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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER: 1-12718
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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
incorporation or organization) No.)
21600 OXNARD STREET, WOODLAND HILLS, CA 91367
(Address of principal executive offices) (Zip Codes)
(818) 676-6978
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 May 11, 1998, 111,761,431 shares of Class A Common Stock, $.001 par
value per share, were outstanding (exclusive of 3,194,374 shares held as
treasury stock) and 10,297,642 shares of Class B Common Stock, $.001 par value
per share, were outstanding.
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FOUNDATION HEALTH SYSTEMS, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I--FINANCIAL INFORMATION
Item 1--Financial Statements
Condensed Consolidated Balance Sheets--March 31, 1998 and December 31,
1997................................................................. 3
Condensed Consolidated Statements of Operations for the First Quarter
Ended March 31, 1998 and 1997........................................ 4
Condensed Consolidated Statements of Cash Flows for the First Quarter
Ended March 31, 1998 and 1997........................................ 5
Notes to Condensed Consolidated Financial Statements................... 6
Item 2--Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 9
Item 3--Quantitative and Qualitative Disclosures About Market Risk....... 16
PART II--OTHER INFORMATION
Item 1--Legal Proceedings................................................ 18
Item 2--Changes in Securities............................................ 20
Item 3--Defaults Upon Senior Securities.................................. 21
Item 4--Submission of Matters to a Vote of Security Holders.............. 21
Item 5--Other Information................................................ 21
Item 6--Exhibits and Reports on Form 8-K................................. 24
Signatures............................................................... 31
</TABLE>
2
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PART I--FINANCIAL INFORMATIONPART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FOUNDATION HEALTH SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
1997
MARCH 31, ------------
1998
------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents.......................................................... $ 343,940 $ 559,360
Securities available for sale...................................................... 603,498 553,001
Premiums receivable, net........................................................... 243,469 224,383
Amounts receivable under government contracts...................................... 269,043 272,060
Deferred taxes..................................................................... 205,930 213,695
Reinsurance and other receivables.................................................. 109,453 130,875
Other assets....................................................................... 236,863 223,900
Net assets of discontinued operations.............................................. 299,181 267,713
------------ ------------
Total current assets............................................................. 2,311,377 2,444,987
Securities held to maturity........................................................ 13,821 12,885
Property and equipment, net........................................................ 435,070 427,149
Goodwill and other intangible assets, net.......................................... 1,039,387 1,044,727
Other assets....................................................................... 147,231 146,602
------------ ------------
Total Assets..................................................................... $ 3,946,886 $4,076,350
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Reserves for claims and other settlements.......................................... $ 917,824 $ 967,815
Unearned premiums.................................................................. 132,700 244,340
Notes payable and capital leases................................................... 3,498 3,593
Amounts payable under government contracts......................................... 95,912 78,441
Accounts payable and other liabilities............................................. 392,505 470,483
------------ ------------
Total current liabilities........................................................ 1,542,439 1,764,672
Notes payable and capital leases................................................... 1,353,420 1,308,979
Other liabilities.................................................................. 123,625 106,725
------------ ------------
Total Liabilities................................................................ 3,019,484 3,180,376
Stockholders' Equity:
Common stock and additional paid-in capital........................................ 630,120 628,735
Retained earnings.................................................................. 396,632 370,394
Unrealized investment gains and (losses), net of taxes............................. (3,519) (7,324)
Common stock held in treasury, at cost............................................. (95,831) (95,831)
------------ ------------
Total stockholders' equity....................................................... 927,402 895,974
------------ ------------
Total Liabilities and Stockholders' Equity....................................... $ 3,946,886 $4,076,350
------------ ------------
------------ ------------
</TABLE>
See Notes To Condensed Consolidated Financial Statements
3
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FOUNDATION HEALTH SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
FIRST QUARTER ENDED
MARCH 31,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Revenues
Health plan premiums................................................................ $ 1,844,484 $ 1,419,745
Government contracts................................................................ 213,627 246,034
Specialty services.................................................................. 91,113 78,030
Investment and other income......................................................... 26,150 26,210
------------ ------------
2,175,374 1,770,019
------------ ------------
Expenses
Health plan services................................................................ 1,584,503 1,181,008
Government health care services..................................................... 163,291 190,912
Specialty services.................................................................. 73,208 65,259
Selling, general and administrative................................................. 258,408 214,535
Amortization and depreciation....................................................... 30,841 24,684
Interest............................................................................ 21,861 14,938
------------ ------------
2,132,112 1,691,336
------------ ------------
Income from continuing operations before income taxes................................. 43,262 78,683
Income tax provision.................................................................. 17,024 31,059
------------ ------------
Income from continuing operations..................................................... 26,238 47,624
Income from discontinued operations................................................... -- 10,857
------------ ------------
Net income.......................................................................... $ 26,238 $ 58,481
------------ ------------
------------ ------------
Basic earnings per share
Continuing operations............................................................... $ 0.22 $ 0.38
Discontinued operations............................................................. -- 0.09
------------ ------------
Net................................................................................. $ 0.22 $ 0.47
------------ ------------
------------ ------------
Diluted earnings per share
Continuing operations $ 0.22 $ 0.38
Discontinued operations -- 0.09
------------ ------------
Net................................................................................. $ 0.22 $ 0.47
------------ ------------
------------ ------------
Weighted average common and common stock equivalent shares outstanding:
Basic............................................................................... 121,614 125,297
Diluted............................................................................. 121,907 125,706
</TABLE>
See Notes To Condensed Consolidated Financial Statements
4
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FOUNDATION HEALTH SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FIRST QUARTER ENDED
MARCH 31,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................................................... $ 26,238 $ 58,481
Adjustments to reconcile net income to net cash used for operating activities:
Amortization and depreciation..................................................... 30,841 24,684
Other changes in net assets of discontinued operations............................ (30,324) (8,123)
Other............................................................................. 939 203
Change in assets and liabilities
Premium receivable and unearned subscriber premiums............................... (130,726) (127,750)
Other assets...................................................................... 29,957 (32,363)
Amounts receivable/payable under government contracts............................. 20,488 (22,905)
Reserves for claims and other settlements......................................... (49,991) (9,454)
Accounts payable and accrued liabilities.......................................... (85,520) 10,021
------------ ------------
Net cash used for operating activities................................................ (188,098) (107,206)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale or maturity of securities available for sale................................... 118,609 116,510
Purchases of securities available for sale.......................................... (165,660) (146,458)
Maturity of securities held to maturity............................................. 1,500 1,550
Purchases of securities held to maturity............................................ (1,052) (2,264)
Purchases of property and equipment................................................. (26,450) (18,630)
Investment in other companies....................................................... -- (12,566)
Other............................................................................... -- (904)
------------ ------------
Net cash used for investing activities................................................ (73,053) (62,762)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and employee stock purchases................ 1,385 5,599
Proceeds from issuance of notes payable and other financing arrangements............ 45,000 74,766
Repayment of debt and other non-current liabilities................................. (654) (706)
------------ ------------
Net cash provided by financing activities............................................. 45,731 79,659
------------ ------------
Net decrease in cash and cash equivalents............................................. (215,420) (90,309)
Cash and cash equivalents, beginning of period........................................ 559,360 487,938
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD.............................................. $ 343,940 $ 397,629
------------ ------------
------------ ------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
5
<PAGE>
FOUNDATION HEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--MERGER
The current operations of Foundation Health Systems, Inc. (the "Company")
are a result of the April 1, 1997 merger transaction (the "FHS Combination")
involving Health Systems International, Inc. ("HSI") and Foundation Health
Corporation ("FHC"). Pursuant to the FHS Combination, 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 FHS
Combination, FHC stockholders received 1.3 shares of the Company's Class A
Common Stock for every share of FHC common stock held, resulting in the issuance
of approximately 76.7 million shares of the Company's Class A Common Stock to
FHC stockholders.
The FHS Combination 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, the Company's
condensed consolidated financial statements have been prepared and/or restated
as though HSI and FHC always had been combined.
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.
All adjustments presented in these condensed consolidated financial statements
are of a normal recurring nature. 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. For further information
please refer to the consolidated financial statements and notes thereto in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
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 AND GEM COSTS
Net restructuring costs of $149.4 million were recorded during the year
ended December 31, 1997 related to the FHS combination and the restructuring of
the Company's Eastern Division health plans. As of March 31, 1998, $40.9 million
of the net restructuring charge is expected to require future outlays of cash
and $68.4 million has been paid. In addition, $70.4 million of merger costs,
$118.6 million of other costs and $57.5 million of premium deficiency costs of
Gem Insurance Company were recorded during 1997.
NOTE 4--DISCONTINUED OPERATIONS
The Company revised its strategy of maintaining a presence in the workers'
compensation insurance business and thereby adopted a plan to discontinue this
segment of its business through divestiture of its
6
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FOUNDATION HEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4--DISCONTINUED OPERATIONS (CONTINUED)
workers' compensation insurance subsidiaries. As a result, the Company is
reporting its workers' compensation insurance segment as discontinued operations
for each period presented in the condensed consolidated financial statements.
Consistent with the foregoing, on May 5, 1998 the Company entered into a
definitive agreement to sell its workers' compensation insurance operations to
Superior National Insurance Group, Inc. The transaction is expected to yield the
Company approximately $290 million in cash net of tax considerations and the
cost of reinsurance.
The following sets forth the summarized balance sheet and results of
operations for the workers' compensation insurance companies to be sold as of
March 31, 1998 and December 31, 1997, and for the first quarters ended March 31,
1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Total assets..................................................... $ 1,246,253 $1,260,335
Total liabilities................................................ 992,057 1,000,815
------------ ------------
Net assets....................................................... 254,196 259,520
Amounts to reconcile to net assets from discontinued operations:
Elimination of net notes payable to Parent and other net
receivables from Parent and subsidiaries..................... 139,804 107,193
Loss on disposition............................................ (94,819) (99,000)
------------ ------------
Net assets from discontinued operations.......................... $ 299,181 $ 267,713
------------ ------------
------------ ------------
</TABLE>
<TABLE>
<CAPTION>
FIRST QUARTER ENDED
MARCH 31,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Total revenues........................................................ $ 149,979 $ 132,225
Total expenses........................................................ 159,555 118,949
---------- ----------
Income (loss) before income taxes..................................... (9,576) 13,276
Provision (benefit) for income taxes.................................. (5,395) 2,419
---------- ----------
Net income (loss) from discontinued operations........................ (4,181) 10,857
Loss after measurement date anticipated in loss on disposition........ 4,181 --
---------- ----------
Net income (loss) from discontinued operations........................ $ -- $ 10,857
---------- ----------
---------- ----------
</TABLE>
The loss on disposition of $99 million recorded at December 31, 1997
included the anticipated results of operations through the disposal date and
therefore the net loss of $4.2 million is not reflected on the Company's
condensed consolidated statement of operations for the quarter ended March 31,
1998.
NOTE 5--COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted SFAS No. 130 "Reporting
Comprehensive Income." This standard requires that an enterprise report, by
major components and as a single total, the change in
7
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FOUNDATION HEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5--COMPREHENSIVE INCOME (CONTINUED)
its net assets during the period from non-owner sources which is defined as net
income plus direct adjustments to stockholders' equity such as unrealized
investment adjustments and pension liability adjustments. The Company's
comprehensive income for the first quarter ended March 31 pursuant to such
standard is as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ----------
<S> <C> <C>
Net Income............................................................. $ 26,238 $ 58,481
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities not included in net income... 3,805 (15,737)
--------- ----------
Comprehensive Income................................................... $ 30,043 $ 42,744
--------- ----------
--------- ----------
</TABLE>
NOTE 6--EARNINGS PER SHARE
Basic earnings per share excludes dilution and reflects income divided by
the weighted average shares of common stock outstanding during the periods
presented. Diluted earnings per share is based upon the weighted average shares
of common stock and dilutive common stock equivalents (stock options)
outstanding during the periods presented; no adjustment to income is required.
Common stock equivalents arising from dilutive stock options are computed using
the treasury stock method.
NOTE 7--RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During 1997, the Financial Accounting Standards Board issued SFAS 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; and SFAS No. 132 "Employers Disclosures About Pensions and
Other Postretirement Benefits", which revises and standardizes pension and other
benefit plan disclosures. Adoption of these statements will not impact the
Company's consolidated financial position, results of operations or cash flows.
These statements are effective for fiscal years beginning after December 15,
1997. Accordingly, the Company plans to adopt these statements during the fourth
quarter of 1998.
NOTE 8--PRIOR PERIOD RECLASSIFICATION
Certain prior period amounts have been reclassified to conform with the
current period presentation.
8
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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, individual,
Medicaid and Medicare health maintenance organization ("HMO") and preferred
provider organization ("PPO") plans; government sponsored managed care plans;
and managed care products related to bill review, administration and
cost-containment, behavioral health, dental, vision and pharmaceutical products
and services.
CONSOLIDATED OPERATING RESULTS
REVENUES AND HEALTH CARE COSTS
The Company's revenues grew by $405.4 million or 22.9% for the quarter ended
March 31, 1998 as compared to the same period in 1997. Growth in revenues for
the quarter was due primarily to the acquisitions that occured in 1997,
including Physicians Health Services Inc. ("PHS"), FOHP, Inc. ("FOHP"), PACC
HMO, Inc. and PACC Health Plans, Inc. (collectively, "PACC") and the Advantage
Health plans ("Advantage Health"), as well as growth in the Company's existing
businesses. In particular, increase in premium rates in vitrually all markets
and growth in Medicaid enrollment in California contributed to the increase in
revenue. Specialty Services Division revenue increased by $13.1 million or 16.8%
for the quarter ended March 31, 1998 as compared to the same period in 1997
primarily due to increased revenue from the Company's behavioral health plans,
and bill review, cost containment and administrative services business. This
increase was partially offset by lower Government Contract Division revenue
which declined $32.4 million or 13.2% for the quarter ended March 31, 1998 as
compared to the same period in 1997, a result of contract risk share provisions
that reduce revenues when health care costs decline. Investment and other income
was $26.2 million for the quarter ended March 31, 1998, unchanged from the same
period in 1997.
The Health Plan medical care ratio ("MCR") (medical costs as a percentage of
revenue) for the quarter ended March 31, 1998 was 85.9% compared to 83.2% for
the quarter ended March 31, 1997. The increase in the MCR was primarily due to
higher pharmacy and Medicare benefit costs. This was partially offset by reduced
costs as a percent of revenue in the Government Contract Division and Specialty
Services Division.
SELLING, GENERAL, AND ADMINISTRATIVE COSTS
The Company's selling, general and administrative ("SG&A") expenses
increased by $43.9 million or 20.5% for the quarter ended March 31, 1998 as
compared to the same period in 1997. The increase in SG&A expenses is primarily
due to additional SG&A expenses associated with the acquisitions that occurred
in 1997. The administrative expense ratio (SG&A as a percentage of health plan
and government contracts revenue) decreased slightly to 12.6% for the quarter
ended March 31, 1998 from 12.9% for the same period in 1997.
AMORTIZATION AND DEPRECIATION
Amortization and depreciation expense increased by $6.2 million for the
quarter ended March 31, 1998 as compared to the same period in 1997. This was
primarily due to higher levels of intangible and fixed assets, a result of the
acquisitions of companies that occurred in 1997.
INTEREST EXPENSE
Interest expense increased by $6.9 million for the quarter ended March 31,
1998 as compared to the same period during the prior year. The increase in
interest expense was due to higher debt levels
9
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associated with the Company's revolving lines of credit. The additional
borrowings were made for general corporate purposes as well as the purchase of
PHS, FOHP, PACC and Advantage Health during 1997.
INCOME TAX PROVISION
The tax provision rate on income from continuing operations for the quarter
ended March 31, 1998 of 39.4% declined slightly from the tax provision rate of
39.5% on income from continuing operations for the quarter ended March 31, 1997.
The tax provision rate differs from the statutory federal rate of 35% due to
state income taxes and tax-exempt income, offset by non deductable goodwill
amortization.
LINE OF BUSINESS REPORTING
The Company currently operates in the managed health care segment. The
managed health care segment's continuing operations are in three primary lines
of business (i) health plan operations; (ii) government contracts; and (iii)
specialty services. Discontinued operations include the worker's compensation
insurance segment.
CONTINUING OPERATIONS
HEALTH PLANS
Revenues generated by the Company's Health Plan operations increased $424.7
million or 29.9% for the quarter ended March 31, 1998 compared to the same
period in 1997 due to the acquisitions that occurred in 1997 including PHS,
FOHP, PACC and Advantage Health which contributed approximately $218.8 million,
$90.7 million, $35.6 million and $13.0 million, respectively, in revenue during
the first quarter of 1998. In addition, increases in commercial premium rates
and Medicaid enrollment growth in the California Division, commercial growth in
several states in the Company's Western Division, including Washington and
Colorado, and strong enrollment growth in Florida of 15% contributed to the
increase in Health Plan revenue.
The MCR for the Company's Health Plan operations increased to 85.9% for the
quarter ended March 31, 1998 as compared to 83.2% in the same period in 1997.
Higher Medicare benefit costs in a number of markets and pharmacy costs in
virtually all areas of the country accounted for the rise in the MCR. In
addition, reductions in reserve redundancy for shared risk and excess
reinsurance that occurred in the California Division during the first quarter of
1997 resulted in a lower MCR during that period.
GOVERNMENT CONTRACTS
Government Contract Division revenue decreased by $32.4 million or 13.2% for
the quarter ended March 31, 1998, compared to the same period in 1997. The
decline in revenue was primarily due to the risk sharing provision of CHAMPUS
contracts that reduce revenues when health care costs decline.
Government health care costs as a percentage of government contract revenue
decreased to 76.4% in the first quarter of 1998 from 77.6% in the first quarter
of 1997. This was primarily a result of improved health care delivery results on
the California/Hawaii CHAMPUS contract.
SPECIALTY SERVICES
Revenues generated by the Company's Specialty Services Division for the
first quarter of 1998 increased by $13.1 million or 16.8 % as compared to the
same period in 1997 primarily due to growth in service fees by the Company's
bill review cost containment and administrative services businesses, and
continued growth in its managed health network businesses.
Specialty Services Division costs decreased as a percentage of specialty
services revenue to 80.3% for the first quarter of 1998 as compared to 83.6% in
1997. The reduction in the MCR was due to reduced
10
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administrative expenses as a percent of revenue in the bill review, cost
containment and administrative service business, partially offset by slightly
higher costs due to a change in product mix in the managed health network
businesses.
DISCONTINUED OPERATIONS
WORKERS' COMPENSATION INSURANCE BUSINESS
The Company revised its strategy of maintaining a presence in the workers'
compensation insurance business and thereby adopted a plan to discontinue this
segment of its business through divestiture of its workers' compensation
insurance subsidiaries. As a result, the Company is reporting its workers'
compensation insurance segment as discontinued operations. Consistent with the
foregoing, on May 5, 1998 the Company entered into a definitive agreement to
sell its workers' compensation insurance operations to Superior National
Insurance Group, Inc. The transaction is expected to yield the Company
approximately $290 million in cash net of tax considerations and the cost of
reinsurance.
REVENUE
Total workers' compensation revenue in the first quarter of 1998 increased
by $17.8 million to $150.0 million compared to the same quarter in 1997. Net
earned premium of $139.6 million in the first quarter of 1998 was $18.2 million
or 15% greater than the first quarter of 1997. The increase in premium is due
primarily to the effect of quota share and aggregate excess of loss reinsurance
in 1997. Ceded premium under the Aggregate Excess of Loss Treaty was $15 million
and ceded premium under the Quota Share Treaty was $8.0 million in the first
quarter of 1997. The decrease in ceded premium was offset by a $11.7 million
decline in written premiums, primarily as a result of reduced premium in the
California market, as the market continued to experience severe price
competition.
COSTS
Workers' compensation costs of $159.5 million, including general and
administrative costs, increased $40.6 million in the first quarter of 1998
compared to the same quarter in 1997. The increase is due primarily to increased
workers' compensation loss costs as a result of the elimination of the Aggregate
Excess of Loss Treaty effective January 1, 1998. In the first quarter of 1997,
$18.5 million of losses were ceded under this treaty. In addition, $10.1 million
of losses and commissions were ceded under the Quota Share Treaty in the first
quarter of 1997. Neither of these treaties were in effect during the first
quarter of 1998. Workers' compensation loss and loss adjustment expense costs
are $5.1 million greater than in the first quarter of 1997 and other
underwriting costs increased approximately $2 million in the first quarter of
1998 compared to the first quarter of 1997 due to the impact of the Quota Share
Reinsurance Treaty in the first quarter of 1997.
NET INCOME
The loss on dispositon of $99.0 million recorded at December 31, 1997
included the anticipated results of operations through the disposal date and
therefore, the net loss of $4.2 million is not reflected on the Company's
condensed consolidated statement of operations for the quarter ended March 31,
1998. This compares to net income of $10.8 million in the first quarter of 1997.
The following table presents financial information reflecting the Company's
continuing operations for its primary lines of business:
11
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FOUNDATION HEALTH SYSTEMS, INC.
LINE OF BUSINESS FINANCIAL INFORMATION
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
FIRST QUARTER ENDED
FIRST QUARTER ENDED MARCH 31, 1998 MARCH 31, 1997
------------------------------------------- ------------------------------
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.................... $ 1,844,484 84.8% 29.9% $ 1,419,745 80.3%
Government contracts.................... 213,627 9.8 (13.2) 246,034 13.9
Specialty services...................... 91,113 4.2 16.8 78,030 4.4
Investment and other income............. 26,150 1.2 (0.2) 26,210 1.4
------------ ----- ------------ -----
2,175,374 100.0 22.9 1,770,019 100.0
------------ ----- ------------ -----
Expenses
Health plan services.................... 1,584,503 72.8 34.2 1,181,008 66.7
Government health care services......... 163,291 7.5 (14.5) 190,912 10.8
Specialty services...................... 73,208 3.4 12.2 65,259 3.7
Selling, general and administrative
(SG&A)................................ 258,408 11.9 20.5 214,535 12.1
Amortization and depreciation........... 30,841 1.4 24.9 24,684 1.4
Interest................................ 21,861 1.0 46.3 14,938 0.8
------------ ----- ------------ -----
2,132,112 98.0 26.1 1,691,336 95.5
------------ ----- ------------ -----
Income from continuing operations before
income taxes............................ 43,262 2.0 (45.0) 78,683 4.5
Income tax provision...................... 17,024 0.8 (45.2) 31,059 1.8
------------ ----- ------------ -----
Income from continuing operations......... $ 26,238 1.2% (44.9)% $ 47,624 2.7%
------------ ----- ------------ -----
------------ ----- ------------ -----
Basic earnings per share.................. $ 0.22 $ 0.38
Diluted earnings per share................ 0.22 0.38
Weighted average common and common stock
equivalent shares outstanding:
Basic................................. 121,614 125,297
Diluted............................... 121,907 125,706
Operating ratios:
Health plan medical care ratio........ 85.9% 83.2%
Government contracts medical care
ratio............................... 76.4 77.6
Specialty services medical care
ratio............................... 80.3 83.6
SG&A as a percent of health plan and
government contracts revenues....... 12.6 12.9
</TABLE>
12
<PAGE>
FOUNDATION HEALTH SYSTEMS, INC.
LINE OF BUSINESS FINANCIAL INFORMATION
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FIRST QUARTER ENDED
MARCH 31, 1998 FIRST QUARTER
-------------------------------- ENDED
PERCENT MARCH 31, 1997
INCREASE -----------------
ENROLLMENT (DECREASE) ENROLLMENT
------------- ----------------- -----------------
<S> <C> <C> <C>
Health Plan
Commercial........................................................ 3,523 32.0% 2,669
Medicare risk..................................................... 310 25.5 247
Medicaid.......................................................... 492 65.1 298
----- ----- -----
4,325 34.6 3,214
Government..........................................................
CHAMPUS PPO and indemnity......................................... 882 (7.6) 955
CHAMPUS HMO....................................................... 720 25.4 574
----- ----- -----
1,602 4.8 1,529
ASO................................................................. 185 (17.4) 224
----- ----- -----
Combined.......................................................... 6,112 23.1 4,967
----- ----- -----
----- ----- -----
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Certain of the Company's subsidiaries must comply with minimum capital and
surplus requirements under applicable state laws and regulations, and must have
adequate reserves for claims. 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,
lines of credit, and funds from planned divestitures of business are adequate to
fund existing obligations, introduce new products and services, and continue to
develop health care-related businesses. The Company regularly evaluates cash
requirements for current operations and commitments, and for capital
acquisitions and other strategic transactions. The Company may elect to raise
additional funds for these purposes, either through additional debt or equity,
the sale of investment securities or otherwise, as appropriate.
Government health care receivables and payables are best estimates of
payments that are ultimately collectible or payable. Since these amounts are
subject to government audit and negotiation, amounts ultimately collected may
vary from current estimates.
For the quarter ended March 31, 1998, cash used for operating activities was
$188.1 million compared to $107.2 million in the same quarter of 1997. This
decrease in the first quarter of 1998 was due primarily to the timing of receipt
of payments under federal Medicare contracts, a reduction of claims inventory in
the government contracts business, payments for merger, restructuring and other
costs associated with the FHS Combination, and restructuring charges associated
with the integration of businesses in New York, New Jersey and Connecticut. Net
cash used by investing activities was $73.1 million during the first quarter of
1998 as compared to $62.8 million during the same period in 1997. The increase
is due to a higher net redemption of securities available for sale and higher
capital spending. Net cash generated from financing
13
<PAGE>
activities was $45.7 million in 1998 as compared to $79.7 million during the
same period in 1997. The net change during the first quarter of 1998 was due
primarily to additional draws under the revolving line of credit of $45 million
which were used to finance capital contributions to FOHP and PHS and to settle
an intercompany tax balance with the discontinued workers' compensation
operations in advance of receiving a tax refund.
The Company has a $1.5 billion credit facility (the "Credit Facility") with
Bank of America as Administrative Agent for the Lenders thereto, which was
amended by an Amendment dated April 6, 1998 with the Lenders (the "Amendment").
All previous revolving credit facilities were terminated and rolled into the
Credit Facility on July 8, 1997. At the election of the Company, and subject to
customary covenants, loans are initiated on a bid or committed basis and carry
interest at offshore or domestic rates, at the applicable LIBOR Rate plus margin
or the bank reference rate. Actual rates on borrowings under the Credit Facility
vary, based on competitive bids and the Company's unsecured credit rating at the
time of the borrowing. Under the Amendment, the Company's public issuer rating
becomes the exclusive means of setting the facility fee and borrowing rates
under the Credit Facility. In addition, certain covenants including financial
covenants were amended. The Credit Facility is available for five years, until
July 2002, but it may be extended under certain circumstances for two additional
years. As of May 11, 1998 $1.38 billion was outstanding under the Credit
Facility.
The Company's subsidiaries must comply with certain minimum capital
requirements under applicable state laws and regulations. The long-term portion
of principal and interest payments under the California Wellness Foundation
Notes issued by the Company in connection with the Health Net conversion is
subordinated to Health Net meeting tangible equity requirements under applicable
California statutes and regulations. As of March 31, 1998, the Company's
subsidiaries were in compliance with minimum capital requirements.
IMPACT OF INFLATION AND OTHER ELEMENTS
The managed health care industry is labor intensive and its profit margin is
low; hence, it is especially sensitive to inflation. Increases in medical
expenses or contracted medical rates without corresponding increases in premiums
could have a material adverse effect on the Company.
Various federal and state legislative initiatives regarding the health care
industry have been proposed during recent legislative sessions, and health care
reform and similar issues continue to be in the forefront of social and
political discussion. If health care reform or similar legislation is enacted,
such legislation could impact the Company. Management cannot at this time
predict whether any such initiative will be enacted and, if enacted, the impact
on the financial condition or results of operations of the Company.
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.
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 payments 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
14
<PAGE>
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.
Reference is also made to the disclosures contained under the heading
"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.
YEAR 2000
The Company recognizes that the arrival of the Year 2000 requires computer
systems to be able to recognize the date change from 1999 to 2000 and, like
other companies, is assessing and modifying its computer applications and
business processes to provide for their continued functionality.
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have time sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, prepare invoices or
engage in normal business activities.
The Year 2000 effort for the Company has the highest priority of technology
projects. The project has dedicated resources with multiple teams to address
unique systems environment. Uniform project management techniques are in place
with overall oversight responsibility residing with the Company's Chief
Technology Officer. Emphasis has been placed on business unit involvement and
the use of internal staff enhanced by external specialists. Selected systems
will be retired with the business functions being converted to Year 2000
compliant systems. A number of the Company's systems include packaged software
from large vendors that the Company is closely monitoring to ensure that these
systems are Year 2000 compliant. The Company believes that vendors will make
timely updates available to ensure that all remaining purchased software is Year
2000 compliant. The remaining systems' compliance with Year 2000 will be
addressed by internal technical staff.
The Company has initiated formal communications with others with whom it
does significant business to determine their Year 2000 issues. There can be no
assurances that the systems of other companies on which the Company's systems
rely will be timely converted, or that the failure to convert by another company
would not have a material adverse effect on the Company.
The Company does not anticipate that the related overall costs to resolve
these potential Year 2000 problems will be material to any single year. The
total current cost estimate for the Year 2000 project is between $13 and $17
million. These costs are expensed as incurred.
However, notwithstanding the foregoing, the costs of the project and the
timetable in which the Company plans to complete the Year 2000 compliance
requirements are based on estimates derived utilizing numerous assumptions of
future events including the continued availability of certain resources, third
party modification plans and other factors. There can therefore be no assurance
that these estimates will be achieved and actual results could differ materially
from these estimates.
At this time it is unclear as to the extent of existing insurance coverage,
if any, the Company may have to cover potential year 2000 liabilities. The
Company is currently analyzing the obtainment of such coverage.
15
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
CONTINUING OPERATIONS
The Company is exposed to interest rate and market risk primarily due to its
investing and borrowing activities. Market risk generally represents the risk of
loss that may result from the potential change in the value of a financial
instrument as a result of fluctuations in interest rates and in equity prices.
Interest rate risk is a consequence of maintaining fixed income investments. The
Company is exposed to interest rate risks arising from changes in the level or
volatility of interest rates, prepayment speeds and/or the shape and slope of
the yield curve. In addition, the Company is exposed to the risk of loss related
to changes in credit spreads. Credit spread risk arises from the potential that
changes in an issuer's credit rating or credit perception may affect the value
of financial instruments.
The Company has several bond portfolios to fund reserves. The Company
attempts to manage the interest rate risks related to its investment portfolios
by actively managing the asset/liability duration of its investment portfolios.
The overall goal of the investment portfolios is to support the ongoing
operations of the Company's business units. The Company's philosophy is to
actively manage assets to maximize total return over a multiple-year time
horizon, subject to appropriate levels of risk. Each business unit will have
additional requirements with respect to liquidity, current income and
contribution to surplus. The Company manages these risks by setting risk
tolerances, targeting asset-class allocations, diversifying among assets and
asset characteristics, and using performance measurement and reporting.
The Company uses a value-at-risk model to assess the market risk of its
investments. The estimation of potential losses that could arise from changes in
market conditions is typically accomplished through the use of statistical
models which seek to predict risk of loss based on historical price and
volatility patterns. The Company's measured value at risk for its investments
from continuing operations, using a 95% confidence level, was approximately $3.9
million at March 31, 1998.
The Company's calculated value-at-risk exposure represents an estimate of
reasonably possible net losses that could be recognized on its investment
portfolios assuming hypothetical movements in future market rates and are not
necessarily indicative of actual results which may occur. It does not represent
the maximum possible loss nor any expected loss that may occur, since actual
future gains and losses will differ from those estimated, based upon actual
fluctuations in market rates, operating exposures, and the timing thereof, and
changes in the Company's investment portfolios during the year.
The Company, however, believes that any loss incurred would be offset by the
effects of interest rate movements on the respective liabilities, since these
liabilities are affected by many of the same factors that affect asset
performance; that is, economic activity, inflation and interest rates, as well
as regional and industry factors.
In addition, the Company has some interest rate market risk due to its
borrowings. Notes payable, capital leases and other financing arrangements
totaled $1.35 billion at March 31, 1998 and the related average interest rate
was 6.08% (which interest rate is subject to change pursuant to the terms of the
Credit Facility). See a description of the Credit Facility under "Liquidity and
Capital Resources." The table below presents the expected cash flows of market
risk sensitive instruments at March 31, 1998. These cash flows include both
expected principal and interest payments consistent with the terms of the
outstanding debt as of March 31, 1998 (dollars in thousands).
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002 BEYOND TOTAL
--------- --------- ---------- --------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Long-term Borrowings
Fixed Rate................. $ 4,329 $ 4,329 $ 24,288 $ 2,540 $ 2,715 $ 10,859 $ 49,060
Floating Rate.............. 78,600 78,600 78,600 78,600 1,388,600 0 1,703,000
--------- --------- ---------- --------- ------------ --------- ------------
Total........................ $ 82,929 $ 82,929 $ 102,888 $ 81,140 $ 1,391,315 $ 10,859 $ 1,752,060
--------- --------- ---------- --------- ------------ --------- ------------
--------- --------- ---------- --------- ------------ --------- ------------
</TABLE>
16
<PAGE>
DISCONTINUED OPERATIONS
The Company plans to sell its risk-assuming workers' compensation insurance
businesses which represent a separate segment of business. Therefore the results
of these businesses have been reported as discontinued operations.
The Company's measured value-at-risk of its investments from discontinued
operations at a 95 percent confidence level, at March 31, 1998 was approximately
$9.4 million.
The discontinued operations businesses do not have any significant interest
rate risk due to debt.
17
<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" or the "FHS Combination") 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.
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 transition 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 (there currently exists one vacancy on the Board of
Directors which vacancy is in the process of being filled): 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's predecessor, HSI, filed a lawsuit against
Medaphis Corporation ("Medaphis") and its former Chairman and Chief Executive
Officer Randolph G. Brown, entitled HEALTH SYSTEMS INTERNATIONAL, INC. V.
MEDAPHIS CORPORATION, RANDOLPH G. BROWN AND DOES 1-50, case number BC 160414,
Superior Court of California, County of Los Angeles. The lawsuit arises out of
the acquisition of Health Data Sciences Corporation ("HDS") by Medaphis. In July
1996, HSI, the owner of 1,234,544 shares 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. HSI received as the
result of the acquisition 976,771 shares of Medaphis Common Stock in exchange
for its Series F Preferred Stock. Pursuant to the Merger Agreement, the Company
succeeded to the interests of HSI in the Medaphis lawsuit, and the Company has
been substituted for HSI as plaintiff in the suit.
In its complaint, the Company alleges that Medaphis was actually a poorly
run company with sagging earnings in its core business, 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 presenting materially false
financial statements and by failing to disclose that Medaphis would shortly
reveal a "write off" of up to $40 million 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 registration statement and the prospectus
provided by
18
<PAGE>
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. The Company alleges that the defendants' actions
constitute violations of both federal and state securities laws, as well as
fraud and other torts under state law. The Company is seeking either rescission
of the transaction or damages in excess of $38 million. The defendants have
denied the allegations in the complaint, and the Company is vigorously pursuing
its claims against Medaphis.
Recently the Company moved to disqualify the law firm representing certain
of the individual defendants. The trial court granted the Company's motion, and
the law firm and its clients have appealed such decision. In addition, the trial
court granted a stay of the case until June 4, 1998 in order to permit the law
firm to appeal. The Company intends to press for an expedited appeal. Prior to
the stay the case was in the early stages of discovery. No trial date has yet
been set.
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. Thereafter, the plaintiffs filed a motion seeking to recover an additional
$4 million in attorneys' fees, and Gem filed post-trial motions for judgment
notwithstanding the verdict, for a new trial and for remittitur of the jury
verdict. Gem's motion for judgment notwithstanding the verdict was denied. The
court granted Gem's motion for remittitur and remitted the jury verdict to an
award of $1 million in compensatory damages and $2 million in punitive damages.
The court further ordered that if the plaintiffs did not accept the remittitur
order, Gem's motion for new trial would be granted. The plaintiffs accepted the
court's remittitur. The court also awarded plantiffs approximately $233,000 in
attorneys' fees and interest. Notwithstanding the plaintiffs' acceptance of the
court's remittitur, Gem plans to appeal the verdict.
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.
19
<PAGE>
ITEM 2. CHANGES IN SECURITIES
REVOLVING CREDIT FACILITY
On July 8, 1997 the Company entered into a Credit Agreement with the banks
identified therein (the "Banks") and Bank of America National Trust and Savings
Association ("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 maturing on July 7, 2002. 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) 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 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 subject to certain specified limitations.
Under the Credit Agreement, as amended pursuant to a Letter Agreement dated
March 27, 1998 (the "Credit Facility Letter Agreement") and the First Amendment
and Waiver to Credit Agreement dated as of April 6, 1998 (the "Amendment and
Waiver") with the Banks, the Company is: (i) obligated to maintain certain
covenants keyed to the Company's financial condition and performance (including
a Total Leverage Ratio and Fixed Charge Ratio); (ii) obligated to limit liens;
(iii) subject to customary covenants, including (A) disposition of assets only
in the ordinary course and generally at fair value and (B) restrictions on
acquisitions, mergers, consolidations, loans, leases, joint ventures, contingent
obligations and certain transactions with affiliates; (iv) permitted to sell the
Company's workers' compensation insurance business, provided that the net
proceeds shall be applied towards repayment of the outstanding Loans under the
Credit Agreement; and (v) permitted to incur additional indebtedness in an
aggregate amount not to exceed $1,000,000,000 upon certain terms and conditions,
including mandatory prepayment of the outstanding Loans with a certain portion
of the proceeds from the issuance of such indebtedness, resulting in a permanent
reduction of the aggregate amount of commitments under the Credit Agreement by
the amount so prepaid. The Credit Facility Letter Agreement and the Amendment
and Waiver also provided for an increase in the interest and facility fees under
the Credit Agreement.
SHAREHOLDER RIGHTS PLAN
On May 20, 1996, the Board of Directors of the Company declared a dividend
distribution of one right (a "Right") for each outstanding share of the
Company's Class A Common Stock and Class B Common Stock (collectively, the
"Common Stock"), to stockholders of record at the close of business on July 31,
1996 (the "Record Date"). The Board of Directors of the Company also authorized
the issuance of one Right for each share of Common Stock issued after the Record
Date and prior to the earliest of the Distribution Date (as defined below), the
redemption of the Rights and the expiration of the Rights and in certain other
circumstances. Rights will attach to all Common Stock certificates representing
shares then outstanding and no separate Rights Certificates will be distributed.
Subject to certain exceptions contained in the Rights Agreement dated as of June
1, 1996 by and between the Company and Harris Trust and Savings Bank, as Rights
Agent (the "Rights Agreement"), the Rights will separate from the Common Stock
in the event any person acquires 15% or more of the outstanding Class A Common
Stock, the Board of Directors of the Company declares a holder of 10% or more to
the outstanding Class A Common Stock
20
<PAGE>
to be an "Adverse Person," or any person commences a tender offer for 15% of the
Class A Common Stock (each event causing a "Distribution Date").
Except as set forth below and subject to adjustment as provided in the
Rights Agreement, each Right entitles its registered holder, upon the occurrence
of a Distribution Date, to purchase from the Company one one-thousandth of a
share of Series A Junior Participating Preferred Stock, at a price of $170.00
per one-thousandth share. However, in the event any person acquires 15% or more
of the outstanding Class A Common Stock, or the Board of Directors of the
Company declares a holder of 10% or more of the outstanding Class A Common Stock
to be an "Adverse Person," the Rights (subject to certain exceptions contained
in the Rights 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.
A copy of the Rights Agreement has been filed with the Securities and
Exchange Commission as Exhibit 99.1 to the Company's Registration Statement on
Form 8-A (File No. 001-12718). In connection with its execution of the Merger
Agreement for the FHS Combination, the Company entered into Amendment No. 1 (the
"Rights Amendment") to the Rights Agreement to exempt the Merger Agreement and
related transactions from triggering the Rights. In addition, the Rights
Amendment modifies certain terms of the Rights Agreement applicable to the
determination of certain "Adverse Persons," which modifications become effective
upon consummation of the transactions provided for under the Merger Agreement.
This summary description of the Rights does not purport to be complete and is
qualified in its entirety by reference to the Rights Agreement.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the security holders of the
Company, either through the solicitation of proxies or otherwise, during the
quarter ended March 31, 1998.
ITEM 5. OTHER INFORMATION
CAUTIONARY STATEMENTS
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company has previously filed with its Annual
Report on Form 10-K for the year ended December 31, 1997 certain cautionary
statements identifying important risk factors that could cause the Company's
actual results to differ materially from those projected in forward-looking
statements of the Company made by or on behalf of the Company.
The Company wishes to caution readers that these factors, among others,
could cause the Company's actual financial or enrollment results to differ
materially from those expressed in any projected, estimated or forward-looking
statements relating to the Company. The factors should be considered in
conjunction with any discussion of operations or results by the Company or its
representatives, including any forward-looking discussion, as well as comments
contained in press releases, presentations to securities analysts or investors,
or other communications by the Company.
In making these statements, the Company was not and is not undertaking to
address or update each factor in future filings or communications regarding the
Company's business or results, and is not undertaking to address how any of
these factors may have caused changes to discussions or information contained in
previous filings or communications. In addition, certain of these matters may
have affected the Company's past results and may affect future results.
21
<PAGE>
RECENT DEVELOPMENTS
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 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. The CWF and the Company are also party to a
Registration Rights Agreement dated as of March 2, 1995 (the "CWF Registration
Rights Agreement") pursuant to which the CWF has the right to demand
registration for sale in underwritten public offerings of up to 8,026,298 shares
of Class B Common Stock.
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 as
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. The CWF currently holds 10,297,642 shares of Class B
Common Stock and, as of March 31, 1998, approximately $18.6 million in principal
of the CWF Notes remained outstanding.
On February 25, 1998, the CWF notified the Company of its intention to sell
up to 8,026,000 shares of Class B Common Stock pursuant to the CWF Registration
Rights Agreement in an underwritten public offering. Pursuant to the terms of
the CWF Registration Rights Agreement, the Company upon receipt of a
notification under such agreement must prepare and file a registration statement
with respect to such shares with the Securities and Exchange Commission as
expeditiously as possible but in no event later than 90 days following receipt
of the notice, subject to certain exceptions. The Company is responding to the
CWF notification in accordance with the terms of the CWF Registration Rights
Agreement. Any shares of Class B Common Stock sold by the CWF to third parties
will automatically convert on a one-for-one basis into shares of Class A Common
Stock.
SALE OF WORKERS' COMPENSATION BUSINESSES
The Company revised its strategy of maintaining a presence in the workers'
compensation insurance business as a result of various adverse developments
arising in 1997 in the workers' compensation insurance business, primarily
related to the workers' compensation claims environment in California. As
discussed in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997, such adverse developments resulted in the need for the
Company to strengthen its workers' compensation reserves at the end of 1997.
These developments also led the Company to adopt a plan to discontinue this
segment of its business, through divestiture of its workers' compensation
risk-assuming insurance subsidiaries.
In this connection, on May 5, 1998 the Company entered into a definitive
agreement (the "Workers' Compensation Sale Agreement") to sell its risk-assuming
workers' compensation insurance operations (the "Workers' Compensation
Operations") to Superior National Insurance Group, Inc. of Calabasas, Calif.
("Superior National"). The transaction, subject to customary closing conditions
including regulatory
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approvals and a favorable vote from Superior National's shareholders, is
expected to close in the third quarter of 1998 and is expected to yield the
Company approximately $290 million in cash net of tax considerations and the
cost of reinsurance.
As required under the terms of the Workers' Compensation Sale Agreement, the
Company has obtained a commitment from a third party reinsurance company to
purchase reinsurance that will cover up to $150 million of adverse loss
development in the Workers' Compensation Operations for losses incurred through
December 31, 1997. At Superior National's option, the Company is obligated to
increase reinsurance coverage by $25 million in exchange for additional purchase
price consideration. A copy of the Workers' Compensation Sale Agreement is filed
as Exhibit 10.65 to this Quarterly Report on Form 10-Q.
In addition to the sale of the Workers' Compensation Operations, the Company
and Superior National have agreed to a contract under which the Company's
administrative services businesses that currently provide certain services to
the Workers' Compensation Operations would continue to provide such services and
additional services to Superior National for a period of five years after
closing. The Company estimates that, based on past results and the expected
contribution from Superior National's operations, this five-year service
agreement will create additional total revenue in the range of $40 to $50
million for the Company's administrative service subsidiaries over such
five-year term.
OTHER POTENTIAL DIVESTITURES
The Company is presently reviewing a possible plan to exit its HMO
operations in the states of Texas, Louisiana and Oklahoma due to inadequate
returns on invested capital. The Company is presently reviewing an exit strategy
for such states' businesses (including potential sale transactions). In December
1997 the Company also entered into a sale agreement to divest its
non-operational HMO license in Alabama to an unaffiliated third party.
The Company has decided to review the possibility of divesting its direct
ownership of two Southern California hospitals, a 128-bed hospital located in
Los Angeles, California, the East Los Angeles Doctors Hospital, and a 200-bed
hospital located in Gardena, California, the Memorial Hospital of Gardena.
Direct ownership of these two hospitals is not consistent with the Company's
business philosophy to manage health care through contracts with independent
providers of medical services. The Company is presently responding to inquiries
of parties which have expressed an interest in purchasing these hospitals.
The Company is also analyzing the strategic fit of its Denticare managed
dental operations with the ongoing operations and operating strategy of the
Company and, in this connection, whether a sale of such operations could be
completed consistent with the Company's interests.
As described in its Annual Report on Form 10-K for the year ended December
31, 1997, the Company continues to evaluate the profitability realized or likely
to be realized by its existing businesses and operations, and is reviewing from
a strategic standpoint which of such businesses or operations should be
divested.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed as part of this Quarterly Report on Form
10-Q or are incorporated herein by reference:
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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).
2.3 Amendment No. 1 to Agreement and Plan of Merger, dated October 20, 1997,
by and among the Company, PHS Acquisition Corp. and Physicians Health
Services, Inc. (filed as Exhibit 2.3 to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 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 (filed as Exhibit 3.2
to the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997, which is incorporated by reference herein).
4.1 Form of Class A Common Stock Certificate (included as Exhibit 4.2 to the
Company's Registration Statements on Forms S-1 and S-4 (File nos.
33-72892 and 33-72892-01, respectively) which is incorporated by
reference herein).
4.2 Form of Class B Common Stock Certificate (included as Exhibit 4.3 to the
Company's Registration Statements on Forms S-1 and S-4 (File nos.
33-72892 and 33-72892-01, respectively) which is incorporated by
reference herein).
4.3 Form of Indenture of Foundation Health Corporation ("FHC") (filed as an
exhibit to FHC's Registration Statement on Form S-3 (File No. 33-68684),
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).
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).
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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).
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).
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10.17 Registration Rights Agreement dated as of March 2, 1995 between the
Company and The California Wellness Foundation (filed as Exhibit No.
28.2 to the Company's Current Report on Form 8-K dated March 2, 1995,
which is incorporated by reference herein).
10.18 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) (filed as Exhibit
10.23 to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997, which is incorporated by reference herein).
10.24 Guarantee Agreement dated July 8, 1997 between the Company and First
Security Bank, National Association (filed as Exhibit 10.24 to the
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1997, which is incorporated by reference herein).
10.25 Employment Letter Agreement dated May 28, 1996 between Michael D. Pugh and
QualMed, Inc. (filed as Exhibit 10.35 to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1996, which is incorporated
by reference herein).
10.26 Employment Letter Agreement dated June 4, 1996 between Arthur M. Southam
and the Company and Health Net (filed as Exhibit 10.36 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, which
is incorporated by reference herein).
10.27 Employment Letter Agreement dated July 3, 1996 between Jay M. Gellert and
the Company (filed as Exhibit 10.37 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1996, which is
incorporated by reference herein).
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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 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).
10.31 Consulting Agreement, dated as of May 1, 1997, between the Company, FHC
and Allen J. Marabito, (filed as Exhibit 10.35 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, which
is incorporated by reference herein).
10.32 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).
10.33 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).
10.34 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).
10.35 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).
10.36 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).
10.37 1993 Nonstatutory Stock Option Plan of Foundation Health Corporation (as
amended and restated September 7, 1995) (filed as Exhibit 4.10 to the
Company's Registration Statement on Form S-8 (File No. 333-24621), which
is incorporated by reference herein).
10.38 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).
10.39 Foundation Health Systems, Inc. 1997 Stock Option Plan (filed as Exhibit
10.45 to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997, which is incorporated by reference herein).
10.40 Foundation Health Systems, Inc. Third Amended and Restated Non-Employee
Director Stock Option Plan (filed as Exhibit 10.46 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, which
is incorporated by reference herein).
10.41 Foundation Health Systems, Inc. Employee Stock Purchase Plan (filed as
Exhibit 10.47 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997, which is incorporated by reference herein).
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10.42 Foundation Health Systems, Inc. Performance-Based Annual Bonus Plan (filed
as Exhibit 10.48 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997, which is incorporated by reference herein).
10.43 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).
10.44 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).
10.45 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).
10.46 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).
10.47 Agreement and Plan Reorganization dated January 9, 1996 by and between FHC
and Managed Health Network, Inc. (filed as Annex 1 of Proxy
Statement/Prospectus contained in FHC's Registration Statement on Form
S-4 (File No. 333-00517), which is incorporated by reference herein).
10.48 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).
10.49 $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).
10.50 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).
10.51 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).
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10.52 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).
10.53 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).
10.54 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).
10.55 $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).
10.56 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).
10.57 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).
10.58 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).
10.59 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).
10.60 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).
10.61 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).
10.62 Amended Letter Agreement between the Company and Jay M. Gellert dated as
of August 22, 1997 (filed as Exhibit 10.69 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997, which is
incorporated by reference herein).
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10.63 Form of Credit Facility Commitment Letter, dated March 27, 1998, between
the Company and the Majority Banks (as defined therein) (filed as
Exhibit 10.70 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1997, which is incorporated by reference herein).
*10.64 First Amendment and Waiver to Credit Agreement, dated as of April 6, 1998,
among the Company, Bank of America National Trust and Savings
Association and the Banks (as defined therein), a copy of which is filed
herewith.
*10.65 Purchase Agreement by and between Foundation Health Corporation and
Superior National Insurance Group, Inc., dated as of May 5, 1998, a copy
of which is filed herewith.
10.66 Employment Letter Agreement between the Company and Dale Terrell dated
December 31, 1997 (filed as Exhibit 10.71 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1997, which is incorporated
by reference herein).
10.67 Employment Letter Agreement between the Company and Steven P. Erwin dated
March 11, 1998 (filed as Exhibit 10.72 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997, which is incorporated by
reference herein).
10.68 Employment Agreement, dated as of December 31, 1997, between the Company
and Maurice Costa (filed as Exhibit 10.73 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1997, which is incorporated
by reference herein).
10.69 Employment Agreement, dated as of December 31, 1997, between the Company
and Robert L. Natt (filed as Exhibit 10.74 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997, which is
incorporated by reference herein).
10.70 Employment Letter Agreement, dated October 10, 1997, between the Company
and Alex Labak (filed as Exhibit 10.75 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997, which is incorporated by
reference herein).
10.71 Employment Letter, dated June 9, 1995, between Philip Katz, Ph.D. and
Health Net (filed as Exhibit 10.38 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1995, which is incorporated by
reference herein).
*11.1 Statement relative to computation of per share earnings of the Company
(included in the notes to the Financial Statements contained in this
Quarterly Report on Form 10-Q).
21.1 Subsidiaries of the Company (filed as Exhibit 21.1 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997, which is
incorporated by reference herein).
*27.1 Financial Data Schedule, a copy of which has been filed with the EDGAR
version of this filing.
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* A copy of the Exhibit is filed herewith.
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed by the Company during the
quarterly period ended March 31, 1998.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
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FOUNDATION HEALTH SYSTEMS, INC.
(REGISTRANT)
Date: May 14, 1998 By: /s/ JAY M. GELLERT
-----------------------------------------
Jay M. Gellert
PRESIDENT AND CHIEF OPERATING OFFICER
Date: May 14, 1998 By: /s/ STEVEN P. ERWIN
-----------------------------------------
Steven P. Erwin
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
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EXHIBIT 10.64
FIRST AMENDMENT AND WAIVER TO
CREDIT AGREEMENT
THIS FIRST AMENDMENT AND WAIVER TO CREDIT AGREEMENT is made and dated as
of April 6, 1998 (the "FIRST AMENDMENT") among FOUNDATION HEALTH SYSTEMS,
INC. (the "COMPANY"), the Banks party to the Credit Agreement referred to
below, and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, a national
banking association, as Administrative Agent (the "AGENT"), and amends that
certain Credit Agreement dated as of July 8, 1997 (as amended or modified
from time to time, the "CREDIT AGREEMENT").
RECITALS
WHEREAS, the Company has requested the Agent and the Banks to amend
certain provisions of the Credit Agreement, and the Agent and the Banks are
willing to do so, on the terms and conditions specified herein;
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereby agree as
follows:
1. TERMS. All terms used herein shall have the same meanings as in the
Credit Agreement unless otherwise defined herein.
2. AMENDMENT. The Credit Agreement is hereby amended as follows:
2.1 AMENDMENTS TO SECTION 1.01.
(a) There shall be added to Section 1.01 of the Credit Agreement,
in appropriate alphabetical sequence, the following new definitions reading
as follows:
"RESTRICTED INDEBTEDNESS" means all Indebtedness of the Company or its
Subsidiaries, other than Specified Indebtedness, incurred after December
31, 1997 and pursuant to Section 7.05(e).
"SPECIFIED INDEBTEDNESS" means up to an aggregate of $200,000,000 of (a)
Indebtedness of the Company or any Subsidiary, other than any
Indebtedness for borrowed money or Commercial Paper Debt and (b)
Indebtedness of the Company or a Subsidiary assumed or issued in
connection with Permitted Acquisition, in either case, incurred after
December 31, 1997 and pursuant to Section 7.05(e).
"WORKERS COMPENSATION DISPOSITION" means the sale or other disposition
by the Company after December 31, 1997 of its discontinued workers
compensation businesses.
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<PAGE>
(b) The definition of the term "Adjusted EBITDA" in Section 1.01
of the Credit Agreement is hereby amended by adding the following clause
immediately prior to the end thereof:
"minus (iii) the aggregate losses, reserves and charges for the
Company's workers' compensation business after December 31, 1997 to the
extent that the aggregate amount thereof exceeds the $25,000,000 reserve
set forth in the definition of the term "Specified Charges."
(c) The definition of the term "Applicable Level" in Section 1.01
of the Credit Agreement is hereby amended and restated in its entirety to
read as follows:
"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) Baal 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)
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) Ba2 by Moody's.
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<PAGE>
"LEVEL 7" means any period (other than a Level 1 Period,
Level 2 Period, Level 3 Period, Level 4 Period, Level 5 Period or
Level 6 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) Ba3 by Moody's.
"LEVEL 8" means any period other than a Level 1 Period,
Level 2 Period, Level 3 Period, Level 4 Period, Level 5 Period,
Level 6 Period or Level 7 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 7 or
Level 8, 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 Rating shall be available, the Applicable Level shall be Level 8.
(d) The definition of the term "Applicable Margin" in Section
1.01 of the Credit Agreement is hereby amended and restated in its entirety
to read as follows:
"APPLICABLE MARGIN" means, in the case of Facility Fees, Base Rate
Committed Loans or Offshore Rate Committed Loans, a rate per annum
determined by reference to the Applicable Level as follows:
<TABLE>
<CAPTION>
APPLICABLE APPLICABLE BASE RATE APPLICABLE OFFSHORE FACILITY
LEVEL MARGIN RATE MARGIN FEE
----- -------------------- ------------------- --------
<S> <C> <C> <C>
Level 1 0.000% 0.200% 0.100%
Level 2 0.000% 0.225% 0.125%
Level 3 0.000% 0.250% 0.150%
Level 4 0.000% 0.325% 0.175%
Level 5 0.000% 0.550% 0.200%
Level 6 0.000% 0.775% 0.225%
Level 7 0.250% 1.250% 0.250%
Level 8 0.700% 1.700% 0.300%
</TABLE>
The Applicable Margin shall be effective on the earlier of the date on
which such rating change is publicly announced or on the date written
confirmation of a change in the Senior Unsecured Debt Rating is sent to the
Company by S&P or Moody's.
-3-
<PAGE>
(e) The definition of the term "Fixed Charges" in Section 1.01 of
the Credit Agreement is hereby amended by adding the following clause
immediately prior to the end thereof:
", each of the foregoing shall exclude all effects of the Company's
workers compensation business, including, for the quarters ending on or
before December 31, 1997, the amounts set forth on Part 2 of Schedule
1.01."
(f) The first clause in the definition of the term "Net Cash
Flow" in Section 1.01 of the Credit Agreement is hereby amended and restated
in its entirety to read as follows:
"(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 and excluding all effects of
the Company's workers compensation business, including, for the quarters
ending on or before December 31, 1997, the amounts set forth on Part 2
of Schedule 1.01)";
and the following clause shall be added immediately prior to the end of such
definition:
"and minus (iv) the aggregate losses, reserves and charges for the
Company's workers' compensation business after December 31, 1997 to the
extent that the aggregate amount thereof exceeds the $25,000,000 reserve
set forth in the definition of the term "Specified Charges."
(g) The definition of the term "Specified Charges" in Section
1.01 of the Credit Agreement is hereby amended and restated in its entirety
to read as follows:
"SPECIFIED CHARGES" means those items, and only those items, set
forth on Part 1 of Schedule 1.01 hereof.
(h) There shall be added to the Credit Agreement a new Schedule
1.01 reading in its entirety as set forth on Schedule 1.01 hereto.
2.2 AMENDMENTS TO SECTION 2.09. Section 2.09 of the Credit
Agreement is hereby amended and restated to read in its entirety as follows:
2.09 MANDATORY REDUCTION OF COMMITMENTS AND REPAYMENT OF LOANS.
(a) Subject to Section 3.04, the Company shall ratably
prepay Committed Loans with all net cash proceeds (less costs of sale)
from the Workers Compensation Disposition. The Company shall give the
Administrative Agent not less than one Business Day's notice of such
prepayment, and such notice of prepayment shall specify the date and
amount of such prepayment and the Type(s) of Committed Loans to be
prepaid. The Administrative Agent will promptly notify each Bank of its
receipt of
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<PAGE>
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) Subject to Section 3.04, the Company shall ratably prepay
Committed Loans by an amount equal to the first $250,000,000 of net cash
proceeds from any Restricted Indebtedness and 50% of any such net cash
proceeds in excess of $250,000,000. The Company shall give the
Administrative Agent not less than one Business Day's notice of such
prepayment, and such notice of prepayment shall specify the date and
amount of such prepayment and the Type(s) of 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. On the date such prepayment is required to be made, the
aggregate Commitments shall automatically and permanently be reduced by
an amount equal to the first $250,000,000 of net cash proceeds from any
Restricted Indebtedness and 50% of such net cash proceeds in excess of
$250,000,000 from any Restricted Indebtedness.
(c) The Company shall repay to the Banks on the Revolving
Termination Date the aggregate principal amount of Committed Loans
outstanding on such date.
(d) The Company shall repay each Bid Loan on the last day of
the relevant Interest Period.
2.3 AMENDMENT TO SECTION 7.02. Section 7.02 of the Credit
Agreement is hereby amended by replacing the period at the end thereof with
"; and" and by adding the following clause immediately thereafter:
"(e) the Workers Compensation Disposition; PROVIDED that all net cash
proceeds therefrom (less costs of sale) shall promptly thereafter (and
in no event later than 30 days after the closing thereof) be applied by
the Company to prepay the Committed Loans pursuant to Section 2.09(a)."
2.4 AMENDMENT TO SECTION 7.05. Section 7.05 of the Credit
Agreement is hereby amended and restated as follows:
"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
-5-
<PAGE>
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 December 31, 1997 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 incurred after December 31, 1997 in an
aggregate amount not to exceed $1,000,000,000, so long as (i) (A) such
Indebtedness (other than Specified Indebtedness) is not senior in right
of payment to the Obligations, contains no covenants, events of default
or other material provisions that are more restrictive than those
contained in this Agreement, and has principal payment dates commencing
after July 8, 2002 and (B) the net cash proceeds of such Indebtedness
(other than Specified Indebtedness) shall be applied by the Company to
prepay the Committed Loans and reduce the Commitments pursuant to
Section 2.09(b) and (ii) not more than $150,000,000 of all Indebtedness
permitted under this subsection (e) may be Indebtedness of Subsidiaries;
and
(f) Commercial Paper Debt."
2.5 AMENDMENT TO SECTION 7.11. Section 7.11 of the Credit
Agreement is hereby amended by adding the following sentence immediately
prior to the end thereof:
"The Company will not, and will not permit any of its
Subsidiaries to, make any payment or prepayment of any Restricted
Indebtedness on any day other than the stated scheduled date for such
payment set forth in such Restricted Indebtedness or redeem, purchase or
defease any Restricted Indebtedness prior to its stated maturity."
2.6 AMENDMENT TO SECTION 7.12.
(a) Clause (a) of Section 7.12 of the Credit Agreement is
hereby amended and restated in its entirety to read as follows:
"(a) the Total Leverage Ratio, as of any date set forth
below, to exceed the ratio set forth below opposite such date:
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<PAGE>
<TABLE>
<CAPTION>
Date Maximum Total Leverage Ratio
---- ----------------------------
<S> <C>
December 31, 1997 3.50 to 1.00
March 31, 1998 4.00 to 1.00
June 30, 1998 3.75 to 1.00
September 30, 1998 3.50 to 1.00
December 31, 1998 3.25 to 1.00
Thereafter 3.00 to 1.00;"
</TABLE>
(b) Clause (b) of Section 7.12 of the Credit Agreement is
hereby amended and restated to read in its entirety as follows:
"(b) the Fixed Charges Coverage Ratio, as of any date set
forth below, to be less than the ratio set forth below opposite such date:
<TABLE>
<CAPTION>
Date Minimum Fixed Charges Coverage Ratio
---- ------------------------------------
<S> <C>
December 31, 1997 2.50 to 1.00
March 31, 1998 2.25 to 1.00
June 30, 1998 1.50 to 1.00
September 30, 1998 1.50 to 1.00
December 31, 1998 1.75 to 1.00
Thereafter 2.00 to 1.00;"
</TABLE>
(c) Clause (c) of Section 7.12 of the Credit Agreement is
hereby amended by inserting the phrase "(without giving effect to any
losses)" after the date "June 30, 1997" in the third line thereof.
3. WAIVER. By their execution hereof, the Banks hereby confirm that
the waivers set forth in that certain waiver letter dated March 5, 1998 to
the Company have become permanent.
4. REPRESENTATIONS AND WARRANTIES. The Company represents and warrants
to the Agent and the Banks that, on and as of the date hereof, and after
giving effect to this First Amendment;
4.1 AUTHORIZATION. The execution, delivery and performance by the
Company of this First Amendment has been duly authorized by all necessary
corporate action, and this First Amendment has been duly executed and
delivered by the Company.
4.2 BINDING OBLIGATION. This First Amendment constitutes the
legal, valid and binding obligations of the Company, enforceable against it
in accordance with its terms, except as enforceability may be limited by
applicable bankruptcy, insolvency, or similar laws
-7-
<PAGE>
affecting the enforcement of creditors' rights generally or by equitable
principles relating to enforceability.
4.3 NO LEGAL OBSTACLE TO AMENDMENT. The execution, delivery and
performance of this First Amendment will not (a) contravene the Organization
Documents of the Company; (b) constitute a breach or default under any
contractual restriction or violate or contravene any law or governmental
regulation or court decree or order binding on or affecting the Company which
individually or in the aggregate does or could reasonably be expected to have
a Material Adverse Effect; or (c) result in, or require the creation or
imposition of, any Lien on any of the Company's properties. No approval or
authorization of any governmental authority is required to permit the
execution, delivery or performance by the Company of this First Amendment, or
the transactions contemplated hereby.
4.4 INCORPORATION OF CERTAIN REPRESENTATIONS. After giving effect
to the terms of this First Amendment, the representations and warranties of
the Company set forth in Article V of the Credit Agreement are true and
correct in all respects on and as of the date hereof as though made on and as
of the date hereof, except as to such representations made as of an earlier
specified date.
4.5 DEFAULT. Taking into account the effectiveness of the waiver
letter referenced in Section 3 hereof, no Default or Event of Default under
the Credit Agreement has occurred and is continuing.
5. CONDITIONS, EFFECTIVENESS. The effectiveness of this First
Amendment shall be subject to the compliance by the Company with its
agreements herein contained, and to the delivery of the following to Agent in
form and substance satisfactory to Agent:
5.1 AUTHORIZED SIGNATORIES. A certificate, signed by the
Secretary or an Assistant Secretary of the Company and dated the date of this
First Amendment, as to the incumbency of the person or persons authorized to
execute and deliver this First Amendment and any instrument or agreement
required hereunder on behalf of the Company.
5.2 AUTHORIZING RESOLUTIONS. A certificate, signed by the
Secretary or an Assistant Secretary of the Company and dated the date of this
First Amendment, as to the resolutions of the Company's board of directors
authorizing the transactions contemplated by this First Amendment.
5.3 AMENDMENT FEE. Payment to the Agent, (i) for the PRO RATA
benefit of each Bank executing this First Amendment on or before 2:00 p.m.,
Pacific time, on April 6, 1998, of an amendment fee in an amount equal to
.075% of the aggregate amount of the Commitments held by the Banks that have
executed this First Amendment and (ii) for the PRO RATA benefit of each Bank
that delivered a written commitment to execute this First Amendment by 4:00
p.m., Pacific time, on or before March 27, 1998, an additional fee in an
amount equal to .075% of the
-8-
<PAGE>
aggregate amount of the Commitments held by the Banks that delivered such
written commitments.
5.4 OTHER EVIDENCE. Such other evidence with respect to the
Company or any other person as the Agent or any Bank may reasonably request
to establish the consummation of the transactions contemplated hereby, the
taking of all corporate action in connection with this First Amendment and
the Credit Agreement and the compliance with the conditions set forth herein.
6. MISCELLANEOUS.
6.1 EFFECTIVENESS OF THE CREDIT AGREEMENT AND THE NOTES. Except
as hereby expressly amended, the Credit Agreement and the Notes shall each
remain in full force and effect, and are hereby ratified and confirmed in all
respects on and as of the date hereof.
6.2 WAIVERS. This First Amendment is limited solely to the
matters expressly set forth herein and is specific in time and in intent and
does not constitute, nor should it be construed as, a waiver or amendment of
any other term or condition, right, power or privilege under the Credit
Agreement or under any agreement, contract, indenture, document or instrument
mentioned therein; nor does it preclude or prejudice any rights of the Agent
or the Banks thereunder, or any exercise thereof or the exercise of any other
right, power or privilege, nor shall it require the Majority Banks to agree
to an amendment, waiver or consent for a similar transaction or on a future
occasion, nor shall any future waiver of any right, power, privilege or
default hereunder, or under any agreement, contract, indenture, document or
instrument mentioned in the Credit Agreement, constitute a waiver of any
other right, power, privilege or default of the same or of any other term or
provision.
6.3 COUNTERPARTS. This First Amendment may be executed in any
number of counterparts, and all of such counterparts taken together shall be
deemed to constitute one and the same instrument. This First Amendment shall
not become effective until the Company, the Agent and the Majority Banks
shall have signed a copy hereof and the same shall have been delivered to the
Agent.
6.4 GOVERNING LAW. This First Amendment shall be governed by and
construed in accordance with the laws of the State of California.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment
to be duly executed and delivered as of the date first written above.
FOUNDATION HEALTH SYSTEMS, INC.
[/s/ SIGNATURE]
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION,
as Administrative Agent
[/s/ SIGNATURE]
[NOTE: Signature blocks for
other Banks and Schedules are
not included with this copy]
-10-
<PAGE>
Exhibit 10.65
PURCHASE AGREEMENT
PURCHASE AGREEMENT, dated as of May 5, 1998 (this "AGREEMENT"), by
and between Foundation Health Corporation, a Delaware corporation ("SELLER"),
and Superior National Insurance Group, Inc., a Delaware corporation
("PURCHASER").
WHEREAS, Seller is the owner of all of the outstanding shares (the
"SHARES") of capital stock of Business Insurance Group, Inc., a Delaware
insurance holding company (the "COMPANY"), whose principal assets are all of
the capital stock of each of California Compensation Insurance Company, a
California stock insurance company ("CALCOMP"), Business Insurance Company, a
Delaware stock insurance company ("BIC"), Combined Benefits Insurance
Company, a California stock insurance company ("CBIC") and Commercial
Compensation Insurance Company, a New York stock insurance company ("CCIC",
and together with CalComp, BIC and CBIC, taken as a whole, the "INSURANCE
SUBSIDIARIES", and together with the Company, the "SELLER SUBSIDIARIES");
WHEREAS, the Seller Subsidiaries have the right to acquire the
reinsurance policy described on Exhibit A (the "REINSURANCE AGREEMENT") and a
condition to the obligations of the Purchaser to consummate the transactions
contemplated hereby is that the Seller Subsidiaries shall have entered into
the Reinsurance Agreement;
WHEREAS, Purchaser desires to purchase from Seller, and Seller
desires to sell to Purchaser, all of the Shares of the Company, and by that
means, the ownership of the Seller Subsidiaries, subject to the terms and
conditions of this Agreement;
WHEREAS, Seller intends, prior to the Closing (as hereinafter
defined), to cause the Company to dividend or otherwise distribute all of the
capital stock of each of Foundation Health Medical Resource Management, d/b/a
Reviewco ("REVIEWCO"), Foundation Integrated Risk Management Solutions,
Incorporated, d/b/a FIRM Solutions ("FIRMS") and Axis Integrated Resources,
Inc. ("AXIS"), each a wholly owned subsidiary of the Company (collectively,
the "EXCLUDED ASSETS") to one or more other Affiliates of Seller;
<PAGE>
WHEREAS, contemporaneous with the Closing (i) Purchaser, the
Company and Reviewco will enter into a long-term service agreement consistent
with the terms of Exhibit B-1 (e.g., medical bill review, PPO utilization and
certain managed care services), (ii) Purchaser, the Company and FIRMS will
enter into a long-term service agreement consistent with the terms of Exhibit
B-2 (e.g., claim negotiation and review services), (iii) Purchaser, the
Company and Axis will enter into a long-term service agreement consistent
with the terms of Exhibit B-3 (e.g., recruitment of employees and placement
of temporary workers services) and (iv) Purchaser, the Company and Foundation
Health Systems, Inc. ("FHS"), will enter into a term sheet setting forth the
terms of a transitional service agreement in the form of Exhibit B-4 (e.g.,
transitional corporate administrative services) (collectively, the "SERVICE
AGREEMENTS");
WHEREAS, Seller holds certain promissory notes, dated May 30, 1996
and August 9, 1996 issued by the Company in the current combined principal
amount of $121,250,000 plus all accrued and unpaid interest thereon (the
"INTERCOMPANY NOTE"), which will be satisfied in connection with the sale of
the Shares;
WHEREAS, certain stockholders of Purchaser, including certain of
the executive officers and directors of the Purchaser and Insurance Partners,
L.P., Insurance Partners Offshore (Bermuda), L.P. and certain of their
affiliates have entered into Voting Agreements, dated the date hereof in the
forms of Exhibit C-1-C-2 (the "VOTING AGREEMENTS"), whereby such stockholders
have agreed under the terms thereof to vote all of their shares of common
stock of Purchaser in favor of all matters that require stockholder approval
in order to consummate the transactions contemplated hereby; and
WHEREAS, Purchaser and Seller desire to treat the sale of the
Shares as a sale of the Seller Subsidiaries' assets for purposes of Federal
income taxation and to make an election under Section 338(h)(10) of the
Internal Revenue Code of 1986, as amended (the "CODE") with respect to the
Company and each of the Insurance Subsidiaries.
NOW, THEREFORE, in consideration of the foregoing and the
representations, warranties, covenants and agreements set forth herein, and
other good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged, the parties, intending to be legally bound hereby,
agree as follows:
2
<PAGE>
ARTICLE I
PURCHASE AND SALE
SECTION 1.1 PURCHASE AND SALE. Upon the terms and subject to
the conditions set forth in this Agreement, at the Closing, Seller shall
sell, assign, transfer and deliver to Purchaser, and Purchaser shall purchase
from Seller, the Shares, free and clear of all options, pledges, security
interests, liens or other encumbrances or restrictions on voting or transfer
("ENCUMBRANCES"), other than restrictions imposed by Federal or state
securities laws.
SECTION 1.2 PURCHASE PRICE. On the Closing Date (as hereinafter
defined) and subject to the terms and conditions set forth in this Agreement,
Seller shall deliver a certificate or certificates representing the Shares
duly endorsed in blank or accompanied by stock powers duly executed in blank
and, in consideration of the sale, assignment, transfer and delivery of the
Shares, Purchaser shall pay to Seller an amount equal to $280,000,000 less
the cost of the Reinsurance Agreement (the "PURCHASE PRICE") by wire transfer
of immediately available funds to an account or accounts designated by
Seller. The Intercompany Note will be settled prior to Closing. Interest
accrued prior to Closing on the Intercompany Note may continue to be paid to
Seller consistent with past practices. All accrued but unpaid interest on
the Intercompany Note as of the Closing Date will be settled pursuant to
Section 4.9.
SECTION 1.3 CLOSING.
(a) The sale and purchase of the Shares contemplated by this
Agreement shall take place at a closing (the "CLOSING") to be held at the
offices of Riordan & McKinzie in Los Angeles at 8:00 a.m. local time on a
date as soon as practical following the satisfaction or waiver of all
conditions to the obligations of the parties set forth in Article VI, but in
no event later than September 15, 1998 (or October 15, 1998, in the event
Purchaser has commenced its common stock rights offering contemplated by the
Financing Agreements), or at such other place or at such other time or on
such other date as Seller and Purchaser mutually agree on in writing (the day
on which the Closing takes place being the "CLOSING DATE").
(b) At the Closing, Seller shall deliver or cause to be delivered
to Purchaser (i) stock certificates evidencing the Shares duly endorsed in
blank or accompanied by stock powers duly executed in blank, (ii) duly
executed Service
3
<PAGE>
Agreements, (iii) a duly executed Reinsurance Agreement and (iv) all other
previously undelivered certificates and other documents required to be
delivered by Seller to Purchaser at or prior to the Closing Date in
connection with the transactions contemplated hereby.
(c) At the Closing, Purchaser shall deliver to Seller (i) the
Purchase Price by wire transfer in immediately available funds to an account
or accounts designated by Seller, (ii) duly executed Service Agreements and
(iii) all other previously undelivered certificates and other documents
required to be delivered by Purchaser to Seller at or prior to the Closing
Date in connection with the transactions contemplated hereby.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller represents and warrants to Purchaser as follows:
SECTION 2.1 ORGANIZATION. Seller and each Seller Subsidiary is
a corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation or organization and has all
requisite power and authority to own, lease and operate its properties and to
carry on its business as it is now being conducted. Seller and each Seller
Subsidiary is duly qualified or licensed to do business as a foreign
corporation or other entity and is in good standing in each jurisdiction in
which the nature of the business conducted by it makes such qualification or
licensing necessary. Seller has made available to Purchaser a complete and
correct copy of each of the articles or certificate of incorporation, bylaws,
certificate of formation, operating agreement or similar organizational
documents of Seller and each Seller Subsidiary, as currently in effect. As
used in this Agreement, "SELLER MATERIAL ADVERSE EFFECT" means any material
adverse change in, or material adverse effect on, the business, financial
condition or operations of the Seller Subsidiaries, taken as a whole;
PROVIDED, HOWEVER, that, the effects of changes that are generally applicable
to (i) changes resulting from market fluctuations in the value of the Seller
Subsidiaries' investment portfolio and (ii) the commutation of the Agreement
of Reinsurance No. 8382 and the Agreement of Reinsurance No. 8429, each
between the Seller Subsidiaries and General Reinsurance Corporation, if
completed prior to Closing, shall be excluded from the determination of
Seller Material Adverse Effect; and PROVIDED, FURTHER, that any adverse
effect on the Seller Subsidiaries resulting from
4
<PAGE>
the execution of this Agreement and the announcement of this Agreement and
the transactions contemplated hereby shall also be excluded from the
determination of Seller Material Adverse Effect.
SECTION 2.2 CAPITALIZATION. Section 2.2 of the written
statement delivered by Seller to Purchaser at or prior to the execution of
this Agreement (the "DISCLOSURE SCHEDULE") sets forth the authorized, issued
and outstanding capital stock of each Seller Subsidiary. All the outstanding
shares of capital stock of the Seller Subsidiaries are duly authorized,
validly issued, fully paid, nonassessable and free of preemptive rights.
There are no existing (i) options, warrants, calls, subscriptions or other
rights, convertible securities, agreements or commitments of any character
obligating Seller or any Seller Subsidiary to issue, transfer or sell any
shares of capital stock or other equity interest in any Seller Subsidiary or
securities convertible into or exchangeable for such shares or equity
interests, (ii) contractual or other obligations of any Seller Subsidiary to
repurchase, redeem or otherwise acquire any capital stock of Seller or any
Seller Subsidiary or (iii) voting trusts or similar agreements or
understandings to which Seller or any Seller Subsidiary is a party with
respect to the voting of the capital stock of any Seller Subsidiary.
SECTION 2.3 OWNERSHIP OF STOCK. The Shares are owned by Seller
free and clear of all Encumbrances, other than restrictions imposed by
Federal and state securities laws. All of the issued and outstanding shares
of the stock of each of the Insurance Subsidiaries is owned by the Company
free and clear of all Encumbrances other than restrictions imposed by Federal
and state securities laws. Upon the consummation of the transactions
contemplated hereby, Purchaser will acquire title to the Shares, free and
clear of all Encumbrances, other than restrictions imposed by Federal and
state securities laws.
SECTION 2.4 AUTHORIZATION; VALIDITY OF AGREEMENT. Seller and
each Seller Subsidiary, as appropriate, has the power and authority to
execute and deliver this Agreement and all the agreements and documents
contemplated hereby, to carry out its obligations hereunder and thereunder,
and to consummate the transactions contemplated hereby and thereby. The
execution, delivery and performance by Seller and each Seller Subsidiary, as
appropriate, of this Agreement, and all the agreements and documents
contemplated hereby and thereby, and the consummation by it of the
transactions contemplated hereby and thereby, have been duly authorized by
all necessary corporate action, and no other corporate action on the part of
Seller or such Seller Subsidiary is necessary to authorize the execution and
delivery by Seller and such Seller Subsidiary as, appropriate, of this
Agreement and all the
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agreements and documents contemplated hereby and thereby and the consummation
by it of the transactions contemplated hereby and thereby. This Agreement
and each of the agreements and documents contemplated hereby has been duly
executed and delivered by Seller and the Seller Subsidiaries, as appropriate,
and (assuming due and valid authorization, execution and delivery hereof by
Purchaser) is a valid and binding obligation of Seller and the Seller
Subsidiaries, as appropriate, enforceable against Seller and the Seller
Subsidiaries, as appropriate, in accordance with its terms, except that (i)
such enforcement may be subject to applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereafter in effect
affecting creditors' rights generally and (ii) the remedy of specific
performance and injunctive and other forms of equitable relief may be subject
to equitable defenses and to the discretion of the court before which any
proceeding therefor may be brought.
SECTION 2.5 CONSENTS AND APPROVALS; NO VIOLATIONS. Except as
disclosed in Section 2.5 of the Disclosure Schedule and except for (a)
filings pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended (the "HSR ACT"), (b) approvals or consents of any court,
legislative, executive or regulatory authority or agency (a "GOVERNMENTAL
ENTITY") under insurance holding company laws of the states in which the
Seller Subsidiaries are domiciled or as may be otherwise required by law,
(c) applicable requirements under corporation or "blue sky" laws of various
states and (d) matters specifically described in this Agreement, neither the
execution, delivery or performance of this Agreement or any agreement or
document contemplated hereby by Seller or any Seller Subsidiary, as the case
may be, nor the consummation by Seller or any Seller Subsidiary, as the case
may be, of the transactions contemplated hereby or thereby will (i) violate
any provision of the articles or certificate of incorporation, bylaws or
other organizational documents of Seller or any Seller Subsidiary, (ii)
result in a violation or breach of, or constitute (with or without due notice
or lapse of time or both) a default (or give rise to any right of
termination, cancellation or acceleration) under, or result in the creation
of any lien, security interest, charge or encumbrances upon any of the
properties or assets of Seller or any Seller Subsidiary under (or result in
being declared void, voidable or without further binding effect) any of the
terms, conditions or provisions of any note, bond, mortgage, indenture,
lease, license, contract, agreement or other instrument, commitment or
obligation to which Seller or any Seller Subsidiary is a party or by which
any of them or any of their properties or assets may be bound, (iii) violate
any order, writ, judgment, injunction, decree, law, statute, rule or
regulation applicable to Seller, any Seller Subsidiary or any of their
properties or assets, (iv) require on the part of Seller or any Seller
Subsidiary any filing or registration with, notification to, or
authorization, consent or approval of, any Governmental Entity or (v) result
in a termination,
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loss or adverse modification of any license, permit, certificate or franchise
granted to, or otherwise held by, Seller or any Seller Subsidiary; except in
the case of clauses (ii) through (v) for such violations, breaches, defaults
or other events specified therein, which, or filings, registrations,
notifications, authorizations, consents or approvals the failure of which to
obtain, would (A) not have a Seller Material Adverse Effect and would not
materially adversely affect the ability of Seller to consummate the
transactions contemplated by this Agreement or (B) become applicable as a
result of the business or activities in which Purchaser is or proposes to be
engaged or as a result of any acts or omissions by, or the status of any
facts pertaining to, Purchaser.
SECTION 2.6 FINANCIAL STATEMENTS.
(a) Seller has delivered to Purchaser the unaudited consolidated
balance sheets of the Seller Subsidiaries as of December 31, 1997, and the
related unaudited consolidated statements of income for each of the two years
in the period ended December 31, 1997 (collectively, the "FINANCIAL
STATEMENTS"). Except as set forth in Section 2.6 of the Disclosure Schedule,
(i) the Financial Statements have been derived from the books and records of
the Seller Subsidiaries and (ii) (A) the unaudited consolidated balance
sheets included in the Financial Statements present fairly in all material
respects, the financial position of the Seller Subsidiaries as of the
respective dates thereof, and (B) the other related unaudited statements of
income present fairly, in all material respects, the results of their
operations for the periods therein specified, in each case prepared in
accordance with United States Generally Accepted Accounting Principles
("GAAP"), except for the absence of footnote disclosures, Statements of Cash
Flows and Statements of Changes in Stockholders' Equity, all of which are
required under GAAP.
(b) Seller has delivered to Purchaser copies of audited statutory
financial statements for each Insurance Subsidiary as of the year ended
December 31, 1997, prepared in conformity with accounting practices
prescribed or permitted by the respective state of domicile for each
Insurance Subsidiary (collectively, the "STAT FINANCIAL STATEMENTS"). Each
of the balance sheets included in the STAT Financial Statements fairly
presents in all material respects the financial position of the applicable
Seller Subsidiary as of December 31, 1997 and each statement of operations
included in the STAT Financial Statements fairly presents in all material
respects the results of operations of the applicable Insurance Subsidiary for
the period therein set forth, in each case in accordance with statutory
accounting practices prescribed or permitted by the respective state of
domicile.
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(c) Notwithstanding any other provision of this Agreement
(including Sections 2.6 and 2.7), Seller makes no representation or warranty
with respect to (i) the items set forth in Section 2.6 of the Disclosure
Schedule (the "LISTED ITEMS") or (ii) the reserves of the Seller Subsidiaries
for losses or loss adjustment expenses (including, without limitation,
whether such reserves or liabilities are adequate or sufficient). Purchaser
acknowledges that nothing in this Agreement (including Sections 2.6 and 2.7)
is intended to, or shall be construed to, provide a guaranty of the adequacy
of (i) the Listed Items or (ii) the loss and loss adjustment expense reserves
of Seller as shown in the Financial Statements or the STAT Financial
Statements.
SECTION 2.7 NO UNDISCLOSED LIABILITIES. Except as disclosed in
Section 2.7 of the Disclosure Schedule and as set forth in Section 2.6(c)
above and except (a) for liabilities and obligations incurred in the ordinary
course of business, consistent with past practices, after December 31, 1997,
(b) for liabilities and obligations disclosed in the Financial Statements or
the STAT Financial Statements and (c) for liabilities and obligations
incurred in connection with the transactions contemplated hereby or otherwise
as contemplated by this Agreement, since December 31, 1997, the Seller
Subsidiaries have not incurred any liabilities or obligations that would
constitute a Seller Material Adverse Effect.
SECTION 2.8 ABSENCE OF CERTAIN CHANGES. Except as (a) disclosed
in Sections 2.6 or 2.8 of the Disclosure Schedule or (b) contemplated by this
Agreement, since December 31, 1997, the Seller Subsidiaries have not (i)
suffered any change constituting a Seller Material Adverse Effect, (ii)
amended their articles or certificate of incorporation, bylaws or other
organizational documents, (iii) materially changed their accounting
principles, practices or methods, except as required by GAAP or applicable
law, (iv) suffered any event or change or taken any action that would have
violated Section 4.1(b) through (m) below if it had occurred or been taken
after the date hereof and (iv) the Company has not (x) split, combined or
reclassified the Shares or (y) declared or set aside or paid any dividend or
other distribution with respect to the Shares other than regular cash
dividends which have been declared consistent with past practice and set
forth in Section 2.8 of the Disclosure Schedule (excluding dividends or
distributions payments made to Seller Subsidiaries).
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SECTION 2.9 EMPLOYEE BENEFIT PLANS; ERISA.
(a) Section 2.9(a) of the Disclosure Schedule sets forth a list of
all material employee benefit plans, programs and agreements, (including but
not limited to plans described in Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), and all multiemployer
plans (as defined in Section 4001(a)(3) of ERISA maintained or contributed to
by the Seller Subsidiaries, or by any trade or business, whether or not
incorporated (an "ERISA AFFILIATE"), which together with the Seller
Subsidiaries, would be deemed a "single employer" within the meaning of
Section 414 of the Code for the benefit of employees, former employees and
directors of, and consultants of, and consultants to, the Seller Subsidiaries
("BENEFIT PLANS").
(b) With respect to each Benefit Plan, Seller has made available
to Purchaser complete copies of the plan documents (including all amendments
thereto) and, where applicable, the most recent summary plan description, all
other material employee communications and the most recent Internal Revenue
Service determination letter relating to such Benefit Plan.
(c) Each Benefit Plan has been operated and administered in all
material respects in accordance with its terms and applicable law, including,
without limitation, ERISA and the Code, except where the failure to so
administer such plan would not reasonably be expected to have a Seller
Material Adverse Effect.
(d) Except as disclosed in Section 2.9(d) of the Disclosure
Schedule, no Benefit Plan provides medical or death benefits with respect to
current or former employees of the Seller Subsidiaries beyond their
termination of employment other than (i) to the extent required by applicable
law, (ii) death benefits under any "pension plan" (as defined in Section
3(2) of ERISA) or (iii) benefits the full cost of which is borne by the
current or former employee (or his beneficiary).
(e) Except as set forth in Section 2.9(e) of the Disclosure
Schedule, all costs of administering and contributions required to be made to
each Benefit Plan under the terms of that Benefit Plan, ERISA, the Code or
any other applicable law have been timely made.
(f) No Benefit Plan is subject to Code Section 412.
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(g) The Internal Revenue Service has issued a favorable
determination letter with respect to each Benefit Plan that is intended to
qualify under Section 401(a) of the Code and to the knowledge of Seller, no
event has occurred (either before or after the date of the letter) that would
disqualify the plan.
(h) Except as set forth in Section 2.9(h) of the Disclosure
Schedule, to the knowledge of Seller, there are no investigations,
proceedings, or lawsuits, either currently in progress or expected to be
instituted in the future, relating to any Benefit Plan, by any administrative
agency, whether local, state, or federal.
(i) There are no pending or, to the knowledge of Seller,
threatened lawsuits or other claims (other than routine claims for benefits
under the plan and qualified domestic relations orders) against or involving
(i) any Benefit Plan or (ii) any Fiduciary of such plan (within the meaning
of Section 3(21)(A) of ERISA) brought on behalf of any participant,
beneficiary, or Fiduciary thereunder relating to any Benefit Plan.
(j) None of the Seller Subsidiaries have any intention or legally
binding commitment to create any additional Benefit Plan, or to modify or
change any existing Benefit Plan so as to increase benefits to participants
or the cost of maintaining the plan.
(k) Except as disclosed in Section 2.9(k) of the Disclosure
Schedule, none of the Benefit Plans or employment contracts with any of the
Seller Subsidiaries provide any benefits that become payable solely as a
result of the consummation of this transaction.
SECTION 2.10 LITIGATION. Except as disclosed in Section 2.10 of
the Disclosure Schedule, there is no action, suit, proceeding or, to the
knowledge of Seller or any Seller Subsidiary, investigation pending or, to
the knowledge of Seller or any Seller Subsidiary, action, suit, proceeding or
investigation threatened, involving the Seller Subsidiaries or any of their
assets or their officers or directors as such, or challenging the validity or
propriety of the transactions contemplated by this Agreement by or before any
Governmental Entity or by any third party that is reasonably likely to have a
Seller Material Adverse Effect. Except as disclosed in Section 2.10 of the
Disclosure Schedule, no material orders, decrees, awards, sanctions or
judgments exist against Seller or the Seller Subsidiaries, any of their
assets or their officers or directors as such, other than those applicable to
the industry as a whole in the jurisdiction where issued.
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SECTION 2.11 NO DEFAULT; COMPLIANCE WITH APPLICABLE LAWS.
(a) Except as disclosed in Section 2.11(a) of the Disclosure
Schedule, none of the Seller Subsidiaries is in default or violation of any
term, condition or provision of (i) its articles or certificates of
incorporation, bylaws or similar organizational documents, (ii) any of the
Material Agreements (as hereinafter defined) or (iii) any statute, law, rule,
regulation, judgment, decree, order, arbitration award, or licenses, permits,
consents, approvals and authorizations of any Governmental Entity ("PERMITS")
applicable to any Seller Subsidiary including, without limitation, laws,
rules and regulations relating to the environment, occupational health and
safety, employee benefits, wages, workplace safety, equal employment
opportunity and any unlawful discrimination, excluding from the foregoing
clauses (ii) and (iii), defaults or violations which would not have a Seller
Material Adverse Effect or which become applicable as a result of the
business or activities in which Purchaser is or proposes to be engaged or as
a result of any acts or omissions by, or the status of any facts pertaining
to, Purchaser. Except as set forth on Disclosure Schedule 2.11(a) hereto,
neither Seller nor any Seller Subsidiary has received any written notice
since January 1, 1996 from any Governmental Entity alleging any violation
described in clause (iii) or directing Seller or any Seller Subsidiary to
take any remedial action with respect to such law, ordinance or regulation
which in each case would have a Seller Material Adverse Effect.
(b) Each Insurance Subsidiary has been duly authorized by the
relevant state insurance regulatory authorities to issue the insurance
contracts that it is currently writing in the respective states in which it
conducts its business, with such authority listed state by state for each
Insurance Subsidiary in Section 2.11(b) of the Disclosure Schedule. Each
Insurance Subsidiary has all other material Permits necessary to conduct its
business in the manner and in the areas in which it is presently being
conducted by such Insurance Subsidiary, and all such material Permits are
valid and in full force and effect.
SECTION 2.12 TAXES. Except as disclosed in Section 2.12 of the
Disclosure Schedule:
(a) the Seller Subsidiaries have (i) timely filed or caused to be
filed all Tax Returns (as hereinafter defined) required to be filed by them
other than those Tax Returns the failure of which to file would not have a
Seller Material Adverse Effect, and all such returns were true, correct and
complete in all material respects
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when filed and (ii) paid or accrued (in accordance with GAAP) all material
Taxes (as hereinafter defined) shown to be due on such Tax Returns other than
such Taxes that are being contested in good faith by the Seller Subsidiaries;
(b) neither Seller nor the Seller Subsidiaries have received
written notice of any ongoing or pending nor to the knowledge of Seller or
the Seller Subsidiaries, there are no threatened federal, state, local or
foreign audits or examinations of any Tax Return of the Seller Subsidiaries
except a federal income tax examination which is currently in process for the
tax year ended June 30, 1996;
(c) there are no outstanding written requests, agreements,
consents or waivers to extend the statutory period of limitations applicable
to the assessment of any material Taxes or deficiencies against the Seller
Subsidiaries other than the six-month statute extension which results from
filing of federal tax returns by the extended due date;
(d) none of the Seller Subsidiaries is a party to an agreement
providing for the allocation or sharing of Taxes, except with its common
parent, FHS, which agreement will be terminated effective as of December 31,
1997; and
(e) there are no material statutory liens for Taxes upon the
assets of any Seller Subsidiary which are not provided for in the Financial
Statements, except liens for Taxes not yet due and payable and liens for
Taxes that are being contested in good faith.
(f) No assessment, audit or other proceeding by any taxing
authority is proposed, pending, or, to the knowledge of the Seller or the
Seller Subsidiaries, threatened with respect to any Taxes or Tax returns of
any of the Seller Subsidiaries.
(g) No consent to the application of Section 341(f)(2) of the Code
has been made or filed by or with respect to any of the Seller Subsidiaries
or any of their assets and properties.
(h) The Seller Subsidiaries have not taken any action that would
require an adjustment pursuant to Section 481 of the Code by reason of a
change in accounting method or otherwise.
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(i) There have not been, nor will there be from the date hereof
through and including the Closing Date, any payments, or any agreements to
make payments, which are contingent upon, or related to, the transactions
contemplated hereunder and which would be "excess parachute payments" under
Section 280G of the Code.
(j) The Seller Subsidiaries have not executed or entered into any
closing agreement pursuant to Section 7121 of the Code, or any predecessor
provisions thereof or any similar provision of state or other law with
respect to any period for which the statute of limitations has not expired.
"TAXES" shall mean any and all taxes, charges, fees, levies or
other assessments, including, without limitation, income, gross receipts,
excise, real or personal property, sales, withholding, social security,
occupation, use, service, service use, value added, license, net worth,
payroll, franchise, transfer and recording taxes, fees and charges, imposed
by the United States Internal Revenue Service or any taxing authority
(whether domestic or foreign including, without limitation, any state, local
or foreign government or any subdivision or taxing agency thereof (including
a United States possession)), whether computed on a separate, consolidated,
unitary, combined or any other basis; and such term shall include any
interest, penalties or additional amounts attributable to, or imposed upon,
or with respect to, any such taxes, charges, fees, levies or other
assessments. "TAX RETURN" shall mean any report, return, document,
declaration or other information or filing required to be supplied to any
taxing authority or jurisdiction (foreign or domestic) with respect to Taxes.
SECTION 2.13 PROPERTY. Except as set forth in Section 2.13 of
the Disclosure Schedule, each Seller Subsidiary has sufficient leaseholds or
rights to real property to conduct its respective businesses as currently
conducted in all material respects. Section 2.13 of the Disclosure Schedule
lists all facility leases and agreements or rights to use facilities to which
any of the Seller Subsidiaries is a party in any capacity. No notice of
default has been given to Seller or any Seller Subsidiary, there is no
existing default, and no conditions that, with notice or lapse of time, would
constitute a default by any party to any such agreements.
SECTION 2.14 INTELLECTUAL PROPERTY. Section 2.14 of the
Disclosure Schedule lists all material trademarks, copyrights and patents
owned or used by the Seller Subsidiaries in the conduct of their business,
and states all royalties or license fees the Seller Subsidiaries pay for
material proprietary rights used in any of their businesses. Except as
disclosed in Section 2.14 of the Disclosure Schedule, there are
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no pending or, to the knowledge of Seller or the Seller Subsidiaries,
threatened claims of which Seller or the Seller Subsidiaries have been given
written notice, by any person and neither Seller nor any Seller Subsidiary
has asserted a claim against any person with respect to any patents, patent
rights, trademarks, trademark rights, service marks, service mark rights,
trade names, trade name rights, copyrights, logos, assumed names and
applications therefor and any know-how, technology, trade secrets or other
proprietary information owned or used by the Seller Subsidiaries in their
respective operations as currently conducted (collectively, the "SELLER
INTELLECTUAL PROPERTY"). The Seller Subsidiaries have such ownership of or
such rights by license, lease or other agreement to Seller Intellectual
Property as are necessary to permit them to conduct their respective
operations as currently conducted, except where the failure to have such
rights would not have a Seller Material Adverse Effect. Except as set forth
in Section 2.14 of the Disclosure Schedule, to the knowledge of the Seller
and the Seller Subsidiaries, the Seller Subsidiaries have taken all
appropriate actions and made all appropriate applications and filings
pursuant to applicable laws to perfect or protect their interest in the
Seller Intellectual Property.
SECTION 2.15 CONTRACTS. Seller has delivered or listed in
Section 2.15 of the Disclosure Schedule and made available to Purchaser
copies of all written Material Agreements (as hereinafter defined). Except
as set forth in Section 2.15 of the Disclosure Schedule, each Material
Agreement is in full force and effect and, to the knowledge of Seller and the
Seller Subsidiaries, is valid and enforceable by the applicable Seller
Subsidiary in accordance with its terms. Except as set forth in Section 2.15
of the Disclosure Schedule, none of Seller Subsidiaries is in default in the
observance or the performance of any term or obligation to be performed by it
under any Material Agreement; to the knowledge of Seller there does not exist
any event that, with the giving of notice or the lapse of time or both, would
constitute a breach of or a default under any Material Agreement; and to the
knowledge of Seller, there have been no intentional waivers or releases of
any rights or remedies of any Seller Subsidiaries under any Material
Agreement except for such breaches, defaults or waivers the effect of which,
individually or in the aggregate, would not have a Seller Material Adverse
Effect. To the knowledge of Seller and the Seller Subsidiaries, no other
person is in default in the observance or the performance of any term or
obligation to be performed by it under any Material Agreement. As used in
this Agreement, "MATERIAL AGREEMENT(S)" shall mean each agreement,
arrangement, instrument, bond, commitment, franchise, indemnity, indenture,
lease, license or understanding to which any Seller Subsidiary is a party or
to which any Seller Subsidiary or any of its respective properties is subject
that (i) obligates any Seller Subsidiary to pay an amount in excess of
$150,000 in any twelve-month period
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beginning after December 31, 1997, (ii) provides for the extension of credit,
(iii) provides for a guaranty by any Seller Subsidiary of obligations of
others in excess of $150,000, (iv) constitutes an employment agreement or
personal service contract not terminable on less than sixty (60) days' notice
without penalty, (v) expressly limits, in any material respect, the ability
of any Seller Subsidiary to engage in any line of business, compete with any
person or expand the nature or geographic scope of its business, (vi) creates
a joint venture, (vii) since January 1, 1996, involved the acquisition or
disposition of a portion of the business or assets of any Seller Subsidiary
that provided for an aggregate purchase price in excess of $5,000,000 (other
than the sale of obsolete equipment or materials, in each case, in the
ordinary course of business) (the "DISPOSED BUSINESSES"), (viii) producer
agreements that the Insurance Subsidiaries have entered into with the ten
largest producers overall for the Insurance Subsidiaries taken as a whole and
(ix) all excess of loss, quota share and aggregate stop reinsurance
agreements and reinsurance assumed or fronting arrangements. Notwithstanding
the foregoing, the term "MATERIAL AGREEMENT(S)" does not include insurance
contracts (including runoff contracts, reinsurance (other than as provided in
clause (ix) above), retrocession agreements, surety agreements and financial
guaranties, structured annuities for settlement of claims, agreements entered
into with parties identified on Schedule M of the STAT Financial Statements,
incentive commission agreements and agent and broker agreements (other than
as provided in clause (viii) above)) entered into by the Seller Subsidiaries
in the ordinary course of the insurance business except as specifically
described above.
SECTION 2.16 LABOR MATTERS. Except as set forth in Section 2.16
of the Disclosure Schedule, (a) neither Seller nor any Seller Subsidiary is a
party to, or bound by, any collective bargaining agreement, contract or other
agreement or understanding with a labor union or labor organization, (b)
there is no unfair labor practice or labor arbitration proceeding pending or,
to the knowledge of Seller, threatened against Seller or the Seller
Subsidiaries, except for any such proceeding which would not have,
individually or in the aggregate, a Seller Material Adverse Effect and (c)
the Seller Subsidiaries are in material compliance with all applicable
regulations respecting employment practices, terms and conditions of
employment, wages and hours, equal employment opportunity, and the payment of
social security and similar taxes. Set forth in Section 2.16 of the
Disclosure Schedule is a list of all (i) employment contracts, (ii) severance
policies, (iii) compensation and bonus plans applicable to employees of the
Seller Subsidiaries and (iv) historic bonus and compensation practices
applicable to employees of the Seller Subsidiaries. Except as set forth in
Section 2.16 of the Disclosure Schedule, there is no material controversy
pending or, to the knowledge of Seller or the Seller Subsidiaries threatened
between
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the Seller Subsidiaries and any of their employees, and to the knowledge of
Seller or the Sellers Subsidiaries there are not facts that could reasonably
result in any such material controversy. The Seller Subsidiaries are not
liable for any claims for past due wages, bonuses or compensation or any
penalties for failure to pay such past due wages, bonuses or compensation.
SECTION 2.17 BROKERS OR FINDERS. Except for the fees payable to
Salomon Smith Barney and Shattuck Hammond Partners, Inc., which will be paid
by Seller, Seller represents, as to itself and the Seller Subsidiaries, that
no agent, broker, investment banker, financial advisor or other firm or
person is or will be entitled to any brokers' or finder's fee or any other
commission or similar fee in connection with any of the transactions
contemplated by this Agreement.
SECTION 2.18 TRANSACTIONS WITH RELATED PARTIES. Except as set
forth in Section 2.18 of the Disclosure Schedule or with respect to
inconsequential matters, no Affiliate of the Seller Subsidiaries has any
contract for services, borrowed or loaned money or other property with, or
made any material contractual or other claims on or against, any Seller
Subsidiary or has any interest in any property used by any Seller Subsidiary.
Seller has made available to Purchaser copies of all Forms B required to be
filed by the Seller Subsidiaries with insurance regulatory authorities in
calender year 1997.
SECTION 2.19 ENVIRONMENTAL MATTERS.
(a) DEFINITIONS. The following terms, when used in this
Section 2.19, shall have the following meanings:
(i) "SELLER SUBSIDIARIES" for purposes of this Section 2.19
includes (A) Seller, (B) the Seller Subsidiaries, (C) all affiliates of the
Seller Subsidiaries, and (D) all partnerships, joint ventures and other
entities or organizations in which any Seller Subsidiary was at any time
after January 1, 1993, or is a partner, joint venturer, member or
participant.
(ii) "RELEASE" means and includes any spilling, leaking,
pumping, pouring, emitting, emptying, discharging, injecting, escaping,
leaching, dumping or disposing into the environment of any Hazardous
Substance, and otherwise as defined in any Environmental Law.
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(iii) "HAZARDOUS SUBSTANCE" means any pollutants, contaminants
and any toxic, hazardous, infectious, carcinogenic, corrosive, ignitable
or flammable chemical, chemical compound, material or waste, whether
solid, liquid or gas, including asbestos, urea formaldehyde, PCB's,
radon gas, crude oil or any fraction thereof, all forms of natural gas,
petroleum products or by-products or derivatives, radioactive substance and
any other substance, material or waste that is subject to regulation,
control or remediation under any Environmental Law as hazardous or toxic.
(iv) "ENVIRONMENTAL LAWS" mean all laws, rules, regulations,
ordinances, orders or decrees as now in effect which regulate or relate to
the protection or clean-up of the environment, the use, treatment, storage,
transportation, generation, manufacture, processing distribution, handling
or release or threatened release of Hazardous Substances, the preservation
or protection of waterways, groundwater, drinking water, air, wildlife,
plants or other natural resources, or the health of persons, including
protection of the health of employees. Environmental Laws include, without
limitation, the Federal Water Pollution Control Act, Resource Conservation
& Recovery Act, Clean Water Act, Safe Drinking Water Act, Atomic Energy
Act, Occupational Safety and Health Act, Toxic Substances Control Act,
Clean Air Act, Comprehensive Environmental Response, Compensation and
Liability Act, Hazardous Materials Transportation Act and all analogous or
related federal, state or local statutes, laws, rules and regulations.
(v) "ENVIRONMENTAL CONDITIONS" mean the release into the
environment of any Hazardous Substance as a result of which any Seller
Subsidiary has or may become liable to any person or entity or by reason of
which any of the assets of any Seller Subsidiary may suffer or be subjected
to any encumbrance or lien.
(b) ENVIRONMENTAL REPRESENTATIONS. Except as set forth in
Section 2.19(b) of the Disclosure Schedule and except for claims which
individually or in the aggregate are not reasonably likely to have a Seller
Material Adverse Effect, each Seller Subsidiary is in compliance in all material
respects, with all Environmental Laws.
(c) NOTICE OF VIOLATION. Neither Seller nor any Seller Subsidiary
has received any written notice of alleged, actual or potential responsibility
for, or any written inquiry or written notice of investigation regarding (i) any
Release or threat-
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ened Release by any Seller Subsidiary or any Hazardous Substance at any
location, or (ii) an alleged violation of or non-compliance by any Seller
Subsidiary with the conditions of any permit required under any Environmental
Law or the provisions of any Environmental Law. Neither Seller nor any
Seller Subsidiary has received any written notice of any other claim, demand
or action by any person or entity alleging any actual or threatened injury or
damage to any person, entity, property, natural resource or the environment
arising from or relating to any Release or threatened Release by any Seller
Subsidiary of any Hazardous Substances.
(d) ENVIRONMENTAL CONDITIONS. There are no present or past
Environmental Conditions in any way relating to any Seller Subsidiary, the
business or the assets of any Seller Subsidiary, except for any Environmental
Conditions which individually or in the aggregate are not reasonably likely
to have a Seller Material Adverse Effect.
SECTION 2.20 YEAR 2000 COMPLIANCE. To the knowledge of Seller
and the Seller Subsidiaries, no Seller Subsidiary owns or uses any
application programs, databases, software or hardware (including distributed
systems and imbedded chips), the performance of which will be adversely
affected by dates after the commencement of the year 2000 ("YEAR 2000
MATTERS") except to the extent such adverse effects would not have a Seller
Material Adverse Effect. Set forth in Section 2.20 of the Disclosure Schedule
is a description of the Seller Subsidiaries' compliance program with respect
to Year 2000 Matters and a statement as to their progress in meeting such
program's compliance schedule and goals as of the date hereof.
SECTION 2.21 INSURANCE. Section 2.21 of the Disclosure Schedule
sets forth the insurance carriers and areas of coverage with respect to the
insurance policies of the Seller Subsidiaries.
SECTION 2.22 BANK ACCOUNTS. Section 2.22 of the Disclosure
Schedule sets forth a list of the Seller Subsidiaries' bank accounts, safe
deposit boxes, and related powers of attorney, and identifies all persons
authorized to draw thereon or have access thereto.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser represents and warrants to Seller as follows:
SECTION 3.1 ORGANIZATION. Purchaser is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation and has all requisite corporate power and
authority to own, lease and operate its properties and to carry on its
business as is now being conducted, except where the failure to be so
organized, existing and in good standing or to have such power and authority
would not have a Purchaser Material Adverse Effect (as hereinafter defined).
Purchaser is duly qualified or licensed to do business and is in good
standing in each jurisdiction in which the property owned, leased or operated
by it or the nature of the business conducted by it makes such qualification
or licensing necessary, except where the failure to be so duly qualified or
licensed and in good standing would not have a Purchaser Material Adverse
Effect. As used in this Agreement, "PURCHASER MATERIAL ADVERSE EFFECT" means
any material adverse change in, or material adverse effect on, the business,
financial condition or operations of Purchaser and its Subsidiaries, taken as
a whole; PROVIDED, HOWEVER, that any adverse effect on Purchaser and its
Subsidiaries resulting from the execution of this Agreement and the
announcement of this Agreement and the transactions contemplated hereby shall
also be excluded from the determination of Purchaser Material Adverse Effect.
SECTION 3.2 AUTHORIZATION; VALIDITY OF AGREEMENT; NECESSARY
ACTION. Subject to the approval of its stockholders, Purchaser has the
corporate power and authority to execute and deliver this Agreement and all
the agreements and documents contemplated hereby, and to consummate the
transactions contemplated hereby. The execution, delivery and performance by
Purchaser of this Agreement and all the agreements and documents contemplated
hereby, and the consummation of the transactions contemplated hereby, have
been duly authorized by all necessary corporate proceedings, subject to
stockholder approval by a majority of all stockholders entitled to vote, and
no other corporate action on the part of Purchaser is necessary to authorize
the execution and delivery by Purchaser of this Agreement and all the
agreements and documents contemplated hereby, and the consummation by it of
the transactions contemplated hereby. Stockholders holding or otherwise
controlling the right to vote not less than 41.8% of the outstanding voting
shares of the Purchaser have executed and delivered Voting Agreements to the
Seller. This Agreement and
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all the agreements and documents contemplated hereby, have been duly executed
and delivered by Purchaser and by certain of its stockholders as appropriate
(and assuming due and valid authorization, execution and delivery hereof by
Seller) is a valid and binding obligation of Purchaser and such stockholders,
as appropriate, enforceable against them in accordance with its terms, except
that (i) such enforcement may be subject to applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws, now or
hereafter in effect, affecting creditors' rights generally and (ii) the
remedy of specific performance and injunctive and other forms of equitable
relief may be subject to equitable defenses and to the discretion of the
court before which any proceeding therefor may be brought.
SECTION 3.3 CONSENTS AND APPROVALS; NO VIOLATIONS. Except as
set forth in Section 3.3 of the written statement delivered by Purchaser to
Seller at or prior to the execution of the Agreement (the "PURCHASER
DISCLOSURE SCHEDULE") and except for (a) filings pursuant to the HSR Act, (b)
approvals or consents of Governmental Entities under insurance holding
company laws of the states in which the Seller Subsidiaries are domiciled,
(c) filings required pursuant to the Securities Act of 1933, as amended, or
the Securities Exchange Act of 1934, as amended, (d) approval by Purchasers'
stockholders and (e) matters specifically described in this Agreement,
neither the execution, delivery or performance of this Agreement by Purchaser
nor the consummation by Purchaser of the transactions contemplated hereby
will (i) violate any provision of the certificate of incorporation, bylaws or
other organizational documents of Purchaser, (ii) result in a violation or
breach of, or constitute (with or without due notice or lapse of time or
both) a default (or give rise to any right of termination, cancellation or
acceleration) under, any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, lease, license, contract, agreement or other
instrument or obligation to which Purchaser or any of its Subsidiaries is a
party or by which any of them or any of their properties or assets may be
bound, (iii) violate any order, writ, judgment, injunction, decree, law,
statute, rule or regulation applicable to Purchaser, any of its Subsidiaries
or any of their properties or assets or (iv) require on the part of Purchaser
any filing or registration with, notification to, or authorization, consent
or approval of, any Governmental Entity except in the case of clauses (ii),
(iii) or (iv) for such violations, breaches or defaults which, or filings,
registrations, notifications, authorizations, consents or approvals the
failure of which to obtain would not have a Purchaser Material Adverse Effect
and would not materially adversely affect the ability of Purchaser to
consummate the transactions contemplated by this Agreement.
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SECTION 3.4 ACQUISITION FOR INVESTMENT. Purchaser is acquiring the
Shares solely for its own account and not with a view to any distribution or
other disposition of such Shares, and the Shares will not be transferred except
in a transaction registered or exempt from registration under the Securities Act
of 1933, as amended.
SECTION 3.5 FINANCING. Purchaser has (i) entered into a valid,
binding and enforceable stock purchase agreement and backup letter agreement
with the Zurich Centre Investments Ltd. (collectively, the "IP STOCK PURCHASE
AGREEMENT") with Insurance Partners, L.P. ("IP"), Insurance Partners Offshore
(Bermuda), L.P. ("IPB") and Capital Z Partners, Ltd. ("CAPITAL Z"), and (ii)
received a written "highly confident letter" from Donaldson, Lufkin & Jenrette
(together, the "FINANCING AGREEMENTS") for financing the consummation of the
transactions contemplated hereby. IP, IPB and Capital Z have sufficient
unencumbered funds unconditionally committed to fulfill their respective
obligations under the IP Stock Purchase Agreement. The proceeds for such
financing set forth in the Financing Agreements, together with Purchaser's cash
on hand as of the date hereof and as of the Closing Date, will be sufficient to
enable Purchaser to pay the full amount of the Purchase Price at the Closing.
True and complete copies of each of the Financing Agreements have been provided
to Seller by Purchaser.
SECTION 3.6 INVESTIGATION BY PURCHASER. In entering into this
Agreement, Purchaser:
(a) acknowledges that, except for the specific representations and
warranties of Seller contained in Article II, none of Seller, any Seller
Subsidiary, or any of their respective directors, officers, employees,
Affiliates, controlling persons, agents, advisors or representatives, makes or
shall be deemed to have made any representation or warranty, either express or
implied, as to the accuracy or completeness of any of the information
(including, without limitation, any reserve estimates, projections, forecasts or
other forward-looking information) provided or otherwise made available to
Purchaser or any of its directors, officers, employees, Affiliates, controlling
persons, agents, advisors or representatives (including, without limitation, in
any management presentations, information or offering memorandum, the actuarial
report entitled "An Actuarial Analysis of the Loss and Loss Adjustment Expense
Reserves of Business Insurance Group as of December 31, 1997," prepared by
Milliman & Robertson, Inc. (the "M&R REPORT"), supplemental information or other
materials or information with respect to any of the above); and
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(b) agrees, to the fullest extent permitted by law, that Seller and
its directors, officers, employees, Affiliates, controlling persons, agents,
advisors or representatives shall not have any liability or responsibility
whatsoever to Purchaser or any of its directors, officers, employees,
Affiliates, controlling persons, agents, advisors or representatives on any
basis in respect of the specific representations and warranties of Seller set
forth in Article II, except as and only to the extent expressly set forth herein
with respect to such representations and warranties and subject to the
limitations and restrictions contained herein.
SECTION 3.7 CAPITAL ADEQUACY; SOLVENCY. Purchaser represents that
immediately after the sale of the Shares and the other transactions contemplated
herein, Purchaser (and any successor corporation) will have a positive net worth
(calculated in accordance with GAAP) and will not be insolvent (as defined under
the federal Bankruptcy Code (the "BANKRUPTCY CODE") and in equity) and that the
sale of the Shares and other transactions contemplated hereby and any borrowing
by Purchaser in connection with such transactions will not have the effect of
hindering, delaying or defrauding any creditors of Purchaser (or any successor
corporation). Purchaser further represents that (A) upon consummation of the
sale of the Shares and within the meaning of Section 548 of the Bankruptcy Code,
the Seller Subsidiaries (and any successor corporations) will (i) have adequate
capitalization, (ii) not have an unreasonably small capital with respect to the
business or transactions engaged in or to be engaged in and (iii) not have
incurred debts that would be beyond the ability of Purchaser (or any successor
corporation) to pay as such debts mature and (B) the Purchase Price is a
reasonably equivalent value in exchange for the Shares.
ARTICLE IV
COVENANTS
SECTION 4.1 INTERIM OPERATIONS OF SELLER. Promptly upon the
execution of this Agreement, Seller agrees that Purchaser may place certain
senior executives, including Arnold Senter (the "INTERIM CONSULTING TEAM"), in
interim consulting positions at the Company and the Insurance Subsidiaries
pursuant to consulting arrangements which are reasonably acceptable to the
parties and consistent with the terms of this Agreement. The Seller agrees to
cause the Company and the Insurance Subsidiaries to take, or not take, such
actions as the Interim Consulting Team may reasonably direct with respect to (i)
the strategy and execution of the Seller Subsidiaries' underwriting,
reinsurance, claims handling and other operational
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functions, and (ii) the restructuring of certain asset positions, both in the
Seller Subsidiaries' investment portfolios and otherwise, each subject to
Seller's approval, which will not be unreasonably withheld. The Interim
Consulting Team will coordinate all of its activities under this Agreement
through Jay M. Gellert, B. Curtis Westen and Maurice A. Costa or their
designees. Notwithstanding any other provision of the Agreement, neither the
Seller, nor any of the Seller Subsidiaries, shall be obligated to commute any
insurance or reinsurance policy or otherwise take any action that may be
reasonably expected to cause any Governmental Entity to require Seller or any
of its Affiliates to make a capital contribution to the Seller Subsidiaries.
Absent the written approval of one of the Interim Consulting Team, Seller
covenants and agrees that, except (i) as contemplated by this Agreement
(including the distribution of the Excluded Assets) or (ii) as disclosed in
Section 4.1 of the Disclosure Schedule after the date hereof and prior to the
Closing Date:
(a) the business of the Seller Subsidiaries shall be conducted only
in the ordinary and usual course of business and shall not include any actions
inconsistent with the transactions contemplated hereby or by the agreements
contemplated hereunder;
(b) none of the Seller Subsidiaries will amend its articles or
certificate of incorporation, bylaws or similar organizational documents;
(c) the Company will not (i) split, combine or reclassify the Shares,
(ii) declare, set aside or pay any dividend or other distribution payable in
cash, stock or property with respect to the Shares, PROVIDED, that the Company
may dividend or otherwise distribute or take any other necessary action to allow
Seller to retain the Excluded Assets, (iii) issue or sell any additional shares
of, or securities convertible into or exchangeable for, or options, warrants,
calls, commitments or rights of any kind to acquire, the Shares or any capital
stock of the Company, or (iv) redeem, purchase or otherwise acquire directly or
indirectly any of its capital stock;
(d) none of the Seller Subsidiaries shall (i) adopt any new employee
benefit plan (including any stock option, stock benefit or stock purchase plan)
or amend any existing employee benefit plan in any material respect, except for
changes which are less favorable to participants in such plans or as may be
required by applicable law or (ii) increase any compensation or enter into or
amend any employment, severance, termination or similar agreement with any of
its present or future officers or directors, except for promotions in the
ordinary course of business consistent with past practices, normal merit
increases of five percent (5%) or less per
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annum in the ordinary and usual course of business and the payment of cash
bonuses to employees pursuant to and consistent with existing plans or
programs, with respect to which any necessary accruals have been made;
(e) none of the Seller Subsidiaries shall, except as may be required
or contemplated by this Agreement or in the ordinary and usual course of
business, consistent with prior practice, acquire, sell, lease or dispose of any
assets which, individually or in the aggregate, are material to the financial
position or results of operations of the affected Seller Subsidiary;
(f) none of the Seller Subsidiaries shall (i) incur or assume any
long-term or short-term debt or issue any debt securities except for borrowings
under existing lines of credit in the ordinary course of business consistent
with past practice, (ii) assume, guarantee, endorse or otherwise become liable
or responsible (whether directly, indirectly, contingently or otherwise) for the
material obligations of any other person except in the ordinary and usual course
of business consistent with past practice in an amount not material to the
affected Seller Subsidiary, (iii) make any loans, advances or capital
contributions to, or investments in, any other person other than in the ordinary
and usual course of business consistent with past practice, (iv) pledge or
otherwise encumber the Shares or any shares of any Insurance Subsidiary or (v)
mortgage or pledge any of its material assets, tangible or intangible, or create
or suffer to exist any material Encumbrance of any kind with respect to any such
asset;
(g) none of the Seller Subsidiaries shall (i) acquire (by merger,
consolidation or acquisition of stock or assets) any corporation, partnership or
other business organization or division thereof or any equity interest therein
(other than purchases of marketable securities in the ordinary course of
business), (ii) other than capital expenditures provided for in the 1998
capital expenditures budgets of the Seller Subsidiaries, which budgets have been
delivered or made available to Purchaser, authorize any new capital expenditure
or expenditures which, individually, is in excess of $150,000 or, in the
aggregate, are in excess of $500,000 or (iii) enter into or amend any contract,
agreement, commitment or arrangement providing for the taking of any action
which would be prohibited hereunder;
(h) none of the Seller Subsidiaries shall adopt a plan of complete or
partial liquidation or resolutions providing for or authorizing such liquidation
or a dissolution, merger, consolidation, restructuring, recapitalization or
other reorganization;
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(i) none of the Seller Subsidiaries shall materially change any of
the accounting methods or practices used by it unless required by GAAP,
statutory accounting practices or applicable law;
(j) none of the Seller Subsidiaries shall settle or compromise any
claim (including arbitration) or litigation, which after insurance reimbursement
involves an amount in excess of $500,000 or otherwise is material to the Seller
Subsidiaries taken as a whole, without the prior written consent of Purchaser,
which consent will not be unreasonably withheld;
(k) none of the Seller Subsidiaries shall make any payment, loan or
advance of any amount to or in respect of, or engage in the sale, transfer or
lease of any of its property or assets to, or enter into any contract with, any
Affiliate, except (i) in accordance with the terms of the agreements set forth
in Section 2.18 of the Disclosure Schedule, and (ii) in connection with Seller's
retention of the Excluded Assets and the owned real property, as contemplated by
this Agreement;
(l) none of the Seller Subsidiaries shall amend the terms of the (i)
Material Agreements, as disclosed in Section 2.15 of the Disclosure Schedule and
(ii) contracts, agreements or arrangements with any related party, as disclosed
in Section 2.18 of the Disclosure Schedule, to cause any change in the cost,
services being provided, or term of any such agreements, other than as
specifically contemplated by this Agreement;
(m) none of the Seller Subsidiaries shall cancel any indebtedness or
intentionally waive, release, grant or transfer any rights of substantial value
to the affected Seller Subsidiary, except in the ordinary course of business and
consistent with past practice, or forgive or waive any rights in connection with
any loans to its officers, directors or other related individuals; and
(n) neither Seller nor any Seller Subsidiary will authorize or enter
into an agreement to do any of the foregoing.
SECTION 4.2 ACCESS TO INFORMATION. Seller shall cause each Seller
Subsidiary to afford Purchaser's officers, employees, accountants, counsel and
other authorized representatives full and complete access during normal business
hours throughout the period prior to the Closing Date or the date of termination
of this Agreement, to its and its offices, properties, contracts, commitments,
books and records (including but not limited to Tax Returns related solely to
the Seller Subsid-
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iaries) and any report, schedule or other document filed or received by it
during such period pursuant to the requirements of Federal or state
securities laws and to use all reasonable efforts to cause its
representatives to furnish promptly to Purchaser such additional financial
and operating data and other information as to its businesses and properties
as Purchaser or its duly authorized representatives may from time to time
reasonably request and to make reasonably available the officers and
employees of each Seller Subsidiary to answer fully and promptly reasonable
questions put to them; PROVIDED, HOWEVER, that nothing herein shall require
Seller or the Seller Subsidiaries to disclose any information to Purchaser if
such disclosure would violate applicable laws or regulations of any
Governmental Entity. Unless otherwise required by law and until the Closing
Date, Purchaser will hold any such information which is nonpublic in
confidence in accordance with the provisions of the Confidentiality Agreement
between Seller and Purchaser, dated as of January 6, 1998 (the
"CONFIDENTIALITY AGREEMENT").
SECTION 4.3 TAX MATTERS.
(a) SECTION 338(h)(10) ELECTION; ALLOCATION OF "ADJUSTED GROSSED-UP
BASIS." Seller and Purchaser agree to elect under section 338(h)(10) of the
Code to treat the sale of the Shares as a sale by the Company of all of its
assets and a sale by the Insurance Subsidiaries of all their assets (the
"SECTION 338(h)(10) ELECTION") and shall make any such available election under
any substantially similar state or local law, if requested by Seller. As
reasonably requested by Seller, Purchaser shall take such actions as Seller
deems necessary to effect the Section 338(h)(10) Election (including, without
limitation, the timely filing of Internal Revenue Service Form 8023 (Corporate
Qualified Stock Purchase Elections).
(b) ALLOCATION. On or before the date that is 30 days after the
Closing Date, Purchaser shall provide to Seller a proposed allocation of the
Purchase Price for the deemed sale of assets resulting from the making of the
Section 338(h)(10) Election, setting forth the estimated fair market values of
the assets of each of the Company and the Insurance Subsidiaries. On or before
the date that is 60 days after the Closing Date, Seller and Purchaser shall
agree upon a final allocation of such purchase price (the "FINAL ALLOCATION").
Seller and Purchaser shall cooperate in developing the Final Allocation,
PROVIDED, HOWEVER, that Purchaser's allocation shall be presumed to be an
allocation based upon the fair market values of the Seller Subsidiaries and that
Seller shall have the burden of proof to demonstrate that such allocation is not
an appropriate allocation.
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(c) FORMS. On or before the date that is ten days before the Closing
Date, Seller shall provide to Purchaser drafts of all forms, together with all
drafts of required attachments thereto, other than allocation of the Purchase
Price, required for making the Section 338(h)(10) Election and any such
available election under any substantially similar state or local law if
requested by Seller (the "ELECTION FORMS"). On the Closing Date, Seller shall
deliver to Purchaser the Election Forms, properly executed by Seller or any
proper Affiliate of Seller. Seller and Purchaser shall cooperate in drafting
and making final the Election Forms, and any dispute with respect thereto shall
be resolved pursuant to Section 4.3(n). Seller shall be responsible for filing
the Election Forms with the proper taxing authorities, PROVIDED that Purchaser
shall be responsible for filing any Election Form that must be filed with its
Tax Returns.
(d) MODIFICATION; REVOCATION. Purchaser and Seller each agrees that
it shall not, and shall not permit any of its respective Affiliates to, take any
action to modify the Election Forms following the execution thereof, or to
modify or revoke the Section 338(h)(10) Election, or any such available election
under any substantially similar state or local law if requested by Seller,
following the filing of the Election Forms, without the written consent of
Purchaser or Seller, as the case may be.
(e) CONSISTENT TREATMENT. Purchaser and Seller shall, and shall
cause their respective Affiliates to, file all Tax Returns in a manner
consistent with the information contained in the Election Forms as filed and the
Final Allocation, unless otherwise required because of a change in applicable
tax law.
(f) EXPENSES RESULTING FROM SECTION 338(h)(10) ELECTIONS. Purchaser
and its Affiliates (including the Company and the Insurance Subsidiaries
following the Closing), on the one hand, and Seller and its Affiliates, on the
other hand, shall bear their respective administrative, legal and similar
expenses resulting from the making of the Section 338(h)(10) Election and any
such available elections under any substantially similar state or local law if
requested by Seller.
(g) TAX SHARING AGREEMENT. The tax sharing agreement between, among
others, each of the Seller Subsidiaries and its common parent, FHS, referenced
in Section 2.12(d) shall be terminated effective as of April 30, 1998. After
the Closing Date none of the Seller Subsidiaries, Seller, or any Affiliate of
Seller shall have any further rights or liabilities thereunder, except to the
extent stated on the balance sheet of the Seller Subsidiaries as of April 30,
1998 (using the Seller Subsidiaries' actual financial statements at and as of
March 31, 1998, together with projected
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April 30, 1998 results as provided by Salomon Smith Barney to the Purchaser),
with all amounts then due being paid as soon as such amounts are determined
but in no event later the Closing Date. This Agreement shall be the sole Tax
sharing agreement relating to any Seller Subsidiary for all Pre-Closing Tax
Periods.
(h) ACTIONS OUT OF THE ORDINARY COURSE. If Purchaser causes or
permits the Seller Subsidiaries or any Affiliate of Purchaser to take any action
on the Closing Date other than actions contemplated by this Agreement or actions
in the ordinary course of business, including but not limited to the
distribution of any dividend or the effectuation of any redemption, Purchaser
shall indemnify Seller for any resulting tax liability from such action.
(i) TAX INDEMNITY. (i) Notwithstanding any other provisions of
this Agreement, from and after the Closing Date, Seller shall be liable to,
and shall indemnify and hold harmless, Purchaser and the Seller Subsidiaries
against the following Taxes, but only for Taxes in excess of the sum of Taxes
paid prior to December 31, 1997, Taxes accrued as current Taxes payable or
reserves on the December 31, 1997 financial balance sheet, and Taxes accrued
or paid after December 31, 1997 in the ordinary course of business, in
accordance with past practice, with respect to business operations for the
period of January 1, 1998 through the Closing Date: (A) Taxes imposed on the
Seller Subsidiaries with respect to taxable years or periods ending on or
before the Closing Date; (B) with respect to taxable years or periods
beginning before the Closing Date and ending after the Closing Date, Taxes
imposed on the Seller Subsidiaries which are allocable, pursuant to such
clause (ii) hereof, to the portion of such taxable year or period ending on
the Closing Date (an "INTERIM PERIOD") (Interim Periods and any taxable years
or periods that end on or prior to the Closing Date being referred to
collectively hereinafter as "PRE-CLOSING PERIODS"); (C) Taxes imposed on any
member of any affiliated group with which the Seller and the Seller
Subsidiaries or any Seller Subsidiary files or has filed a Tax Return on a
consolidated, combined or unitary basis for a taxable year or period
beginning before the Closing Date; (D) Taxes required to be paid or
reimbursed by the Seller under subsection (i)(iii) hereof (to the extent such
Taxes have not been paid by Seller); (E) Taxes or additional Taxes imposed on
the Purchaser or the Seller Subsidiaries as a result of a breach of the
representations and warranties set forth in Section 2.12 of this Agreement or
of the covenants contained in this subsection (i) without duplication; or (F)
Taxes or other payments required to be made after the date hereof by the
Seller Subsidiaries to any party under any Tax sharing, indemnity or
allocation agreement (whether or not written).
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(ii) In order to apportion appropriately any Taxes relating to
any taxable year or period that includes an Interim Period, the parties
hereto shall, to the extent permitted under applicable law, elect with the
relevant Tax authority to treat, for all purposes, the Closing Date as the
last day of the taxable year or period of the Seller Subsidiaries, and such
Interim Period shall be treated as a short taxable year and a Pre-Closing
Period for purposes of this subsection (i). In any case where applicable
law does not permit the Seller Subsidiaries to treat the Closing Date as
the last day of the taxable year or period of the Seller Subsidiaries with
respect to Taxes that are payable with respect to an Interim Period, the
portion of any such Tax that is allocable to the portion of the Interim
Period ending on the Closing Date shall be:
(x) in the case of Taxes that are either (1)
based upon or related to income or receipts, or (2) imposed
in connection with any sale or other transfer or assignment
of property (real or personal, tangible or intangible),
deemed equal to the amount which would be payable if the
taxable year or period ended on the Closing Date (except
that, solely for purposes of determining the marginal tax
rate applicable to income or receipts during such period in
a jurisdiction in which such tax rate depends upon the level
of income or receipts, annualized income or receipts may be
taken into account, if appropriate, for an equitable sharing
of such Taxes); and
(y) in the case of Taxes not described in
subparagraph (x) above that are imposed on a period basis
and measured by the level of any item, deemed to be the
amount of such Taxes for the entire period (or, in the case
of such Taxes determined on an arrears basis, the amount of
such Taxes for the immediately preceding period) multiplied
by a fraction the numerator of which is the number of
calendar days in the Interim Period ending on the Closing
Date and the denominator of which is the number of calendar
days in the entire relevant period.
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(iii) The Seller shall be liable for and shall pay all
applicable sales, transfer, recording, deed, stamp and other similar taxes,
including, without limitation, any real property transfer or gains taxes
(if any), resulting from the consummation of the transactions contemplated
by this Agreement.
(j) PURCHASER AND SELLER SUBSIDIARIES INDEMNIFICATION. Except as
otherwise provided in Section 4.3(i), Purchaser and the Seller Subsidiaries
shall be liable for, and shall indemnify and hold Seller and any of its
Affiliates harmless against, (i) any and all Taxes imposed on the Seller
Subsidiaries relating or apportioned to any taxable year or portion thereof
ending after the Closing Date and (ii) the loss of any tax benefit solely as a
result of Purchaser's failure to take any action required under Section 4.3
necessary to effectuate the filing of the Section 338(h)(10) Election.
(k) REFUNDS OR CREDITS. At the reasonable request of Seller,
Purchaser shall cooperate, or cause the Seller Subsidiaries to cooperate, with
Seller in obtaining any refunds or credits (including interest thereon), other
than any refunds or credits on the December 31, 1997 financial statements of the
Seller Subsidiaries, relating to Taxes for which Seller may be liable under
Section 4.3(i); PROVIDED, HOWEVER, that Purchaser shall not be required to file
such claims for refund to the extent such claims for refund would have a
material adverse effect in future periods or to the extent the claims for refund
relate to a carryback of an item. Purchaser shall be entitled to all other
refunds and credits of Taxes; PROVIDED, HOWEVER, it will not allow the amendment
of any Tax Return relating to any Taxes for a period ending on or prior to the
Closing Date or the carryback of an item to a period ending prior to Closing
without Seller's consent. For purposes of this Section 4.3(k), the terms
"refund" and "credit" shall include a reduction in Taxes and the use of an
overpayment of Taxes as an audit or other Tax offset. Receipt of a refund shall
occur upon the filing of a return or an adjustment thereto using such reduction,
overpayment or offset, or upon the receipt of cash.
(l) MUTUAL COOPERATION. As soon as practicable, but in any event
within 30 days after either Seller's or Purchaser's request, Purchaser shall, or
shall cause the Seller Subsidiaries to, deliver to Seller or Seller shall
deliver to Purchaser, as the case may be, such information and other data
relating to the Tax Returns and Taxes of the Seller Subsidiaries and shall
provide such other assistance as may reasonably be requested, to cause the
completion and filing of all Tax Returns or to respond to audits by any taxing
authorities with respect to any Tax Returns or taxable periods or to otherwise
enable Seller, Purchaser or the Seller Subsidiaries to satisfy
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their accounting or Tax requirements. For a period of five years from and
after the Closing, Purchaser and Seller shall, and shall cause their
Affiliates to, maintain and make available to the other party, on such other
party's reasonable request, copies of any and all information, books and
records referred to in this Section 4.3(l). After such five-year period,
Purchaser or Seller may dispose of such information, books and records,
PROVIDED that prior to such disposition, Purchaser or Seller shall give the
other party the opportunity to take possession of such information, books and
records.
(m) CONTESTS. Whenever any taxing authority asserts a claim, makes
an assessment or otherwise disputes the amount of Taxes for which Seller is or
may be liable under this Agreement, Purchaser shall, if informed of such an
assertion, inform Seller within ten business days, and Seller shall have the
right to control any resulting proceedings and to determine whether and when to
settle any such claim, assessment or dispute to the extent such proceedings or
determinations affect the amount of Taxes for which Seller may be liable under
the Agreement except the Purchaser shall have the right to consent, which
consent will not be unreasonably withheld, to any settlement to the extent such
proceedings or settlement materially affect the amount of Taxes imposed on the
Seller Subsidiaries for periods beginning after the Pre-Closing Periods. If
Purchaser fails to provide such notice and such failure shall materially
prejudice Seller's ability to defend such assessment, then Seller's obligation
under Section 4.3(i) shall be null and void with regard to such assessment.
Whenever any taxing authority asserts a claim, makes an assessment or otherwise
disputes the amount of Taxes for which Purchaser is liable under this Agreement,
Purchaser shall have the right to control any resulting proceedings and to
determine whether and when to settle any such claim, assessment or dispute,
except that Seller shall have the right to consent, which consent shall not be
unreasonably withheld, to any settlement to the extent such proceedings
materially affect the amount of Taxes for which Seller is or may be liable under
this Agreement.
(n) RESOLUTION OF DISAGREEMENTS BETWEEN SELLER AND PURCHASER. If
either Seller or Purchaser disagrees as to the amount of Taxes for which it may
be liable under this Agreement or Seller and Purchaser are unable to agree as to
the Final Allocation, the parties shall promptly consult each other to resolve
such dispute following the receipt of written notice from either party to begin
such consultation (the "CONSULTATION NOTICE"). If any such point of
disagreement cannot be resolved within 60 days of the date of the Consultation
Notice, or in the case of the Final Allocation, within the 60-day period
required by Section 4.3(b), as appropriate, Seller and Purchaser shall within
ten days after such period jointly select a nationally recognized independent
public accounting or law firm which has not, except pursuant
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to this Section 4.3(n), performed any services since January 1, 1993, for
Seller or Purchaser or their respective Affiliates, to act as an arbitrator
to resolve, within 60 days after its selection, all points of disagreement
concerning tax matters with respect to this Agreement and presented to such
accounting firm at the time of its selection. If the parties cannot agree on
the selection of an accounting or law firm within such ten-day period, they
shall cause their respective accounting firms to select such firm within five
business days of the end of such ten-day period. Any such resolution shall
be conclusive and binding on Purchaser and Seller. The fees of such
independent public accountants or law firm shall be divided equally between
Seller and Purchaser. Seller and Purchaser shall (and shall cause the Seller
Subsidiaries to) provide to such firm full cooperation. Such firm shall be
instructed to reach its conclusion regarding the dispute within 60 days of
its selection.
(o) SURVIVAL OF OBLIGATIONS. The obligations of the parties set
forth in Section 4.3 shall be unconditional and absolute, and shall remain in
effect until the expiration of the applicable statutes of limitations.
SECTION 4.4 EMPLOYEE MATTERS.
(a) As of the Closing Date, Purchaser shall cause the Seller
Subsidiaries to continue to employ all persons who, immediately prior to the
Closing Date, were employees ("COMPANY EMPLOYEES") of the Seller Subsidiaries on
terms consistent with Purchaser's employment policies and benefit plans in
general effect at that time. Such employment may be with Purchaser, its
affiliates or with third party employee leasing companies, as determined by
Purchaser and shall be on terms mutually satisfactory to each Company Employee
and Purchaser. With respect to any employee benefits that are provided to
Company Employees under any of Purchaser's employee benefit plans, programs,
policies and arrangements, including vacation policies ("PURCHASER PLANS"),
service accrued by Company Employees during employment with Seller and the
Seller Subsidiaries prior to the Closing Date shall be recognized for all
purposes, except to the extent necessary to prevent duplication of benefits.
Nothing in this Section 4.4 shall require that the Purchaser (i) maintain any
particular benefit plan or benefit in effect for any period of duration
following the Closing Date, or (ii) continue to employ any individual for any
period of duration following the Closing Date, except as required by any
employment contract or laws.
(b) Purchaser agrees to assume and honor, and cause the Seller
Subsidiaries to assume and honor, without modification, all employment,
severance, retention, other incentive agreements and arrangements,
postretirement medical,
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dental and life insurance arrangements and all supplemental pension plans, as
amended through the date hereof (each, an "EMPLOYEE ARRANGEMENT"), for the
benefit of any employees and former employees of the Company or any Company
Subsidiary. The Employee Arrangements set forth in Section 4.4(b) of the
Disclosure Schedule represent all the employment-related obligations of the
Seller Subsidiaries that will remain in effect following the Closing Date.
(c) Purchaser shall cause each Purchaser Plan to waive (i) any
pre-existing condition restriction which was waived under the terms of any
analogous Benefit Plan immediately prior to the Closing and (ii) waiting
period limitation which would otherwise be applicable to a Company Employee
on or after the Closing to the extent such Company Employee had satisfied any
similar waiting period limitation under an analogous Benefit Plan prior to
the Closing. Company Employees shall also be given credit for any deductible
or co-payment amounts paid in respect of the Benefit Plan year in which the
Closing occurs, to the extent that, following the Closing, they participate
in any Purchaser Plan for which deductibles or co-payments are required. For
purposes of this Agreement, "COMPANY EMPLOYEES" shall include those Company
Employees who, as of immediately prior to the Closing Date, are on lay-off,
disability or leave of absence, paid or unpaid.
(d) Purchaser shall have no liability or obligation whatsoever in
connection with options to purchase FHS common stock that were granted by FHS to
any Company employee; PROVIDED, HOWEVER, that Company employees shall be
eligible for Purchaser equity incentives, subject to the discretion of the
compensation committee of the Board of Directors of the Purchaser.
(e) As soon as practicable following the Closing Date, all Company
Employees who are participants in the FHS 401(k) Associate Savings Plan, as
amended and restated as of September 1, 1997, shall be given the opportunity to
receive a distribution of their respective account balances and shall be given
the opportunity to elect to "roll over" such account balance to the Superior
National Insurance Company 401(k) Plan, as amended and restated (the "SUPERIOR
401(k) PLAN"), in both cases subject to, and in accordance with, the provisions
of such Plans and applicable law. Prior to such distributions, (i) Purchaser
will provide FHS with such documents and other information as FHS shall
reasonably request to assure itself that the Superior 401(k) Plan and the trust
established
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pursuant thereto are qualified and tax-exempt under Sections 401(a)
and 501(a) of the Code and will accept eligible rollover distributions from
Company Employees and (ii) FHS shall provide Purchaser with such documents and
other information as Purchaser may reasonably request to assure itself that the
FHS 401(k) Associate Savings Plan and the trust established pursuant thereto are
qualified and tax-exempt under Sections 401(a) and 501(a) of the Code and can
make eligible rollover distributions. If as of the date hereof, the Superior
401(k) Plan will not accept eligible rollover distributions from Company
Employees, Purchaser shall cause such plan to be so amended as soon as
practicable following the Closing Date.
SECTION 4.5 PUBLICITY. Purchaser and Seller shall, subject to
their respective legal obligations (including requirements of stock exchanges
and other similar regulatory bodies), consult with each other and use reasonable
efforts to agree upon the text of any press release before issuing it or
otherwise making public statements with respect to the transactions contemplated
by this Agreement.
SECTION 4.6 APPROVALS AND CONSENTS; COOPERATION; NOTIFICATION.
(a) The parties shall use all reasonable efforts, and cooperate with
each other, to obtain as promptly as practicable all Permits and third-party
consents necessary or advisable to consummate the transactions contemplated by
this Agreement, and each party shall keep the other apprised of the status of
matters relating to completion of the transactions contemplated hereby.
Purchaser and Seller shall have the right to review in advance, to the extent
reasonably practicable, and shall consult with the other on, in each case
subject to applicable laws relating to the exchange of information, all the
information relating to Seller, the Seller Subsidiaries or Purchaser, as the
case may be, and any of their respective Affiliates, which appears in any filing
made with, or written materials submitted to, any third party or any
Governmental Entity in connection with the transactions contemplated by this
Agreement, PROVIDED, HOWEVER, that nothing contained herein shall be deemed to
provide either party with a right to review any information provided to any
Governmental Entity on a confidential basis in connection with the transactions
contemplated hereby. The party responsible for any such filing shall promptly
deliver to the other party evidence of the filing of all applications, filings,
registrations and notifications relating thereto (except for any confidential
portions thereof), and any supplement, amendment or item of additional
information in connection therewith (except for any confidential portions
thereof). The party responsible for a filing shall, to the extent reasonably
requested, also promptly deliver to the other party a copy of each material
notice, order, opinion and other item or correspondence received by such filing
party from any Governmental Entity in respect of any such application (except
for any confidential portions thereof).
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(b) Seller and Purchaser shall use all reasonable efforts to file as
soon as practicable all notifications, filings and other documents required to
obtain all governmental authorizations, approvals, consents or waivers,
including, without limitation, under the HSR Act, and to respond as promptly as
practicable to any inquiries received from the Federal Trade Commission, the
Antitrust Division of the Department of Justice and any other Governmental
Entity for additional information or documentation and to respond as promptly as
practicable to all inquiries and requests received from any State Attorney
General or other Governmental Entity in connection therewith.
(c) Without limiting the generality of the foregoing, within 20
business days after the date hereof, Purchaser shall, if applicable as required
by law, make Form A filings with the insurance departments of the states listed
in Section 2.11(b) of the Disclosure Schedule with respect to the transactions
contemplated hereby. Purchaser shall promptly make any and all other filings
and submissions of information with such insurance departments which are
required or requested by such insurance departments to obtain the approvals
required by such insurance departments to consummate the transactions
contemplated hereby. Seller agrees to furnish Purchaser with such information
and reasonable assistance as Purchaser may reasonably request in connection with
its preparation of such Form A filings and other filings or submissions.
Purchaser shall keep Seller fully apprised of its actions with respect to all
such filings and submissions and shall provide Seller with copies of such Form A
filings and other filings or submissions in connection with the transactions
contemplated by this Agreement (except for any confidential portions thereof).
(d) Purchaser and Seller shall promptly advise each other upon
receiving any communication from any Governmental Entity whose consent or
approval is required for consummation of the transactions contemplated by this
Agreement which causes such party to believe that there is a reasonable
likelihood that any requisite regulatory approval will not be obtained or that
the receipt of any such approval will be materially delayed.
(e) Seller shall give prompt notice to Purchaser of the occurrence of
any Seller Material Adverse Effect, and Purchaser shall give prompt notice to
Seller of the occurrence of any Purchaser Material Adverse Effect. Each of
Seller and Purchaser shall give prompt notice to the other of the occurrence or
failure to occur of an event that would, or, with the lapse of time would, cause
any condition to the consummation of the transactions contemplated hereby not to
be satisfied.
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SECTION 4.7 NO SOLICITATION. Seller shall not, directly or
indirectly, through any Affiliate, officer, director, employee, investment
banker, attorney, representative or agent of Seller or any of the Seller
Subsidiaries, solicit, initiate, or encourage any inquiries or proposals that
constitute, or could reasonably be expected to lead to, an Acquisition Proposal
(as hereinafter defined). Seller will immediately cease and cause to be
terminated any existing activities, discussions or negotiations with any parties
conducted heretofore with respect to any of the foregoing. For purposes of this
Agreement, "ACQUISITION PROPOSAL" means any offer or proposal for, or any
indication of interest in, a merger or other business combination involving the
Seller Subsidiaries or the acquisition of any equity interest in, or a
substantial portion of the assets of, the Seller Subsidiaries, other than the
transactions contemplated by this Agreement.
SECTION 4.8 EXCLUDED ASSETS, REAL PROPERTY.
(a) Seller and the Seller Subsidiaries shall take all actions
necessary to cause the Excluded Assets to be transferred (by dividend or
otherwise) to one or more other Affiliates of Seller so that such other
Affiliates acquire valid title to the Excluded Assets prior to the Closing.
(b) Seller and the Seller Subsidiaries shall take all actions
necessary to cause all right, title or interest in any real property owned by
any Seller Subsidiary prior to the Closing Date, whether held for use or for
investment, to be transferred (by dividend or otherwise) to one or more other
Affiliates of the Seller so that such other Affiliates prior to the Closing
acquire all ownership rights and title to such real property assets previously
held by a Seller Subsidiary. Seller, or another Affiliate of the Seller, shall
replace the book value of all the owned real estate assets so transferred with
cash (or cash equivalents reasonably acceptable to Purchaser) equal in value to
such book value at the date of transfer.
SECTION 4.9 INTERCOMPANY ACCOUNTS. All intercompany accounts and
Item 5 on Section 2.18 of the Disclosure Schedule (an administrative service
agreement between the Company and FHS, effective 10/1/97), including, without
limitation, the August 23, 1994 promissory note from Seller to CalComp in the
principal amount of $10,000,000, as set forth in Section 4.9 of the Disclosure
Schedule, between the Seller Subsidiaries, on the one hand, and Seller or its
Affiliates on the other hand ("INTERCOMPANY ACCOUNTS") will be terminated at or
before the Closing, and, if practicable, settled at or before the Closing, and
if not, then as soon as practicable after the Closing Date and, in any event,
within 60 days thereafter,
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PROVIDED, that all principal and accrued interest under the promissory notes
set forth in Section 4.9 of the Disclosure Schedule will be paid in full at
the Closing.
SECTION 4.10 RESERVE COVER.
(a) Prior to the Closing, Seller shall cause the Seller Subsidiaries
to purchase $150,000,000 of adverse development protection on loss and allocated
loss adjustment expense reserves for claims occurring on or before December 31,
1997, pursuant to the Reinsurance Agreement. If Purchaser should determine
while the Reinsurance Agreement is in effect to commute it, Purchaser shall pay
to Seller, as soon as is practicable, one-half of (a) the then fair market value
of the returned assets less (b) the sum of (i) the then net present value (using
a discount rate reasonably acceptable to the parties) of the commuted reserves,
plus (ii) the tax cost of the commutation. Should Seller and Purchaser not
agree upon the fair market value of such assets, the net present value of such
commutation reserves or the tax costs of such commutation, they shall mutually
retain Ernst & Young LLP ("E&Y") to act as an independent actuary (the
"INDEPENDENT ACTUARY") to determine the correct value and shall be bound by its
determination. If E&Y shall decline to serve in such capacity or has a conflict
with either of the parties, the parties shall agree on the appointment of the
Independent Actuary within a 10 day period. If the parties cannot agree upon
the selection of the Independent Actuary within a ten-day period, they shall
cause their respective accounting firms to select such firm within five business
days of the end of such ten-day period. Any such resolution shall be conclusive
and binding on Purchaser and Seller. Seller and Purchaser shall (and shall
cause the Seller Subsidiaries to) provide to such firm full cooperation. Such
firm shall be instructed to reach its conclusion regarding the dispute within 60
days of its selection. The cost of the Independent Actuary's services shall be
evenly borne by Seller and Purchaser and shall be paid by Purchaser out of the
commutation savings proceeds, evenly reducing the proceeds available to each
party, prior to paying to Seller its portion of the commutation savings.
(b) Within 60 days of the date hereof (but in any event at least five
days prior to the Closing Date), Purchaser may request, in writing, and, if
requested, Seller agrees it shall cause the Seller Subsidiaries to increase the
amount of reinsurance cover by $25,000,000, consistent with the terms of the
Reinsurance Agreement, for aggregate ultimate net losses incurred by Seller
Subsidiaries on or prior to June 30, 1998 for losses occurring on or prior to
that portion of the 1998 accident year commencing on January 1, 1998 to and
including June 30, 1998, in exchange for a
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$5,000,000 increase in the purchase price payable at the Closing by Purchaser
pursuant to Section 1.2.
SECTION 4.11 AUDITED FINANCIAL STATEMENTS; QUARTERLY STATEMENTS.
(a) As soon as practical after the date hereof but in no event after
45 days following the date hereof, Seller shall deliver to Purchaser audited
GAAP financial statements for the Seller Subsidiaries, on a consolidated basis,
for each of the years ended on December 31, 1995, December 31, 1996 and December
31, 1997, including a balance sheet as of the latter two dates, and the
statements of operations, shareholders' equity and cash flows, and the related
management letters for the periods ending on each of such dates (collectively
the "AUDITED FINANCIAL STATEMENTS").
(b) Within 30 days after the end of each fiscal quarter after the
date hereof prior to the Closing, Seller shall deliver to Purchaser quarterly
GAAP financial statements (the "QUARTERLY FINANCIAL STATEMENTS") for the Seller
Subsidiaries, on a consolidated basis, including a balance sheet as of the end
of each quarter and statements of operations for each 1998 quarterly period then
ended, in a form sufficient for filing as part of Purchaser's proxy statement.
(c) Upon the reasonable request of Purchaser, Seller shall promptly
provide, or cause to be provided, to Purchaser such information as may be
reasonably required by Purchaser in connection with its Proxy Statement (as
defined below) and all other documents required to be filed by Purchaser in
order to consummate the transactions contemplated hereby.
SECTION 4.12 RELATED PARTY SERVICE AGREEMENTS. Purchaser shall
enter into the Service Agreements with certain related parties of Seller on
terms consistent with the terms of Exhibits B-1 through B-4.
SECTION 4.13 LEASE RENEWALS. Purchaser and Seller shall use all
reasonable efforts in good faith to negotiate leases of three years in duration
(or such shorter period of time as may be remaining on the applicable underlying
lease) for all properties and facilities of the Seller Subsidiaries where the
use of such property or facility by a Seller Subsidiary is not the subject of a
lease, or the use by an Affiliate of a Seller Subsidiary is not the subject of a
lease. The monthly rents payable on such new leases will be equal to the total
monthly rental cost of the Seller's Affiliate for such facility TIMES the
percentage of the space (based on square footage) to be used by
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the Seller Subsidiary. All lease agreements in effect on the date of this
Agreement shall be honored for their remaining term by both Purchaser and
Seller.
SECTION 4.14 FURTHER ASSURANCES. (a) Each party agrees to use all
reasonable efforts to take, or cause to be taken, all action, and to do, or
cause to be done, all things necessary, proper or advisable under applicable
laws and regulations to consummate and make effective the transactions
contemplated by this Agreement.
(b) Purchaser will use all reasonable efforts to cause a stockholder
or stockholders of Purchaser holding at least 5% of the outstanding common stock
of Purchaser who have not entered into Voting Agreements on or prior to the date
hereof to enter into a Voting Agreement as soon as practicable after the date
hereof.
SECTION 4.15 STATE INSURANCE REGULATORY APPROVAL FOR CCIC.
Notwithstanding the provision of Section 6.1(c), in the event that Purchaser is
unable to obtain state insurance regulatory approval to acquire CCIC within five
(5) business days after the receipt of state insurance regulatory approval for
all of the other Insurance Subsidiaries, Seller shall have the right to treat
CCIC as an "Excluded Asset" by providing written notice (the "CCIC NOTICE") to
Purchaser of its election to distribute the stock of CCIC out of the Company.
Following delivery of the CCIC Notice:
(i) CCIC will be deemed to be an "Excluded Asset" and will no
longer be treated as an "Insurance Subsidiary" for all purposes under the
Agreement;
(ii) the Purchase Price will be reduced by 80% of the net book
value of CCIC included in the most recent Quarterly Financial Statement
delivered to Purchaser (the "CCIC VALUE");
(iii) Purchaser and Seller agree to negotiate in good faith
to enter into an interim management agreement prior to Closing pursuant to
which Seller will agree to continue to operate CCIC, at Purchaser's full
cost and risk, consistent with the terms of Section 4.1 of this Agreement
until Seller is able to secure the necessary state insurance regulatory
approval to acquire all of the capital stock of CCIC;
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(iv) Seller agrees that it will take all steps reasonably
necessary to secure such state insurance regulatory approval as soon as
possible after the delivery of the CCIC Notice;
(v) Purchaser agrees that it will purchase the capital stock of
CCIC from Seller or its Affiliates, subject only to receipt of the
necessary state insurance regulatory approvals and the Closing, for a price
equal to the CCIC Value plus interest on such amount from the date of
Closing until the date of purchase of the capital stock of CCIC accruing at
a rate of 10% per annum (the "CCIC PURCHASE");
(vi) upon consummation of the CCIC Purchase, CCIC will be deemed
to be an "Insurance Subsidiary" as of the Closing Date; and
(vii) notwithstanding the foregoing, Seller will be free to
sell the capital stock or assets of CCIC to a third party at any time after
twelve (12) months after the Closing Date after which time Purchaser will
no longer have the obligation to purchase CCIC pursuant to this Section
4.15.
SECTION 4.16 STOCKHOLDER APPROVAL AND FINANCING. Purchaser shall,
as promptly as practicable, after the date hereof prepare and file with the
Securities Exchange Commission a proxy statement (the "Proxy Statement") and
take such other actions necessary in accordance with applicable law and its
Certificate of Incorporation and bylaws to convene a meeting of its stockholders
to consider and vote upon the approval of the transaction contemplated by the
Financing Agreements in connection with the consummation of the transactions
contemplated by this Agreement. The Proxy Statement shall include the
recommendation of the Board of Directors of Purchaser that its stockholders vote
in favor of those matters requiring their approval in order to consummate the
transactions contemplated by this Agreement and the Financing Agreements. The
Board of Directors of Purchaser shall take all reasonable steps to solicit and
obtain such approval. The Purchaser agrees to use its best efforts to arrange
and complete financing of the transactions as contemplated by the Financing
Agreements, including taking all steps necessary to enforce its rights under the
Financing Agreements. Purchaser further agrees that prior to the Closing it
will not amend the terms of the IP Stock Purchase Agreement without the prior
written consent of Seller if such amendments would adversely effect the
completion of the Financing Agreements.
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ARTICLE V
INDEMNIFICATION
SECTION 5.1 INDEMNIFICATION BY SELLER. Subject to the limits
set forth in this Article V, Seller agrees to indemnify, defend and hold
Purchaser, its officers, directors, agents and Affiliates (the "PURCHASER
INDEMNIFIED PARTIES"), harmless from and in respect of any and all losses,
damages, costs and reasonable expenses (including, without limitation,
reasonable expenses of investigation and defense fees and disbursements of
counsel and other professionals and losses in connection with any clean-up or
remedial action pursuant to Environmental Laws), (collectively, "LOSSES"),
that they may incur arising out of or due to any inaccuracy of any
representation or the breach of any warranty, covenant, undertaking or other
agreement of Seller contained in this Agreement or the Disclosure Schedule;
PROVIDED, HOWEVER, that Seller shall have no liability to Purchaser under
this Section 5.1 unless Purchaser Indemnified Parties shall have met the
aggregate deductible requirements of Section 5.3. Notwithstanding any other
provision of this Agreement, including this Section 5.1, the Seller shall
have no obligation to indemnify, or otherwise have any liability to, the
Purchaser Indemnified Parties for any Loss arising out of, or relating to the
business or operations of the Seller Subsidiaries following the date hereof
(the "EXCLUDED LOSSES"), including without limitations any Excluded Breach
(as defined below) unless written notice of a Loss occurring during the first
20 business days after the date hereof is provided as contemplated by Section
7.1(e) within 35 days following the date hereof.
SECTION 5.2 INDEMNIFICATION BY PURCHASER. Subject to the limits
set forth in this Article V, Purchaser agrees to indemnify, defend and hold
Seller, its officers, directors, agents and Affiliates, harmless from and in
respect of any and all Losses that they may incur (i) arising out of or due
to any inaccuracy of any representation or the breach of any warranty,
covenant, undertaking or other agreement of Purchaser contained in this
Agreement and (ii) arising out of any and all actions, suits, claims and
administrative or other proceedings of every kind and nature instituted or
pending against Seller or any of its Affiliates at any time after the Closing
Date to the extent that such Losses (x) relate to or arise out of or in
connection with the assets, businesses, operations, conduct, products,
environmental conditions or violations of Environmental Laws and/or employees
(including former employees) of the Seller Subsidiaries relating to or
arising out of or in connection with occurrences after the Closing Date and
(y) do not arise out of a breach of Seller's
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representations and warranties in, or a default in the performance of any of
Seller's covenants under, this Agreement;
SECTION 5.3 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The
several representations and warranties of the parties contained in this
Agreement or in any instrument delivered pursuant to this Agreement will
survive the Closing Date and will remain in full force and effect thereafter
for a period of one year from the Closing Date; PROVIDED, HOWEVER, that the
representations and warranties contained in Section 2.12 shall be governed by
Section 4.3 and the representations and warranties contained in Section 2.19
will survive the Closing Date for a period of two years from the Closing
Date; PROVIDED, FURTHER, that such representations or warranties shall
survive (if at all) beyond such period with respect to any inaccuracy therein
or breach thereof, notice of which shall have been duly given within such one
year or two years time period, as applicable, in accordance with Section 5.4.
Other than as stated in the tax indemnity in Section 4.3, anything to the
contrary contained herein notwithstanding, neither party shall be entitled to
recover from the other unless and until the total of all claims for indemnity
or damages with respect to any inaccuracy or breach of any such
representations or warranties or breach of any covenants, undertakings or
other agreements, whether such claims are brought under this Article V or
otherwise (other than, in each case, the Excluded Losses), exceeds $5,000,000
and then only for the amount by which such claims for indemnity or damages
exceed $5,000,000; PROVIDED, HOWEVER, that no party shall be entitled to
recover from the other more than $50,000,000 in the aggregate pursuant to
this Article V.
SECTION 5.4 NOTICE AND OPPORTUNITY TO DEFEND. If an event
occurs which a party asserts is an indemnifiable event pursuant to Section
5.1 or 5.2, the party seeking indemnification shall promptly notify the other
party obligated to provide indemnification (the "INDEMNIFYING PARTY"). If
such event involves (i) any claim or (ii) the commencement of any action or
proceeding by a third person, the party seeking indemnification will give
such Indemnifying Party prompt written notice of such claim or the
commencement of such action or proceeding, PROVIDED, HOWEVER, that the
failure to provide prompt notice as provided herein will relieve the
Indemnifying Party of its obligations hereunder only to the extent that such
failure prejudices the Indemnifying Party hereunder. If any such action is
brought against any party seeking indemnification and it notifies the
Indemnifying Party of the commencement thereof, the Indemnifying Party shall
be entitled to participate therein and, to the extent that it wishes, at its
cost, risk and expense to assume the defense thereof, with counsel reasonably
satisfactory to the party seeking indemnification, unless the named party to
such action or proceeding includes both an Indemnifying
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Party and a party seeking indemnification and the party seeking
indemnification has been advised in writing by counsel that there may be one
or more legal defenses available to such party that are different from or
additional to those available to the Indemnifying Party, in which event the
party seeking indemnification shall be entitled, at the Indemnifying Party's
reasonable cost and expense to separate counsel of its own choosing
reasonably acceptable to the Indemnifying Party. After notice from the
Indemnifying Party to the party seeking indemnification of such election to
so assume the defense thereof, the Indemnifying Party shall not be liable to
the party seeking indemnification for any legal expenses of other counsel or
any other expenses subsequently incurred by such party in connection with the
defense thereof. The party seeking indemnification agrees to cooperate in
all reasonable respects with the Indemnifying Party and its counsel in the
defense against any such asserted liability. The party seeking
indemnification shall have the right to participate at its own expense in the
defense of such asserted liability. The Indemnifying Party shall be entitled
to compromise or settle any claim as to which it is providing
indemnification, which compromise or settlement shall be made only with the
written consent of the party being indemnified, such consent not to be
unreasonably withheld. If an Indemnifying Party fails to assume the defense
of a claim within 30 calendar days after receipt of the notice of claim by
the Indemnifying Party, the party seeking indemnification, against which such
claim has been asserted, will, upon delivering notice to such effect to the
Indemnifying Party, have the right to undertake, at the Indemnifying Party's
reasonable cost and expense subject to the limitations set forth in this
Article V, the defense, compromise or settlement of such claim on behalf of
and for the account of the Indemnifying Party subject to the limitations set
forth in this Article V; PROVIDED, HOWEVER, that such claim shall not be
compromised or settled without the written consent of the Indemnifying Party,
which consent shall not be unreasonably withheld. If the party seeking
indemnity assumes the defense of the claim, it shall keep the Indemnifying
Party reasonably informed of the progress of any such defense, compromise or
settlement. In no event shall an Indemnifying Party be liable for any
settlement effected without its consent, which will not be unreasonably
withheld.
SECTION 5.5 ADJUSTMENT FOR INSURANCE AND TAXES. The amount
which an Indemnifying Party is required to pay to, for or on behalf of the
other party (hereinafter referred to as an "INDEMNITEE") pursuant to this
Article V and Section 4.3 shall be adjusted (including, without limitation,
retroactively) (i) by any insurance proceeds actually recovered by or on
behalf of such Indemnitee in reduction of the related indemnifiable loss (the
"INDEMNIFIABLE LOSS") and (ii) to take account of any tax benefit actually
realized as a result of any Indemnifiable Loss, less the cost of
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procuring such insurance proceeds or tax benefit. Amounts required to be
paid, as so reduced, are hereinafter sometimes called an "INDEMNITY PAYMENT."
If an Indemnitee has received or has had paid on its behalf an Indemnity
Payment for an Indemnifiable Loss and subsequently receives insurance
proceeds for such Indemnifiable Loss, or realizes any tax benefit as a result
of such Indemnifiable Loss, then the Indemnitee shall (i) promptly notify the
Indemnifying Party of the amount and nature of such proceeds and benefits,
together with the cost of procuring them, and (ii) pay to the Indemnifying
Party the amount of such insurance proceeds or tax benefit (reduced by such
procurement cost), or, if lesser, the amount of the Indemnity Payment.
SECTION 5.6 MITIGATION OF LOSS. Each Indemnitee is obligated to
use its reasonable efforts to mitigate the amount of any Loss for which it is
entitled to seek indemnification hereunder, and the Indemnifying Party shall
not be required to make any payment to an Indemnitee in respect of such Loss
to the extent such Indemnitee failed to comply with the foregoing obligation.
SECTION 5.7 SUBROGATION. Upon making any Indemnity Payment, the
Indemnifying Party will, to the extent of such payment, be subrogated to all
rights of the Indemnitee against any third party in respect of the Loss to
which the payment relates; PROVIDED, HOWEVER, that until the Indemnitee
recovers full payment of its Loss, any and all claims of the Indemnifying
Party against any such third party on account of such payment are hereby made
expressly subordinated and subjected in right of payment of the Indemnitee's
rights against such third party. Without limiting the generality of any
other provision hereof, each such Indemnitee and Indemnifying Party will duly
execute upon request all instruments reasonably necessary to evidence and
perfect the above described subrogation and subordination rights.
SECTION 5.8 TAX INDEMNIFICATION. None of the provisions of this
Article V, with the exception of Section 5.5, shall apply to the claims,
obligations, liabilities, covenants and representations under Section 4.3,
which shall be governed solely by the terms thereof.
SECTION 5.9 SET-OFF. Neither Seller nor Purchaser shall have
any right to set-off any Losses against any payments to be made by such party
or parties pursuant to this Agreement or the Service Agreements, except as
otherwise expressly provided herein or therein.
SECTION 5.10 EXCLUSIVE REMEDY. Following the Closing, the
indemnities provided for in this Article V shall be the sole and exclusive
remedies of
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the parties and their respective officers, directors, employees, Affiliates,
agents, representatives, successors and assigns for any breach of or
inaccuracy in any representation or warranty or any breach, nonfulfillment or
default in the performance of any of the covenants or agreements contained in
this Agreement (but not any such covenants or agreements to the extent they
are by their terms to be performed after the Closing Date). The parties
shall not be entitled to a recission of this Agreement or to any further
indemnification rights or claims of any nature whatsoever in respect thereof
(whether by contract, common law, statute, law, regulation or otherwise,
including, without limitation, under the Racketeer Influence and Corrupt
Organizations Act of 1970, as amended), all of which the parties hereby
waive, PROVIDED, HOWEVER, that nothing herein is intended to waive any claims
for intentional fraud.
ARTICLE VI
CONDITIONS
SECTION 6.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE
CLOSING. The obligations of Seller, on the one hand, and Purchaser, on the
other hand, to consummate the Closing are subject to the satisfaction (or, if
permissible, waiver by the party for whose benefit such conditions exist) of
the following conditions:
(a) no arbitrator or Governmental Entity shall have issued any
order, decree or ruling, and there shall not be any statute, rule or
regulation, restraining, enjoining or prohibiting the consummation of the
material transactions contemplated by this Agreement; PROVIDED that the
parties shall have used all reasonable efforts to cause any such order,
decree, ruling, statute, rule or regulation to be vacated or lifted;
(b) any waiting period applicable to the transactions contemplated
hereby under the HSR Act shall have expired or been terminated;
(c) the required state insurance regulatory approvals of the
consummation of the transactions contemplated hereunder (the "STATE INSURANCE
REGULATORY APPROVAL"), including the approval of the California Department of
Insurance pursuant to California Insurance Code Section 1215 ET SEQ., shall
have been obtained, PROVIDED, that if Purchaser is unable to obtain Insurance
Regulatory Approval for CCIC and Seller has exercised its right under Section
4.15 to treat CCIC
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as an Excluded Asset, this Section 6.1(c) shall be deemed satisfied with
respect to CCIC; and
(d) all authorizations, approvals or consents required to permit
the consummation of the transactions contemplated hereby shall have been
obtained and be in full force and effect, except where the failure to have
obtained any such authorizations, approvals or consents would not have a
Seller Material Adverse Effect or a Purchaser Material Adverse Effect, as the
case may be.
SECTION 6.2 CONDITIONS TO THE OBLIGATIONS OF PURCHASER. The
obligations of Purchaser to consummate the transactions contemplated hereby
are subject to the satisfaction (or waiver by Purchaser) of the following
further conditions:
(a) the representations and warranties of Seller shall be true and
accurate as of the Closing Date as if made at and as of such time (other than
(i) Section 2.8 and (ii) those representations and warranties that address
matters only as of a particular date or only with respect to a specific
period of time which need to be true and accurate only as of such date or
with respect to such period), except (x) where the failure of such
representations and warranties to be so true and accurate (without giving
effect to any limitation as to "materiality" or "material adverse effect" set
forth therein), would not have, a Seller Material Adverse Effect or (y) where
the failure of such representations to be true and accurate arises out of, or
relates to, the business or operations of the Seller Subsidiaries following
the date hereof (an "EXCLUDED BREACH"), unless written notice of such failure
or inaccuracy occurring within the first 20 business days after the date
hereof is provided as contemplated by Section 7.1(e) within 35 days following
the date hereof;
(b) Seller shall have performed in all material respects the
obligations hereunder required to be performed by it at or prior to the
Closing Date;
(c) Purchaser shall have received an incumbency certificate and a
certificate signed by two executive officers of Seller, dated as of the
Closing Date, to the effect that the conditions set forth in Section 6.2(a)
and Section 6.2(b) have been satisfied;
(d) the Seller Subsidiaries shall have entered into the Reinsurance
Agreement;
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(e) all Intercompany Accounts have been terminated as of the
Closing Date;
(f) Seller shall have entered into the Transitional Services
Agreement contemplated by Exhibit B-4 hereto;
(g) Purchaser shall have received letters of resignation from each
of the members of the Board of Directors of each Seller Subsidiary, which
resignations shall be effective as of the Closing Date;
(h) the Company shall have no subsidiaries other than the
Insurance Subsidiaries; and
(i) Seller shall have delivered copies to Purchaser of all
certificates of good standing, certificates of qualification and certificates
of authority for each Seller Subsidiary consistent with the disclosure
provided in Section 2.11(b) of the Disclosure Schedules.
SECTION 6.3 CONDITIONS TO THE OBLIGATIONS OF SELLER. The
obligations of Seller to consummate the transactions contemplated hereby are
subject to the satisfaction (or waiver by Seller) of the following conditions:
(a) the representations and warranties of Purchaser shall be true
and accurate as of the Closing Date as if made at and as of such time (other
than those representations and warranties that address matters only as of a
particular date or only with respect to a specific period of time which need
to be true and accurate only as of such date or with respect to such period),
except where the failure of such representations and warranties to be so true
and accurate (without giving effect to any limitation as to "materiality" or
"material adverse effect" set forth therein) would not have a Purchaser
Material Adverse Effect;
(b) Purchaser shall have performed in all material respects all of
the obligations hereunder required to be performed by Purchaser, at or prior
to the Closing Date;
(c) Seller shall have received an incumbency certificate and a
certificate signed by two executive officers of Purchaser, dated as of the
Closing Date, to the effect that the conditions set forth in Section 6.3(a)
and Section 6.3(b) have been satisfied;
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(d) Purchaser shall have delivered executed copies of each of the
Service Agreements; and
(e) at the Closing, Purchaser shall have delivered to Seller a
certificate (which certificate shall survive the Closing) to the effect that
(i) Purchaser has conducted and is satisfied with the results of its
business, accounting and legal due diligence review of the Shares and the
business and affairs of Seller and the Seller Subsidiaries and (ii) in
completing the transactions contemplated in accordance with this Agreement,
Purchaser has not and is not relying on any representation or warranty of
Seller or the Seller Subsidiaries which is not expressly stated in this
Agreement.
ARTICLE VII
TERMINATION
SECTION 7.1 TERMINATION. Anything herein or elsewhere to the
contrary notwithstanding, this Agreement may be terminated and the
transactions contemplated herein may be abandoned at any time prior to the
Closing Date:
(a) by the mutual consent of Seller and Purchaser;
(b) by Seller or Purchaser:
(i) if the Closing shall not have occurred on or prior to
November 30, 1998 (or December 31, 1998 if the only condition remaining
unfulfilled at November 30, 1998 is approval by any required Governmental
Entity and Seller and Purchaser are continuing to seek to obtain such
approval); PROVIDED, HOWEVER, that the right to terminate this Agreement
under this Section 7.1(b)(i) shall not be available to any party whose
failure to fulfill any obligation under this Agreement has been the cause
of, or resulted in, the failure of the Closing to occur on or prior to such
date; or
(ii) if any Governmental Entity shall have issued an order,
decree or ruling or taken any other action (which order, decree, ruling or
other action the parties hereto shall use all reasonable efforts to lift),
in each case permanently restraining, enjoining or otherwise prohibiting
the material
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transactions contemplated by this Agreement, and such order, decree,
ruling or other action shall have become final and non-appealable;
(c) by Seller if Purchaser (x) breaches or fails in any material
respect to perform or comply with any of its material covenants and
agreements contained herein or (y) breaches its representations and
warranties in any material respect and such breach would have a Purchaser
Material Adverse Effect, in each case such that the conditions set forth in
Section 6.1 or Section 6.3 would not be satisfied; PROVIDED, HOWEVER, that if
any such breach is curable within a reasonable period of time by Purchaser
through the exercise of Purchaser's best efforts and for so long as Purchaser
shall be so using its best efforts to cure such breach, Seller may not
terminate this Agreement pursuant to this Section 7.1(c);
(d) by Purchaser if Seller (x) breaches or fails in any material
respect to perform or comply with any of their material covenants and
agreements contained herein or (y) breaches its representations and
warranties in any material respect (other than Excluded Breaches) and such
breach would have a Seller Material Adverse Effect, in each case such that
the conditions set forth in Section 6.1 or Section 6.2 would not be
satisfied; PROVIDED, HOWEVER, that if any such breach is curable within a
reasonable period of time by Seller through the exercise of Seller's best
efforts and for so long as Seller shall be so using its best efforts to cure
such breach, Purchaser may not terminate this Agreement pursuant to this
Section 7.1(d);
(e) by Purchaser if, from the date of this Agreement through to
the Closing Date, there shall have occurred a "Material Adverse Change," as
hereinafter defined, in the financial condition, business or operations of
the Seller Subsidiaries, taken as a whole. A "MATERIAL ADVERSE CHANGE", for
purposes of this Section 7.1(e), means (i) during the twenty (20) business
days following the date of this Agreement, any change in the business or
operations of the Seller Subsidiaries that meets the definition of a Seller
Material Adverse Effect and with respect to which Purchaser provides Seller,
within thirty-five (35) days following the date hereof, written notice of its
desire to terminate this Agreement pursuant to this Section 7.1(e) and (ii)
after such twenty (20) business day period, subject to the right to provide
written notice as provided by the immediately preceding clause (i), until the
Closing Date, a change in the business or operations of the Seller
Subsidiaries that meets the definition of a Seller Material Adverse Effect,
other than a Seller Material Adverse Effect arising out of, or relating to,
the business or operations of the Seller Subsidiaries after the date hereof
or the matters disclosed in the Disclosure Schedules; or
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(f) by Seller if (x) Purchaser, its board of directors or officers
fails to recommend to Purchaser's stockholders, or withdraws, revokes or
otherwise adversely modifies its approval or recommendation of the
transactions contemplated hereby or (y) the stockholders of Purchaser fail to
approve those matters requiring their approval in order to consummate the
transactions contemplated hereby.
SECTION 7.2 PROCEDURE AND EFFECT OF TERMINATION. In the event
of the termination and abandonment of this Agreement by Seller or Purchaser
pursuant to Section 7.1, written notice thereof shall forthwith be given to
the other party. If the transactions contemplated by this Agreement are
terminated as provided herein:
(a) each party will return all documents, work papers and other
material of any other party relating to the transactions contemplated hereby,
whether so obtained before or after the execution hereof, to the party
furnishing the same;
(b) all confidential information received by either party with
respect to the business of any other party or its subsidiaries or Affiliates
shall be treated in accordance with the provisions of the Confidentiality
Agreement, which shall survive the termination of this Agreement; and
(c) neither party will have any liability under this Agreement to
the other except (i) as stated in subparagraphs (a) and (b) of this Section
7.2, (ii) for any willful breach of any provision of this Agreement and (iii)
as provided in the Confidentiality Agreement.
SECTION 7.3 BREAKUP FEE. In the event that the conditions to
closing set forth in Article VI with respect to a party have been met and
there is no basis for such party to terminate this Agreement pursuant to
Section 7.1, yet, upon written request, such party does not agree upon and
does not meet a reasonable schedule to set the Closing Date and complete the
Closing, then such party shall be deemed to have wrongfully failed to close
and the other party shall be entitled to: (a) obtain injunctive relief to
require the Closing to occur; OR (b) receive a $15,000,000 payment from the
other party and seek additional monetary damages from the other party, if
any, PROVIDED, HOWEVER, that the occurrence of the Closing shall preclude in
full the availability of alternative (b). In addition, in the event Seller
terminates the Agreement pursuant to Section 7.1(f), Seller shall be entitled
to receive a $15,000,000 payment from Purchaser and seek additional monetary
damages, if any. Any payment required above shall be paid in immediately
available funds within three (3) business
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days of the demand for such payment and shall accrue interest at LIBOR plus
2% per annum. For the purposes of this Agreement, "LIBOR" shall mean "LIBOR"
as defined in FHS's senior credit facility.
ARTICLE VIII
MISCELLANEOUS
SECTION 8.1 GOVERNING LAWS AND CONSENT TO JURISDICTION. The
laws of the State of Delaware (irrespective of its choice of law principles)
shall govern all issues concerning the validity of this Agreement, the
construction of its terms and the interpretation and enforcement of the
rights and duties of the parties. Each party irrevocably submits to the
exclusive jurisdiction of the federal courts of the United States of America
located in Los Angeles County, California (and federal courts having
jurisdiction over appeals therefrom) in respect of the transactions
contemplated by this Agreement, the other agreements and documents referred
to herein and the transactions contemplated by this Agreement and such other
documents and agreements.
SECTION 8.2 AMENDMENT AND MODIFICATION. Subject to applicable
law, this Agreement may be amended, modified and supplemented in any and all
respects by written agreement of the parties at any time prior to the Closing
Date with respect to any of the terms contained herein.
SECTION 8.3 NOTICES. All notices, consents and other
communications hereunder shall be in writing and shall be deemed to have been
duly given (i) upon actual receipt or when delivered by hand or by FedEx or a
similar overnight courier, (ii) five days after being deposited in any United
States Post Office enclosed in a postage prepaid, registered or certified
envelope addressed or (iii) when successfully transmitted by telecopier (with
a confirming copy of such communication to be sent as provided in clause (i)
or (ii) above), to the receiving party during regular business hours at the
address or telecopier number set forth below (or at such other address or
telecopier number for a party as shall be specified by like notice),
PROVIDED, HOWEVER, that any notice of change of address or telecopier number
shall be effective only upon receipt:
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(a) if to Purchaser, to:
Superior National Insurance Group, Inc.
26601 Agoura Road
Calabasas, California 91302
Telephone No.: (818) 880-1600
Telecopy No.: (818) 880-8615
Attention: J. Chris Seaman
with a copy to:
Riordan & McKinzie
5473 Corsa Avenue, Suite #116
Westlake Village, California 91362
Telephone No.: (818) 706-1800
Telecopy No.: (818) 706-2956
Attention: Dana M. Warren, Esq.
(b) if Seller, to:
Foundation Health Systems, Inc.
225 North Main
Pueblo, CO 81003
Telephone : (719) 585-8077
Telecopy No: (719) 585-8175
Attention: General Counsel
with a copy to:
Skadden, Arps, Slate, Meagher &
Flom (Illinois)
333 West Wacker Drive
Chicago, Illinois 60606
Telephone No.: (312) 407-0700
Telecopy No.: (312) 407-0411
Attention: Peter C. Krupp, Esq.
SECTION 8.4 INTERPRETATION.
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(a) The words "hereof," "herein" and "herewith" and words of
similar import shall, unless otherwise stated, be construed to refer to this
Agreement as a whole and not to any particular provision of this Agreement,
and article, section, paragraph, exhibit and schedule references are to the
articles, sections, paragraphs, exhibits and schedules of this Agreement
unless otherwise specified. The words describing the singular number shall
include the plural and vice versa, and words denoting any gender shall
include all genders and words denoting natural persons shall include
corporations and partnerships and vice versa. As used in this Agreement, the
term "AFFILIATE(S)" shall have the meaning set forth in Rule l2b-2 of the
Securities Exchange Act of 1934, as amended. The phrases "to the knowledge
of," "to a party's best knowledge," or any similar phrase shall mean such
facts and other information which as of the date of determination are
actually known to any vice president or chief financial officer and any
officer superior to any of the foregoing, of the referenced party. The
phrase "made available" in this Agreement shall mean that the information
referred to has been made available if requested by the party to whom such
information is to be made available. The phrases "the date of this
Agreement," "the date hereof" and terms of similar import, unless the context
otherwise requires, shall be deemed to refer to May 5, 1998. As used in this
Agreement, the term "business day" means a day, other than a Saturday or a
Sunday, on which banking institutions in the city of Los Angeles are open.
The parties have participated jointly in the negotiation and drafting of this
Agreement. In the event an ambiguity or question of intent or interpretation
arises, this Agreement shall be construed as if drafted jointly by the
parties, and no presumption or burden of proof shall arise favoring or
disfavoring any party by virtue of the authorship of any provisions of this
Agreement.
(b) The Disclosure Schedule shall be construed with and as an
integral part of this Agreement as if the same had been set forth verbatim
herein. Any matter disclosed pursuant to the Disclosure Schedule shall be
deemed to be disclosed for all purposes under this Agreement, but such
disclosure shall not be deemed to be an admission or representation as to the
materiality of the item so disclosed.
(c) Headings are for convenience of the parties only and shall be
given no substantive or interpretative effect whatsoever.
(d) Notwithstanding the provisions of Section 1.2, the Purchase
Price shall be increased by the amount of any capital contributions made to
the Company after December 31, 1997 in order to fund any capital
contributions or any other payment (a "GOVERNMENTAL PAYMENT"), in an amount
not to exceed $25,000,000,
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which are required by any Governmental Entity (as defined below) and such
increase shall be payable by wire transfer of immediately available funds to
an account designated by Seller; PROVIDED that an increase in the Purchase
Price attributable to Governmental Payments in excess of $10,000,000 shall be
paid in the form of a senior note from Purchaser (the "PURCHASER NOTE") with
the principal amount thereon due three years from the Closing Date and
bearing a rate of interest, payable quarterly, equal to the interest on the
senior notes to be issued by Purchaser pursuant to the Financing Agreements.
The Purchaser Note, if any, shall be in a form reasonably acceptable to
Seller and Purchaser.
SECTION 8.5 COUNTERPARTS. This Agreement may be executed in
multiple counterparts, all of which shall together be considered one and the
same agreement.
SECTION 8.6 ENTIRE AGREEMENT; THIRD PARTY BENEFICIARIES. This
Agreement (including the documents and the instruments referred to herein),
the Confidentiality Agreement and the Disclosure Schedule (i) constitute the
entire agreement and supersede all prior agreements and understandings, both
written and oral, among the parties with respect to the subject matter hereof
and (ii) except as provided herein, are not intended to confer upon any
person other than the parties hereto any rights or remedies hereunder.
SECTION 8.7 SEVERABILITY. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void, unenforceable or against its regulatory
policy, the remainder of the terms, provisions, covenants and restrictions of
this Agreement shall remain in full force and effect and shall in no way be
affected, impaired or invalidated.
SECTION 8.8 SERVICE OF PROCESS. Each party irrevocably consents
to the service of process outside the territorial jurisdiction of the courts
referred to in Section 8.1 hereof in any such action or proceeding by mailing
copies thereof by registered United States mail, postage prepaid, return
receipt requested, to its address as specified in or pursuant to Section 8.3
hereof. However, the foregoing shall not limit the right of a party to effect
service of process on the other party by any other legally available method.
SECTION 8.9 SPECIFIC PERFORMANCE. Each party acknowledges and
agrees that in the event of any breach of this Agreement, each non-breaching
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party would be irreparably and immediately harmed and could not be made whole
by monetary damages. It is accordingly agreed that, subject to the terms of
Section 7.3, the parties will (a) waive, in any action for specific
performance, the defense of adequacy of a remedy at law and (b) be entitled,
in addition to any other remedy to which they may be entitled at law or in
equity, to compel specific performance of this Agreement in any action
instituted in accordance with Section 8.1.
SECTION 8.10 ASSIGNMENT. Neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned by either party
(whether by operation of law or otherwise) without the prior written consent
of the other party. Subject to the preceding sentence, this Agreement will
be binding upon, inure to the benefit of and be enforceable by the parties
and their respective permitted successors and assigns.
SECTION 8.11 EXPENSES. Except as otherwise provided herein, all
costs and expenses incurred in connection with the transactions contemplated
hereby, this Agreement and the consummation of the transactions contemplated
hereby shall be paid by the party incurring such costs and expenses, whether
or not the transactions contemplated hereby is consummated, PROVIDED that
Purchaser shall pay all fees associated with any filings made under the HSR
Act in connection with the transactions contemplated by this Agreement.
SECTION 8.12 WAIVERS. Except as otherwise provided in this
Agreement, any failure of either party to comply with any obligation,
covenant, agreement or condition herein may be waived by the party or parties
entitled to the benefits thereof only by a written instrument signed by the
party granting such waiver, but such waiver or failure to insist upon strict
compliance with such obligation, covenant, agreement or condition shall not
operate as a waiver of, or estoppel with respect to, any subsequent or other
failure.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be signed by their respective officers thereunto duly authorized as of the
date first written above.
FOUNDATION HEALTH CORPORATION
By: /s/ SIGNATURE
------------------------------------
SUPERIOR NATIONAL INSURANCE GROUP, INC.
By: /s/ SIGNATURE
------------------------------------
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
CONSOLIDATED BALANCE SHEET AND CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 343,940
<SECURITIES> 603,498
<RECEIVABLES> 512,512<F1>
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,311,377
<PP&E> 435,070<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,946,886
<CURRENT-LIABILITIES> 1,542,439
<BONDS> 1,353,420<F3>
0
0
<COMMON> 124
<OTHER-SE> 927,278
<TOTAL-LIABILITY-AND-EQUITY> 3,946,886
<SALES> 2,149,224
<TOTAL-REVENUES> 2,175,374
<CGS> 1,821,002
<TOTAL-COSTS> 1,821,002
<OTHER-EXPENSES> 289,249
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,861
<INCOME-PRETAX> 43,262
<INCOME-TAX> 17,024
<INCOME-CONTINUING> 26,238
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,238
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0.22
<FN>
<F1>NET OF ALLOWANCES FOR DOUBTFUL ACCOUNTS
<F2>NET OF ACCUMULATED DEPRECIATION
<F3>INCLUDES BORROWINGS UNDER FHS REVOLVING CREDIT FACILITY MISC NOTES PAYABLE &
CAPITAL LEASES
</FN>
</TABLE>
