UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 13D
Under the Securities Exchange Act of 1934
(AMENDMENT NO. 1)
FOHP, Inc.
(Name of Issuer)
Convertible Subordinated Surplus
Debentures, Convertible into Common
Stock, per value $.01 per share, and
Common Stock, par value $.01 per share
(Title of Class of Securities)
-[Not Applicable]-
(CUSIP Number)
Michael E. Jansen, Esq.
Foundation Health Systems, Inc.
225 North Main Street
Pueblo, CO 81003
(719) 542-0500
(Name, Address and Telephone Number of Person Authorized
to Receive Notices and Communications)
Copy to:
Mark J. Mihanovic
McDermott, Will & Emery
2049 Century Park East, 34th Floor
Los Angeles, CA 90067
(310) 277-4110
December 1 and December 8, 1997
(Date of Event which Requires Filing of this Statement)
Check the following box if a fee is being paid with the statement. / /
(A fee is not required only if the reporting person: (1) has a previous
statement on file reporting beneficial ownership of more than five percent of
the class of securities described in Item 1; and (2) has filed no amendment
subsequent thereto reporting beneficial ownership of five percent or less of
such class.) (See Rule 13d-7.)
Note: Six copies of this statement, including all exhibits, should be filed
with the Commission. See Rule 13d-1(a) for other parties to whom copies are to
be sent.
AMENDMENT TO SCHEDULE 13D
CUSIP No. Not Applicable Page 2 of 11 Pages
_______________________________________________________________________________
1 NAMES OF REPORTING PERSONS S.S. OR
I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS
Foundation Health Systems, Inc. (IRS Identification No. 95-4288333)
_______________________________________________________________________________
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) / /
(b) / /
________________________________________________________________________________
3 SEC USE ONLY
________________________________________________________________________________
4 SOURCE OF FUNDS
BK; WC
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS
2(d) or 2(e) / /
________________________________________________________________________________
6 CITIZENSHIP OR PLACE OF ORGANIZATION
Delaware
7 SOLE VOTING POWER
NUMBER OF SHARES
BENEFICIALLY 97,913,161 shares of common stock, par value $.01 per share
OWNED BY ("Common Stock") of FOHP, Inc. (the "Issuer"), plus such
EACH additional number of shares of such Common Stock issuable upon
REPORTING conversion of convertible subordinated surplus debentures (the
PERSON "Debentures") held by Foundation Health Systems, Inc. ("FHS") as
WITH: represents 99.99% of the total outstanding equity of the Issuer
on a fully-diluted basis (taking into account the conversion or
partial conversion of the Debentures, the conversion of all other
securities convertible into shares of Common Stock and the
exercise of all warrants and options exercisable for shares of
Common Stock)
8 SHARED VOTING POWER
-0-
9 SOLE DISPOSITIVE POWER
97,913,161 shares of Common Stock plus such additional number of
shares of Common Stock upon conversion of the Debentures as
represents 99.99% of the total outstanding equity of the Issuer
on a fully-diluted basis (taking into account conversion or
partial conversion of the Debentures, the conversion of all other
securities convertible into shares of Common Stock and the
exercise of all warrants and options exercisable for shares of
Common Stock)
10 SHARED DISPOSITIVE POWER
-0-
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
97,913,161 shares of Common Stock plus such additional number of shares of such
Common Stock upon conversion of the Debentures as represents 99.99% of the total
outstanding equity of the Issuer on a fully-diluted basis (taking into account
the conversion or partial conversion of the Debentures, the conversion of all
other securities convertible into shares of Common Stock and the exercise of all
warrants and options exercisable for shares of Common Stock)
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11)
EXCLUDES CERTAIN SHARES / /
________________________________________________________________________________
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
99.99%
________________________________________________________________________________
14 TYPE OF REPORTING PERSON
CO
________________________________________________________________________________
AMENDMENT TO STATEMENT PURSUANT TO RULE 13D-1
OF THE
GENERAL RULES AND REGULATIONS
UNDER THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
Foundation Health Services, Inc., a Delaware corporation ("FHS"),
hereby amends the Statement on Schedule 13D (the "Original Statement") relating
to Convertible Subordinated Surplus Debentures of FOHP, Inc., a New Jersey
corporation (the "Company"), convertible into common stock, par value $.01 per
share ("Common Stock") of the Company and the Common Stock of the Company.
Capitalized terms used herein but not defined herein shall have the meanings
ascribed to them in the Original Statement.
Item 1. Security and Issuer
Item 1 is restated in its entirety as follows:
The securities to which this amendment relates are (a) the 4,941,049
shares of Common Stock of Company (with principal executive offices located at 2
Bridge Avenue, Red Bank, New Jersey 07701), which were issued by the Company
upon the conversion by FHS on December 1, 1997 of the Convertible Subordinated
Surplus Debentures dated as of April 30, 1997 (the "April 30 Debentures"), and
the 92,804,003 shares of Common Stock which were issued by the Company upon the
partial conversion by FHS on December 8, 1997 of the Convertible Subordinated
Surplus Debentures, dated as of December 8, 1997 (the "December 8 Debentures")
(the December 8 Debentures, together with the April 30 Debentures, are referred
to herein collectively as the "FOHP Debentures"), the form of which is attached
hereto as Exhibit A; plus (b) the Common Stock into which the remaining portion
of the December 8 Debentures are convertible, which, taken together with the
shares of Common Stock issued by the Company pursuant to the conversion of the
April 30 Debentures and the partial conversion of the December 8 Debentures,
represents 99.99 percent of the total outstanding equity of the Company, on a
fully-diluted basis (taking into account the partial conversion of the December
8 Debentures, the conversion of the April 30 Debentures, the conversion of all
other securities convertible into shares of Common Stock and the exercise of all
warrants and options exercisable for shares of Common Stock).
Item 2. Identity and Background
Item 2 is unchanged except for the attached Schedule I hereto, which
is restated in its entirety.
Item 3. Source and Amount of Funds or other Consideration
Item 3 is amended by the addition of the following paragraphs:
The source of the funds paid to FOHP at the closing of the sale of the
December 8 Debentures was borrowings by FHS under a credit facility issued by a
consortium of commercial banks led by Bank of America, National Trust & Savings
Association ("B of A") and working capital of FHS. The aggregate purchase price
for, and principal amount of, the December 8 Debentures was $29 million.
FHS converted $50 million of the principal amount of the April 30
Debentures for the 4,941,049 shares of Common Stock and converted $18,952,930 of
the principal amount of the December 8 Debentures for the 92,804,003 shares of
Common Stock. No additional cash payments from FHS were required in connection
with such conversions. Such numbers of shares of Common Stock, when taken with
the 168,109 shares already owned by FHS, equals 97,913,161 shares of Common
Stock.
Item 4. Purpose of Transaction
Item 4 is restated in its entirety as follows:
Upon the conversion of the FOHP Debentures by FHS acquired a majority
equity interest in the Company and the right to name a majority of the Board of
Directors of the Company (the "Company Board").
FHS, in its capacity as majority shareholder of the Company, has the
right to designate such number of directors on the Company Board (the "FHS
Designees") as reflects its percentage ownership of the Common Stock. Until
such time as FHS exercises such right, FHS has the right to appoint FHS
Designees as represents no less than 15% of the total number of directors on the
Company Board. FHS has named three individuals to the Company Board. FHS may
at any time appoint more FHS Designees and take majority control of the Company
Board by shareholder vote.
Notwithstanding the above, for so long as any shares of Common Stock
are held by any "NJ Practitioner" (as such term is defined in the Company
Bylaws), "NJ Acute Care Institution" (as such term is defined in the Company
Bylaws), affiliate to an NJ Acute Care Institution, or other health care
provider to First Option Health Plan of New Jersey, Inc., a New Jersey
corporation and a wholly-owned subsidiary of the Company ("FOHP-NJ"), the
Company Board shall include as directors not less than three persons who are not
designated by FHS, one of whom shall be an NJ Practitioner and another a
representative of an NJ Acute Care Institution.
FHS has the right, under the Amended and Restated Securities Purchase
Agreement (attached to the Original Statement as Exhibit B), dated February 10,
1997, among FHS, the Company and FOHP-NJ, and amended by an Amendment (attached
to the Original Statement as Exhibit C) dated March 13, 1997 (as so amended,
referred to herein as the "Amended Purchase Agreement"), to acquire the
remaining shares of Common Stock not then owned thereby pursuant to a tender
offer, merger, consolidation or other business combination transaction for
consideration (to be paid in cash or FHS stock) equal to the value of such
Common Stock based on appraiser determinations at any time during the 1999
calendar year. FHS has not made a determination as to whether it will so
acquire such remaining shares of Common Stock.
Pursuant to the General Administrative Management Services Agreement,
dated April 30, 1997, between the Company and FHS (attached to the Original
Statement as Exhibit E), FHS provides a variety of management services to the
Company, including provider contracting, utilization review and quality
assurance, employee relations, sales and marketing and strategic planning. FHS
has also entered into the Management Information Systems and Claims Processing
Service Management Services Agreement, dated April 30, 1997 (attached to the
Original Statement as Exhibit F) pursuant to which FHS has the option to provide
information systems and claims processing services to the Company. FHS is not
currently providing such services, but retains the option to provide them.
FHS may change its intentions or take any other action with respect to
the Company or any of its debt or equity securities in any manner permitted by
law. Except as described herein, FHS has no current plans which relate or would
result in any of the events described in Sections (a) through (j) of the
instructions to this Item 4 of Schedule 13D.
Item 5. Interest in the Securities of the Issuer
a) FHS directly owns 97,913,161 shares of Common Stock as a result
of its conversion of the FOHP Debentures. FHS has the right to convert the
remaining portion of the December 8 Debentures into such number of shares of
Common Stock as represents 99.99 percent of the authorized shares of Common
Stock on a fully-diluted basis (taking into account the conversion or partial
conversion of the FOHP Debentures, the conversion of all other securities
convertible into shares of Common Stock and the exercise of all warrants and
options exercisable for shares of Common Stock).
b) The responses to Items 7-11 of the cover page of this Amendment
to Schedule 13D relating to beneficial ownership of Common Stock are
incorporated herein by reference.
c) Not applicable.
d) Not applicable.
e) Not applicable.
Item 6. Contracts, Arrangements, Understandings or Relationships with Respect
to Securities of the Issuer
Item 6 is amended by the addition of the following paragraph:
FHS purchased Subordinated Surplus Debentures (the "December 31
Debentures"), dated as of December 31, 1997, in the principal amount of $24
million from the Company. The Debentures are not convertible into any equity
security of the Company and are subordinated to all other indebtedness of the
Company and its subsidiaries. The December 31 Debentures bear interest at an
annual rate equal to the rate charged to FHS under its credit facility issued by
a consortium of commercial banks led by B of A (or such other credit facility as
may be used to refinance such facility). The December 31 Debentures mature and
are payable by the Company to FHS on December 31, 2002. A form of the December
31 Debentures is attached hereto as Exhibit B.
Item 7. Material to be filed as Exhibits.
Exhibit A: Form of the Convertible Subordinated Surplus Debentures of the
Company, dated as of December 8, 1997, purchased by FHS.
Exhibit B: Form of the Subordinated Surplus Debentures of the Company, dated
as of December 31, 1997, purchased by FHS.
After reasonable inquiry and to the best of its knowledge and belief, the
undersigned certifies that the information set forth in this amendment to
statement is true, complete and correct.
Foundation Health Systems, Inc.
s/ Michael E. Jansen
By: Michael E. Jansen, Esq.
Title: Vice President, Assistant Secretary and
Assistant General Counsel
SCHEDULE I
BOARD OF DIRECTORS AND EXECUTIVE OFFICERS OF
FOUNDATION HEALTH SYSTEMS, INC.
The directors and executive officers of Foundation Health Systems, Inc. are
identified in the tables below.
DIRECTORS
NAME PRESENT PRINCIPAL
OCCUPATION BUSINESS ADDRESS
Malik M. Hasan, Chairman of the c/o Foundation
M.D. Board and Chief Health
Executive Officer of Systems, Inc.
FHS 21600 Oxnard Street
Woodland Hills, CA
91367
Patrick Foley Chairman, President DHL Airways, Inc.
and Chief Executive 333 Twin Dolphin
Officer of DHL Drive
Airways Redwood City, CA
94065
Earl B. Fowler President of Fowler Fowler International
International Corporation
Corporation Crystal Park III
2231 Crystal Drive
Suite 500
Arlington, VA 22202
Richard W. Hanselman Consultant 3017 Poston Avenue
Nashville, TN 37203
Richard J. Chairman Emeritus of Unocal Corporation
Stegemeier Unocal Corporation 376 Valencia Avenue
Brea, CA 92621
Raymond S. Troubh Financial Consultant 10 Rockefeller Plaza
Suite 172
New York, NY 10020
J. Thomas Bouchard Senior Vice I.B.M.
President, Human One Old Orchard Road
Resources of Mail Drop 326
International Armonk, NY 10504
Business Machines
Corporation
George Deukmejian Partner, Sidley & Sidley & Austin
Austin 555 West Fifth
Street
40th Floor
Los Angeles, CA
90013
Thomas T. Farley Senior Partner, Petersen, Fonda,
Petersen, Fonda, Farley, Mattoon,
Farley, Mattoon, Crockenberg and
Crockenberg and Garcia, P.C.
Garcia, P.C. 650 Thatcher
Building
Pueblo, CO 81003
Roger F. Greaves Consultant 24021 Alder Place
Calabasas, CA 91302
EXECUTIVE OFFICERS
NAME PRESENT PRINCIPAL BUSINESS ADDRESS
OCCUPATION
Malik M. Hasan, Chairman and Chief c/o Foundation
M.D. Executive Officer Health
Systems, Inc.
21600 Oxnard
Street, Woodland
Hills, CA 91367
Jay M. Gellert President and Chief c/o Foundation
Operating Officer Health
Systems, Inc.
21600 Oxnard Street
Woodland Hills, CA
91367
Dale T. Berkbigler, Executive Vice c/o Foundation
M.D. President of Medical Health
Affairs and Chief Systems, Inc.
Medical Officer 21600 Oxnard Street
Woodland Hills, CA
91367
B. Curtis Westen, Senior Vice c/o Foundation
Esq. President, General Health
Counsel and Systems, Inc.
Secretary 21600 Oxnard Street
Woodland Hills, CA
91367
Robert Natt President of FHS c/o Foundation
North Eastern Health
Division Systems, Inc.
21600 Oxnard Street
Woodland Hills, CA
91367
Arthur M. Southam, President of FHS c/o Foundation
M.D. California Division Health
Systems, Inc.
21600 Oxnard Street
Woodland Hills, CA
91367
Michael D. Pugh President of FHS c/o Foundation
Western Division Health
Systems, Inc.
21600 Oxnard Street
Woodland Hills, CA
91367
Maurice Costa President of FHS c/o Foundation
Workers' Health
Compensation Systems, Inc.
Division 21600 Oxnard Street
Woodland Hills, CA
91367
Gary Velasquez President of FHS c/o Foundation
Government Health
Operations Division Systems, Inc.
and Specialty 21600 Oxnard Street
Services Division Woodland Hills, CA
91367
Alex Labak Senior Vice c/o Foundation
President and Chief Health
Marketing Officer Systems, Inc.
21600 Oxnard Street
Woodland Hills, CA
91367
Dale Terrell Senior Vice c/o Foundation
President and Chief Health
Information Officer Systems, Inc.
21600 Oxnard Street
Woodland Hills, CA
91367
Phil Katz Senior Vice c/o Foundation
President and Chief Health
Technology Officer Systems, Inc.
21600 Oxnard Street
Woodland Hills, CA
91367
EXHIBIT A TO AMENDED STATEMENT TO SCHEDULE 13D
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933.
THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE
OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SUCH ACT OR AN
OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION
IS NOT REQUIRED.
FOHP, INC.
CONVERTIBLE SUBORDINATED SURPLUS DEBENTURES
December 8, 1997
FOHP, Inc., a New Jersey corporation (the "Company"), for value received,
promises to pay to Foundation Health Systems, Inc., a Delaware corporation
formerly known as "Health Systems International, Inc." ("FHS"), or its
registered assigns, the principal sum (such principal sum being referred to
herein as the "Principal Amount") of $29,000,000 and accrued and unpaid interest
thereon. The Principal Amount hereof, and the interest thereon, shall be
payable at the main office of the Company or by mail to the registered address
of the holder hereof on December 8, 2002 (the "Maturity Date"), subject to the
provisions set forth in Section 4 hereof. No such payment shall be required to
the extent that such Principal Amount and interest is or has been converted into
Conversion Shares (as such term is defined in Section 2 hereof) under the terms
of the Debentures evidenced by this instrument (the "Debentures").
These Debentures have been issued in return for additional capital contributions
made by FHS pursuant to Section 6.2 of the Amended and Restated Securities
Purchase Agreement, dated February 10, 1997, as amended by an Amendment dated as
of March 13, 1997, among FHS, the Company and First Option Health Plan of New
Jersey, Inc., a New Jersey corporation and a wholly-owned subsidiary of FOHP
("FOHP-NJ") (referred to herein, as so amended, as the "Purchase Agreement").
The Company previously issued to FHS on April 30, 1997 debentures initially
representing approximately $51.6 million of principal amount, the entire
remaining principal amount of which debentures was converted into common stock,
par value $.01 per share ( Common Stock ), of FOHP as of December 1, 1997.
The following is a statement of the rights of the holder hereof and the
conditions to which these Debentures are subject, and to which the holder
hereof, by the acceptance hereof, agrees:
1. Interest. The Principal Amount hereof shall bear interest at an annual
rate equal to the rate charged to FHS under its credit facility (the "BA
Facility") issued by a consortium of commercial banks led by Bank of America,
National Trust & Savings Association or such credit facility as is used to
refinance the BA Facility (the "Rate"), which Rate shall be subject to
adjustment at the beginning of each calendar quarter and shall become due and
payable, subject to the provisions of Section 4.1(b) hereof, with respect to any
given calendar quarter within 10 days after the end of such quarter. Any such
interest not paid when due and payable shall be considered "Defaulted Interest"
and shall be included in the Principal Amount hereunder.
2. Conversion.
(a) Any and all portions of the Principal Amount shall be convertible into
such number of shares (referred to herein as Conversion Shares ) of Common
Stock of the Company, at any time prior to or on the Maturity Date (such
conversion ratio being referred to herein as the "Conversion Ratio"), which will
equal, for each $1,000,000 of Principal Amount so converted, an additional 1.42
percent of the total equity of the Company, as of the date hereof (as such total
equity may be increased from time to time to reflect any securities issued
pursuant to Section 6.2 of, or otherwise expressly contemplated to be issued
under, the Purchase Agreement) on a fully-diluted basis (i.e., taking into
account the conversion of all other securities convertible into shares of Common
Stock, the exercise of all warrants and options exercisable for shares of Common
Stock, and such partial conversion of such Principal Amount); provided that,
once the number of such Conversion Shares, when added to the other shares of
Common Stock and other securities convertible into shares of Common Stock held
by FHS, represent 99.99% of the fully diluted equity of the Company, then the
balance of such Principal Amount shall not be considered convertible hereunder
but shall be subject to and have all other benefits under the terms and
provisions of this Agreement.
(b) The Company hereby represents, warrants and agrees that it will take all
action necessary to ensure that there will exist enough remaining authorized
shares of Common Stock in order to issue such number of Conversion Shares into
which these Debentures are convertible in order to represent the additional
percentages of total equity of the Company as set forth in this Section 2.
(c) In order to exercise its conversion rights provided under the terms of
this Section 2, the holder hereof will surrender these Debentures, together with
a notice of conversion indicating the portion of the Principal Amount converted
into Conversion Shares substantially in the form attached hereto as Exhibit A,
to the Company at any time during usual business hours at its office at 1501
Route 66, Neptune, NJ 07754, Attention: President (or at such other address as
the Company may designate from time to time by written notice to the holder).
3. Issuance of Stock on Conversion.
3.1 Delivery of Certificates. These Debentures shall have been deemed to have
been surrendered for conversion and converted at the close of business on the
date on which these Debentures and notice of conversion from the holder hereof
are received by the Company, and on such receipt the Company will issue and
deliver at its sole expense, as soon as practicable after such date, a
certificate or certificates of its Common Stock evidencing the number of shares
into which these Debentures have been converted to the holder hereto.
3.2 Lost Certificates. In the event such certificate or certificates are lost,
mutilated or destroyed, such certificate or certificates may be replaced,
provided notice is submitted by the holder of such certificate or certificates,
along with any other required supporting documentation.
3.3 No Fractional Shares. No fractional shares shall be issued on conversion
hereof. If upon any conversion of these Debentures the holder hereof would be
entitled to recover a fraction of a share of Common Stock, such fraction of a
share shall be rounded up or down, as the case may be, to the nearest whole
number of shares of Common Stock.
3.4 Adjustment upon Changes in Capitalization. In the event of any change in
Common Stock by reason of a stock dividend, stock split, merger,
recapitalization, combination, exchange of shares, issuer tender offer or share
repurchase or other similar transaction, the type and number of shares or
securities into which the Debentures is convertible shall be adjusted
appropriately.
4. Ranking of Debentures.
4.1 Obligation to Repay.
(a) The obligation of the Company to repay the Principal Amount and accrued
interest under these Debentures shall be subordinated to all other indebtedness
of the Company and its subsidiaries.
(b) No payments shall be made, in respect of all or any portion of the
Principal Amount or interest thereon, except with the prior written approval of
the New Jersey Department. Such approval may not be withheld if the Company or
FHS provides the New Jersey Department with notice at least 10 business days in
advance of any such payments that FOHP-NJ's statutory surplus will exceed 125
percent of FOHP-NJ's minimum net worth requirement after payment of the
requested amount and for the near future, unless the New Jersey Department
determines that FOHP-NJ's financial condition would be adversely affected as a
result of such payment. The Principal Amount shall be suspended and shall not
mature to the extent FOHP-NJ's net worth, as determined by the New Jersey
Department, is inadequate to make interest payments on these Debentures.
4.2 Bankruptcy, Dissolution and Liquidation. Upon any bankruptcy, dissolution
or liquidation of the Company, these Debentures shall thereupon be deemed to be
converted into Conversion Shares and shall thereupon be treated as pari passu
with then-outstanding shares of capital stock of the Company.
4.3 No Impairment. Nothing contained in this Section 4 shall impair, as
between the Company and the holder hereof, the obligation of the Company, which
is absolute and unconditional, to pay to the holder hereof the Principal Amount
and interest thereon (except to the extent these Debentures are converted into
Conversion Shares) provided that the approval of the State of New Jersey
Department of Banking and Insurance referenced in Section 4.1 herein is
obtained.
5. Covenants.
5.1 Affirmative Covenants. From and after the date hereof until the earlier of
the Maturity Date or the conversion of these Debentures, the Company shall
comply with and perform each of the following covenants and agreements:
5.1.1 Financial Reporting. The Company will furnish to FHS copies of the
following financial statements, reports and information:
(a) as soon as available and in any event within 90 days after the end of each
fiscal year of the Company, a copy of the Company's consolidated annual report
(including audited balance sheets, statements of operations, statements of
stockholders' equity and statements of cash flow) for the Company and its
subsidiaries for such fiscal year, prepared in accordance with generally
accepted accounting principles ("GAAP") consistent with the preceding year,
certified by Ernst & Young, LLP or such other independent public accountants as
shall be approved by the holder hereof, which approval shall not be unreasonably
withheld;
(b) as soon as available and in any event within 45 days after the end of each
calendar quarter, a consolidated balance sheet, statement of operations and
statement of cash flow for the Company and its subsidiaries, as of the end of,
and for, each such quarter, prepared in accordance with GAAP consistently
applied (subject to the absence of notes and to customary and reasonable
year-end adjustments), certified by the Company's chief financial officer as
fairly and accurately representing the financial condition of the Company and
its subsidiaries as of the end of, and for, the period covered thereby; and
(c) such other information with respect to the financial condition and
operations of the Company and its subsidiaries as the holder hereof may
reasonably request.
5.1.2 Payment of Taxes and Claims. The Company will duly pay and discharge, as
the same become due and payable, all taxes, assessments and governmental and
other charges, levies or claims levied or imposed, which are, or which if unpaid
might become, a lien or charge upon the properties, assets, earnings or business
of the Company or any of its operating subsidiaries; provided, however, that
nothing contained in this Section 5.1.2 shall require the Company to pay and
discharge, or cause to be paid and discharged, any such tax, assessment, charge,
levy or claim so long as the Company in good faith shall contest the validity
thereof and shall set aside on its books adequate reserves with respect thereto.
In the event the Company fails to satisfy its obligations under this
Section 5.1.2, FHS may, but is not obligated to, satisfy such obligations in
whole or in part, and any payments made and expenses incurred in doing so shall
constitute additional indebtedness to FHS and shall be paid or reimbursed by the
Company as additional Principal Amount.
5.1.3 Selection of Accountants. As long as these Debentures are outstanding,
the holder hereof shall have the right to approve the accounting firm retained
or to be retained by the Company to render accounting advice thereto (such
approval not to be unreasonably withheld).
5.1.4 Maintenance of Corporate Existence and Properties.
(a) The Company will, and will cause each of its operating subsidiaries to, at
all times do or cause to be done all things necessary to maintain, preserve and
renew its corporate charter and its rights, and comply in all material respects
with all related laws applicable to the Company and such operating subsidiary;
provided, however, that nothing contained in this paragraph shall (i) require
the Company or such operating subsidiary to maintain, preserve or renew any
right not material in the conduct of the business of the Company or such
operating subsidiary, (ii) prevent the termination of the corporate existence of
such operating subsidiary of the Company if, in the reasonable opinion of the
Board of Directors of the Company, such termination is not disadvantageous to
the holder hereof or (iii) require the Company or such operating subsidiary to
comply with any law so long as the validity or applicability thereof shall be
contested in good faith by appropriate proceedings.
(b) The Company will as soon as practicable give written notice to the holder
hereof of any litigation, arbitration or governmental investigation or
proceeding, which has been instituted or, to the knowledge of the Company, is
threatened against the Company or any of its operating subsidiaries, or any of
their respective properties, which (i) involves or is likely to involve a claim
or claims for damages, penalties or awards in excess of $100,000 in the case of
claims for which the Company is not adequately insured or in excess of $300,000
in the case of claims for which the Company is adequately insured; (ii) if
determined adversely to the Company or such operating subsidiary would have a
material adverse effect thereon; or (iii) relates to the Purchase Agreement or
any documents executed pursuant thereto.
(c) The Company will provide or cause to be provided for itself and its
operating subsidiaries insurance against loss or damage of the kinds customarily
insured against by corporations similarly situated, with reputable insurers, in
such amounts, with such deductibles and by such methods as shall be adequate,
and in no event involving material differences from the insurance currently
generally maintained.
(d) The Company will keep true books of records and accounts in which full and
correct entries in all material respects will be made of all its business
transactions and the business transactions of its operating subsidiaries, and
will reflect in its financial statements adequate accruals and appropriations to
reserves, all in accordance with GAAP (subject to customary and reasonable
year-end adjustments) and as otherwise required by the New Jersey Department.
(e) The Company will, and will cause each of its operating subsidiaries to,
comply with all applicable statutes, rules, regulations, orders and restrictions
relating to federal, state and local laws and of any governmental department,
commission, board, regulatory authority, bureau, agency and instrumentality with
respect thereto, and of any court, arbitrator or other body with jurisdiction
and authority, in respect of the conduct of the respective businesses thereof
and the ownership of their respective properties, except those, the violations
of which would not have a material adverse effect thereon and except such as are
being contested in good faith.
5.1.5 Notice of Event of Default. In addition to any other reporting
requirements set forth herein, the Company shall have an immediate obligation to
report to the holder hereof the occurrence of any Event of Default (as defined
in Section 6 hereof) or any event which, with the giving of notice or the
passage of time, or both, would constitute any such Event of Default.
5.1.6 Board Composition.
(a) Prior to full conversion of these Debentures and while they are
outstanding, FHS shall be permitted to designate such number of directors on the
Board of Directors of the Company and the Boards of Directors of each of the
Company's Subsidiaries as represents the greater of (i) no less than 15 percent
of the directors on the Board of Directors of the Company and the Boards of
Directors of each of the Company's subsidiaries or (ii) such greater percentage
of the directors on the Board of Directors of the Company and of the Boards of
Directors of each of the Company's subsidiaries as is equal to the percentage
ownership by FHS of all outstanding Common Stock in the event such percentage
exceeds 15 percent.
(b) Upon conversion of the entire Principal Amount, FHS, through its ownership
of Conversion Shares, shall be permitted to designate and elect such number of
directors on the Board of Directors of the Company and the Boards of Directors
of each of the Company's subsidiaries as represents the percentage of the
directors on the Board of Directors of the Company and the Board of Directors of
each of the Company's subsidiaries as is equal to FHS' percentage ownership of
all outstanding Common Stock, with such number of directors to be increased as
such ownership may be increased from time to time notwithstanding any "staggered
term" or other conflicting provision (but subject to the requirements set forth
in Article III Section 1 of the Bylaws of the Company that, during the period
specified therein, there be at least three directors on such Board of Directors
who are not designees of FHS).
(c) In no event shall the number of directors of the Board of Directors of the
Company or the board of directors of any of the Company s subsidiaries exceed 12
without the prior written consent of the holder hereof (subject to the
requirements set forth in Article III Section 1 of the By-laws of the Company
that, during the period specified therein, there be at least three directors on
such Board of Directors who are not designees of FHS).
5.1.7 Use of Proceeds. The Company shall, immediately upon receipt of the
Principal Amount at the Closing on the date hereof, make a capital contribution
of such amount to FOHP-NJ.
5.1.8 Increase of Authorized Capital. In accordance with Section 2(b)
hereof, the Company shall take all action necessary to ensure that there will
exist enough remaining authorized shares of Common Stock in order to issue such
number of Conversion Shares into which these Debentures are convertible in order
to represent the additional percentages of total equity of the Company set forth
in and consistent with Section 2(a) hereof.
5.2 Negative Covenants. From and after the date hereof, the Company shall not,
and shall cause its operating subsidiaries to not, do any of the following:
5.2.1 Restrictions on Sale of Assets, Consolidations, Mergers and Acquisitions.
(a) The Company will not, and will cause each of its operating subsidiaries to
not, sell, lease, transfer or otherwise dispose of all or a substantial portion
of its assets (other than in connection with the sale of securities issued by
the United States government the proceeds of which are used to purchase
additional securities of the United States government).
(b) The Company shall not, and shall cause each of its operating subsidiaries
to not, without the prior written consent of the holder hereof, consolidate with
or merge into any other person or entity or permit any other person or entity to
consolidate with or merge into it; provided, however, that a subsidiary of the
Company may consolidate with or merge into the Company or a wholly-owned
subsidiary of the Company.
(c) The Company shall not and shall cause each of its operating subsidiaries to
not, acquire, by asset or stock purchase, merger or otherwise, the assets or
stock of any other corporation or partnership without the prior written consent
of the holder hereof.
5.2.2 Additional Indebtedness. The Company will not, and will cause each of
its operating subsidiaries to not, create, incur, assume or suffer to exist any
indebtedness for borrowed money ("Borrowed Money") after the date hereof except
for (i) Borrowed Money evidenced by these Debentures and (ii) other Borrowed
Money, incurred with the consent of the holder hereof, the proceeds of which are
used in the ordinary course of business of the Company or such operating
subsidiary, as the case may be.
5.2.3 Liens and Encumbrances. The Company will not, and will cause each of its
operating subsidiaries to not, cause or permit any of its assets or properties,
whether now owned or hereafter acquired, to be subject to any liens or
encumbrances except in the ordinary course of business of the Company or such
operating subsidiary, as the case may be.
5.2.4 Guarantees. The Company shall not and shall cause each of its operating
subsidiaries to not, become liable as a guarantor, or otherwise, without the
prior written consent of the holder hereof, except for guarantees provided as to
obligations of a wholly-owned subsidiary of the Company.
5.2.5 Restrictions on Dividends, Distributions and Investments. The Company
will not, without the prior written consent of the holder hereof:
(a) declare or pay any dividend or make any other distributions on any shares
of the Company's capital stock;
(b) except as otherwise permitted by the Purchase Agreement, redeem, purchase
or otherwise acquire for value any shares of the Company's capital stock or any
warrants, rights or other options to purchase such capital stock; or
(c) except as otherwise permitted by the Purchase Agreement permit its
ownership of voting capital stock of any subsidiary of the Company to be less
than 100 percent.
5.2.6 Issuance of Additional Stock. Except as otherwise expressly contemplated
herein, the Company will not, without the prior written consent of the holder
hereof, issue any additional shares of Common Stock or any other capital stock
of the Company, or any options, stock appreciation rights, warrants or other
rights to acquire the Common Stock or any interest therein, or other rights to
acquire authorized and unissued shares of capital stock of the Company, or
modify terms of existing securities so as to in any manner dilute the existing
conversion rights of the holder hereof.
5.2.7 Granting of Pre-Emptive Rights and Rights of First Refusal. Except as
otherwise expressly contemplated herein, the Company will not, without the prior
written consent of the holder hereof, grant any pre-emptive rights or rights of
first refusal to any shareholders of the Company.
5.2.8 Additional Prohibited Transactions. Neither the Company nor any of its
subsidiaries shall take any of the following actions or engage in any of the
following transactions without the prior written consent of the holder hereof:
(a) amend its certificate of incorporation or bylaws (except to take the action
to increase the authorized number of shares of Common Stock as contemplated by
Section 5.1.8 hereof);
(b) make capital expenditures (including such expenditures made by the Company
and all such subsidiaries) exceeding, in the aggregate, $1,000,000 during any
calendar year;
(c) make any material change in the scope of the business of the Company;
(d) file for receivership, dissolution, liquidation or bankruptcy;
(e) acquire equity securities (other than pursuant to a buy back or repurchase
of equity securities issued by the Company) or assets of any other person or
entity involving payments aggregating in excess of $1,000,000 during any
calendar year;
(f) file a registration statement with respect to the public sale of securities
of the Company under the Securities Act of 1933, as amended; or
(g) enter into, assume or become bound by any agreement to do any of the
foregoing or otherwise attempt to do any of the foregoing.
6. Default.
6.1 Events of Default. An "Event of Default" shall exist if any of the
following occurs and is continuing as to the Company:
(a) Default shall be made by the Company on a payment of the Principal Amount
or interest on these Debentures, when and as such Principal Amount and interest,
as the case may be, shall become due and payable by acceleration or otherwise;
or
(b) Default shall be made in the performance or observance of any covenant,
condition, undertaking or agreement contained in these Debentures or the
Purchase Agreement (other than any defaults relating to actions taken by, or
omissions of, FHS in connection with the performance of its obligations under
the Management Agreements) (as defined in the Purchase Agreement), and such
default shall continue for 20 days without being cured after the holder hereof
provides to the Company written notice of such default; or
(c) Any warranty, representation or other statement made by or on behalf of the
Company contained in these Debentures or the Purchase Agreement shall be false
or misleading in any material respect at the time such warranty, representation
or other statement, as the case may be, was made; or
(d) The Company or any of its operating subsidiaries shall (i) file a petition
seeking relief for itself under the United States Bankruptcy Code, as now
constituted or hereafter amended from time to time, or file an answer consenting
to, admitting the material allegations of or otherwise not controverting, or
fail timely to controvert, a petition filed against the Company seeking relief
under the United States Bankruptcy Code, as now constituted or hereafter amended
from time to time or (ii) file a petition or answer with respect to relief under
the provisions of any other now-existing or future applicable bankruptcy,
insolvency or other similar law of the United States or any state thereof or of
any other country or province thereof or jurisdiction providing for the
reorganization, winding-up or liquidation of corporations or an arrangement,
composition, extension or adjustment with creditors; or
(e) (i) An order for relief shall be entered against the Company or any of its
operating subsidiaries under the United States Bankruptcy Code, as now
constituted or hereafter amended from time to time, which order is not stayed
and remains unstayed for a period of 45 days, (ii) the entry of an order,
judgment or decree by operation of law or by a court or by the New Jersey
Department having jurisdiction in the premises which is not stayed and remains
unstayed for a period of 45 days (A) adjudging the Company or any of its
operating subsidiaries bankrupt or insolvent under, or ordering relief against
the Company or any of its operating subsidiaries or by the New Jersey Department
under, or approving a properly-filed petition seeking relief against the Company
or any of its operating subsidiaries or by the New Jersey Department under the
provisions of any other now-existing or future applicable bankruptcy, insolvency
or other similar law of the United States or any state thereof or of any other
country or province thereof or jurisdiction providing for the reorganization,
winding-up or liquidation of corporations or any arrangement, composition,
extension or adjustment with creditors, (B) appointing a receiver, supervisor,
liquidator, assignee, sequestrator, trustee or custodian of the Company or any
of its operating subsidiaries or of any substantial portion of the property of
the Company or any such operating subsidiaries, or (C) ordering the
reorganization, winding-up or liquidation of the affairs of the Company or any
of its subsidiaries, or (iii) the expiration of 60 days after the filing of any
involuntary petition against the Company or any of its operating subsidiaries
seeking any of the relief specified in paragraph (d) of this Section 6.1 or this
Section 6.1 (e) without dismissal of such petition; or
(f) The Company or any of its operating subsidiaries shall (i) make a general
assignment for the benefit of creditors, (ii) consent to the appointment of, or
taking possession of all or a substantial part of the property of the Company or
any such operating subsidiary by, a receiver, supervisor, liquidator, assignee,
sequestrator, trustee or custodian of the Company or any such operating
subsidiary, (iii) admit its insolvency or inability to pay its debts generally
as such debts become due, (iv) fail generally to pay its debts as such debts
become due or (v) take any action (including such actions taken by the Company's
directors or a majority of the Company's shareholders) regarding the dissolution
or liquidation of the Company or any such operating subsidiary.
6.2 Remedies. In case any one or more of the Events of Default specified in
Section 6.1 hereof shall have occurred and be continuing, the holder hereof
shall have the right to accelerate payment of the entire Principal Amount, and
all interest accrued thereon, and, upon such acceleration, such Principal Amount
and interest shall thereupon become immediately due and payable, without any
presentment, demand, protest or other notice of any kind (which presentment
demand, protest or other notice of any kind are hereby expressly waived), and
the Company shall forthwith pay to the holder hereof the entire then outstanding
Principal Amount, and interest accrued thereon, due pursuant to these
Debentures; provided, however, that any such payment by the Company must be in
accordance with Section 4.1(b) hereof.
7. Miscellaneous.
7.1 Waiver and Amendment. Any provision of these Debentures may be amended,
waived or modified only upon the written consent of the Company, the holder
hereof and the New Jersey Department.
7.2 Notices. Any notice or other communication required or permitted hereunder
shall be in writing and shall be delivered personally, telegraphed, telexed,
sent by facsimile transmission, sent by certified, registered or express mail,
postage prepaid, or sent by reputable overnight courier. Any such notice shall
be deemed given when so delivered personally, telegraphed, telexed or sent by
facsimile transmission or, if mailed, two days after the date of deposit in the
United States mail or, if sent by overnight courier, the business day next
succeeding the date the notice is sent, as follows:
(a) if to FHS, to:
Foundation Health Systems, Inc.
225 North Main Street
Pueblo, Colorado 81003
Attention: Senior Vice President, General Counsel and Secretary
Fax: (719) 585-8175
(b) if to the Company, to:
FOHP, Inc.
1501 Route 66
Neptune, New Jersey 07701
Attention: Senior Vice President, General Counsel and Secretary
Fax: (732) 842-5404
with a copy to:
Shereff, Friedman, Hoffman & Goodman, LLP
919 Third Avenue
New York, New York 10022-9998
Attention: Charles I. Weissman, Esq.
Fax: (212) 758-9526
and with an additional copy to:
Giordano, Halleran & Ciesla, P.C.
125 Half Mile Road
Post Office Box 190
Middletown, New Jersey 07748
Attention: Paul T. Colella, Esq.
Fax: (908) 224-6599
Any party may by notice given in accordance with this section to the other party
designate another address or person for receipt of notices hereunder.
7.3 Governing Law. These Debentures shall be governed by, and construed in
accordance with, the laws of the State of New Jersey.
7.4 Headings. The headings herein are for purposes of convenience and
reference only, and shall not affect the construction hereof.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed,
issued and delivered this 8th day of December, 1997.
FOHP, INC.
By:_____________________
Name: Roger Birnbaum
Title: President and Chief Executive
Officer
Acknowledged and Agreed:
FOUNDATION HEALTH SYSTEMS, INC.
By:______________________
Name: Michael E. Jansen, Esq.
Title: Vice President, Assistant
General Counsel and
Assistant Secretary
EXHIBIT A TO CONVERTIBLE SUBORDINATED SURPLUS DEBENTURES
The holder of Convertible Subordinated Surplus Debentures, dated as of December
8, 1997 (the "Debentures"), issued by FOHP, Inc. (the "Company") hereby notifies
the Company, in accordance with Section 2 of the Debentures, of its conversion
of $ ____ of the Principal Amount (as such term is defined in the Debentures) of
the Debentures into _____ shares of common stock, par value $.01 per share, of
the Company.
Principal Amount to be Converted Number of Shares
IN WITNESS WHEREOF, this Notice of Conversion is executed as of ______ ___,
____.
____________________
EXHIBIT B TO AMENDED STATEMENT TO SCHEDULE 13D
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933.
THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE
OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SUCH ACT OR AN
OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION
IS NOT REQUIRED.
FOHP, INC.
SUBORDINATED SURPLUS DEBENTURES
December 31, 1997
FOHP, Inc., a New Jersey corporation (the "Company"), for value received,
promises to pay to Foundation Health Systems, Inc., a Delaware corporation
formerly known as "Health Systems International, Inc." ("FHS"), or its
registered assigns, the principal sum (such principal sum being referred to
herein as the "Principal Amount") of $24,000,000 and accrued and unpaid interest
thereon. The Principal Amount hereof, and the interest thereon, shall be
payable at the main office of the Company or by mail to the registered address
of the holder hereof on December 31, 2002 (the "Maturity Date"), subject to the
provisions set forth in Section 2 hereof.
These Debentures have been issued in return for additional capital contributions
made by FHS pursuant to Section 6.2 of the Amended and Restated Securities
Purchase Agreement, dated February 10, 1997, as amended by an Amendment dated as
of March 13, 1997, among FHS, the Company and First Option Health Plan of New
Jersey, Inc., a New Jersey corporation and a wholly-owned subsidiary of FOHP
("FOHP-NJ") (referred to herein, as so amended, as the "Purchase Agreement").
The Company previously issued to FHS (1) on April 30, 1997 debentures initially
representing approximately $51.6 million of principal amount, the entire
remaining principal amount of which debentures was converted into common stock,
par value $.01 per share ("Common Stock"), of FOHP as of December 1, 1997; and
(2) on December 8, 1997 debentures initially representing approximately $29
million of principal amount, convertible into Common Stock of FOHP.
The following is a statement of the rights of the holder hereof and the
conditions to which these Debentures are subject, and to which the holder
hereof, by the acceptance hereof, agrees:
1. Interest. The Principal Amount hereof shall bear interest at an annual
rate equal to the rate charged to FHS under its credit facility (the "BA
Facility") issued by a consortium of commercial banks led by Bank of America,
National Trust & Savings Association or such credit facility as is used to
refinance the BA Facility (the "Rate"), which Rate shall be subject to
adjustment at the beginning of each calendar quarter and shall become due and
payable, subject to the provisions of Section 2.1(b) hereof, with respect to any
given calendar quarter within 10 days after the end of such quarter. Any such
interest not paid when due and payable shall be considered "Defaulted Interest"
and shall be included in the Principal Amount hereunder.
2. Ranking of Debentures.
2.1 Obligation to Repay.
(a) The obligation of the Company to repay the Principal Amount and accrued
interest under these Debentures shall be subordinated to all other indebtedness
of the Company and its subsidiaries.
(b) No payments shall be made, in respect of all or any portion of the
Principal Amount or interest thereon, except with the prior written approval of
the New Jersey Department. Such approval may not be withheld if the Company or
FHS provides the New Jersey Department with notice at least 10 business days in
advance of any such payments that FOHP-NJ's statutory surplus will exceed 125
percent of FOHP-NJ's minimum net worth requirement after payment of the
requested amount and for the near future, unless the New Jersey Department
determines that FOHP-NJ's financial condition would be adversely affected as a
result of such payment. The Principal Amount shall be suspended and shall not
mature to the extent FOHP-NJ's net worth, as determined by the New Jersey
Department, is inadequate to make interest payments on these Debentures.
2.2 No Impairment. Nothing contained in this Section 2 shall impair, as
between the Company and the holder hereof, the obligation of the Company, which
is absolute and unconditional, to pay to the holder hereof the Principal Amount
and interest thereon provided that the approval of the New Jersey Department of
Banking and insurance referenced in Section 2.1 herein is obtained.
3. Covenants.
3.1 Affirmative Covenants. From and after the date hereof until the Maturity
Date, the Company shall comply with and perform each of the following covenants
and agreements:
3.1.1 Financial Reporting. The Company will furnish to FHS copies of the
following financial statements, reports and information:
(a) as soon as available and in any event within 90 days after the end of each
fiscal year of the Company, a copy of the Company's consolidated annual report
(including audited balance sheets, statements of operations, statements of
stockholders' equity and statements of cash flow) for the Company and its
subsidiaries for such fiscal year, prepared in accordance with generally
accepted accounting principles ("GAAP") consistent with the preceding year,
certified by Ernst & Young, LLP or such other independent public accountants as
shall be approved by the holder hereof, which approval shall not be unreasonably
withheld;
(b) as soon as available and in any event within 45 days after the end of each
calendar quarter, a consolidated balance sheet, statement of operations and
statement of cash flow for the Company and its subsidiaries, as of the end of,
and for, each such quarter, prepared in accordance with GAAP consistently
applied (subject to the absence of notes and to customary and reasonable
year-end adjustments), certified by the Company's chief financial officer as
fairly and accurately representing the financial condition of the Company and
its subsidiaries as of the end of, and for, the period covered thereby; and
(c) such other information with respect to the financial condition and
operations of the Company and its subsidiaries as the holder hereof may
reasonably request.
3.1.2 Payment of Taxes and Claims. The Company will duly pay and discharge, as
the same become due and payable, all taxes, assessments and governmental and
other charges, levies or claims levied or imposed, which are, or which if unpaid
might become, a lien or charge upon the properties, assets, earnings or business
of the Company or any of its operating subsidiaries; provided, however, that
nothing contained in this Section 3.1.2 shall require the Company to pay and
discharge, or cause to be paid and discharged, any such tax, assessment, charge,
levy or claim so long as the Company in good faith shall contest the validity
thereof and shall set aside on its books adequate reserves with respect thereto.
In the event the Company fails to satisfy its obligations under this
Section 3.1.2, FHS may, but is not obligated to, satisfy such obligations in
whole or in part, and any payments made and expenses incurred in doing so shall
constitute additional indebtedness to FHS and shall be paid or reimbursed by the
Company as additional Principal Amount.
3.1.3 Selection of Accountants. As long as these Debentures are outstanding,
the holder hereof shall have the right to approve the accounting firm retained
or to be retained by the Company to render accounting advice thereto (such
approval not to be unreasonably withheld).
3.1.4 Maintenance of Corporate Existence and Properties.
(a) The Company will, and will cause each of its operating subsidiaries to, at
all times do or cause to be done all things necessary to maintain, preserve and
renew its corporate charter and its rights, and comply in all material respects
with all related laws applicable to the Company and such operating subsidiary;
provided, however, that nothing contained in this paragraph shall (i) require
the Company or such operating subsidiary to maintain, preserve or renew any
right not material in the conduct of the business of the Company or such
operating subsidiary, (ii) prevent the termination of the corporate existence of
such operating subsidiary of the Company if, in the reasonable opinion of the
Board of Directors of the Company, such termination is not disadvantageous to
the holder hereof or (iii) require the Company or such operating subsidiary to
comply with any law so long as the validity or applicability thereof shall be
contested in good faith by appropriate proceedings.
(b) The Company will as soon as practicable give written notice to the holder
hereof of any litigation, arbitration or governmental investigation or
proceeding, which has been instituted or, to the knowledge of the Company, is
threatened against the Company or any of its operating subsidiaries, or any of
their respective properties, which (i) involves or is likely to involve a claim
or claims for damages, penalties or awards in excess of $100,000 in the case of
claims for which the Company is not adequately insured or in excess of $300,000
in the case of claims for which the Company is adequately insured; (ii) if
determined adversely to the Company or such operating subsidiary would have a
material adverse effect thereon; or (iii) relates to the Purchase Agreement or
any documents executed pursuant thereto.
(c) The Company will provide or cause to be provided for itself and its
operating subsidiaries insurance against loss or damage of the kinds customarily
insured against by corporations similarly situated, with reputable insurers, in
such amounts, with such deductibles and by such methods as shall be adequate,
and in no event involving material differences from the insurance currently
generally maintained.
(d) The Company will keep true books of records and accounts in which full and
correct entries in all material respects will be made of all its business
transactions and the business transactions of its operating subsidiaries, and
will reflect in its financial statements adequate accruals and appropriations to
reserves, all in accordance with GAAP (subject to customary and reasonable
year-end adjustments) and as otherwise required by the New Jersey Department.
(e) The Company will, and will cause each of its operating subsidiaries to,
comply with all applicable statutes, rules, regulations, orders and restrictions
relating to federal, state and local laws and of any governmental department,
commission, board, regulatory authority, bureau, agency and instrumentality with
respect thereto, and of any court, arbitrator or other body with jurisdiction
and authority, in respect of the conduct of the respective businesses thereof
and the ownership of their respective properties, except those, the violations
of which would not have a material adverse effect thereon and except such as are
being contested in good faith.
3.1.5 Notice of Event of Default. In addition to any other reporting
requirements set forth herein, the Company shall have an immediate obligation to
report to the holder hereof the occurrence of any Event of Default (as defined
in Section 4 hereof) or any event which, with the giving of notice or the
passage of time, or both, would constitute any such Event of Default.
3.1.6 Board Composition.
(a) Prior to the maturity of these Debentures and while they are outstanding,
FHS shall be permitted to designate such number of directors on the Board of
Directors of the Company and the Boards of Directors of each of the Company's
Subsidiaries as represents the greater of (i) no less than 15 percent of the
directors on the Board of Directors of the Company and the Boards of Directors
of each of the Company's subsidiaries or (ii) such greater percentage of the
directors on the Board of Directors of the Company and of the Boards of
Directors of each of the Company's subsidiaries as is equal to the percentage
ownership by FHS of all outstanding Common Stock in the event such percentage
exceeds 15 percent.
(b) After maturity of these Debentures, FHS shall be permitted to designate and
elect such number of directors on the Board of Directors of the Company and the
Boards of Directors of each of the Company's subsidiaries as represents the
percentage of the directors on the Board of Directors of the Company and the
Board of Directors of each of the Company's subsidiaries as is equal to FHS'
percentage ownership of all outstanding Common Stock, with such number of
directors to be increased as such ownership may be increased from time to time
notwithstanding any "staggered term" or other conflicting provision (but subject
to the requirements set forth in Article III Section 1 of the Bylaws of the
Company that, during the period specified therein, there be at least three
directors on such Board of Directors who are not designees of FHS).
(c) In no event shall the number of directors of the Board of Directors of the
Company or the board of directors of any of the Company s subsidiaries exceed 12
without the prior written consent of the holder hereof (subject to the
requirements set forth in Article III Section 1 of the By-laws of the Company
that, during the period specified therein, there be at least three directors on
such Board of Directors who are not designees of FHS).
3.1.7 Use of Proceeds. The Company shall, immediately upon receipt of the
Principal Amount at the Closing on the date hereof, make a capital contribution
of such amount to FOHP-NJ.
3.2 Negative Covenants. From and after the date hereof, the Company shall not,
and shall cause its operating subsidiaries to not, do any of the following:
3.2.1 Restrictions on Sale of Assets, Consolidations, Mergers and Acquisitions.
(a) The Company will not, and will cause each of its operating subsidiaries to
not, sell, lease, transfer or otherwise dispose of all or a substantial portion
of its assets (other than in connection with the sale of securities issued by
the United States government the proceeds of which are used to purchase
additional securities of the United States government).
(b) The Company shall not, and shall cause each of its operating subsidiaries
to not, without the prior written consent of the holder hereof, consolidate with
or merge into any other person or entity or permit any other person or entity to
consolidate with or merge into it; provided, however, that a subsidiary of the
Company may consolidate with or merge into the Company or a wholly-owned
subsidiary of the Company.
(c) The Company shall not and shall cause each of its operating subsidiaries to
not, acquire, by asset or stock purchase, merger or otherwise, the assets or
stock of any other corporation or partnership without the prior written consent
of the holder hereof.
3.2.2 Additional Indebtedness. The Company will not, and will cause each of
its operating subsidiaries to not, create, incur, assume or suffer to exist any
indebtedness for borrowed money ("Borrowed Money") after the date hereof except
for (i) Borrowed Money evidenced by these Debentures and (ii) other Borrowed
Money, incurred with the consent of the holder hereof, the proceeds of which are
used in the ordinary course of business of the Company or such operating
subsidiary, as the case may be.
3.2.3 Liens and Encumbrances. The Company will not, and will cause each of its
operating subsidiaries to not, cause or permit any of its assets or properties,
whether now owned or hereafter acquired, to be subject to any liens or
encumbrances except in the ordinary course of business of the Company or such
operating subsidiary, as the case may be.
3.2.4 Guarantees. The Company shall not and shall cause each of its operating
subsidiaries to not, become liable as a guarantor, or otherwise, without the
prior written consent of the holder hereof, except for guarantees provided as to
obligations of a wholly-owned subsidiary of the Company.
3.2.5 Restrictions on Dividends, Distributions and Investments. The Company
will not, without the prior written consent of the holder hereof:
(a) declare or pay any dividend or make any other distributions on any shares
of the Company's capital stock;
(b) except as otherwise permitted by the Purchase Agreement, redeem, purchase
or otherwise acquire for value any shares of the Company's capital stock or any
warrants, rights or other options to purchase such capital stock; or
(c) except as otherwise permitted by the Purchase Agreement permit its
ownership of voting capital stock of any subsidiary of the Company to be less
than 100 percent.
3.2.6 Issuance of Additional Stock. Except as otherwise expressly contemplated
herein, the Company will not, without the prior written consent of the holder
hereof, issue any additional shares of Common Stock or any other capital stock
of the Company, or any options, stock appreciation rights, warrants or other
rights to acquire the Common Stock or any interest therein, or other rights to
acquire authorized and unissued shares of capital stock of the Company, or
modify terms of existing securities.
3.2.7 Granting of Pre-Emptive Rights and Rights of First Refusal. Except as
otherwise expressly contemplated herein, the Company will not, without the prior
written consent of the holder hereof, grant any pre-emptive rights or rights of
first refusal to any shareholders of the Company.
3.2.8 Additional Prohibited Transactions. Neither the Company nor any of its
subsidiaries shall take any of the following actions or engage in any of the
following transactions without the prior written consent of the holder hereof:
(a) amend its certificate of incorporation or bylaws;
(b) make capital expenditures (including such expenditures made by the Company
and all such subsidiaries) exceeding, in the aggregate, $1,000,000 during any
calendar year;
(c) make any material change in the scope of the business of the Company;
(d) file for receivership, dissolution, liquidation or bankruptcy;
(e) acquire equity securities (other than pursuant to a buy back or repurchase
of equity securities issued by the Company) or assets of any other person or
entity involving payments aggregating in excess of $1,000,000 during any
calendar year;
(f) file a registration statement with respect to the public sale of securities
of the Company under the Securities Act of 1933, as amended; or
(g) enter into, assume or become bound by any agreement to do any of the
foregoing or otherwise attempt to do any of the foregoing.
4. Default.
4.1 Events of Default. An "Event of Default" shall exist if any of the
following occurs and is continuing as to the Company:
(a) Default shall be made by the Company on a payment of the Principal Amount
or interest on these Debentures, when and as such Principal Amount and interest,
as the case may be, shall become due and payable by acceleration or otherwise;
or
(b) Default shall be made in the performance or observance of any covenant,
condition, undertaking or agreement contained in these Debentures or the
Purchase Agreement (other than any defaults relating to actions taken by, or
omissions of, FHS in connection with the performance of its obligations under
the Management Agreements) (as defined in the Purchase Agreement), and such
default shall continue for 20 days without being cured after the holder hereof
provides to the Company written notice of such default; or
(c) Any warranty, representation or other statement made by or on behalf of the
Company contained in these Debentures or the Purchase Agreement shall be false
or misleading in any material respect at the time such warranty, representation
or other statement, as the case may be, was made; or
(d) The Company or any of its operating subsidiaries shall (i) file a petition
seeking relief for itself under the United States Bankruptcy Code, as now
constituted or hereafter amended from time to time, or file an answer consenting
to, admitting the material allegations of or otherwise not controverting, or
fail timely to controvert, a petition filed against the Company seeking relief
under the United States Bankruptcy Code, as now constituted or hereafter amended
from time to time or (ii) file a petition or answer with respect to relief under
the provisions of any other now-existing or future applicable bankruptcy,
insolvency or other similar law of the United States or any state thereof or of
any other country or province thereof or jurisdiction providing for the
reorganization, winding-up or liquidation of corporations or an arrangement,
composition, extension or adjustment with creditors; or
(e) (i) An order for relief shall be entered against the Company or any of its
operating subsidiaries under the United States Bankruptcy Code, as now
constituted or hereafter amended from time to time, which order is not stayed
and remains unstayed for a period of 45 days, (ii) the entry of an order,
judgment or decree by operation of law or by a court or by the New Jersey
Department having jurisdiction in the premises which is not stayed and remains
unstayed for a period of 45 days (A) adjudging the Company or any of its
operating subsidiaries bankrupt or insolvent under, or ordering relief against
the Company or any of its operating subsidiaries or by the New Jersey Department
under, or approving a properly-filed petition seeking relief against the Company
or any of its operating subsidiaries or by the New Jersey Department under the
provisions of any other now-existing or future applicable bankruptcy, insolvency
or other similar law of the United States or any state thereof or of any other
country or province thereof or jurisdiction providing for the reorganization,
winding-up or liquidation of corporations or any arrangement, composition,
extension or adjustment with creditors, (B) appointing a receiver, supervisor,
liquidator, assignee, sequestrator, trustee or custodian of the Company or any
of its operating subsidiaries or of any substantial portion of the property of
the Company or any such operating subsidiaries, or (C) ordering the
reorganization, winding-up or liquidation of the affairs of the Company or any
of its subsidiaries, or (iii) the expiration of 60 days after the filing of any
involuntary petition against the Company or any of its operating subsidiaries
seeking any of the relief specified in paragraph (d) of this Section 4.1 or this
Section 4.1(e) without dismissal of such petition; or
(f) The Company or any of its operating subsidiaries shall (i) make a general
assignment for the benefit of creditors, (ii) consent to the appointment of, or
taking possession of all or a substantial part of the property of the Company or
any such operating subsidiary by, a receiver, supervisor, liquidator, assignee,
sequestrator, trustee or custodian of the Company or any such operating
subsidiary, (iii) admit its insolvency or inability to pay its debts generally
as such debts become due, (iv) fail generally to pay its debts as such debts
become due or (v) take any action (including such actions taken by the Company's
directors or a majority of the Company's shareholders) regarding the dissolution
or liquidation of the Company or any such operating subsidiary.
4.2 Remedies. In case any one or more of the Events of Default specified in
Section 4.1 hereof shall have occurred and be continuing, the holder hereof
shall have the right to accelerate payment of the entire Principal Amount, and
all interest accrued thereon, and, upon such acceleration, such Principal Amount
and interest shall thereupon become immediately due and payable, without any
presentment, demand, protest or other notice of any kind (which presentment
demand, protest or other notice of any kind are hereby expressly waived), and
the Company shall forthwith pay to the holder hereof the entire then outstanding
Principal Amount, and interest accrued thereon, due pursuant to these
Debentures; provided, however, that any such payment by the Company must be in
accordance with Section 2.1(b) hereof.
5. Miscellaneous.
2.DOC~5.1 Waiver and Amendment. Any provision of these Debentures may be
amended, waived or modified only upon the written consent of the Company, the
holder hereof and the New Jersey Department.
5.2 Notices. Any notice or other communication required or permitted hereunder
shall be in writing and shall be delivered personally, telegraphed, telexed,
sent by facsimile transmission, sent by certified, registered or express mail,
postage prepaid, or sent by reputable overnight courier. Any such notice shall
be deemed given when so delivered personally, telegraphed, telexed or sent by
facsimile transmission or, if mailed, two days after the date of deposit in the
United States mail or, if sent by overnight courier, the business day next
succeeding the date the notice is sent, as follows:
(a) if to FHS, to:
Foundation Health Systems, Inc.
225 North Main Street
Pueblo, Colorado 81003
Attention: Senior Vice President, General Counsel and Secretary
Fax: (719) 585-8175
(b) if to the Company, to:
FOHP, Inc.
1501 Route 66
Neptune, New Jersey 07701
Attention: Senior Vice President, General Counsel and Secretary
Fax: (732) 842-5404
with a copy to:
Shereff, Friedman, Hoffman & Goodman, LLP
919 Third Avenue
New York, New York 10022-9998
Attention: Charles I. Weissman, Esq.
Fax: (212) 758-9526
and with an additional copy to:
Giordano, Halleran & Ciesla, P.C.
125 Half Mile Road
Post Office Box 190
Middletown, New Jersey 07748
Attention: Paul T. Colella, Esq.
Fax: (908) 224-6599
Any party may by notice given in accordance with this section to the other party
designate another address or person for receipt of notices hereunder.
5.3 Governing Law. These Debentures shall be governed by, and construed in
accordance with, the laws of the State of New Jersey.
5.4 Headings. The headings herein are for purposes of convenience and
reference only, and shall not affect the construction hereof.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed,
issued and delivered this 31st day of December, 1997.
FOHP, INC.
By:_____________________
Name: Roger Birnbaum
Title: President and Chief Executive
Officer
Acknowledged and Agreed:
FOUNDATION HEALTH SYSTEMS, INC.
By:______________________
Name: Michael E. Jansen, Esq.
Title: Vice President, Assistant
General Counsel and
Assistant Secretary
