the
recipient at the number specified on SCHEDULE 10.02, and (ii) shall be followed
promptly by delivery of a hard copy original thereof) and mailed, faxed or
delivered, to the address or facsimile number specified for notices on SCHEDULE
10.02; or, as directed to the Company or the Administrative Agent, to such other
address as shall be designated by such party in a written notice to the other
parties, and as directed to any other party, at such other address as shall be
designated by such party in a written notice to the Company and the
Administrative Agent.
(b) All such notices, requests and communications shall, when
transmitted by overnight delivery, or faxed, be effective when delivered for
overnight (next-day) delivery, or transmitted in legible form by facsimile
machine, respectively, or if mailed, upon the third Business Day after the date
deposited into the U.S. mail, or if delivered, upon delivery; except that
notices pursuant to Article II or IX shall not be effective until actually
received by the Administrative Agent.
(c) Any agreement of the Administrative Agent and the Banks herein to
receive certain notices by telephone or facsimile
-79-
<PAGE>
is solely for the convenience and at the request of the Company. The
Administrative Agent and the Banks shall be entitled to rely on the authority
of any Person purporting to be a Person authorized by the Company to give
such notice and the Administrative Agent and the Banks shall not have any
liability to the Company or other Person on account of any action taken or
not taken by the Administrative Agent or the Banks in reliance upon such
telephonic or facsimile notice. The obligation of the Company to repay the
Loans shall not be affected in any way or to any extent by any failure by the
Administrative Agent and the Banks to receive written confirmation of any
telephonic or facsimile notice or the receipt by the Administrative Agent and
the Banks of a confirmation which is at variance with the terms understood by
the Administrative Agent and the Banks to be contained in the telephonic or
facsimile notice.
10.03 NO WAIVER; CUMULATIVE REMEDIES. No failure to exercise and no delay
in exercising, on the part of the Administrative Agent or any Bank, any right,
remedy, power or privilege hereunder, shall operate as a waiver thereof; nor
shall any single or partial exercise of any right, remedy, power or privilege
hereunder preclude any other or further exercise thereof or the exercise of any
other right, remedy, power or privilege.
10.04 COSTS AND EXPENSES. The Company shall:
(a) subject to the terms of the Fee Letters, whether or not the
transactions contemplated hereby are consummated, pay or reimburse the Arrangers
and Administrative Agent within five Business Days after demand (subject to
Section 4.01(e)) for all costs and expenses incurred by the Arrangers and
Administrative Agent in connection with the development, preparation, delivery,
administration and execution of, and any amendment, supplement, waiver or
modification to (in each case, whether or not consummated), this Agreement, any
Loan Document and any other documents prepared in connection herewith or
therewith, and the consummation of the transactions contemplated hereby and
thereby, including reasonable Attorney Costs incurred by the Arrangers and
Administrative Agent with respect thereto; and
(b) pay or reimburse the Administrative Agent, the Arrangers and each
Bank within five Business Days after demand for all costs and expenses
(including reasonable Attorney Costs) incurred by them in connection with the
enforcement, attempted enforcement, or preservation of any rights or remedies
under this Agreement or any other Loan Document during the existence of an Event
of Default or after acceleration of the Loans (including in connection with any
"workout" or restructuring regarding the Loans, and including in any Insolvency
Proceeding or appellate proceeding).
-80-
<PAGE>
10.05 COMPANY INDEMNIFICATION. Whether or not the transactions
contemplated hereby are consummated, the Company shall indemnify and hold the
Agent-Related Persons, and each Bank and each of its respective officers,
directors, employees, counsel, agents and attorneys-in-fact (each, an
"INDEMNIFIED PERSON") harmless from and against any and all liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
charges, expenses and disbursements (including reasonable Attorney Costs) of any
kind or nature whatsoever which may at any time (including at any time following
repayment of the Loans and the termination, resignation or replacement of the
Administrative Agent or replacement of any Bank) be imposed on, incurred by or
asserted against any such Person in any way relating to or arising out of this
Agreement or any document contemplated by or referred to herein, or the
transactions contemplated hereby, or any action taken or omitted by any such
Person under or in connection with any of the foregoing, including with respect
to any investigation, litigation or proceeding (including any Insolvency
Proceeding or appellate proceeding) related to or arising out of this Agreement
or the Loans or the use of the proceeds thereof, whether or not any Indemnified
Person is a party thereto (all the foregoing, collectively, the "INDEMNIFIED
LIABILITIES"); PROVIDED, that the Company shall have no obligation hereunder to
any Indemnified Person with respect to Indemnified Liabilities resulting solely
from the gross negligence or willful misconduct of such Indemnified Person. The
agreements in this Section shall survive payment of all other Obligations.
10.06 PAYMENTS SET ASIDE. To the extent that the Company makes a payment
to the Administrative Agent or the Banks, or the Administrative Agent or the
Banks exercise their right of set-off, and such payment or the proceeds of such
set-off or any part thereof are subsequently invalidated, declared to be
fraudulent or preferential, set aside or required (including pursuant to any
settlement entered into by the Administrative Agent or such Bank in its
discretion) to be repaid to a trustee, receiver or any other party, in
connection with any Insolvency Proceeding or otherwise, then (a) to the extent
of such recovery the obligation or part thereof originally intended to be
satisfied shall be revived and continued in full force and effect as if such
payment had not been made or such set-off had not occurred, and (b) each Bank
severally agrees to pay to the Administrative Agent upon demand its pro rata
share of any amount so recovered from or repaid by the Administrative Agent.
10.07 SUCCESSORS AND ASSIGNS. The provisions of this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns, except that the Company may not assign or transfer any
of its
-81-
<PAGE>
rights or obligations under this Agreement without the prior written consent
of the Administrative Agent and each Bank.
10.08 ASSIGNMENTS, PARTICIPATIONS, ETC.
(a) Any Bank may, with the written consent of the Company at all
times other than during the existence of an Event of Default and the
Administrative Agent, which consents shall not be unreasonably withheld, at any
time assign and delegate to one or more Eligible Assignees (provided that no
written consent of the Company or the Administrative Agent shall be required in
connection with any assignment and delegation by a Bank to an Eligible Assignee
that is an Affiliate of such Bank) (each an "ASSIGNEE") all, or any ratable part
of all, of the Loans, the Commitments and the other rights and obligations of
such Bank hereunder, in a minimum amount of $10,000,000; PROVIDED, HOWEVER, that
the Company and the Administrative Agent may continue to deal solely and
directly with such Bank in connection with the interest so assigned to an
Assignee until (i) written notice of such assignment, together with payment
instructions, addresses and related information with respect to the Assignee,
shall have been given to the Company and the Administrative Agent by such Bank
and the Assignee; (ii) such Bank and its Assignee shall have delivered to the
Company and the Administrative Agent an Assignment and Acceptance in the form of
EXHIBIT E ("ASSIGNMENT AND ACCEPTANCE") together with any Note or Notes subject
to such assignment and (iii) the assignor Bank or Assignee has paid to the
Administrative Agent a processing fee in the amount of $2,000.
(b) From and after the date that the Administrative Agent notifies
the assignor Bank that it has received (and provided its consent with respect
to) an executed Assignment and Acceptance and payment of the above-referenced
processing fee, (i) the Assignee thereunder shall be a party hereto and, to the
extent that rights and obligations hereunder have been assigned to it pursuant
to such Assignment and Acceptance, shall have the rights and obligations of a
Bank under the Loan Documents, and (ii) the assignor Bank shall, to the extent
that rights and obligations hereunder and under the other Loan Documents have
been assigned by it pursuant to such Assignment and Acceptance, relinquish its
rights and be released from its obligations under the Loan Documents.
(c) Within five Business Days after its receipt of notice by the
Administrative Agent that it has received an executed Assignment and Acceptance
and payment of the processing fee, (and provided that it consents to such
assignment in accordance with Section 10.08(a)), the Company shall execute and
deliver to the Administrative Agent new Notes evidencing such Assignee's
assigned Loans and Commitment and, if the assignor
-82-
<PAGE>
Bank has retained a portion of its Loans and its Commitment, replacement
Notes in the principal amount of the Revolving Loans retained by the assignor
Bank (such Notes to be in exchange for, but not in payment of, the Notes held
by such Bank). Immediately upon each Assignee's making its processing fee
payment under the Assignment and Acceptance, this Agreement shall be deemed
to be amended to the extent, but only to the extent, necessary to reflect the
addition of the Assignee and the resulting adjustment of the Commitments
arising therefrom. The Commitment allocated to each Assignee shall reduce
such Commitments of the assigning Bank PRO TANTO.
(d) Any Bank may at any time sell to one or more commercial banks or
other Persons not Affiliates of the Company (a "PARTICIPANT") participating
interests in any Loans, the Commitment of that Bank and the other interests of
that Bank (the "ORIGINATOR") hereunder and under the other Loan Documents;
PROVIDED, HOWEVER, that (i) the Originator's obligations under this Agreement
shall remain unchanged, (ii) the Originator shall remain solely responsible for
the performance of such obligations, (iii) the Company and the Administrative
Agent shall continue to deal solely and directly with the Originator in
connection with the Originator's rights and obligations under this Agreement and
the other Loan Documents, and (iv) no Bank shall transfer or grant any
participating interest under which the Participant has rights to approve any
amendment to, or any consent or waiver with respect to, this Agreement or any
other Loan Document, except to the extent such amendment, consent or waiver
would require unanimous consent of the Banks as described in the FIRST PROVISO
to Section 10.01. In the case of any such participation, the Participant shall
be entitled to the benefit of Sections 3.01, 3.03 and 10.05 as though it were
also a Bank hereunder, and if amounts outstanding under this Agreement are due
and unpaid, or shall have been declared or shall have become due and payable
upon the occurrence of an Event of Default, each Participant shall be deemed to
have the right of set-off in respect of its participating interest in amounts
owing under this Agreement to the same extent as if the amount of its
participating interest were owing directly to it as a Bank under this Agreement.
(e) Notwithstanding any other provision in this Agreement, any Bank
may at any time assign all or any portion of its rights under and interest in
this Agreement and the Note held by it for the purpose of creating a security
interest in favor of any Federal Reserve Bank in accordance with Regulation A of
the FRB or U.S. Treasury Regulation 31 CFR Section 203.14, and such Federal
Reserve Bank may enforce such pledge or security interest in any manner
permitted under applicable law.
-83-
<PAGE>
10.09 CONFIDENTIALITY. Each Bank agrees to take and to cause its
Affiliates to take normal and reasonable precautions and exercise due care to
maintain the confidentiality of all information identified as "confidential" or
"secret" by the Company and provided to it by the Company or any Subsidiary, or
by the Administrative Agent on such Company's or Subsidiary's behalf, under this
Agreement or any other Loan Document, and neither it nor any of its Affiliates
shall use any such information other than in connection with or in enforcement
of this Agreement and the other Loan Documents or in connection with other
business now or hereafter existing or contemplated with the Company or any
Subsidiary; except to the extent such information (i) was or becomes generally
available to the public other than as a result of disclosure by the Bank in
breach of this Section 10.09, or (ii) was or becomes available on a
non-confidential basis from a source other than the Company, provided that such
source is not bound by a legal or contractual obligation known to the Bank;
PROVIDED, HOWEVER, that any Bank may disclose such information (A) at the
request or pursuant to any requirement of any Governmental Authority to which
the Bank is subject or in connection with an examination of such Bank by any
such authority; (B) pursuant to subpoena or other court process; (C) when
required to do so in accordance with the provisions of any applicable
Requirement of Law; (D) to the extent reasonably required in connection with any
litigation or proceeding to which the Administrative Agent, any Bank or their
respective Affiliates may be party; (E) after the occurrence of a Default, to
the extent reasonably required in connection with the exercise of any remedy
hereunder or under any other Loan Document; (F) to such Bank's independent
auditors, counsel and other professional advisors; (G) to any Participant or
Assignee, actual or potential, provided that such Person agrees in writing to
keep such information confidential to the same extent required of the Banks
hereunder; (H) as to any Bank or its Affiliate, as expressly permitted under the
terms of any other document or agreement regarding confidentiality to which the
Company or any Subsidiary is party with such Bank or such Affiliate; and (I) to
its Affiliates; PROVIDED, however, that in the event any Bank is requested to
disclose confidential information pursuant to subsection (B), (C) or (D), such
Bank shall use reasonable efforts to notify the Company promptly, if it may
lawfully so do, so that the Company may seek a protective order or other
appropriate remedy.
10.10 SET-OFF. In addition to any rights and remedies of the Banks
provided by law, if an Event of Default exists or the Loans have been
accelerated, each Bank or any Affiliate, which is an Eligible Assignee, thereof
is authorized at any time and from time to time, without prior notice to the
Company, any such notice being waived by the Company to the fullest extent
permitted by law, to set off and apply any and all deposits
-84-
<PAGE>
(general or special, time or demand, provisional or final) at any time held
by, and other indebtedness at any time owing by, such Bank to or for the
credit or the account of the Company against any and all Obligations owing to
such Bank, now or hereafter existing, irrespective of whether or not the
Administrative Agent or such Bank shall have made demand under this Agreement
or any Loan Document and although such Obligations may be contingent or
unmatured and each such Affiliate is hereby irrevocably authorized to permit
such set-off and appropriation. Each Bank agrees promptly to notify the
Company and the Administrative Agent after any such set-off and application
made by such Bank; PROVIDED, HOWEVER, that the failure to give such notice
shall not affect the validity of such set-off and application.
10.11 NOTIFICATION OF ADDRESSES, LENDING OFFICES, ETC. Each Bank shall
notify the Administrative Agent in writing of any changes in the address to
which notices to the Bank should be directed, of addresses of any Lending
Office, of payment instructions in respect of all payments to be made to it
hereunder and of such other administrative information as the Administrative
Agent shall reasonably request.
10.12 COUNTERPARTS. This Agreement may be executed in any number of
separate counterparts, each of which, when so executed, shall be deemed an
original, and all of said counterparts taken together shall be deemed to
constitute but one and the same instrument.
10.13 SEVERABILITY. The illegality or unenforceability of any provision of
this Agreement or any instrument or agreement required hereunder shall not in
any way affect or impair the legality or enforceability of the remaining
provisions of this Agreement or any instrument or agreement required hereunder.
10.14 NO THIRD PARTIES BENEFITED. This Agreement is made and entered into
for the sole protection and legal benefit of the Company, the Banks, the
Administrative Agent and the Agent-Related Persons, and their permitted
successors and assigns, and no other Person shall be a direct or indirect legal
beneficiary of, or have any direct or indirect cause of action or claim in
connection with, this Agreement or any of the other Loan Documents.
10.15 GOVERNING LAW AND JURISDICTION.
(a) THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE LAW OF THE STATE OF CALIFORNIA; PROVIDED THAT THE
ADMINISTRATIVE AGENT AND THE BANKS SHALL RETAIN ALL RIGHTS ARISING UNDER FEDERAL
LAW.
-85-
<PAGE>
(b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR
ANY OTHER LOAN DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF CALIFORNIA
OR OF THE UNITED STATES FOR THE SOUTHERN DISTRICT OF CALIFORNIA, AND BY
EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF THE COMPANY, THE
ADMINISTRATIVE AGENT AND THE BANKS CONSENTS, FOR ITSELF AND IN RESPECT OF ITS
PROPERTY, TO THE NON-EXCLUSIVE JURISDICTION OF THOSE COURTS. EACH OF THE
COMPANY, THE ADMINISTRATIVE AGENT AND THE BANKS IRREVOCABLY WAIVES ANY
OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE
GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE
BRINGING OF ANY ACTION OR PROCEEDING IN SUCH JURISDICTION IN RESPECT OF THIS
AGREEMENT OR ANY DOCUMENT RELATED HERETO. THE COMPANY, THE ADMINISTRATIVE AGENT
AND THE BANKS EACH WAIVE PERSONAL SERVICE OF ANY SUMMONS, COMPLAINT OR OTHER
PROCESS, WHICH MAY BE MADE BY ANY OTHER MEANS PERMITTED BY CALIFORNIA LAW.
10.16 WAIVER OF JURY TRIAL. THE COMPANY, THE BANKS AND THE ADMINISTRATIVE
AGENT EACH WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR
CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE
OTHER LOAN DOCUMENTS, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY
ACTION, PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES
AGAINST ANY OTHER PARTY OR ANY ADMINISTRATIVE AGENT-RELATED PERSON, PARTICIPANT
OR ASSIGNEE, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE.
THE COMPANY, THE BANKS AND THE ADMINISTRATIVE AGENT EACH AGREE THAT ANY SUCH
CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY.
WITHOUT LIMITING THE FOREGOING, THE PARTIES FURTHER AGREE THAT THEIR RESPECTIVE
RIGHT TO A TRIAL BY JURY IS WAIVED BY OPERATION OF THIS SECTION AS TO ANY
ACTION, COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO
CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT OR THE OTHER LOAN
DOCUMENTS OR ANY PROVISION HEREOF OR THEREOF. THIS WAIVER SHALL APPLY TO ANY
SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT
AND THE OTHER LOAN DOCUMENTS.
10.17 ENTIRE AGREEMENT. This Agreement, together with the other Loan
Documents, embodies the entire agreement and understanding among the Company,
the Banks and the Administrative Agent, and supersedes all prior or
contemporaneous agreements and understandings of such Persons, verbal or
written, relating to the subject matter hereof and thereof.
-86-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered in Los Angeles by their proper and duly authorized
officers as of the day and year first above written.
[Signature blocks not included]
-87-
<PAGE>
CONSULTING AGREEMENT
CONSULTING AGREEMENT (this "Agreement"), dated as of May 1, 1997,
among Foundation Health Systems, Inc. (formerly Health Systems International,
Inc.), a Delaware corporation (the "Company"), Foundation Health Corporation, a
Delaware corporation ("FHC"), and Allen J. Marabito ("Marabito").
WHEREAS, the Company, Marabito and FHC, which became a wholly-owned
subsidiary of the Company upon consummation of the merger on April 1, 1997 (the
"Merger Date")(pursuant to the Agreement and Plan of Merger, dated October 1,
1996, by and among the Company, FH Acquisition Corp. and FHC), have previously
entered into that certain Amended and Restated Employment Agreement, dated as of
December 16, 1996 (the "Employment Agreement");
WHEREAS, it is mutually in the best interests of Marabito and the
Company to terminate the Employment Agreement;
WHEREAS, the Company desires to continue to benefit from the
experience and ability of Marabito in the capacity of a consultant to the
Company upon termination of his employment relationship with the Company and
Marabito is willing to commit himself to serve in the capacity of a consultant
to the Company; and
WHEREAS, the parties desire to enter into this Agreement setting forth
(i) the terms and conditions of the termination of the employment relationship
of Marabito with the Company and (ii) the terms and conditions of the retention
of Marabito as a consultant to the Company.
NOW, THEREFORE, in order to effect the foregoing, in consideration of
the premises and the respective covenants and agreements of the parties herein
contained, and intending to be legally bound hereby, the parties hereto agree as
follows:
<PAGE>
1. TERMINATION OF EMPLOYMENT AGREEMENT.
(a) Except as provided in paragraph (b) below, effective as of the
date hereof, the Employment Agreement shall be terminated and, except as
provided herein, the Company, FHC and Marabito shall have no further rights
and/or obligations under the Employment Agreement. As of the Effective Date (as
defined below), Marabito hereby resigns his position as an officer and/or
director of the Company and each of its direct or indirect subsidiaries.
(b) Notwithstanding paragraph (a) above and other provisions of this
Agreement, the provisions of Sections 5(d) and (e) and Sections 6 through 11 of
the Employment Agreement shall survive the termination of the Employment
Agreement (the "Surviving Provisions").
(c) The provisions set forth in paragraphs 5 through 7 hereof shall
commence immediately on the date on which all Settlement Payments (as defined
below) have been made pursuant to paragraph 2 hereof (the "Effective Date").
(d) Marabito hereby agrees and authorizes the Company and Wachovia
Bank of North Carolina, N.A. to amend the Benefit Protection Trust dated as of
April 1, 1997 (the "Trust Agreement") in favor of Marabito in order to (i)
replace Schedule I to the Trust Agreement with Schedule I attached hereto and
(ii) make such other changes required in order to make payments to Marabito
required pursuant to this Agreement.
2. FINAL PAYMENT.
(a) Marabito shall be entitled to receive, in full satisfaction of
the Company's and FHC's obligations set forth in the Employment Agreement
(except for the Surviving Provisions), a cash lump sum in an amount equal to
$2,222,643, subject to applicable withholding requirements, if any (the
"Settlement Payment"). Marabito acknowledges that no further amounts are due
under Section 5(c) of the Employment Agreement.
(b) The Settlement Payment shall be made by wire transfer in the name
of Allen J. Marabito to Wells Fargo Bank, 1113 East Bidwell Street, Folsom,
California 95630, Account Number 0363202458, Federal Transit No. 121000248, no
later than eight (8) days following the
2
<PAGE>
date of Marabito's execution of this Agreement, provided that Marabito has
not exercised his right to revoke pursuant to paragraph 4 hereof. Marabito
acknowledges and agrees that, in the event that he revokes this Agreement
pursuant to paragraph 4 hereof, he shall have no right pursuant to this
Agreement to receive any payments described in this paragraph 2(b). Marabito
further acknowledges that following his receipt of the Settlement Payment,
the Company and FHC shall have no further obligations to him with respect to
the benefits described in the Employment Agreement or otherwise, except for
the Surviving Provisions, including, but not limited to, the Deferred
Compensation Plan, the FHC Retiree Medical Plan, the FHC Stock Option Plan,
and the Indemnification Agreement dated July 8, 1991, a copy of which is
attached hereto as Exhibit A.
(c) The Company acknowledges and agrees that the Board of Directors
of FHC recently approved, and the Compensation and Stock Option Committee of the
Board of Directors of the Company recently ratified, the payment of certain
amounts to Deferred Compensation Plan participants, who vote to approve the
suspension of the Deferred Compensation Plan, upon the receipt of the necessary
approvals to suspend the Deferred Compensation Plan. The Company agrees to use
all reasonable efforts to seek and obtain the necessary approvals to suspend the
Deferred Compensation Plan as soon as practicable after the date hereof.
Marabito hereby agrees to such suspension of the Deferred Compensation Plan and
in consideration thereof, the Company agrees to make a lump sum cash payment to
Marabito, by wire transfer to the bank account described in paragraph 2(b)
hereof, within three (3) business days following the date of receipt by the
Company of the consents of 80% or more of the participants in the Deferred
Compensation Plan to suspend the Deferred Compensation Plan, in the amount of
$181,476.
(d) Simultaneously with the payment of the Settlement Payment, the
Company shall make a lump sum cash payment to Marabito by wire transfer to the
bank account described in paragraph 2(b) hereof for Marabito's accrued but
unpaid vacation time.
(e) The Company acknowledges and agrees that during the benefit
period referred to in Section 5(d) of the Employment Agreement, Marabito shall
be entitled to
3
<PAGE>
automobile benefits as provided to Marabito by FHC immediately prior to the
Merger Date (as defined in the Employment Agreement) and as set forth in the
"Policy Guidelines on Executive Automobile Policy" dated May 1, 1993, a copy
of which is attached hereto as Exhibit B.
3. RELEASES.
(a) As a material inducement to enter into this Agreement, Marabito
hereby knowingly and voluntarily, fully and finally releases, acquits and
forever discharges the Company and FHC, affiliates thereof, and their past and
present officers, directors, shareholders, partners, trustees, beneficiaries,
managers, employees, attorneys, agents, successors or assigns (the "Company
Released Parties"), from any and all claims, charges, complaints, liens,
demands, causes of action, obligations, damages and liabilities, KNOWN OR
UNKNOWN, SUSPECTED OR UNSUSPECTED, that he had, now has, or may hereafter claim
to have against the Company Released Parties arising out of or relating in any
way to Marabito's employment relationship with the Company or the termination
thereof, or the termination of the Employment Agreement (including without
limitation the Age Discrimination Act). Notwithstanding the generality of the
foregoing, nothing contained herein shall release the Company or FHC or in any
way impair Marabito's rights to insurance coverage or reimbursement or
indemnification from the Company or FHC arising from or relating in any way to
Marabito's service as an employee, officer or director as provided by law or
under the Company's or FHC's bylaws, or under any applicable indemnification
agreement (including the Indemnification Agreement dated July 8, 1991) or
insurance policy to which the Company or FHC is a party, including, but not
limited to, Marabito's rights to reimbursement, coverage or indemnification in
connection with any current or future litigation matter arising from or relating
in any way to Marabito's services as an employee, officer, director or
representative of FHC or the Company; nor shall the foregoing release the
Company or FHC from any claim relating to the breach by the Company or FHC of
its obligations set forth herein, or set forth in the Surviving Provisions,
(which include, not are not limited to, the Deferred Compensation Plan, the FHC
Retiree Medical Plan and the FHC Stock Option Plan).
4
<PAGE>
(b) As a material inducement to enter into this Agreement, each of
the Company and FHC, on its behalf and that of its affiliates and their officers
and directors, agents employees, successors and assigns (in their capacity as
officers or directors of the Company or FHC) likewise hereby knowingly and
voluntarily, fully and finally releases, acquits, and forever discharges
Marabito and his agents, employees, successors, heirs, beneficiaries or assigns
(the "Marabito Released Parties") from any and all claims, charges, complaints,
liens, demands, causes of action, obligations, damages and liabilities, KNOWN OR
UNKNOWN, SUSPECTED OR UNSUSPECTED, that it had, now has, or may hereafter claim
to have against Marabito Released Parties arising out of or relating in any way
to Marabito's relationship with the Company or FHC as an employee, officer,
director or representative, whether or not previously asserted before any state
or federal court or before any state, federal or regulatory agency or
governmental entity. Notwithstanding the generality of the foregoing, nothing
contained herein shall release Marabito from any claim relating to the breach by
Marabito of any confidentiality agreements with the Company or FHC or any of its
affiliates or the obligations set forth herein, or set forth in the Surviving
Provisions.
(c) Each of the Company, FHC and Marabito acknowledges that such
party has been advised by legal counsel regarding, is familiar with and
expressly waives all rights afforded by Section 1542 of the Civil Code of the
State of California ("Section 1542"), or any statute of similar effect in any
other jurisdiction in which any action might be brought, with respect to the
claims described in paragraphs (a) and (b) of this paragraph 3. Section 1542
states as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES
NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
SETTLEMENT WITH THE DEBTOR.
Thus, notwithstanding the provisions of Section 1542, and for the purpose of
implementing a full and complete release, each of the Company, FHC and Marabito
understands and agrees that this Agreement is intended to include all claims, if
any, described in paragraphs (a) (in the case
5
<PAGE>
of Marabito) and (b) (in the case of the Company and FHC) above, which either
party may have and which neither party now knows or suspects to exist in such
party's favor against the Company Released Parties (in the case of Marabito)
or Marabito Released Parties (in the case of the Company and FHC) and that
this Agreement extinguishes those claims.
4. MARABITO RIGHT TO REVOKE.
Marabito acknowledges that the Company has advised him to consult
with an attorney of his choosing prior to signing this Agreement and that he
has twenty-one (21) days during which to consider the provisions of this
Agreement, although he may sign and return it sooner. Marabito further
acknowledges that he has been advised by the Company that he has the right to
revoke this Agreement for a period of seven (7) days after signing it and
that this Agreement shall not become effective or enforceable until such
seven (7) day revocation period has expired. Marabito acknowledges and
agrees that, if he wishes to revoke this Agreement, he must do so in writing,
signed by Marabito and received by the Company at its headquarters no later
than 5:00 p.m. Pacific Standard Time on the seventh (7th) day after Marabito
has signed the Agreement. Marabito acknowledges and agrees that, in the event
that he revokes this Agreement, he shall have no right to receive any payment
hereunder. Marabito understands and agrees that the Company is under no
obligation to offer such payment and that he is under no obligation to
consent to the release set forth in paragraph 3(a) of this Agreement.
Marabito represents that he has read this Agreement and understands its terms
and that he enters into this Agreement freely, voluntarily, and without
coercion.
5. RETENTION AS A CONSULTANT.
(a) The provisions of this paragraph 5 shall commence upon the
Effective Date, and shall expire two (2) years from the Effective Date,
unless earlier terminated by reason of Marabito's death or by the Company for
Cause (the "Consulting Period"). "Cause" shall mean (i) a willful act by
Marabito 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
6
<PAGE>
Marabito 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 (8) of its members, that Cause exists.
Following the termination of this Agreement, the Company's and Marabito's
obligations under this Agreement shall cease.
(b) During the Consulting Period, Marabito shall render such
consulting services to the Company and its affiliates as Marabito and the
Company agree upon from time to time; PROVIDED, HOWEVER, that (i) Marabito will
provide substantially full time efforts to help the Company finalize its
transition planning during the short term period immediately following the
Effective Date, (ii) following such short term period Marabito will not be
required to devote more than fifty percent (50%) of his business time to the
performance of such services for the remainder of the first year of the
Consulting Period, taking into account the time and efforts taken pursuant to
clause (i) above; and (iii) Marabito will not be required to devote more than
twenty-five percent (25%) of his business time to the performance of such
services during the second year of the Consulting Period. In this regard, the
Company shall provide Marabito reasonable notice of such consulting obligations
and Marabito shall have the right to reschedule commitments to the Company to
accommodate the requirements of his other outside interests.
(c) Marabito shall perform his duties hereunder at such locations as
are acceptable to him and the Company or by telephone consultation. To
facilitate Marabito's performance during the Consulting Period, the Company
shall furnish Marabito with the use of an office and secretary at the Company's
headquarters reasonably satisfactory to Marabito.
6. COMPENSATION AND RELATED MATTERS.
(a) As a material inducement to enter into this Agreement, the
Company shall pay Marabito a payment totaling $1,777,357 payable as follows:
(i) $1,177,357 relating to the first twelve months of the Consulting Period on
the Effective Date, and (ii) $600,000 relating
7
<PAGE>
to the second twelve months of the Consulting Period being payable in equal
monthly installments beginning on the first anniversary of the Effective
Date, PROVIDED, HOWEVER, that a pro rata amount paid to Marabito pursuant to
clause (i) above shall be paid back to the Company by Marabito upon a breach
by Marabito of the provisions set forth in paragraph 7 hereof. The "pro rata
amount" referred to in the preceding sentence shall be determined by dividing
(A) the number of months from such "breach" to the end of the first year of
the Consulting Period by (B) 12.
(b) The payment described in paragraph (a)(i) above shall be made by
wire transfer to the bank account described in paragraph 2(b) hereof no later
than eight (8) business days following the date of Marabito's execution of this
Agreement, provided that Marabito has not exercised his right to revoke pursuant
to paragraph 4 hereof. Marabito acknowledges and agrees that, in the event that
he revokes this Agreement pursuant to paragraph 4 hereof, he shall have no right
pursuant to this Agreement to receive any payments described in paragraph (a)
above.
(c) The Company shall reimburse Marabito for reasonable business
expenses incurred in the performance of Marabito'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.
7. NON-COMPETITION.
(a) Subject to paragraph 5(a) hereof, as a material inducement to
enter into this Agreement, for a period of two (2) years after the Effective
Date, Marabito 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
8
<PAGE>
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 Marabito, 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.
(b) In the event Marabito wishes to enter into a business
relationship or otherwise take any action which he reasonably believes in good
faith will not violate the terms of paragraph (a) above, Marabito may request
approval from the Company to enter into such relationship or take such action.
If (i) the Company's Board of Directors or President agrees that Marabito's
business relationship or taking such action would not violate paragraph (a)
above or (ii) the Company's Board of Directors or President fails to respond to
Marabito's written request to the Company within 30 days from the receipt of
such written request by the Company's President or Secretary, then Marabito
shall be deemed to have complete approval from the Company to take such actions
or maintain such business relationships described in Marabito's written request
to the Company. In the event the Company's Board of Directors or President
informs Marabito that it believes Marabito's business relationship or actions
described in Marabito's request would violate Marabito's obligations under
paragraph (a) above, so long as Marabito has not been engaged in such business
relationship or taken such actions for a period of more than 10 days prior to
the date of receipt by the Company's President or Secretary of Marabito's
request for approval, Marabito will be deemed to be in compliance with the terms
of paragraph (a) above, if Marabito discontinues such actions or business
relationship within 15 days after Marabito has been informed that the Company's
Board of Directors or President has determined that such action or business
relationship would violate paragraph (a) above.
(c) It is further expressly agreed that the Company and its
affiliates would suffer irreparable injury if Marabito were to compete with the
Company or
9
<PAGE>
any affiliate of the Company in violation of this Agreement and that the
Company and its affiliates would by reason of such competition be entitled to
injunctive relief in a court of appropriate jurisdiction, and Marabito
further consents and stipulates to the entry of such injunctive relief in
such a court prohibiting Marabito from competing with the Company or any
affiliate of the Company in violation of this Agreement.
(d) If it is determined by a court of competent jurisdiction in any
state that the non-competition covenant in this paragraph 7 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.
8. NONDISPARAGEMENT.
Neither the Company or FHC on the one had, nor Marabito on the other
hand, will make any derogatory or negative statements about the other party that
may adversely affect the current or potential business relationships of the
other.
9. SUCCESSOR; 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 Marabito, 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 Marabito hereunder shall inure
to the benefit of and be enforceable by Marabito's personal or legal
representatives, executors, administrators, successors, heirs,
10
<PAGE>
distributees, devisees and legatees. If Marabito 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 (including, but not limited to, the amounts payable under Section
6(a) hereof), unless otherwise provided herein, shall be paid or provided in
accordance with the terms of this Agreement to Marabito's devisees, legatees,
or other designees or, if there be no such designee, to Marabito's estate.
10. 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 certificated or registered mail, return receipt
requested, postage prepaid, addressed as follows:
If to Marabito:
5899 Wedgewood Drive
Granite Bay, California 95746
With a copy to:
Alschuler Grossman & Pines LLP
2049 Century Park East, 39th Floor
Los Angeles, California 90067-3213
Attention: Marshall B. Grossman, Esq.
If to the Company:
Foundation Health Systems, Inc.
21600 Oxnard Street
Woodland Hills, California 91367
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 effective in accordance herewith, except that notices of change of address
shall be effective only upon receipt.
11
<PAGE>
11. WITHHOLDING.
All amounts payable hereunder shall be subject to such withholding
taxes as may be required by law.
12. 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 Marabito 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 or 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.
13. 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.
14. 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.
15. ENTIRE AGREEMENT.
This Agreement sets forth the entire agreement of the parties hereto
in respect of the subject matter contained herein and supersedes all prior
agreements,
12
<PAGE>
promises, covenants, arrangements, communications, representations or
warranties, whether oral or written, by any officer, employee or
representative of any party hereto which are related to the subject matter of
the Employment Agreement or the termination thereof.
13
<PAGE>
IN WITNESS WHEREOF, each of the parties has executed this Agreement as of
the date and year first written above.
FOUNDATION HEALTH SYSTEMS, INC.
By:_____________________________
Name:
Title:
FOUNDATION HEALTH CORPORATION
By:_____________________________
Name:
Title:
________________________________
ALLEN J. MARABITO
14
<PAGE>
FOUNDATION HEALTH SYSTEMS, INC.
1997 STOCK OPTION PLAN
I. INTRODUCTION
The purposes of the Foundation Health Systems, Inc. 1997 Stock Option Plan
(the "Plan") are (i) to align the interests of the stockholders of Foundation
Health Systems, Inc. (the "Company") and the recipients of awards under the Plan
by increasing the proprietary interest of such recipients in the Company's
growth and success, (ii) to advance the interests of the Company by attracting
and retaining key salaried employees of the Company and its subsidiaries and
(iii) to motivate such employees to act in the long-term best interests of the
Company's stockholders.
II. DEFINITIONS
For purposes of the Plan, the following capitalized terms shall have the
meanings set forth in this Article.
2.1 "Agreement" shall mean the written instrument evidencing an award
hereunder between the Company and the recipient of such award, the terms of
which may be amended or modified as provided in Section 6.3.
2.2 "Board" shall mean the Board of Directors of the Company.
2.3 "Bonus Stock" shall mean shares of Common Stock which are not subject to a
Restriction Period.
2.4 "Bonus Stock Award" shall mean an award of Bonus Stock.
2.5 "Code" shall mean the Internal Revenue Code of 1986, as amended.
2.6 "Committee" shall mean the Compensation and Stock Option Committee of the
Board.
2.7 "Common Stock" shall mean the Class A Common Stock, $.001 par value, of
the Company.
2.8 "Company" shall mean Foundation Health Systems, Inc., a Delaware
corporation, or any successor thereto.
2.9 "Disability" shall mean the inability, as determined solely by the
Committee, of the holder of an award to perform substantially such holder's
duties and responsibilities for a continuous period of at least six months.
2.10 "Employer" shall mean the Company and each Subsidiary.
2.11 "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended.
2.12 "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
2.13 "Fair Market Value" shall mean the closing price of a share of Common
Stock as reported in THE WALL STREET JOURNAL on the New York Stock Exchange
Composite Transactions list for the date as of which such value is being
determined or, if there shall be no reported transaction for such date or if
such date is not a trading day, on the next immediately preceding date for which
a transaction was reported or which was a trading day; PROVIDED, HOWEVER, that
Fair Market Value may be determined by the Committee by whatever means or method
as the Committee, in the good faith exercise of its discretion, shall at such
time deem appropriate.
1
<PAGE>
2.14 "Incentive Stock Option" shall mean an option to purchase shares of Common
Stock that meets the requirements of Section 422 of the Code, or any successor
provision, which is intended by the Committee to constitute an Incentive Stock
Option.
2.15 "Mature Shares" shall mean previously acquired shares of Common Stock for
which the holder thereof has good title, free and clear of all liens and
encumbrances and which such holder either (i) has held for at least six months
or (ii) has purchased on the open market.
2.16 "Maturity Value" shall mean, unless the Committee shall determine
otherwise, the average of the Fair Market Value of a share of Common Stock for a
period of sixty consecutive trading days ending on the Valuation Date with
respect to each Restricted Stock Award, or if the Valuation Date is not a
trading day, the sixty consecutive trading days ending on the last trading day
before the Valuation Date.
2.17 "Merger" shall mean any merger of the Company in which the holders of
Common Stock immediately prior to the merger have the same proportionate
ownership of common stock of the surviving or resulting parent corporation
immediately after the merger.
2.18 "Nonqualified Stock Option" shall mean a stock option which is not an
Incentive Stock Option.
2.19 "Permanent and Total Disability" shall have the meaning set forth in
Section 22(e)(3) of the Code or any successor thereto.
2.20 "Restricted Stock" shall mean shares of Common Stock which are subject to
a Restriction Period.
2.21 "Restricted Stock Award" shall mean an award of Restricted Stock.
2.22 "Restriction Period" shall mean any period designated by the Committee
during which the Common Stock subject to a Restricted Stock Award may not be
sold, transferred, assigned, pledged, hypothecated or otherwise encumbered or
disposed of, except as provided in the Plan or the Agreement relating to such
award.
2.23 "SAR" shall mean a stock appreciation right which is granted in tandem
with, or by reference to, an option (including a Nonqualified Stock Option
granted prior to the date of grant of the SAR), which entitles the holder
thereof to receive, upon exercise of such SAR and surrender for cancellation of
all or a portion of such option, shares of Common Stock, cash or a combination
thereof with an aggregate value equal to the excess of the Fair Market Value of
one share of Common Stock on the date of exercise over the base price of such
SAR, multiplied by the number of shares of Common Stock subject to such option,
or portion thereof, which is surrendered.
2.24 "Securities Act" shall mean the Securities Act of 1933, as amended.
2.25 "Stock Award" shall mean a Restricted Stock Award or a Bonus Stock Award.
2.26 "Subsidiary" shall mean any corporation other than the Company in an
unbroken chain of corporations beginning with the Company if, at the time of
reference, each of the corporations other than the last corporation in the
unbroken chain owns stock possessing 50 percent or more of the total combined
voting power of all classes of stock in one of the other corporations in such
chain.
2.27 "Ten Percent Holder" shall have the meaning set forth in Section 4.2(a).
2.28 "Valuation Date" with respect to any Restricted Stock Award shall mean the
date designated in the Agreement with respect to each Restricted Stock Award
pursuant to Section 5.2(a).
III. ELIGIBILITY AND ADMINISTRATION
3.1 ELIGIBILITY. Participants in the Plan shall consist of such key salaried
employees of the Employers as the Committee in its sole discretion may select
from time to time. The Committee's selection of an
2
<PAGE>
employee to participate in the Plan at any time shall not require the Committee
to select such employee to participate in the Plan at any other time.
3.2 ADMINISTRATION.
(a) IN GENERAL. The Plan shall be administered by the Committee. The
Committee may grant to eligible employees any one or a combination of the
following awards under the Plan: (i) options to purchase shares of Common Stock
in the form of Incentive Stock Options or Nonqualified Stock Options, (ii) SARs
and (iii) Stock Awards in the form of Restricted Stock or Bonus Stock. The
Committee shall, subject to the terms of the Plan, select eligible key salaried
employees for participation in the Plan and determine the form, amount and
timing of each award to such employees and, if applicable, the number of shares
of Common Stock and the number of SARs subject to such an award, the exercise
price or base price associated with the award, the time and conditions of
exercise or settlement of the award and all other terms and conditions of the
award, including, without limitation, the form of the Agreement evidencing the
award. The Committee may, in its sole discretion and for any reason at any time,
subject to the requirements imposed under Section 162(m) of the Code and
regulations promulgated thereunder in the case of an award intended to be
qualified performance-based compensation, take action such that (i) any or all
outstanding options and SARs shall become exercisable in part or in full and
(ii) all or a portion of the Restriction Period applicable to any outstanding
Restricted Stock Award shall lapse. The Committee shall, subject to the terms of
the Plan, interpret the Plan and the application thereof, establish rules and
regulations it deems necessary or desirable for the administration of the Plan,
make any determinations necessary or desirable to effectuate the purposes of the
Plan and may impose, incidental to the grant of an award, conditions with
respect to the award, such as limiting competitive employment or other
activities. All such interpretations, rules, regulations, determinations and
conditions shall be final, binding and conclusive. The acts of the Committee
shall be either (i) acts of a majority of the members of the Committee present
at any meeting at which a majority of the Committee members is present or (ii)
acts approved in writing by a majority of the members of the Committee without a
meeting.
(b) DELEGATION. The Committee may delegate some or all of its power and
authority hereunder to such executive officer or officers of the Company as the
Committee deems appropriate; PROVIDED, HOWEVER, that the Committee may not
delegate its power and authority with regard to (i) the grant of an award to any
person who is a "covered employee" within the meaning of Section 162(m) of the
Code or who, in the Committee's judgment, is likely to be a covered employee at
any time during the period an award hereunder to such employee would be
outstanding or (ii) the selection for participation in the Plan of an officer or
other person subject to Section 16 of the Exchange Act or decisions concerning
the timing, pricing or amount of an award to such an officer or other person.
(c) INDEMNIFICATION. No member of the Board of Directors or Committee, nor
any executive officer to whom the Committee delegates any of its power and
authority hereunder, shall be liable for any act, omission, interpretation,
construction or determination made in connection with the Plan in good faith,
and the members of the Board of Directors and the Committee and any such
executive officer shall be entitled to indemnification and reimbursement by the
Company in respect of any claim, loss, damage or expense (including attorneys'
fees) arising therefrom to the full extent permitted by law, except as otherwise
may be provided in the Company's Certificate of Incorporation or By-laws, and
under any directors' and officers' liability insurance that may be in effect
from time to time.
3.3 SHARES AVAILABLE. Subject to adjustment as provided in Section 6.7,
10,000,000 shares of Common Stock shall be available under the Plan. Such shares
of Common Stock and shares of each other class of stock which become available
under the Plan shall be reduced by the sum of the aggregate number of shares of
such stock then subject to awards under the Plan. To the extent that shares of
Common Stock subject to an outstanding option (except to the extent shares of
Common Stock are issued or delivered by the Company in connection with the
exercise of an SAR) or Stock Award are not issued or delivered by reason of the
expiration, termination, cancellation or forfeiture of such award or by reason
of the delivery
3
<PAGE>
or withholding of shares of Common Stock to satisfy all or a portion of the tax
withholding obligations relating to an award, then such shares of Common Stock
shall again be available under the Plan. Shares of Common Stock shall be made
available from authorized and unissued shares of Common Stock, or authorized and
issued shares of Common Stock reacquired and held as treasury shares or
otherwise or a combination thereof.
To the extent required by Section 162(m) of the Code and the regulations
thereunder, the maximum number of shares of Common Stock with respect to which
options, SARs, Stock Awards, or a combination thereof may be granted during the
term of the Plan to any employee shall be 3,000,000, subject to adjustment as
provided in Section 6.7.
IV. STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
4.1 STOCK OPTIONS. The Committee may, in its discretion, grant options to
purchase shares of Common Stock to such eligible employees as may be selected by
the Committee. Each option, or portion thereof, that is not an Incentive Stock
Option, shall be a Nonqualified Stock Option. Each Incentive Stock Option shall
be granted within ten years of the effective date of the Plan. To the extent
that the aggregate Fair Market Value (determined as of the date of grant) of
shares of Common Stock with respect to which options designated as Incentive
Stock Options are exercisable for the first time by an option holder during any
calendar year (under the Plan or any other plan of the Company or any
Subsidiary) exceeds $100,000 (or any other applicable dollar limitation
established under the federal tax laws) such options shall constitute
Nonqualified Stock Options.
4.2 TERMS OF STOCK OPTIONS. Options shall be subject to the following terms
and conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of the Plan, as the Committee shall deem advisable.
(a) NUMBER OF SHARES AND PURCHASE PRICE. The number of shares of Common
Stock subject to an option and the purchase price per share of Common Stock
purchasable upon exercise of the option shall be determined by the Committee;
PROVIDED, HOWEVER, that the purchase price per share of Common Stock purchasable
upon exercise of an option shall not be less than 100% of the Fair Market Value
of a share of Common Stock on the date of grant of such option; PROVIDED
FURTHER, that if an Incentive Stock Option shall be granted to an employee who,
at the time such option is granted, owns capital stock possessing more than ten
percent of the total combined voting power of all classes of capital stock of
the Company (or of any Subsidiary) (a "Ten Percent Holder"), then the purchase
price per share of Common Stock shall be the price (currently 110% of Fair
Market Value) required under the Code in order to constitute an Incentive Stock
Option.
(b) OPTION PERIOD AND EXERCISABILITY. The period during which an option
may be exercised shall be determined by the Committee; PROVIDED, HOWEVER, that
no Incentive Stock Option shall be exercised later than ten years after its date
of grant; PROVIDED FURTHER, that if an Incentive Stock Option shall be granted
to a Ten Percent Holder, such option shall not be exercised later than five
years after its date of grant. The Committee may, in its discretion, establish
performance measures which must be satisfied as a condition either to a grant of
an option or to the exercisability of all or a portion of an option. The
Committee shall determine whether an option shall become exercisable in
cumulative or noncumulative installments and in part or in full at any time. An
exercisable option, or portion thereof, may be exercised only with respect to
whole shares of Common Stock.
(c) METHOD OF EXERCISE. An option may be exercised (i) by giving written
notice to the Company specifying the number of whole shares of Common Stock to
be purchased and accompanied by payment therefor in full (or arrangement made
for such payment to the Company's satisfaction) either (A) in cash, (B) by
delivery (either actual delivery or by attestation procedures established by the
Company) of Mature Shares having an aggregate Fair Market Value, determined as
of the date of exercise, equal to the aggregate purchase price payable by reason
of such exercise, (C) in cash by a broker-dealer acceptable to
4
<PAGE>
the Company to whom the optionee has submitted an irrevocable notice of exercise
or (D) a combination of (A) and (B) , (ii) if applicable, by surrendering to the
Company any SARs which are canceled by reason of the exercise of the option and
(iii) by executing such documents as the Company may reasonably request. Cash
payments shall be made by wire transfer, certified or bank check or personal
check, in each case payable to the order of the Company. If payment is to be
made by delivery of Mature Shares, any fraction of a share of Common Stock which
would be required to pay such purchase price shall be disregarded and the
remaining amount due shall be paid in cash by the optionee. The Company shall
not be required to deliver certificates for shares of Common Stock until the
Company has confirmed the receipt of good and available funds in payment of the
full purchase price therefor.
4.3 STOCK APPRECIATION RIGHTS. The Committee may, in its discretion, grant
SARs to such eligible employees as may be selected by the Committee. Any SAR
related to an Incentive Stock Option shall be granted at the same time that such
Incentive Stock Option is granted.
4.4 TERMS OF SARS. SARs shall be subject to the following terms and
conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of the Plan, as the Committee shall deem advisable.
(a) NUMBER OF SARS AND BASE PRICE. The number of SARs subject to an award
shall be determined by the Committee. The base price of an SAR shall be the
purchase price per share of Common Stock of the related option.
(b) EXERCISE PERIOD AND EXERCISABILITY. The Agreement relating to an award
of SARs shall specify whether such award may be settled in shares of Common
Stock or cash or a combination thereof. The period for the exercise of an SAR
shall be determined by the Committee; PROVIDED, HOWEVER, that no SAR shall be
exercised later than the expiration, cancellation, forfeiture or other
termination of the related option. The Committee shall determine whether an SAR
may be exercised in cumulative or non-cumulative installments and in part or in
full at any time. An exercisable SAR, or portion thereof, may be exercised only
with respect to whole shares of Common Stock. Prior to the exercise of an SAR
for shares of Common Stock, the holder of such SAR shall have no rights as a
stockholder of the Company with respect to the shares of Common Stock subject to
such SAR and shall have rights as a stockholder of the Company in accordance
with Section 6.11.
(c) METHOD OF EXERCISE. An SAR may be exercised (i) by giving written
notice to the Company specifying the number of whole SARs which are being
exercised, (ii) by surrendering to the Company any options which are canceled by
reason of the exercise of the SAR and (iii) by executing such documents as the
Company may reasonably request.
4.4 TERMINATION OF EMPLOYMENT.
(a) IN GENERAL. Subject to Sections 6.9 and 4.4(b) and as described in
Section 4.4(c) in the case of an Incentive Stock Option, all of the terms
relating to the exercise, cancellation or other disposition of an option or SAR
in the event the holder of such option or SAR, as the case may be, is no longer
employed by an Employer, whether by reason of Disability, retirement, death or
other termination of employment, shall be determined by the Committee. Such
determination shall be made at the time of the grant of such option or SAR, as
the case may be, and shall be specified in the Agreement relating to such option
or SAR.
(b) INCENTIVE STOCK OPTIONS. Each Incentive Stock Option held by an
optionee who ceases to be employed by any Employer by reason of Permanent and
Total Disability or death shall be exercisable only to the extent that such
option is exercisable on the date of such optionee's termination of employment.
In the case of the optionee's Permanent and Total Disability, the option may
thereafter be exercised by such optionee (or such optionee's legal
representative) for a period of one year (or such shorter period as the
Committee may specify in the Agreement) after the effective date of such
optionee's termination of employment by reason of Permanent and Total Disability
or until the expiration of the term of such Incentive Stock Option, whichever
period is shorter. In the case of the optionee's death, the option may
5
<PAGE>
thereafter be exercised by the beneficiary or beneficiaries duly designated by
the optionee or, if none, the executor or administrator of the optionee's estate
or, if none, the person to whom the optionee's rights under such option shall
pass by will or by the applicable laws of descent and distribution for a period
of one year (or such other period as the Committee may specify in the Agreement)
after the date of such optionee's death or until the expiration of the term of
such Incentive Stock Option, whichever period is shorter.
Each Incentive Stock Option held by an optionee who ceases to be employed by
any Employer for any reason other than Permanent and Total Disability or death
shall be exercisable only to the extent such option is exercisable on the
effective date of such optionee's termination of employment, and may thereafter
be exercised by such optionee (or such optionee's legal representative) for a
period of three months after the effective date of such optionee's termination
of employment or until the expiration of the term of the Incentive Stock Option,
whichever period is shorter.
If an optionee dies during the exercise period specified in the Agreement
evidencing the award of such option following the termination of the optionee's
employment by reason of Permanent and Total Disability, or if the optionee dies
during the three-month period following termination of employment for any reason
other than death or Permanent and Total Disability, each Incentive Stock Option
held by such optionee shall be exercisable only to the extent such option is
exercisable on the date of the optionee's death and may thereafter be exercised
by the beneficiary or beneficiaries duly designated by the optionee or, if none,
the executor or administrator of the optionee's estate or, if none, the person
to whom the optionee's rights under such option shall pass by will or by the
applicable laws of descent and distribution for a period of one year (or such
shorter period as the Committee may specify in the Agreement) after the date of
death or until the expiration of the term of such Incentive Stock Option,
whichever period is shorter.
V. STOCK AWARDS
5.1 STOCK AWARDS. The Committee may, in its discretion, grant Stock Awards to
such eligible employees as may be selected by the Committee. The Agreement
relating to a Stock Award shall specify whether the Stock Award is a Restricted
Stock Award or Bonus Stock Award.
5.2 TERMS OF STOCK AWARDS. Stock Awards shall be subject to the following
terms and conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of the Plan, as the Committee shall deem advisable.
(a) NUMBER OF SHARES AND OTHER TERMS. The Committee shall determine the
number of shares of Common Stock subject to a Restricted Stock Award or Bonus
Stock Award conditions. In the case of a Restricted Stock Award, the Committee
shall designate a Valuation Date and shall determine the price, if any, to be
paid by the holder for each share of Restricted Stock subject to the Award.
(b) VESTING AND FORFEITURE. The Agreement relating to a Restricted Stock
Award shall provide, in the manner determined by the Committee, in its
discretion, and subject to the provisions of the Plan, (i) for the vesting of
the shares of Common Stock subject to such award if the holder of such award
remains continuously in the employment of any one or more Employers during the
specified Restriction Period and satisfies any other applicable conditions and
(ii) for the forfeiture of the shares of Common Stock subject to such award if
the holder of such award does not remain continuously in the employment of any
one or more Employers during the specified Restriction Period or does not
satisfy any other applicable condition. Bonus Stock Awards shall not be subject
to any Restriction Periods.
(c) SHARE CERTIFICATES. In the case of a Restricted Stock Award, during
the Restriction Period, a certificate or certificates representing the award may
be registered in the holder's name and may bear a legend, in addition to any
legend which may be required pursuant to Section 6.6, indicating that the
ownership of the shares of Common Stock represented by such certificate is
subject to the restrictions,
6
<PAGE>
terms and conditions of the Plan and the Agreement relating to the Restricted
Stock Award. All such certificates shall be deposited with the Company, together
with stock powers or other instruments of assignment (including a power of
attorney), each endorsed in blank with a guarantee of signature if deemed
necessary or appropriate by the Company, which would permit transfer to the
Company of all or a portion of the shares of Common Stock subject to the
Restricted Stock Award in the event such award is forfeited in whole or in part.
Upon termination of any applicable Restriction Period, or upon the grant of a
Bonus Stock Award, in each case subject to the Company's right to require
payment of any taxes in accordance with Section 6.5, either (i) a certificate or
certificates evidencing ownership of the requisite number of shares of Common
Stock shall be delivered to the holder of such award or (ii) a notation of
noncertificated shares shall be made on the stock records of the Company.
(d) RIGHTS WITH RESPECT TO RESTRICTED STOCK AWARDS. Unless otherwise set
forth in the Agreement relating to a Restricted Stock Award, and subject to the
terms and conditions of a Restricted Stock Award and the Plan, the holder of
such award shall have all rights as a stockholder of the Company, including, but
not limited to, voting rights, the right to receive dividends and the right to
participate in any capital adjustment applicable to all holders of Common Stock;
PROVIDED, HOWEVER, that a distribution with respect to shares of Common Stock,
other than a regular cash dividend or any other distribution as the Committee
may in its sole discretion designate, shall be deposited with the Company and
shall be subject to the same restrictions as the shares of Common Stock with
respect to which such distribution was made. Any such distributions on deposit
with the Company shall not be segregated in separate accounts and shall not bear
interest. Any breach of any restrictions, terms or conditions applicable to a
Restricted Stock Award by the holder of such award shall cause a forfeiture of
Restricted Stock, any related distributions, and all rights under the Agreement.
(e) CASH AWARDS. In connection with any Restricted Stock Award, the
Committee may authorize (either at the time such award is made or subsequently)
the payment of a cash amount (a "Cash Award") to the holder of such Restricted
Stock at any time after such Restricted Stock shall have become vested;
PROVIDED, HOWEVER, that the amount of the cash payment, if any, that a holder
shall be entitled to receive shall not exceed 100 percent of the aggregate
Maturity Value of the Restricted Stock Award. Such Cash Awards shall be payable
in accordance with such additional restrictions, terms and conditions as shall
be prescribed by the Committee and shall be in addition to any other salary,
incentive, bonus or other compensation payments which holders shall be otherwise
entitled or eligible to receive from the Company.
5.3 TERMINATION OF EMPLOYMENT. Subject to Section 6.9, all of the terms
relating to the termination of the Restriction Period or other conditions
relating to a Restricted Stock Award, or any cancellation or forfeiture of such
Restricted Stock Award in the event the holder of such Restricted Stock Award is
no longer employed by an Employer, whether by reason of Disability, retirement,
death or other termination of employment, shall be specified in the Agreement
relating to such Restricted Stock Award.
VI. GENERAL
6.1 EFFECTIVE DATE AND TERM OF PLAN. The Plan shall be submitted to the
stockholders of the Company for approval and, if approved by the affirmative
vote of a majority of the shares of Common Stock present in person or
represented by proxy at the 1997 annual meeting of stockholders, shall become
effective on the date of such meeting. The Plan shall terminate when shares of
Common Stock are no longer available for the grant of awards, unless terminated
earlier by the Board. Termination of the Plan shall not affect the terms or
conditions of any award granted prior to termination.
In the event that the Plan is not approved by the stockholders of the
Company on or before June 11, 1998, the Plan and any awards granted hereunder
shall be null and void.
6.2 AMENDMENTS. The Board may amend the Plan as it shall deem advisable,
subject to any requirement of stockholder approval required by applicable law,
rule or regulation, including Section 162(m) and
7
<PAGE>
Section 422 of the Code; PROVIDED, HOWEVER, that no amendment shall be made
without stockholder approval if such amendment would (a) increase the maximum
number of shares of Common Stock available under the Plan (subject to Section
6.7), (b) effect any change inconsistent with Section 422 of the Code or (c)
extend the term of the Plan. No amendment may impair the rights of a holder of
an outstanding award without the consent of such holder.
6.3 AGREEMENT. Each award under the Plan shall be evidenced by an Agreement
setting forth the terms and conditions applicable to such award. No award shall
be valid until an Agreement is executed by a duly authorized representative of
the Company and the recipient of such award and, upon execution by each party
and delivery of the Agreement to the Company, such award shall be effective as
of the effective date set forth in the Agreement. No award under the Plan shall
be effective unless the Agreement evidencing such award is executed by the
recipient and delivered to the Company. An Agreement may be modified or amended
at any time by the Committee, PROVIDED that no modification or amendment may
adversely affect the rights of the holder of the award evidenced by the
Agreement without the holder's consent.
6.4 NON-TRANSFERABILITY OF AWARDS. Unless otherwise specified in the
Agreement relating to an award, no award (or rights thereunder) shall be
transferable other than by will, the laws of descent and distribution, a
qualified domestic relations order or pursuant to beneficiary designation or
assignment procedures approved by the Company. Except to the extent permitted by
the foregoing sentence or the Agreement relating to an award, each award may be
exercised or settled during the holder's lifetime only by the holder or the
holder's legal representative or similar person. Except to the extent permitted
by the second preceding sentence or the Agreement relating to an award, no award
may be sold, transferred, assigned, pledged, hypothecated, encumbered or
otherwise disposed of (whether by operation of law or otherwise) or be subject
to execution, attachment or similar process. Upon any attempt to so sell,
transfer, assign, pledge, hypothecate, encumber or otherwise dispose of any such
award, such award and all rights thereunder and its related Agreement shall
immediately become null and void.
6.5 TAX WITHHOLDING. The Company shall have the right to require, prior to
the issuance or delivery of any shares of Common Stock or the payment of any
cash pursuant to an award made hereunder, payment by the holder of such award of
any federal, state, local or other taxes which may be required to be withheld or
paid in connection with such award. The holder may satisfy any such obligation
by any of the following means: (A) a cash payment to the Company, (B)
authorizing the Company to withhold whole shares of Common Stock which would
otherwise be delivered having an aggregate Fair Market Value, determined as of
the date the obligation to withhold or pay taxes arises in connection with the
award (the "Tax Date"), or withhold an amount of cash which would otherwise be
payable to a holder, equal to the amount necessary to satisfy any such
obligation, (C) by delivery (either actual delivery or by attestation procedures
established by the Company) of shares of Common Stock having an aggregate Fair
Market Value, determined as of the Tax Date, equal to the amount necessary to
satisfy any such obligation, (D) in the case of the exercise of an option, a
cash payment by a broker-dealer acceptable to the Company to whom the optionee
has submitted an irrevocable notice of exercise or (E) a combination of (A), (B)
and (C); PROVIDED, HOWEVER, that the Company shall have sole discretion to
disapprove of an election pursuant to any of clauses (B)-(E), and PROVIDED
FURTHER that no shares of Common Stock shall be withheld or delivered in excess
of the minimum statutory requirements with respect to such tax obligation unless
such shares are Mature Shares. Any fraction of a share of Common Stock which
would be required to satisfy such an obligation shall be disregarded and the
remaining amount due shall be paid in cash by the holder.
6.6 RESTRICTIONS ON SHARES. Each award made hereunder shall be subject to the
requirement that if at any time the Company determines that the listing,
registration or qualification of the shares of Common Stock subject to such
award upon any securities exchange or under any law, or the consent or approval
of any governmental body, or the taking of any other action is necessary or
desirable as a condition of, or in connection with, the exercise or settlement
of such award or the delivery of shares thereunder, such award shall not be
exercised or settled and such shares shall not be delivered unless such listing,
registration, qualification, consent, approval or other action shall have been
effected or obtained, free of any conditions
8
<PAGE>
not acceptable to the Company. The Company may require that certificates
evidencing shares of Common Stock delivered pursuant to any award made hereunder
bear a legend indicating that the sale, transfer or other disposition thereof by
the holder is prohibited except in compliance with the Securities Act.
6.7 ADJUSTMENT. In the event of any stock split, stock dividend,
recapitalization, reorganization, merger, consolidation, combination, exchange
of shares, liquidation, spin-off or other similar change in capitalization or
event, or any distribution to holders of Common Stock other than a regular cash
dividend, the number and class of securities available under the Plan, the
number and class of securities subject to each outstanding option and the
purchase price per security, the terms of each outstanding SAR, and the number
and class of securities subject to each outstanding Stock Award shall be
appropriately adjusted by the Committee, such adjustments to be made in the case
of outstanding options and SARs without an increase in the aggregate purchase
price or base price. The decision of the Committee regarding any such adjustment
shall be final, binding and conclusive. If any such adjustment would result in a
fractional security being (a) available under the Plan, such fractional security
shall be disregarded, or (b) subject to an award under the Plan, the Company
shall pay the holder of such award, in connection with the vesting, exercise or
settlement of such award in whole or in part occurring after such adjustment, an
amount in cash determined by multiplying (i) the fraction of such security
(rounded to the nearest hundredth) by (ii) the excess, if any, of (A) the Fair
Market Value on the vesting, exercise or settlement date over (B) the exercise
or base price, if any, of such award.
6.8 ACCELERATION OF AWARDS.
(a) IN GENERAL. Notwithstanding any provision in the Plan, upon the
occurrence of a Change in Control, as defined below, (i) all outstanding options
and SARs shall immediately become exercisable in full and (ii) the Restriction
Period applicable to any outstanding Restricted Stock Award shall lapse, except
as otherwise provided in the applicable Agreement.
(b) DEFINITION OF CHANGE IN CONTROL. A "Change in Control" shall mean:
(i) APPROVED TRANSACTION. An action of the Board (or, if approval of
the Board is not required as a matter of law, the stockholders of the
Company) approving (a) any consolidation or merger of the Company in which
the Company is not the continuing or surviving corporation or pursuant to
which shares of Common Stock would be converted into cash, securities or
other property, other than a Merger, or (b) any sale, lease, exchange, or
other transfer (in one transaction or a series of related transactions) of
all, or substantially all, of the assets of the Company, or (c) the adoption
of any plan or proposal for the liquidation or dissolution of the Company;
(ii) CONTROL PURCHASE. The purchase by any person (as such term is
defined in Sections 13(d)(3) and 14(d)(2) of the Exchange Act), corporation
or other entity (other than the Company or any employee benefit plan
sponsored by an Employer) of any Common Stock of the Company (or securities
convertible into the Company's Common Stock) for cash, securities or any
other consideration pursuant to a tender offer or exchange offer, without
the prior consent of the Board and, after such purchase, such person shall
be the "beneficial owner" (as such term is defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Company
representing 20 percent or more of the combined voting power of the then
outstanding securities of the Company ordinarily (and apart from rights
accruing under special circumstances) having the right to vote in the
election of directors (calculated as provided in Section (d) of such Rule
13d-3 in the case of rights to acquire the Company's securities);
(iii) BOARD CHANGE. A change in the composition of the Board during
any period of two consecutive years, such that individuals who at the
beginning of such period constitute the entire Board shall cease for any
reason to constitute a majority thereof unless the election, or the
nomination for election by the Company's stockholders, of each new director
was approved by a vote
9
<PAGE>
of at least two-thirds of the directors then still in office who were
directors at the beginning of the period; or
(iv) OTHER TRANSACTIONS. The occurrence of such other transactions
involving a significant issuance of voting stock or change in the
composition of the Board that the Board determines to be a Change in Control
for purposes of the Plan.
The Agreement evidencing options or Restricted Stock granted under the Plan
may contain such provisions limiting the acceleration of the exercisability of
options and the acceleration of the vesting of Restricted Stock as provided in
this Section as the Committee deems appropriate to ensure that the penalty
provisions of Section 4999 of the Code, or any successor thereto in effect at
the time of such acceleration, will not apply to any stock, cash or other
property received by the holder from the Company.
(c) CERTAIN BUSINESS COMBINATIONS. (1) With respect to any optionee who is
subject to Section 16 of the Exchange Act, (i) notwithstanding the exercise
periods set forth in any Agreement to which such optionee is a party, and (ii)
notwithstanding the expiration date of the term of such option (other than an
Incentive Stock Option), in the event the Company is involved in a business
combination which is intended to be treated as a pooling of interests for
financial accounting purposes (a "Pooling Transaction") or pursuant to which
such optionee receives a substitute option to purchase securities of any entity,
including an entity directly or indirectly acquiring the Company, then each
option (or option in substitution thereof) held by such optionee shall be
exercisable to the extent set forth in the Agreement evidencing such option
until and including the latest of (x) the expiration date of the term of the
option or, in the event of such optionee's termination of employment, the last
exercise date prescribed by the optionee's Agreement, (y) the date which is six
months and one day after the consummation of such business combination and (z)
the date which is ten business days after the date of expiration of any period
during which such optionee may not dispose of a security issued in the Pooling
Transaction in order for the Pooling Transaction to be accounted for as a
pooling of interests; and
(2) With respect to any holder of an SAR (other than an SAR which may be
settled only for cash) who is subject to Section 16 of the Exchange Act, (i)
notwithstanding the exercise periods set forth in any Agreement to which such
holder is a party, and (ii) notwithstanding the expiration date of the term of
such SAR (other than an SAR which is related to an Incentive Stock Option), in
the event the Company is involved in a Pooling Transaction or pursuant to which
such holder receives a substitute SAR relating to any entity, including an
entity directly or indirectly acquiring the Company, then each such SAR (or SAR
in substitution thereof) held by such holder shall be exercisable to the extent
set forth in the Agreement evidencing such SAR until and including the latest of
(x) the date set forth pursuant to the optionee's Agreement or the expiration
date of the term of such SAR, as the case may be, (y) the date which is six
months and one day after the consummation of such business combination and (z)
the date which is ten business days after the date of expiration of any period
during which such holder may not dispose of a security issued in the Pooling
Transaction in order for the Pooling Transaction to be accounted for as a
pooling of interests.
6.9 TERMINATION OF EMPLOYMENT.
(a) ACCELERATION OF EXERCISABILITY OR VESTING. Notwithstanding any
provisions to the contrary in an Agreement, if the employment of the holder of
an option or Stock Award shall terminate for any reason (including, without
limitation, the holder's death, Permanent and Total Disability, retirement
(either pursuant to any retirement plan of the Company or any Subsidiary or, in
the absence of any such plan, pursuant to the Committee's discretionary
determination that such termination of employment shall be treated as retirement
for purposes of the Plan), resignation or voluntary termination other than for
"Cause" (as defined in subsection (b) hereof) as determined by the Committee in
its sole discretion, the Committee may determine the following:
10
<PAGE>
(i) Any Restriction Period applicable to any Restricted Stock Award
shall be deemed to have expired upon the holder's termination of employment,
and all Restricted Stock subject to such award shall become vested, and any
Cash Award payable pursuant to the applicable Restricted Stock Award shall
be adjusted in such manner as is provided in the Agreement; and
(ii) Any option shall become exercisable in full upon the holder's
termination of employment.
(b) TERMINATION BY COMPANY FOR CAUSE. If the employment with an Employer
of a holder of a Restricted Stock Award shall terminate for Cause during the
Restriction Period, then all Restricted Stock and any Cash Awards shall be
forfeited immediately. All options held by such holder shall immediately
terminate. For purposes of this subsection, "Cause" shall have the meaning
ascribed thereto in any employment agreement to which such holder is a party or,
in the absence thereof, shall include, but not be limited to, insubordination,
dishonesty, incompetence, moral turpitude, other misconduct of any kind and the
refusal to perform his or her duties and responsibilities for any reason other
than illness or incapacity; PROVIDED, HOWEVER, that if such termination occurs
within 12 months after an Approved Transaction, Control Purchase or Board Change
(as such terms are defined in Section 6.8(a)), termination for Cause shall only
mean a felony conviction for fraud, misappropriation or embezzlement.
(c) GENERAL. For purposes of the Plan, a leave of absence, unless
otherwise determined by the Committee prior to the commencement thereof, shall
not be considered a termination of employment. Awards made under the Plan shall
not be affected by any change of employment so long as the holder continues to
be an employee of an Employer.
6.10 NO RIGHT OF PARTICIPATION OR EMPLOYMENT. No person shall have any right
to participate in the Plan. Neither the Plan nor any award made hereunder shall
confer upon any person any right to continued employment by any Employer or
affect in any manner the right of an Employer to terminate the employment of any
person at any time without liability hereunder.
6.11 RIGHTS AS STOCKHOLDER. No person shall have any right as a stockholder of
the Company with respect to any shares of Common Stock or other equity security
of the Company which is subject to an award hereunder unless and until such
person becomes a stockholder of record with respect to such shares of Common
Stock or equity security.
6.12 GOVERNMENTAL AND OTHER REGULATIONS. The obligations of the Company with
respect to awards under the Plan and related Agreements shall be subject to such
rules, regulations and approvals as may be required, including rules,
regulations and approvals relating to registration statements under the
Securities Act, and those of the New York Stock Exchange. No option shall be
exercisable, no Restriction Period shall expire and no Common Stock shall be
delivered under the Plan until the Company has obtained such consent and
approval from regulatory bodies (federal, state or self-regulatory
organizations) having jurisdiction over such matters as the Committee deems
advisable.
6.13 NON-EXCLUSIVITY. The Plan shall not be construed as creating any
limitations on the Company or the Committee to adopt such other incentive
arrangements as it may deem desirable, including the granting of stock options
and the awards of either shares of Common Stock or cash to any individual.
6.14 GOVERNING LAW. The Plan, each award hereunder and the related Agreement,
and all determinations made and actions taken pursuant thereto, to the extent
not otherwise governed by the Code or the laws of the United States, shall be
governed by the laws of the State of Delaware and construed in accordance
therewith without giving effect to principles of conflicts of laws.
11
<PAGE>
FOUNDATION HEALTH SYSTEMS, INC.
THIRD AMENDED AND RESTATED
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
I. INTRODUCTION
The purposes of the Foundation Health Systems, Inc. Third Amended and
Restated Non-Employee Director Stock Option Plan (the "Plan") are (i) to align
the interests of the stockholders of Foundation Health Systems, Inc. (the
"Company") and the recipients of awards under the Plan by increasing the
proprietary interest of such recipients in the Company's growth and success,
(ii) to advance the interests of the Company by attracting and retaining
non-employee directors of the Company and (iii) to motivate such persons to act
in the long-term best interests of the Company's stockholders.
II. DEFINITIONS
For purposes of the Plan, the following capitalized terms shall have the
meanings set forth in this Article.
2.1 "Agreement" shall mean the written instrument evidencing an Option awarded
hereunder between the Company and the recipient of such Option, the terms of
which may be amended or modified as provided in Section 5.3.
2.2 "Board" shall mean the Board of Directors of the Company.
2.3 "Code" shall mean the Internal Revenue Code of 1986, as amended.
2.4 "Committee" shall mean the Committee, if any, designated by the Board
pursuant to Section 3.2(b).
2.5 "Common Stock" shall mean the Class A Common Stock, $.001 par value, of
the Company.
2.6 "Company" shall mean Foundation Health Systems, Inc., a Delaware
corporation, or any successor thereto.
2.7 "Director" shall mean a member of the Board.
2.8 "Eligible Director" shall mean a Director who is not an employee of the
Company or any of its subsidiaries.
2.9 "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
2.10 "Fair Market Value" shall mean the closing transaction price of a share of
Common Stock as reported in THE WALL STREET JOURNAL on the New York Stock
Exchange Composite Transactions list for the date as of which such value is
being determined or, if there shall be no reported transaction for such date or
if such date is not a trading day, on the next immediately preceding date for
which a transaction was reported or which was a trading day; PROVIDED, HOWEVER,
that Fair Market Value may be determined by the Board by whatever means or
method as the Board, in the good faith exercise of its discretion, shall at such
time deem appropriate.
2.11 "Grant Date" shall mean the date on which an Option is automatically
granted to an Eligible Director under the Plan pursuant to Section 4.1 or 4.2.
2.12 "Holder" shall mean an Eligible Director who has received an Option under
the Plan.
2.13 "Mature Shares" shall mean previously acquired shares of Common Stock for
which the Holder thereof has good title, free and clear of all liens and
encumbrances and which such Holder either (i) has held for at least six months
or (ii) has purchased on the open market.
1
<PAGE>
2.14 "Merger" shall mean any merger of the Company in which the holders of
Common Stock immediately prior to the merger have the same proportionate
ownership of common stock of the surviving or resulting parent corporation
immediately after the merger.
2.15 "Nonqualified Stock Option" shall mean a stock option which is not an
Incentive Stock Option under Section 422 of the Code, or any successor
provision.
2.16 "Option" shall mean any Nonqualified Option granted under the Plan.
2.17 "Permanent and Total Disability" shall have the meaning set forth in
Section 22(e)(3) of the Code or any successor thereto.
2.18 "Securities Act" shall mean the Securities Act of 1933, as amended.
III. ELIGIBILITY AND ADMINISTRATION
3.1 ELIGIBILITY. Subject to the terms and conditions of the Plan,
participation in the Plan shall be limited to Eligible Directors. All Eligible
Directors of the Company shall automatically be participants in the Plan.
3.2 ADMINISTRATION.
(a) POWERS. Subject to Section 3.2(b) hereof, the Plan shall be
administered by the Board. The Board shall have plenary authority to administer
the Plan in accordance with its terms, including, without limitation, to: (i)
interpret all terms and provisions of the Plan consistent with law; (ii) set
aside the number of shares of Common Stock to be subject to each Option granted;
(iii) determine the terms of each Agreement; (iv) prescribe the documents and
procedures necessary to be followed in effecting the exercise of Options granted
under the Plan, or in effecting the replacement of an Agreement in the event
that an Agreement should become lost, stolen, destroyed, misplaced, or otherwise
missing; (v) cause Options to be granted and issued in accordance with the terms
of the Plan; (vi) adopt, amend and rescind general and special rules and
regulations for the Plan's administration; and (vii) make all other
determinations necessary or advisable for the administration of the Plan.
Notwithstanding the above, the Board shall have no authority to exercise any
discretion in determining the time of grant, time of exercise, recipient, price
per share of Common Stock at the time of exercise, or amount of shares of Common
Stock subject to any grant of Options under the Plan. All Options granted shall
conform in all respects to the requirements of the terms of the Plan. No
Director shall be liable to the Company, to any stockholder of the Company, or
to any other Director for any action taken or determination made in good faith.
(b) DELEGATION TO COMMITTEE. Notwithstanding anything to the contrary
contained herein, the Board may at any time, or from time to time, appoint a
Committee of at least two Directors and delegate to such Committee the authority
of the Board to administer the Plan. Upon such appointment and delegation, the
Committee shall have all the powers, privileges and duties of the Board, and
shall be substituted for the Board, in the administration of the Plan, except
the power to appoint members of the Committee and to terminate, modify or amend
the Plan. The Board may from time to time appoint members of any such Committee
in substitution for or in addition to members previously appointed, may fill
vacancies in the Committee and may discharge the Committee. The Committee shall
select one of its members as its chairman and shall hold its meetings at such
times and places as it shall deem advisable. A majority of its members shall
constitute a quorum and all determinations shall be made by a majority of such
quorum. Any determination reduced to writing and signed by a majority of the
members shall be fully as effective as if it had been made by a majority vote at
a meeting duly called and held.
3.3 SHARES AVAILABLE. Subject to adjustment as provided in Section 5.7,
500,000 shares of Common Stock shall be available under the Plan, reduced by the
sum of the aggregate number of shares of Common Stock which become subject to
outstanding Options. To the extent that shares of Common Stock subject to an
outstanding Option are not issued or delivered by reason of the expiration,
termination, cancellation or forfeiture of such Option or by reason of the
delivery or withholding of shares of Common Stock to satisfy
2
<PAGE>
all or a portion of the tax withholding obligations relating to the Option, then
such shares of Common Stock shall again be available under the Plan. Shares of
Common Stock shall be made available from authorized and unissued shares of
Common Stock, or authorized and issued shares of Common Stock reacquired and
held as treasury shares or otherwise or a combination thereof.
IV. STOCK OPTIONS
4.1 AUTOMATIC INITIAL GRANT OF OPTIONS. Each person who is an Eligible
Director on the date the Plan becomes effective pursuant to Section 5.1 shall be
automatically awarded and issued on such date, and without further action of the
Board, a Nonqualified Stock Option to purchase 7,500 shares of Common Stock of
the Company. Each person who thereafter becomes an Eligible Director shall be
automatically awarded and issued on the date of his or her first election to the
Board, and without further action of the Board, a Nonqualified Stock Option to
purchase 7,500 shares of Common Stock of the Company. An Option described in
this Section shall hereinafter be referred to as an "Initial Grant." If the date
the Plan becomes effective or the date of such Eligible Director's first
election to the Board is not a trading day for the Common Stock, such Eligible
Director's Initial Grant shall be made on the first trading day which follows
the date the Plan becomes effective or the date of such election, as the case
may be.
4.2 AUTOMATIC ANNUAL GRANT OF OPTIONS. On the day immediately following the
date of each annual meeting of stockholders of the Company (the "Current Annual
Meeting"), beginning with the annual meeting that occurs in 1998, each Eligible
Director (other than an Eligible Director who received an Initial Grant at the
Current Annual Meeting) shall be automatically awarded and issued on such date,
without further action of the Board, a Nonqualified Stock Option to purchase
7,500 shares of Common Stock of the Company (an "Annual Grant"); PROVIDED THAT
IN the case of an Annual Grant to an Eligible Director (other than an Eligible
Director who receives an Initial Grant on the date the Plan becomes effective)
who received an Initial Grant within the twelve-month period ending on the date
of the Current Annual Meeting, the number of shares subject to such Annual Grant
shall be 7,500 multiplied by a fraction, the numerator of which is the number of
days in the period beginning on the day after the date of such Initial Grant and
ending on the day of the Current Annual Meeting, and the denominator of which is
365. If the day immediately following a Current Annual Meeting is not a trading
day for the Common Stock, Annual Grants to be awarded on such day shall be
awarded on the first trading day which follows the day immediately following the
Current Annual Meeting. No Options shall be awarded to an individual following
his or her termination of service as an Eligible Director, even if such
individual becomes a member of a board of directors of a subsidiary of the
Company.
4.3 OPTION PRICES. The purchase price of the Common Stock subject to each
Option granted under the Plan shall be 100 percent of the Fair Market Value of
the Common Stock on the Grant Date.
4.4 TERM OF OPTIONS. The term of each Option shall be for a period of ten
years from the Grant Date and, except as set forth in Section 4.7 hereof, shall
expire upon termination of service as a Director. Notwithstanding the
immediately preceding sentence, if upon an individual's termination of service
as a Director such individual becomes a member of a board of directors of a
subsidiary of the Company, then such Option shall not expire until such
individual's termination of service as member of the board of directors of such
subsidiary.
4.5 VESTING OF OPTIONS. Each Option shall become exercisable on the date
one year after the Grant Date to the extent of 33 1/3 percent of the shares
of Common Stock subject to the Option, and shall become exercisable on each
subsequent anniversary of the Grant Date to the extent of an additional 33 1/3
percent of the shares of Common Stock subject to the Option until the
Option becomes fully exercisable.
4.6 METHOD OF EXERCISE. An Option may be exercised (i) by giving written
notice to the Company specifying the number of whole shares of Common Stock to
be purchased and accompanied by payment therefor in full (or arrangement made
for such payment to the Company's satisfaction) either (A) in cash, (B) by
delivery (either actual delivery or by attestation procedures established by the
Company) of Mature
3
<PAGE>
Shares having an aggregate Fair Market Value, determined as of the date of
exercise, equal to the aggregate purchase price payable by reason of such
exercise, (C) in cash by a broker-dealer acceptable to the Company to whom the
Holder has submitted an irrevocable notice of exercise or (D) a combination of
(A) and (B) , and (ii) by executing such documents as the Company may reasonably
request. Cash payment shall be made by wire transfer, certified or bank check or
personal check, in each case payable to the order of the Company. If payment is
to be made by delivery of Mature Shares, any fraction of a share of Common Stock
which would be required to pay such purchase price shall be disregarded and the
remaining amount due shall be paid in cash by the Holder. The Company shall not
be required to deliver certificates for shares of Common Stock until the Company
has confirmed the receipt of good and available funds in payment of the full
purchase price therefor.
4.7 TERMINATION OF SERVICE.
(a) DEATH OF HOLDER. If a Holder shall die prior to the exercise of any
Option, then:
(i) if the Holder dies while serving as a Director, then such Option
(subject to clause (iv) below) may be exercised by the legatee(s) or
personal representative of such Holder at any time within one year after
such Holder's death;
(ii) if the Holder's service as a Director was terminated due to
Permanent and Total Disability and such Holder dies within one year after
termination of service, then such Option (subject to clause (iv) below) may
be exercised by the legatee(s) or personal representative of such Holder at
any time during the remainder of the period during which such Holder would
have been able to exercise such Option had the Holder not died;
(iii) if the Holder dies within three months after termination of
service as a Director and clause (ii) is not applicable, then such Option
(subject to clause (iv) below) may be exercised by the legatee(s) or
personal representative of such Holder at any time within one year after
such Holder's death; and
(iv) the exercise of Options after the termination of service of the
Holder as a Director for any reason is subject to the following: (a) no
Option may be exercised after the expiration date of such Option; and (b)
Options may be exercised by the Holder only to the extent such Options were
exercisable at the time of such termination.
(b) PERMANENT AND TOTAL DISABILITY. If a Holder's service as a Director
shall terminate prior to the exercise of any Option as a result of Permanent and
Total Disability, then such Option (subject to clause (a)(iv) above) may be
exercised by such Holder (or his or her personal representative) at any time
within one year after such termination of service as a Director.
(c) REMOVAL BY STOCKHOLDERS FOR CAUSE. If a Holder shall be removed from
the Board by the Company's stockholders prior to the exercise of any Option for
cause (for these purposes, if such termination occurs within 12 months after a
Change in Control, as defined in Section 5.8, removal for cause shall only mean
a felony conviction for fraud, misappropriation or embezzlement), then upon such
removal all Options held by such Holder shall immediately terminate.
(d) REMOVAL BY STOCKHOLDERS WITHOUT CAUSE AND EXPIRATION OF TERM OF
OFFICE. If prior to the exercise of any Option, a Holder's service as a
Director shall be terminated as a result of expiration of the Director's term of
office without an accompanying renomination or reelection of such Director, then
all Options held by such Holder shall become exercisable at the time of such
termination and may be exercised at any time within three months after such
Holder's termination of service as a Director. If prior to the exercise of any
Option, a Holder's service as a Director shall be terminated as a result of (i)
removal by the Company's stockholders without cause or (ii) the tendering of the
Director's resignation upon expiration of such Director's term of office, then
all Options (subject to clause (a)(iv) above) held by such
4
<PAGE>
Holder may be exercised at any time within three months after such Holder's
termination of service as a Director.
(e) TERMINATION FOR OTHER REASON. If prior to the exercise of any Option,
a Holder's service as a Director shall be terminated for any reason other than
as set forth in subsections (a) through (d) above, including as a result of the
tendering of the Director's resignation during the then current term of office
of the Director, then all Options (subject to clause (a)(iv) above) held by such
Holder may be exercised at any time within one month after such Holder's
termination of service as a Director.
V. GENERAL
5.1 EFFECTIVE DATE AND TERM OF PLAN. The Plan as amended and restated herein
shall be submitted to the stockholders of the Company for approval and, if
approved by the affirmative vote of a majority of the shares of Common Stock
present in person or represented by proxy at the 1997 annual meeting of
stockholders, shall become effective on the date of such meeting. The Plan shall
terminate when shares of Common Stock are no longer available for the grant of
awards, unless terminated earlier by the Board. Termination of the Plan shall
not affect the terms or conditions of any award granted prior to termination.
5.2 AMENDMENTS. The Board may amend the Plan as it shall deem advisable,
subject to any requirement of stockholder approval required by applicable law,
rule or regulation. No amendment may impair the rights of a Holder of an
outstanding Option without the consent of such Holder.
5.3 AGREEMENT. Each Option under the Plan shall be evidenced by an Agreement
setting forth the terms and conditions applicable to such Option, which shall be
consistent with the terms of the Plan. No Option shall be valid until an
Agreement is executed by the Company and the recipient of such Option and, upon
execution by each party and delivery of the Agreement to the Company, such
Option shall be effective as of the effective date set forth in the Agreement.
No Option under the Plan shall be effective unless the Agreement evidencing such
Option is executed by the recipient and delivered to the Company. An Agreement
may be modified or amended at any time by the Board or Committee, provided that
no modification or amendment may adversely affect the rights of the Holder of
the Option evidenced by the Agreement without the Holder's consent.
5.4 NON-TRANSFERABILITY OF OPTIONS. No Option shall be transferable other
than by will, the laws of descent and distribution, a qualified domestic
relations order or pursuant to beneficiary designation or assignment procedures
approved by the Company. Except to the extent permitted by the foregoing
sentence, each Option may be exercised or settled during the Holder's lifetime
only by the Holder or the Holder's legal representative or similar person.
Except to the extent permitted by the second preceding sentence, no Options may
be sold, transferred, assigned, pledged, hypothecated, encumbered or otherwise
disposed of (whether by operation of law or otherwise) or be subject to
execution, attachment or similar process. Upon any attempt to so sell, transfer,
assign, pledge, hypothecate, encumber or otherwise dispose of any such Options,
such Options and all rights thereunder and under its related Agreement shall
immediately become null and void.
5.5 TAX WITHHOLDING. The Company shall have the power to withhold, or to
require a Holder to remit to the Company, an amount sufficient to satisfy any
withholding or other tax due with respect to the Holder's exercise of an Option.
5.6 RESTRICTIONS ON SHARES. Each award made hereunder shall be subject to the
requirement that if at any time the Company determines that the listing,
registration or qualification of the shares of Common Stock subject to such
award upon any securities exchange or under any law, or the consent or approval
of any governmental body, or the taking of any other action is necessary or
desirable as a condition of, or in connection with, the exercise or settlement
of such award or the delivery of shares thereunder, such award shall not be
exercised or settled and such shares shall not be delivered unless such listing,
registration, qualification, consent, approval or other action shall have been
effected or obtained, free of any conditions
5
<PAGE>
not acceptable to the Company. The Company may require that certificates
evidencing shares of Common Stock delivered pursuant to any award made hereunder
bear a legend indicating that the sale, transfer or other disposition thereof by
the Holder is prohibited except in compliance with the Securities Act of 1933,
as amended, and the rules and regulations thereunder.
5.7 ADJUSTMENT. In the event of any stock split, stock dividend,
recapitalization, reorganization, merger, consolidation, combination, exchange
of shares, liquidation, spin-off or other similar change in capitalization or
event, or any distribution to Holders of Common Stock other than a regular cash
dividend, the number and class of securities available under the Plan, the
number and class of securities subject to each outstanding Option and the
purchase price per security shall be appropriately adjusted by the Board, such
adjustments to be made in the case of outstanding Options without an increase in
the aggregate purchase price. The decision of the Board regarding any such
adjustment shall be final, binding and conclusive. If any such adjustment would
result in a fractional security being (a) available under the Plan, such
fractional security shall be disregarded, or (b) subject to an Option under the
Plan, the Company shall pay the Holder of such Option, in connection with the
exercise of such Option in whole or in part occurring after such adjustment, an
amount in cash determined by multiplying (i) the fraction of such security
(rounded to the nearest hundredth) by (ii) the excess, if any, of (A) the Fair
Market Value on the exercise date over (B) the exercise price of such Option.
5.8 ACCELERATION OF OPTIONS.
(a) IN GENERAL. Notwithstanding any provision in the Plan or any
Agreement, upon the occurrence of a Change in Control, as defined below, all
outstanding Options shall immediately become exercisable in full.
(b) DEFINITION OF CHANGE IN CONTROL. A "Change in Control" shall mean:
(i) APPROVED TRANSACTION. An action of the Board (or, if approval of
the Board is not required as a matter of law, the stockholders of the
Company) approving (a) any consolidation or merger of the Company in which
the Company is not the continuing or surviving corporation or pursuant to
which shares of Common Stock would be converted into cash, securities or
other property, other than a Merger, or (b) any sale, lease, exchange, or
other transfer (in one transaction or a series of related transactions) of
all, or substantially all, of the assets of the Company, or (c) the adoption
of any plan or proposal for the liquidation or dissolution of the Company;
(ii) CONTROL PURCHASE. The purchase by any person (as such term is
defined in Sections 13(d)(3) and 14(d)(2) of the Exchange Act), corporation
or other entity (other than the Company or any employee benefit plan
sponsored by the Company or any of its subsidiaries) of any Common Stock of
the Company (or securities convertible into the Company's Common Stock) for
cash, securities or any other consideration pursuant to a tender offer or
exchange offer, without the prior consent of the Board, and, after such
purchase, shall the "beneficial owner" (as such term is defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of securities of the
Company representing 20 percent or more of the combined voting power of the
then outstanding securities of the Company ordinarily (and apart from rights
accruing under special circumstances) having the right to vote in the
election of directors (calculated as provided in Section (d) of such Rule
13d-3 in the case of rights to acquire the Company's securities);
(iii) BOARD CHANGE. A change in the composition of the Board during
any period of two consecutive years, such that individuals who at the
beginning of such period constitute the entire Board shall cease for any
reason to constitute a majority thereof unless the election, or the
nomination for election by the Company's stockholders, of each new director
was approved by a vote of at least two-thirds of the directors then still in
office who were directors at the beginning of the period; or
6
<PAGE>
(iv) OTHER TRANSACTIONS. The occurrence of such other transactions
involving a significant issuance of voting stock or change in the
composition of the Board that the Board determines to be a Change in Control
for purposes of the Plan.
(c) CERTAIN BUSINESS COMBINATIONS. With respect to any Holder who is
subject to Section 16 of the Exchange Act, (i) notwithstanding the exercise
periods set forth in Section 4.5 of the Plan and (ii) notwithstanding the
expiration date of the term of such Option, in the event the Company is involved
in a business combination which is intended to be treated as a pooling of
interests for financial accounting purposes (a "Pooling Transaction") or
pursuant to which such Holder receives a substitute option to purchase
securities of any entity, including an entity directly or indirectly acquiring
the Company, then each Option (or option in substitution thereof) held by such
Holder shall be exercisable to the extent set forth in Section 4.5 until and
including the latest of (x) the expiration date of the term of the Option or, in
the event of such Holder's termination of service as a Director, the date
determined pursuant to Section 4.7, (y) the date which is six months and one day
after the consummation of such business combination and (z) the date which is
ten business days after the date of expiration of any period during which such
Holder may not dispose of a security issued in the Pooling Transaction in order
for the Pooling Transaction to be accounted for as a pooling of interests.
5.9 NO RIGHT TO CONTINUE AS DIRECTOR. Neither the adoption of the Plan nor
its amendment, restatement or operation, nor any document describing or
referring to the Plan, or any part thereof, shall confer upon any participant
under the Plan any right to continue as a Director, or shall in any way affect
the right and power of the shareholders of the Company to remove such
participant as a Director at any time with or without assigning a reason
therefor, to the same extent as might have been done if the Plan had not been
adopted.
5.10 RIGHTS AS STOCKHOLDER. No person shall have any right as a stockholder of
the Company with respect to any shares of Common Stock or other equity security
of the Company which is subject to an award hereunder unless and until such
person becomes a stockholder of record with respect to such shares of Common
Stock or equity security.
5.11 GOVERNMENTAL AND OTHER REGULATIONS. The obligations of the Company with
respect to Options granted under the Plan and related Agreements shall be
subject to such rules, regulations and approvals as may be required, including
rules, regulations and approvals relating to registration statements under the
Securities Act and those of the New York Stock Exchange. No Option shall be
exercisable, and no Common Stock shall be delivered under the Plan until the
Company has obtained such consent and approval from regulatory bodies (federal,
state or self-regulatory organizations) having jurisdiction over such matters as
the Board deems advisable.
5.12 NON-EXCLUSIVITY. The Plan shall not be construed as creating any
limitations on the Board or the Committee to adopt such other incentive
arrangements as it may deem desirable, including the granting of stock options
or awarding of stock or cash to any Director otherwise than under the Plan.
5.13 GOVERNING LAW. The Plan, each award hereunder and the related Agreement,
and all determinations made and actions taken pursuant thereto, to the extent
not otherwise governed by the Code or the laws of the United States, shall be
governed by the laws of the State of Delaware and construed in accordance
therewith without giving effect to principles of conflicts of laws.
7
<PAGE>
FOUNDATION HEALTH SYSTEMS, INC.
EMPLOYEE STOCK PURCHASE PLAN
I. INTRODUCTION
Foundation Health Systems, Inc. (the "Company") hereby establishes the
Foundation Health Systems, Inc. Employee Stock Purchase Plan (the "Plan") to
encourage and facilitate the purchase of shares of common stock of the Company
by eligible employees of the Company and its subsidiaries.
II. DEFINITIONS
For purposes of the Plan, the following capitalized terms shall have the
meanings set forth in this Article.
2.1 "Benefits Representative" means the Human Resources Department of the
Company or such other person or persons designated by the Committee to assist
the Committee with the administration of the Plan.
2.2 "Board" means the Board of Directors of the Company as from time to time
constituted.
2.3 "Committee" means the Compensation and Stock Option Committee of the
Board.
2.4 "Common Stock" means the Class A Common Stock, par value $.001 per share,
of the Company.
2.5 "Company" means Foundation Health Systems, Inc., a Delaware corporation,
and any successor thereto.
2.6 "Compensation" means the base compensation paid to a Participant by an
Employer, including shift differentials but excluding bonuses, commissions,
overtime or any other pay outside the regular work schedule, as determined by
the Committee.
2.7 "Effective Date" means September 1, 1997.
2.8 "Employee Stock Purchase Account" means the account established pursuant
to Section 5(c) of the Plan to which a Participant's payroll deductions are
credited.
2.9 "Employer" means the Company and each Subsidiary, other than a Subsidiary,
if any, which the Committee excludes from participation in the Plan.
2.10 "Entry Date" means a date which is September 1, 1997, or the first day of
each subsequent month.
2.11 "Excluded Employee" means an employee of an Employer who (i) is one of up
to thirty-five senior officers of the Company and its Subsidiaries whose
compensation is subject to Committee approval under the by-laws of the Company
or (ii) is scheduled to work less than 20 hours a week.
2.12 "Fair Market Value" means the closing price of a share of Common Stock as
reported in THE WALL STREET JOURNAL on the New York Stock Exchange Composite
Transactions list for the date as of which such value is being determined or, if
there shall be no reported transaction on such date or if such date is not a
trading day, on the next immediately preceding date for which a transaction was
reported or which was a trading day, PROVIDED that if Fair Market Value for any
date cannot be so determined, Fair Market Value shall be determined by the
Committee by whatever means or method as the Committee, in the good faith
exercise of its discretion, shall at such time deem appropriate.
2.13 "Participant" means any employee of an Employer who meets the eligibility
requirements of Article III and has elected to participate in the Plan as
described in such Article. An individual shall cease to be a
1
<PAGE>
Participant as of the date he or she terminates employment with all Employers,
for whatever reason, or abandons his or her election pursuant to Article VII
hereof.
2.14 "Plan" means the Foundation Health Systems, Inc. Employee Stock Purchase
Plan herein set forth, and any amendment hereto.
2.15 "Purchase Date" means a date which is September 30, 1997, or the last day
of each subsequent month.
2.16 "Purchase Period" means a monthly period ending on a Purchase Date.
2.17 "Purchase Price" means, with respect to a share of Common Stock purchased
on a Purchase Date, the lesser of (i) 85 percent of the Fair Market Value of a
share of Common Stock on the first day of the Purchase Period ending on such
Purchase Date or (ii) 85 percent of the Fair Market Value of a share of Common
Stock on such Purchase Date, PROVIDED that if such price includes a fraction of
a cent, the Purchase Price shall be rounded up to the next whole cent.
2.18 "Subsidiary" means a corporation (other than the Company) in an unbroken
chain of corporations beginning with the Company if each of the corporations
other than the last corporation in the unbroken chain owns stock possessing 50
percent or more of the total combined voting power of all classes of stock in
one of the other corporations in such chain. Any corporation that satisfies the
conditions set forth in the immediately preceding sentence after the date the
Plan is adopted by the Board shall be a "Subsidiary" beginning on the date such
corporation satisfies such conditions.
2.19 "Termination Date" means the earlier of (i) the date as of which the Board
terminates the Plan or (ii) the Purchase Date on which all shares available for
issuance under the Plan shall have been purchased by Participants under the
Plan.
III. ELIGIBILITY AND ADMINISTRATION
3.1 ELIGIBILITY AND PARTICIPATION.
(a) Any employee of an Employer who is not an Excluded Employee shall be
eligible to participate in the Plan as of the first Entry Date following such
employee's satisfaction of the "eligibility service requirement" (as defined
below in this Section 4(a)), or, if later, the first Entry Date following the
date on which the employee's Employer adopted the Plan. An employee shall have
satisfied the eligibility service requirement on the Entry Date following his or
her completion of at least 30 days of continuous service with an Employer. For
the sole purpose of calculating days of continuous service under the Plan,
employees shall be credited with service for an Employer or a Subsidiary (even
though such service may have been performed prior to (i) the Effective Date or
(ii) the Company's acquisition of such Subsidiary. No eligibility provision
hereof shall permit participation in the Plan in a manner contrary to the
applicable requirements of the Code and the regulations promulgated thereunder.
(b) At least 15 days (or such other period as may be prescribed by the
Committee) prior to any Entry Date, an employee who is eligible to participate
in the Plan pursuant to subsection (a) of this Section may execute and deliver
to the Benefits Representative an application on the prescribed form specifying
his or her chosen rate of payroll deductions, as described in Article IV. Such
application shall authorize the employee's Employer to reduce the employee's
Compensation by the amount of any such payroll deductions. The application shall
also evidence the employee's acceptance of and agreement to all provisions of
the Plan.
(c) If a Participant is transferred from one Employer to another Employer,
such transfer shall not terminate the Participant's participation in the Plan.
Such Participant shall continue to make payroll deductions under the Plan,
PROVIDED that such Participant completes any forms as the Committee may require,
in the time and manner prescribed by the Committee.
2
<PAGE>
(d) If an individual terminates employment with all Employers so as to
discontinue participation in the Plan, and such individual is subsequently
reemployed by an Employer, such individual shall be required to satisfy the
eligibility service requirement described in subsection (a) of this Section as
if he or she were a new employee.
(e) Notwithstanding anything herein to the contrary, no employee shall be
entitled to participate in the Plan for a Purchase Period if such employee, on
the first day of such Purchase Period would own shares (including shares which
may be purchased under the Plan during such Purchase Period) possessing five
percent or more of the total combined voting power or value of all classes of
stock of the Company or any of its Subsidiaries. For purposes of the foregoing
sentence, the rules of stock attribution set forth in Section 424(d) of the Code
shall apply in determining share ownership.
3.2 ADMINISTRATION. The Plan shall be administered by the Committee. Subject
to the express provisions hereof, the Committee shall have complete authority to
interpret the Plan, to prescribe, amend and rescind rules and regulations
relating to it and to make all other determinations necessary or advisable for
its administration. Such determinations made by the Committee shall be
conclusive. No member of the Committee shall be personally liable for any
decision or determination made in good faith under the Plan.
IV. PARTICIPANT PAYROLL DEDUCTIONS
4.1 ELECTIONS. Each Participant may elect, in the manner described in Section
4, to make payroll deductions under the Plan in an amount equal to a whole
dollar amount or a whole percentage, of such Participant's Compensation for each
payroll period, beginning with the first pay date which occurs on or after the
Entry Date as of which such Participant commences participation in the Plan.
Payroll deductions for each payroll period under the Plan shall be at least two
percent of a Participant's Compensation for such payroll period and may be
limited by such maximum percentage or whole dollar amount, if any, as the
Committee may designate from time to time. Once a Participant's participation in
the Plan commences, such Participant shall continue to participate in the Plan
for each succeeding Purchase Period until he or she withdraws from the Plan
pursuant to Article VII or ceases to be an eligible employee.
4.2 ELECTION CHANGES. At least 15 days (or such other period as may be
prescribed by the Committee) prior to the first day of any Purchase Period, a
Participant shall have the right to elect to increase or decrease his or her
designated rate of payroll deductions under the Plan by executing and delivering
to the Benefits Representative an application on the prescribed form specifying
his or her chosen rate of payroll deductions.
4.3 ACCOUNTS. The Committee shall cause to be established a separate Employee
Stock Purchase Account on behalf of each Participant. Such Employee Stock
Purchase Accounts shall be solely for accounting purposes, and there shall be no
segregation of assets among the separate accounts. Such accounts shall not be
credited with interest or other investment earnings.
V. PURCHASE OF COMMON SHARES
5.1 NUMBER OF SHARES PURCHASED. Subject to a Participant's right of
abandonment described in Article VII, the balance of each Participant's Employee
Stock Purchase Account shall be applied on each Purchase Date to purchase the
number of whole and fractional shares of Common Stock determined by dividing the
balance of such Participant's Employee Stock Purchase Account as of such date by
the Purchase Price. The Participant's Employee Stock Purchase Account shall be
debited accordingly.
5.2 MAXIMUM SHARES PURCHASED.
(a) Notwithstanding any provision of the Plan to the contrary, the maximum
number of shares which shall be available for purchase under the Plan shall be
1,000,000 shares of Common Stock, subject to adjustment as provided in Section
9.2. The shares of Common Stock available under the Plan may be treasury shares,
shares originally issued for such purpose or shares purchased by the Company, as
the
3
<PAGE>
Company may decide. In the event that the aggregate number of shares of Common
Stock which all Participants elect to purchase during a Participation Period
exceeds the number of shares remaining available for issuance under the Plan,
then the number of shares to which each Participant is entitled shall be
determined by multiplying the number of shares available for issuance by a
fraction, the numerator of which is the number of shares which such Participant
has elected to purchase and the denominator of which is the number of shares
which all Participants have elected to purchase.
(b) Notwithstanding any provision contained herein to the contrary, no
Participant shall be permitted to purchase shares of Common Stock in any
calendar year under the Plan and other employee stock purchase plans (within the
meaning of Section 423 of the Code) of the Company and its Subsidiaries with an
aggregate fair market value (determined at the time the options to purchase such
shares are granted) in excess of $25,000, all determined in the manner provided
by Section 423(b)(8) of the Code. Any portion of the balance of a Participant's
Employee Stock Purchase Account that is not applied to purchase shares of Common
Stock due to the application of this subsection shall be refunded to such
Participant as soon as administratively practicable.
5.3 TERMINATION OF EMPLOYMENT.
(a) If a Participant's employment is transferred to a Subsidiary that is
not an Employer, then the Participant's payroll deductions shall be suspended
and the balance of the Participant's Employee Stock Purchase Account shall be
applied to purchase shares of Common Stock on the Purchase Date next occurring
after the effective date of such transfer, except to the extent the Participant
abandons his or her election to purchase shares of Common Stock as described in
Article VII.
(b) Upon termination of employment with all Employers, the Participant's
participation in the Plan shall cease and the entire balance of the
Participant's Employee Stock Purchase Account for the then current Purchase
Period that has not yet been used to purchase shares of Common Stock shall be
refunded to him or her as soon as administratively practicable.
VI. ISSUANCE OF CERTIFICATES
As soon as administratively practicable after each Purchase Date, the
Company, in its sole discretion, shall purchase or issue shares of Common Stock
and at the election of the Company, a certificate representing the shares of
Common Stock purchased by such Participant under the Plan on such date shall be
issued and delivered to such Participant or a notation of noncertificated shares
shall be made on the stock records of the Company. Shares of Common Stock
purchased by a Participant under the Plan shall be registered in the name of the
Participant. Shares of Common Stock purchased hereunder may not be sold,
assigned, transferred, pledged, exchanged, encumbered or otherwise disposed of
in any way (other than by will or the laws of descent and distribution) for a
period commencing on the Purchase Date and ending one year thereafter (the
"Holding Period"); PROVIDED, HOWEVER, that the Committee, in its discretion, may
shorten the Holding Period or otherwise provide for the lapse of any
restrictions outstanding on any shares. All certificates issues to Participants
following each Purchase Date shall bear a legend in substantially the following
form:
The shares represented by this certificate may not be sold, assigned,
transferred, pledged, exchanged, encumbered or otherwise disposed of in any
way (other than by will or the laws of descent and distribution) for a
period commencing on [insert applicable Purchase Date] and ending one year
thereafter (the "Holding Period"); provided, however, that the committee
administering the Foundation Health Systems, Inc. Employee Stock Purchase
Plan, in its discretion, may shorten the Holding Period or otherwise provide
for the lapse of any restrictions outstanding on any such shares.
4
<PAGE>
VII. PARTICIPANT'S RIGHT TO ABANDON PURCHASE OF SHARES
At any time during a Purchase Period, but in no event later than 15 days (or
such shorter period prescribed by the Committee) prior to a Purchase Date, a
Participant may elect to abandon his or her election to purchase shares of
Common Stock under the Plan. Such abandonment election shall be made on forms
prescribed by the Committee and delivered to the Benefits Representative. Upon
such an election by a Participant, the amount credited to the Participant's
Employee Stock Purchase Account for the current Purchase Period shall be
refunded to the Participant as soon as is administratively practicable, and such
Participant's participation in the Plan shall terminate.
VIII. SUSPENSION ON ACCOUNT OF HARDSHIP WITHDRAWAL
If a Participant makes a hardship withdrawal from any plan with a cash or
deferred arrangement qualified under Section 401(k) of the Code, which plan is
sponsored, or participated in, by the Participant's Employer, such Participant
shall be suspended from making payroll deductions under the Plan for a period of
twelve months from the date of such withdrawal. The balance of such
Participant's Employee Stock Purchase Account shall be applied to purchase
shares of Common Stock on the Purchase Date next occurring after the effective
date of such withdrawal, except to the extent the Participant abandons his or
her election to purchase shares of Common Stock as described in Article VII.
After the expiration of such twelve-month period, the Participant may resume his
or her payroll deductions in accordance with Article IV.
IX. GENERAL
9.1 RIGHTS NOT TRANSFERABLE. The right to purchase shares of Common Stock
under the Plan shall not be transferable by any Participant other than by will
or the laws of descent and distribution, and must be exercisable, during his or
her lifetime, only by the Participant.
9.2 CHANGES IN THE COMPANY'S CAPITAL STRUCTURE.
(a) The existence of the Plan shall not affect in any way the right or
power of the Company or its shareholders to make or authorize any adjustment,
recapitalization, reorganization or other change in the Company's capital
structure or its business, or any merger or consolidation of the Company, or any
issue of bonds, debentures, preferred or prior preference stock that affects the
shares of Common Stock or the rights thereof, or the dissolution or liquidation
of the Company, or any sale or transfer of all or any part of its assets or
business, or any other corporate act or proceeding, whether of a similar
character or otherwise.
(b) If, during the term of the Plan, the Company shall effect (i) a
distribution or payment of a dividend on its Common Stock in shares of the
Company, (ii) a subdivision of its outstanding Common Stock by a stock split or
otherwise, (iii) a combination of the outstanding shares of Common Stock into a
smaller number of shares by a reverse stock split or otherwise, or (iv) an
issuance by reclassification or other reorganization of its Common Stock (other
than by merger or consolidation) of any shares of the Company, then each
Participant shall be entitled to receive upon the purchase of shares of Common
Stock pursuant to the Plan such shares of the Company which the Participant
would have owned or would have been entitled to receive after the happening of
such event had the Participant purchased shares of Common Stock pursuant to the
Plan immediately prior to the happening of such event. If any other event shall
occur that, in the judgment of the Board, necessitates adjusting the Purchase
Price, the number of shares of Common Stock offered or other terms of the Plan,
the Board shall take any action that in its judgment shall be necessary to
preserve each Participant's rights substantially proportionate to the rights
existing prior to such event. To the extent that any event or action pursuant to
this paragraph shall entitle Participants to purchase additional shares of
Common Stock or other shares of the Company, the shares available under the Plan
shall be deemed to include such additional shares of Common Stock or such other
shares.
5
<PAGE>
(c) In the event of a merger of one or more corporations into the Company,
or a consolidation of the Company and one or more corporations in which the
Company shall be the surviving corporation, each Participant in the Plan shall,
at no additional cost, be entitled, upon his or her payment for all or part of
the shares of Common Stock purchasable by him or her under the Plan, to receive
(subject to any required action by shareholders) in lieu of the number of shares
of Common Stock which he or she was entitled to purchase, the number and class
of shares of stock or other securities to which such holder would have been
entitled pursuant to the terms of the agreement of merger or consolidation if,
immediately prior to such merger or consolidation, such holder had been the
holder of record of the number of shares of Common Stock equal to the number of
shares paid for by the Participant.
(d) If the Company is merged into or consolidated with another corporation
under circumstances where the Company is not the surviving corporation, or if
the Company sells or otherwise disposes of substantially all its assets to
another corporation during the term of the Plan, each holder of a right to
purchase shall be entitled to receive, upon his or her payment for all or part
of the shares of Common Stock purchasable by him or her under the Plan and in
lieu of such shares of Common Stock, shares of such stock or other securities as
the holders of shares of Common Stock received pursuant to the terms of the
merger, consolidation or sale.
(e) Except as heretofore expressly provided, the issue by the Company of
shares of stock of any class, or securities convertible into shares of stock of
any class, for cash or property, or for labor or services either upon direct
sale or upon the exercise of rights or warrants to subscribe therefor, or upon
conversion of shares or obligations of the Company convertible into such shares
or other securities, shall not affect, and no adjustment by reason thereof shall
be made with respect to, the number or price of shares of Common Stock then
available for purchase under the Plan.
9.3 SHAREHOLDER APPROVAL. The Plan shall be submitted to the stockholders of
the Company for approval and, if approved by the affirmative vote of a majority
of the shares of Common Stock present in person or represented by proxy at the
1997 annual meeting of stockholders, shall become effective as of September 1,
1997.
9.4 RIGHTS OF A SHAREHOLDER. No Participant shall have rights or privileges
of a shareholder of the Company with respect to shares purchasable under the
Plan unless and until the Participant shall become the holder of record of one
or more shares of Common Stock.
9.5 NO REPURCHASE OF COMMON STOCK BY COMPANY. The Company is not obligated to
repurchase any shares of Common Stock acquired under the Plan.
9.6 AMENDMENT OF THE PLAN. The Board may amend the Plan as it shall deem
advisable, subject to any requirement of stockholder approval required by
applicable law, rule or regulation, including Section 423 of the Code; provided,
however, that no amendment shall be made without stockholder approval if such
amendment would increase the maximum number of shares of Common Stock available
under the Plan (subject to Section 9.2). No amendment may impair the rights of a
holder of an outstanding award without the consent of such holder.
9.7 TERMINATION OF THE PLAN. While it is intended that the Plan remain in
effect as long as shares of Common Stock are available for purchase under the
Plan, the Board may terminate the Plan at any time in its discretion by
resolutions duly adopted. Upon termination of the Plan, the Committee shall
terminate payroll deductions and shall apply the balance of each Participant's
Employee Stock Purchase Account to purchase shares of Common Stock as described
in Section 6 as if such termination date were a Purchase Date under the Plan.
Notwithstanding the foregoing, in the event of the termination of the Plan, a
Participant may elect, in the time and manner prescribed by the Committee, to
abandon his or her right to purchase all or a portion of the shares of Common
Stock purchasable by him. As soon as administratively practicable after the
termination of the Plan, the Committee shall refund to each Participant who
elects to
6
<PAGE>
abandon his or her right to purchase shares of Common Stock, the entire balance
of in his or her Employee Stock Purchase Plan Account, or the applicable portion
thereof.
Notwithstanding any provision in the Plan to the contrary, the Plan shall
automatically terminate as of the Purchase Date on which all shares available
for issuance under the Plan shall have been purchased by Participants under the
Plan.
9.8 COMPLIANCE WITH STATUTES AND REGULATIONS. The sale and delivery of Common
Stock under the Plan shall be in compliance with relevant statutes and
regulations of governmental authorities, including state securities laws and
regulations, and with the regulations of applicable stock exchanges.
9.9 GOVERNING LAW. The Plan and all determinations made hereunder and actions
taken pursuant hereto, to the extent not otherwise governed by the Code or the
laws of the United States, shall be governed by the laws of the State of
Delaware and construed in accordance therewith without giving effect to
principles of conflicts of laws.
9.10 COMPANY AS AGENT FOR THE EMPLOYERS. Each Employer, by adopting the Plan,
appoints the Company, the Board and the Committee as its agents to exercise on
its behalf all of the powers and authorities hereby conferred upon the Company,
the Board and the Committee by the terms of the Plan, including, but not by way
of limitation, the power to amend and terminate the Plan. The authority of the
Company, the Board and the Committee to act as such agents shall continue for as
long as necessary to carry out the purposes of the Plan.
7
<PAGE>
FOUNDATION HEALTH SYSTEMS, INC.
PERFORMANCE-BASED ANNUAL BONUS PLAN
1. PURPOSE OF THE PLAN
The purpose of the Foundation Health Systems, Inc. Performance-Based Annual
Bonus Plan (the "Plan") is to provide certain key executives of Foundation
Health Systems, Inc. ("FHS") and of its affiliated group of corporations
(collectively, with FHS, the "Company") with an annual incentive compensation
opportunity based upon achievement of preestablished performance goals. The Plan
is intended to provide compensation which is not subject to the limitation on
deductions for federal income tax purposes contained in Section 162(m) of the
Internal Revenue Code of 1986, as amended (the "Code"), and the Plan should be
construed to the extent possible as providing for remuneration which is
"performance-based compensation" within the meaning of Section 162(m) of the
Code and regulations thereunder.
2. PLAN ADMINISTRATION
The Compensation and Stock Option Committee of the Board of Directors (the
"Board") of FHS or a subcommittee thereof (the "Committee") shall have full
discretion, power and authority to administer and interpret the Plan and to
establish rules and procedures for its administration as the Committee may deem
necessary or appropriate. Any interpretation of the Plan or other act of the
Committee in administering the Plan shall be final and binding upon all
employees of the Company.
3. PARTICIPANTS
The Participants in the Plan are the Company's Chief Executive Officer(s)
(or any employee or employees acting in such capacity within the meaning of
Section 162(m) of the Code and the regulations thereunder) and the other four
highest compensated officers of the Company (other than the Chief Executive
Officer(s) or other persons who are acting in such capacity) who are employed by
the Company on the last day of the applicable Performance Period.
4. PERFORMANCE PERIOD
A Performance Period shall be a calendar year, commencing on January 1, and
terminating on December 31.
5. PERFORMANCE AWARDS
a. IN GENERAL. If the "Performance Goal" for a Performance Period has been
achieved, the Committee shall determine the amount of each Participant's
Performance Award according to subparagraph 5(b). The "Performance Goal" for
each Performance Period is that consolidated income from operations before
taxes, as determined under generally accepted accounting principles consistently
applied, excluding any nonrecurring or extraordinary charges, shall exceed $250
million.
b. DETERMINATION OF AMOUNT OF EACH PERFORMANCE AWARD. Each Participant
shall be eligible to receive a Performance Award if the Performance Goal for the
Performance Period is achieved. The maximum amount of a Participant's
Performance Award shall be equal to his or her "pro rata share" of the "Cash
Bonus Pool" for the Performance Period. The "Cash Bonus Pool" shall be equal to
$7.5 million. A Participant's "pro rata share" of the Cash Bonus Pool shall be
equal to the Cash Bonus Pool multiplied by a fraction, the numerator of which is
the Participant's base salary on the first day of the Performance Period and the
denominator of which is the aggregate of the base salaries of all Participants
on the first day
1
<PAGE>
of the Performance Period. The Committee, in its sole discretion, may reduce the
amount of, or eliminate, a Performance Award of any Participant. In determining
whether a Performance Award will be reduced or eliminated, the Committee shall
consider any extraordinary changes which may have occurred during the
Performance Period, such as changes in accounting practices or the law, and
shall consider such business performance criteria that it deems appropriate,
including, but not limited to, the Company's net income, cash flow, earnings per
share and other relevant operating and strategic business results and such
business performance criteria that are applicable to an individual Participant.
6. PAYMENT OF PERFORMANCE AWARDS
Payment of any Performance Award for a Performance Period shall be made to a
Participant who is employed by the Company on the last day of such period after
the Committee shall have certified in writing that the Performance Goal for the
Performance Period was achieved and any other material terms of the Performance
Award have been satisfied.
7. PLAN AMENDMENT AND TERMINATION
The Committee may amend or terminate the Plan by resolution at any time as
it shall deem advisable, subject to any shareholder approval required by law,
provided that the Committee may not amend the Plan to change the Performance
Goal without the approval of a majority of the votes cast by shareholders in a
separate vote. No amendment may impair the rights of a Participant to a
Performance Award granted in respect of a Performance Period.
8. MISCELLANEOUS PROVISIONS
a. NONTRANSFERABILTY OF PERFORMANCE AWARD. No Performance Award may be
transferable in any manner other than by will or the laws of descent and
distribution, and any attempt to transfer a Performance Award shall be void.
b. WITHHOLDING TAXES. The Company shall have the right to deduct from a
Participant's Performance Award any federal, state, local or other taxes which
may be required to be withheld or paid in connection with such Performance
Award.
c. NO EMPLOYMENT RIGHTS. Nothing in the Plan or in any Performance Award
shall confer on any individual any claim or right to be granted a Performance
Award or any right to be or to continue in the employ of the Company or shall
interfere in any way with the right of the Company to terminate the employment
of any individual at any time.
d. GOVERNING LAW. The Plan shall be interpreted and construed in
accordance with the laws of the State of Delaware, without regard to principles
of conflicts of laws.
e. SEVERABILITY. If a provision of the Plan shall be held illegal or
invalid, the illegality or invalidity shall not affect the remaining parts of
the Plan and the Plan shall be construed and enforced as if the illegal and
invalid provision had not been included in the Plan.
9. EFFECTIVE DATE
The Effective Date of the Plan shall be January 1, 1998.
2
<PAGE>
FOUNDATION HEALTH SYSTEMS, INC.
EARNINGS PER SHARE COMPUTATION
UTILIZING THE TREASURY STOCK METHOD
EXHIBIT 11.1
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------- -------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
PRIMARY
Shares outstanding at beginning of period 125,398,828 124,392,021 125,207,484 123,096,685
Weighted average shares issued (repurchased) during period (92,607) 278,860 94,207 809,624
Dilutive shares contingently issuable upon exercise of stock options,
net of shares assumed to have been purchased (at average market price)
for treasury with assumed proceeds from exercise 477,451 710,840 439,068 829,831
----------- ----------- ----------- -----------
Weighted average shares outstanding (A) 125,783,672 125,381,721 125,740,759 124,736,140
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Income (loss) from continuing operations (B) $ (200,124) $ 60,188 $ (141,647) $ 125,855
Income from discontinued operations (C) - 6,300 - 2,910
----------- ----------- ----------- -----------
Net income (loss) (D) $ (200,124) $ 66,488 $ (141,647) $ 128,765
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Earnings (loss) per share:
Continuing operations (B/A) $ (1.59) $ 0.48 $ (1.13) $ 1.01
Discontinued operations (C/A) - .05 - .02
----------- ----------- ----------- -----------
Net earnings (D/A) $ (1.59) $ 0.53 $ (1.13) $ 1.03
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
FULLY DILUTED
Shares outstanding at beginning of period 125,398,828 124,392,021 125,207,484 123,096,685
Weighted average shares issued (repurchased) during period (92,607) 278,860 94,207 809,624
Dilutive shares contingently issuable upon exercise of stock options,
net of shares assumed to have been purchased (at average market price)
for treasury with assumed proceeds from exercise 585,764 711,418 593,784 834,783
----------- ----------- ----------- -----------
Weighted average shares outstanding (A) 125,891,985 125,382,299 125,895,475 124,741,092
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Income (loss) from continuing operations (B) $ (200,124) $ 60,188 $ (141,647) $ 125,855
Income from discontinued operations (C) - 6,300 - 2,910
----------- ----------- ----------- -----------
Net income (loss) (D) $ (200,124) $ 66,488 $ (141,647) $ 128,765
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Earnings (loss) per share:
Continuing operations (B/A) $ (1.59) $ 0.48 $ (1.13) $ 1.01
Discontinued operations (C/A) - 0.05 - 0.02
----------- ----------- ----------- -----------
Net earnings (D/A) $ (1.59) $ 0.53 $ (1.13) $ 1.03
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
CONSOLIDATED BALANCE SHEETS AND CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 483,650
<SECURITIES> 1,118,748
<RECEIVABLES> 492,603<F1>
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 360,141<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,028,560
<CURRENT-LIABILITIES> 0
<BONDS> 1,009,988<F7>
0
0
<COMMON> 530,873<F3>
<OTHER-SE> 408,564
<TOTAL-LIABILITY-AND-EQUITY> 4,028,560
<SALES> 0
<TOTAL-REVENUES> 1,869,725
<CGS> 0
<TOTAL-COSTS> 1,537,802
<OTHER-EXPENSES> 622,485<F4>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,254
<INCOME-PRETAX> (307,816)
<INCOME-TAX> (107,692)
<INCOME-CONTINUING> (200,124)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (200,124)<F5>
<EPS-PRIMARY> (1.59)<F6>
<EPS-DILUTED> (1.59)
<FN>
<F1>NET OF ALLOWANCES FOR DOUBTFUL ACCOUNTS
<F2>NET OF ACCUMULATED DEPRECIATION
<F3>NET OF TREASURY STOCK
<F4>INCLUDES $405,900 OF GEM REINSURANCE COSTS, MERGER, RESTRUCTURING AND OTHER
COSTS
<F5>INCLUDES $262,888 OF GEM REINSURANCE COSTS, MERGER RESTRUCTURING AND OTHER
COSTS, NET OF TAXES
<F6>INCLUDES $2.09 LOSS PER SHARE, NET OF TAXES, RESULTING FROM GEM REINSURANCE
COSTS, MERGER, RESTRUCTURING AND OTHER COSTS
<F7>INCLUDES BORROWINGS UNDER FHS REVOLVING CREDIT FACILITY, MISC. NOTES
PAYABLE, AND CAPITAL LEASES
</FN>
</TABLE>
