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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1998
/ / 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
FOUNDATION HEALTH SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 95-4288333
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
21650 OXNARD STREET, WOODLAND HILLS, CA 91367
(Address of principal executive offices) (Zip Codes)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (818) 676-6978
Securities registered pursuant to Section 12(b) of the Act:
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<S> <C>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Class A Common Stock, $.001 par value New York Stock Exchange, Inc.
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
The aggregate market value of the voting stock held by non-affiliates of the
registrant at March 29, 1999 was $1,325,343,786 (which represents 119,805,088
shares of Class A Common Stock held by such non-affiliates multiplied by
$11.0625, the closing sales price of such stock on the New York Stock Exchange
on March 29, 1999).
The number of shares outstanding of the registrant's Class A Common Stock as
of March 12, 1999 was 120,319,926 (excluding 3,194,374 shares held as treasury
stock), and 5,047,642 shares of the registrant's Class B Common Stock were
outstanding as of such date.
DOCUMENTS INCORPORATED BY REFERENCE:
Part II of this Form 10-K incorporates by reference certain information from
the registrant's Annual Report to Stockholders for the year ended December 31,
1998 ("Annual Report to Stockholders"). Part III of this Form 10-K incorporates
by reference certain information from the registrant's definitive proxy
statement to be filed with the Securities and Exchange Commission within 120
days after the close of the year ended December 31, 1998.
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PART I
ITEM 1. BUSINESS
Foundation Health Systems, Inc. (the "Company" or "FHS") is an integrated
managed care organization which administers the delivery of managed health care
services. The Company's health maintenance organizations ("HMOs"), insured
preferred provider organizations ("PPOs"), and government contracts subsidiaries
provide health benefits to 5.8 million individuals in 21 states through group,
individual, Medicare risk, Medicaid, and Civilian Health and Medical Program of
the Uniformed Services ("CHAMPUS") programs. The Company's subsidiaries also
offer managed health care products related to behavioral health, dental and
vision services, and offer managed health care product coordination for
multi-region employers and administrative services for medical groups and
self-funded benefits programs. The Company operates and conducts its HMO and
other businesses through its subsidiaries.
The Company currently operates within two segments of the managed health
care industry: Health Plan Services and Government Contracts/Specialty Services.
For a portion of 1998, the Company also operated a risk-assuming workers'
compensation insurance business, which represented a separate segment of
business. Such risk-assuming workers' compensation business was sold in December
1998, and is reported as "Discontinued Operations and Anticipated Divestitures."
During 1998, the Health Plan Services segment consisted of four regional
divisions: Arizona (Arizona and Utah), California (encompassing only the state
of California), Central (Colorado, Florida, Idaho, Louisiana, New Mexico, Ohio,
Oklahoma, Oregon, Pennsylvania, Texas, Washington and West Virginia) and
Northeast (Connecticut, New Jersey and New York). Effective January 1, 1999, the
Company slightly reorganized such divisions and moved the Ohio, Pennsylvania and
West Virginia operations from the Central Division to the Northeast Division.
The Company is one of the largest managed health care companies in the United
States, with approximately 4.2 million full-risk and administrative services
only ("ASO") members in its Health Plan Services segment. The Company also
operates PPO networks providing access to health care services to over 4 million
individuals in 37 states and owns six health and life insurance companies
licensed to sell insurance in 33 states and the District of Columbia.
The Company's HMOs market traditional HMO products to employer groups and
Medicare and Medicaid products to employer groups and directly to individuals.
Health care services that are provided to the Company's commercial and
individual members include primary and specialty physician care, hospital care,
laboratory and radiology services, prescription drugs, dental and vision care,
skilled nursing care, physical therapy and mental health. The Company's HMO
service networks include approximately 43,000 primary care physicians and
108,000 specialists.
The Company's Government Contracts/Specialty Services segment consists of
the Government Contracts Division and the Specialty Services Division. The
Company's Government Contracts Division oversees the provision of contractual
services to federal government programs such as CHAMPUS. The Company receives
revenues for administrative and management services and, under most of its
contracts, also accepts financial responsibility for a portion of the health
care costs. The Company's Specialty Services Division oversees the provision of
supplemental programs to enrollees in the Company's HMOs, as well as to members
whose basic medical coverage is provided by non-FHS companies, including vision
coverage, dental coverage, managed behavioral health programs and a prescription
drug program. The Specialty Services Division consists both of operations in
which the Company assumes underwriting risk in return for premium revenue, and
operations in which the Company provides administrative services only, including
certain of the behavioral health and pharmacy benefits management programs. Such
Division also provides certain bill review and third party administrative
services as described elsewhere in this Annual Report. The Company has entered
into a definitive agreement for the sale of certain of its pharmacy benefit
processing services. See "Discontinued Operations and Anticipated Divestitures."
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The Company continues to evaluate the profitability realized or likely to be
realized by its existing businesses and operations, and the opportunities to
expand its businesses in profitable markets. The Company is reviewing the
strategic importance of each of its businesses and operations, focusing its
resources on its core and strong-performing businesses, and divesting itself of
certain non-core and lesser-performing operations. Accordingly, in 1998 the
Company sold its risk-assuming workers' compensation operations and certain
member support center operations located in Philadelphia, and entered into a
definitive agreement to sell its HMO operations in Louisiana, Oklahoma and
Texas. In February 1999, the Company also entered into a definitive agreement
for the sale of certain of its pharmacy benefit processing services. In
addition, in March of 1999, the Company entered into a definitive agreement to
sell its New Mexico operations, and signed a letter of intent to sell its
Colorado operations. The Company has also undertaken to purchase the remaining
minority interests of FOHP, Inc., a majority-owned subsidiary of the Company
which owns a managed health care company in New Jersey. See "Discontinued
Operations and Anticipated Divestitures" and "Other Information--Recent
Developments."
The Company was incorporated in 1990. The current operations of the Company
are the 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 Agreement and Plan of Merger (the "Merger
Agreement") that evidenced the FHS Combination, FH Acquisition Corp., a
wholly-owned subsidiary of HSI, 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. Under the Merger Agreement, FHC
stockholders received 1.3 shares of the Company's Class A Common Stock for every
share of FHC common stock held. The shares of the Company's Class A Common Stock
issued to FHC's stockholders in the FHS Combination constituted approximately
61% of the outstanding stock of the Company after the FHS Combination and the
shares held by the Company's stockholders prior to the FHS Combination (i.e.,
the prior stockholders of HSI) constituted approximately 39% of the outstanding
stock of the Company after the FHS Combination.
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
consolidated financial statements incorporated by reference into this Annual
Report on Form 10-K have been prepared and/or restated as though HSI and FHC
always had been combined on a calendar year basis.
Prior to the FHS Combination, the Company was the successor to the business
conducted by Health Net, now the Company's HMO subsidiary in California, which
became a subsidiary of the Company in 1992, and HMO and PPO networks operated by
QualMed, Inc. ("QualMed"), which combined with the Company in 1994 to create
HSI. FHC was incorporated in Delaware in 1984. The executive offices of the
Company are located at 21650 Oxnard Street, Woodland Hills, CA 91367. Except as
the context otherwise requires, the term the "Company" refers to FHS and its
subsidiaries.
HEALTH PLAN DIVISIONS
HMO AND PPO OPERATIONS. The Company's HMOs offer members a comprehensive
range of health care services, including ambulatory and outpatient physician
care, hospital care, pharmacy services, eye care, behavioral health and
ancillary diagnostic and therapeutic services. The Company offers a full
spectrum of managed health care products.
The integrated health care programs offered by the Company's HMOs include
products offered through both traditional Network Model HMOs (in which the HMOs
contract with individual physicians, physician groups and independent or
individual practice associations ("IPAs")) and IPA Model HMOs (in which the HMOs
contract with one or more IPAs that in turn subcontract with individual
physicians to provide HMO patient services) which offer quality care, cost
containment and comprehensive coverage; a
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matrix package which allows employees to select their desired coverage from
alternatives that have interchangeable outpatient and inpatient co-payment
levels; point-of-service programs which offer a multi-tier design that provides
both conventional HMO and indemnity-like (in-network and out-of-network) tiers;
a PPO-like tier which allows members to self-refer to the network physician of
their choice; and a managed indemnity plan which is provided for employees who
reside outside of their HMO service areas. The Company's PPO subsidiaries
consist of networks of health care providers which offer their services to
health care third-party payors, such as insurers and self-funded employers.
The Company's strategy is to offer a wide range of managed health care
products and services to employers to assist them in containing health care
costs. The pricing of the products offered is designed to provide incentives to
both employers and employees to select and enroll in the products with greater
managed health care and cost containment elements. In general, the Company's HMO
subsidiaries provide comprehensive health care coverage for a fixed fee or
premium that does not vary with the extent or frequency of medical services
actually received by the member. PPO enrollees choose their medical care from
among the various contracting providers or choose a non-contracting provider and
are reimbursed on a traditional indemnity plan basis after reaching an annual
deductible. The Company assumes both underwriting and administrative expense
risk in return for the premium revenue it receives from its HMO and PPO
products. The HMOs and PPOs have contractual relationships with health care
providers for the delivery of health care to the Company's enrollees. While a
majority of the Company's members are covered by conventional HMO products, the
Company is continuing to expand its other product lines, thereby enabling it to
offer flexibility to an employer and to tailor its products to an employer's
particular needs.
The following table contains certain information relating to commercial HMO
and PPO members, Medicare members and employer groups under contract as of
December 31, 1998 in each region in which the Company operated (excluding
point-of-service):
<TABLE>
<CAPTION>
ARIZONA CALIFORNIA CENTRAL NORTHEAST
DIVISION DIVISION DIVISION DIVISION
--------- ---------- --------- -----------
<S> <C> <C> <C> <C>
Commercial HMO and PPO Members.................. 294,032 1,534,961 514,786 782,403
Medicare Members (risk only).................... 51,280 150,650 61,756 58,486
Medicaid Members................................ -- 438,942 61,671 84,820
</TABLE>
In addition, the following sets forth certain data regarding the Company's
employer groups in its commercial managed care operations of its Health Plan
Divisions as of December 31, 1998:
<TABLE>
<S> <C>
Number of Employer Groups........................................... 63,729
Largest Employer Group as % of enrollment........................... 4.8%
10 largest Employer Groups as % of enrollment....................... 17.6%
</TABLE>
ARIZONA DIVISION
In Arizona, the Company believes that its commercial managed care operations
rank it second largest both as measured by total membership and by size of
provider network. The Company's commercial HMO membership in Arizona was 286,540
as of December 31, 1998. The Company's Medicare risk membership in Arizona was
51,280 as of December 31, 1998 which represented an increase of 8% during 1998.
The Company's commercial HMO membership in Utah was 7,492 as of December 31,
1998. The Arizona Division also oversees the Company's six health and life
insurance companies licensed to sell insurance in 33 states and the District of
Columbia.
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CALIFORNIA DIVISION
The California market is characterized by a concentrated population. In mid
1998, the Company merged the operations of two of its California HMO
subsidiaries, Health Net and Foundation Health, a California Health Plan. The
resulting HMO, Health Net, is believed by the Company to be the third-largest
HMO in the state of California in terms of membership and the largest in terms
of size of provider network. The Company's commercial HMO membership in
California as of December 31, 1998 was 1,534,961, which represented a decrease
of 7% during 1998. The Company's Medicare risk membership in California as of
December 31, 1998 was 150,650, which represented a decrease of 1% during 1998.
The Company's Medicaid membership in California as of December 31, 1998 was
438,942 members.
CENTRAL DIVISION.
During 1998, the Central Division included Health Plan operations in
Colorado, Florida, Idaho, Louisiana, New Mexico, Ohio, Oklahoma, Oregon,
Pennsylvania, Texas, Washington and West Virginia. As of January 1, 1999, the
Health Plan operations in Ohio, Pennsylvania and West Virginia were moved to the
Northeast Division.
The Company believes that its Colorado HMO is the fifth largest HMO in the
state of Colorado as measured by total membership and second largest as measured
by size of provider network. The Company's commercial HMO membership in Colorado
was 77,269 as of December 31, 1998, which represented an increase of 1% during
1998. The Company's Medicare membership in Colorado was 10,324 as of December
31, 1998, which represented a decrease of 15% during 1998. As noted below in the
section of this Annual Report on Form 10-K entitled "Discontinued Operations and
Anticipated Divestitures," the company has entered into a letter of intent to
sell its Colorado HMO operations.
The Company believes its Florida HMO and PPO operations make it the ninth
largest HMO managed care provider in terms of membership and fifth largest HMO
in terms of size of provider network in the state of Florida. The Company's
commercial HMO membership in Florida was 84,508 as of December 31, 1998, which
represented a decrease of 9% during 1998. The Company's Medicare risk membership
in Florida was 24,891 as of December 31, 1998, which represented an increase of
4% during 1998. The Company's Medicaid membership in Florida was 28,318 as of
December 31, 1998, a 21% increase in 1998.
In New Mexico, the Company believes that its ranks sixth largest as measured
by total membership and tenth largest as measured by size of provider network.
The Company's commercial HMO membership in New Mexico was 29,924 as of December
31, 1998, which represented a decrease of 12% during 1998. The Company's
Medicare risk membership in New Mexico was 3,595 as of December 31, 1998, which
represented an increase of 55% during 1998. As noted below in the section of
this Annual Report on Form 10-K entitled "Discontinued Operations and
Anticipated Divestitures," the Company has entered into a definitive agreement
to sell its New Mexico HMO operations.
The Company's commercial HMO membership in eastern Pennsylvania was 47,990
as of December 31, 1998, which represented a decrease of 28% during 1998. The
Company's Medicare risk membership in eastern Pennsylvania was 14,033 as of
December 31, 1998, which represented a decrease of 7% during 1998. Collectively,
the Company's commercial HMO membership in Ohio, western Pennsylvania and West
Virginia was approximately 20,200 as of December 31, 1998. The Company's
Medicare risk membership in Ohio, western Pennsylvania and West Virginia was
approximately 2,600 collectively as of December 31, 1998.
The Company's Washington HMO services Seattle and Spokane and also services
a limited number of residents who reside in the state of Idaho. The Company's
Oregon HMO services Portland and its vicinity. In addition, an increasing
percentage of the population in each of these areas has enrolled in HMOs in the
last several years. In Washington and Oregon, the Company believes that it ranks
third and sixth,
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respectively, with respect to total membership; the Company believes that it
ranks first in Washington and third in Oregon with respect to the size of its
primary care physician and specialist networks. The Company's commercial HMO and
PPO membership in Oregon was 131,889 as of December 31, 1998. At year end 1997,
the Company had 163,406 commercial members in Oregon. The Company's commercial
HMO and PPO membership in Washington was 105,372 as of December 31, 1998, which
represented an increase of 10% during 1998. The Company's Medicare risk
membership in Washington was 2,641 as of December 31, 1998, which represented a
decrease of 20% during 1998. The Company's Medicaid membership in Washington was
30,658 as of December 31, 1998, which represented an increase of 23% during
1998.
Collectively, the Company's commercial HMO membership in Texas, Oklahoma,
and Louisiana was 29,752 as of December 31, 1998. As noted below in the section
of this Annual Report on Form 10-K entitled "Discontinued Operations and
Anticipated Divestitures", the Company has entered into a definitive agreement
to sell these three HMOs.
NORTHEAST DIVISION.
During 1998, the Northeast Division included Company operations in
Connecticut, New Jersey and New York. As referenced above, effective January 1,
1999, the Company's operations in the states of Ohio, Pennsylvania and West
Virginia were moved from the Central Division to the Northeast Division.
In the Company's Northeast Division, the Company and The Guardian Life
Insurance Company of America ("The Guardian") together offer both HMO and
indemnity products through a joint venture doing business as "Healthcare
Solutions." In general, the Company and The Guardian share equally in the
profits of the joint venture, subject to certain terms of the joint venture
arrangement related to expenses. The Guardian is a mutual insurer (owned by its
policy owners) which offers financial products and services, including
individual life and disability income insurance, employee benefits, pensions and
401(k) products. The Guardian is headquartered in New York and has more than
2,000 agents distributing its products nationwide.
The Company believes its Connecticut HMO and PPO operations make it the
largest HMO managed care provider in terms of membership and size of provider
network in the state of Connecticut. The Company's commercial HMO membership in
Connecticut was 356,113 as of December 31, 1998 (including 48,415 members under
The Guardian arrangement), an increase of approximately 5% since the end of
1997. The Company's Medicare risk membership in Connecticut was 44,627 as of
December 31, 1998, which represented an increase of 70% during 1998, and the
Company's Medicaid membership in Connecticut was 62,649 as of December 31, 1998,
which represented an increase of 33% during 1998.
The Company believes its New Jersey HMO and PPO operations make it the third
largest HMO managed care provider in terms of membership and the largest in
terms of size of provider network in the state of New Jersey. The Company's
commercial HMO membership in New Jersey was 231,281 as of December 31, 1998
(including 77,260 members under The Guardian arrangement). The Company's
Medicare risk membership in New Jersey was 2,695 as of December 31, 1998 and the
Company's Medicaid membership in New Jersey was 22,171 as of December 31, 1998.
In New York, the Company had 187,285 members as of December 31, 1998, which
represented an increase of 25% during 1998. Such membership includes 88,164
members under The Guardian arrangement. The Company believes its New York HMO
and PPO operations make it the fifth largest HMO managed care provider in terms
of membership and the second largest in terms of size of provider network in the
state of New York.
MEDICARE RISK. The Company expanded its Medicare risk business in 1998 and,
as of December 31, 1998, the Company's Medicare risk plans had a combined
membership of approximately 322,171 compared to 309,333 as of December 31, 1997.
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The Company offers its Medicare risk products directly to individuals and to
employer groups. To enroll in a Company Medicare risk plan, covered persons must
be eligible for Medicare. Health care services normally covered by Medicare are
provided or arranged for by the Company, in conjunction with a broad range of
preventive health care services. The federal Health Care Financing
Administration ("HCFA") pays to the Company for each enrolled member a monthly
fee based, in part, upon the "Adjusted Average Per Capita Cost," as determined
by HCFA's analysis of fee-for-service costs related to beneficiary demographics.
Depending on plan design and other factors, the Company may charge a member a
premium or prepaid charge.
The Company's California Medicare risk product, Seniority Plus, was licensed
and certified to operate in 25 California counties as of December 31, 1998. The
Company's other HMOs are licensed and certified to offer Medicare risk plans in
25 counties in Colorado, 10 counties in New Mexico, 6 counties in Washington, 9
counties in Pennsylvania, 34 counties in Oregon, 8 counties in Connecticut, 6
counties in Arizona, 3 counties in Florida, 21 counties in New Jersey and 11
counties in New York.
MEDICAID PRODUCTS. As of December 31, 1998, the Company had an aggregate of
approximately 585,500 Medicaid members, principally in California. To enroll in
these Medicaid products, an individual must be eligible for Medicaid benefits
under the appropriate state regulatory requirements. The respective HMOs offer,
in addition to standard Medicaid coverage, certain additional services including
dental and vision benefits. The applicable state agency pays the Company's HMOs
a monthly fee for each Medicaid member enrolled on a percentage of
fee-for-service costs. The Company has Medicaid members and operations in
California, Connecticut, Florida, New Jersey, New York and Washington.
ADMINISTRATIVE SERVICES ONLY BUSINESS. The Company also provides
third-party administrative services to large employer groups throughout its
service areas. Under these arrangements, the Company provides claims processing,
customer service, medical management and other administrative services without
assuming the risk for medical costs. The Company is generally compensated for
these services on a fixed per member per month basis.
INDEMNITY INSURANCE PRODUCTS. The Company offers indemnity products as
"stand-alone" products and as part of multiple option products in various
markets. These products are offered by the Company's six health and life
insurance subsidiaries which are licensed to sell insurance in 33 states and the
District of Columbia. Through these subsidiaries, the Company also offers HMO
members certain auxiliary non-health products such as group life and accidental
death and disability insurance.
Although the Arizona Division oversees the Company's health and life
insurance operations, such operations' products are provided throughout most of
the Company's service areas. The following table contains certain information
relating to such health and life insurance companies' insured PPO, point of
service ("POS"), indemnity and group life products as of December 31, 1998 in
each of the four Health Plan Divisions in which the Company operates:
<TABLE>
<CAPTION>
ARIZONA CALIFORNIA CENTRAL NORTHEAST
DIVISION DIVISION DIVISION DIVISION
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Insured PPO Members................................ 0 28,955 32,721 18,888
Point of Service Members........................... 0 96,209 30,899 214,199(a)
Indemnity Members.................................. 9,142 9,213 1,039 0
Group Life Members................................. 3,364 34,923 23,594 0
</TABLE>
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(a) Represents members under the Company's arrangement with The Guardian
described elsewhere in this Annual Report on Form 10-K.
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GOVERNMENT CONTRACTS DIVISION
CHAMPUS. The Company's wholly-owned subsidiary, Foundation Health Federal
Services, Inc. ("Federal Services"), administers large, multi-year managed care
federal contracts for the United States Department of Defense ("DoD").
Federal Services currently administers health care contracts for DoD's
TRICARE program covering 1.6 million eligible individuals under CHAMPUS. Through
the federal government's TRICARE program, Federal Services provides CHAMPUS
families with improved access to primary health care, lower out-of-pocket
expenses and fewer claims forms. Federal Services currently administers three
TRICARE contracts for five regions that cover the following states:
- Region 11: Washington, Oregon and part of Idaho
- Region 6: Texas, Arkansas, Oklahoma and part of Louisiana
- Regions 9, 10 and 12: California, Hawaii, Alaska and part of Arizona
During 1998, enrollment of CHAMPUS beneficiaries in the HMO option of the
TRICARE program for the Region 11 contract increased by 16% to 131,782 while the
total estimated number of eligible beneficiaries, based on DoD data, increased
by 5% to 248,928. During 1998, enrollment of CHAMPUS beneficiaries in the HMO
option of the TRICARE program for the Region 6 contract increased by 22% to
325,586 while the total estimated number of eligible beneficiaries, based on DoD
data, decreased by 1% to 619,688. During 1998, enrollment of CHAMPUS
beneficiaries in the HMO option of the TRICARE program for the Regions 9, 10 and
12 contract increased by 9% to 362,958 while the total estimated number of
eligible beneficiaries, based on DoD data and excluding Alaska, decreased by 15%
to 647,334 due to base realignments and closures.
Under the TRICARE contracts, Federal Services shares health care cost risk
with DoD for both gains and losses. Federal Services subcontracts to affiliated
and unrelated third parties for the administration and health care risk of parts
of these contracts. If all option periods are exercised by DoD and no extensions
of the performance period are made, health care delivery ends on February 29,
2000 for the Region 11 contract, on October 31, 2000 for the Region 6 contract,
and on March 31, 2001 for the Regions 9, 10 and 12 contract. The DoD
Authorization Act for government fiscal year 1999 authorized DoD to extend the
term of the current TRICARE contracts for two years. Federal Services and DoD
are currently negotiating modifications to the contracts for Region 11 and
Region 6 to add additional option periods which, if exercised, could extend the
period of health care delivery to February 28, 2002 for the Region 11 contract
and October 31, 2002 for the Region 6 contract. Federal Services expects to
negotiate a similar extension to the Regions 9, 10 and 12 contract. Federal
Services also expects to compete for the rebid of those contracts.
Federal Services protested to the U.S. General Accounting Office (the "GAO")
concerning the awards of TRICARE contracts for Region 1 (northeast states) and
for Regions 2 and 5 (mid-Atlantic and midwest states) to competitors of Federal
Services. The GAO sustained the protests and recommended that DoD conduct
another round of competition for these contracts. DoD filed petitions for
reconsideration of the protest decision by the GAO. The GAO denied DoD's
petition for reconsideration of the Regions 2 and 5 decision and DoD will
re-open competition for that contract on approximately April 1, 1999. Federal
Services expects to compete for the rebid of the contract for Regions 2 and 5.
Prior to the GAO deciding DoD's petition for reconsideration of the Region 1
protest decision, Federal Services entered into a litigation settlement
agreement with DoD and the Region 1 contractor whereby Federal Services agreed
not to seek the re-opening of competition for the Region 1 contract in exchange
for certain financial considerations from both the Region 1 contractor and DoD.
MEDICARE AND MEDICAID. During 1998, Federal Services administered contracts
with the states of Massachusetts, New Jersey, Georgia and Maryland to enroll
Medicaid eligible individuals in managed care
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programs within those states. Federal Services is not at risk for the provision
of any health care services under those contracts. Federal Services entered into
an agreement with MAXIMUS, Inc., effective December 24, 1997, to sell the
contracts for Massachusetts, New Jersey, Georgia, and Maryland. The contract
with the state of Maryland expired on June 30, 1998. The contracts with New
Jersey and Georgia have been novated to MAXIMUS, Inc., and novation of the
contract with Massachusetts is pending.
SPECIALTY SERVICES DIVISION
The Company's Specialty Services Division offers behavioral health, dental,
vision and pharmacy benefit management products and services as well as managed
care products related to bill review, administration and cost containment for
hospitals, health plans and other entities.
DENTAL AND VISION. Through DentiCare of California, Inc. ("DentiCare"), the
Company operates a dental HMO in California and Hawaii and performs dental
administrative services for an affiliate company in California and Colorado,
serving in the aggregate approximately 575,000 enrollees as of December 31,
1998. This enrollment includes 143,000 enrollees who are beneficiaries under
Medicaid dental programs, of which 42,000 enrollees are beneficiaries of
Hawaii's Medicaid program, and 184,000 enrollees who are also enrollees of
affiliated Health Plan companies. DentiCare is also a participant in
California's Healthy Families Program, with initial beneficiary enrollment and
service delivery commencing in July 1998. Acquired by the Company in 1991,
DentiCare has grown from total revenues in 1992 of $24 million to $46 million
for the year ended December 31, 1998.
Operating on administrative and information system platforms in common with
DentiCare is Foundation Health Vision Services, Inc., d.b.a. AVP Vision Services
("AVP"). AVP operates in California and Arizona and provides at-risk and
administrative services under various programs that result in the delivery of
vision benefits to over 636,000 enrollees. Total revenues from AVP operations
for the year ended December 31, 1998 exceeded $11 million. Since its acquisition
by the Company in 1992, AVP has grown from 30,000 covered enrollees to 374,000
enrollees in full-risk products and 262,000 enrollees covered under
administrative services contracts as of December 31, 1998.
Both DentiCare and AVP are licensed in California under the Knox-Keene
Health Care Service Plan Act of 1975, as amended (the "Knox-Keene Act"), as
Specialized Health Care Service Plans and compete with other HMOs, traditional
insurance companies, self-funded plans, PPOs and discounted fee-for-service
plans. The two companies share a common strategy to maximize the value and
quality of managed dental and vision care services while appropriately balancing
financial risk assumption among providers, enrollees and other entities to
achieve the effective and efficient use of available resources.
BEHAVIORAL HEALTH. Effective July 1, 1998, the Company's behavioral health
subsidiaries, Managed Health Network and Foundation Health Psychcare Services,
Inc. (collectively, "MHN"), each licensed in California under the Knox-Keene Act
as Specialized Health Care Service Plans, received regulatory approval of their
merger. MHN, directly and through Specialty Services affiliates, offers
behavioral health, substance abuse and employee assistance programs ("EAPs") on
an insured and self-funded basis to employers, governmental entities and other
payors in various states.
MHN provides managed behavioral health programs to employers, governmental
agencies and public entitlement programs, such as CHAMPUS and Medicaid. Employer
group sizes range from Fortune 100 to mid-sized companies with 200 employees.
MHN's strategy is to continue its market share achievement in the Fortune 500,
health plan and CHAMPUS markets through a combination of direct and consultant/
broker sales. MHN intends to achieve additional market share by capitalizing on
competitor consolidation, remaining CHAMPUS procurement opportunities and the
growing state and county Medicaid behavioral carve-outs, funded on either a risk
or administrative-services-only ("ASO") basis.
These products and services were provided to over 8.8 million individuals in
the year ended December 31, 1998, with approximately 3.6 million individuals
under risk-based programs, approximately
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1.5 million individuals under self-funded programs, and approximately 3.9
million individuals under EAP programs.
WORKERS' COMPENSATION ADMINISTRATIVE SERVICES. The Company's subsidiaries
organized under WC Division, Inc. provide a full range of managed care
administrative services to insurers, self-funded employers, third-party claims
administrators and public agencies. These services include automated bill
review, telephonic claims reporting, automated utilization management, field and
telephonic case management, and PPO network access and administration. The
Company also offers ASO claims services as well as vocational rehabilitation and
temporary employee placement and recruitment services. Certain of these
operations were previously part of the Company's workers' compensation business,
the risk-based operations of which the Company sold on December 10, 1998. See
"Discontinued Operations and Anticipated Divestitures." WC Division, Inc. is in
the process of changing its name to Employer & Occupational Services Group, Inc.
PHARMACY BENEFIT MANAGEMENT. On February 26, 1999, the Company entered into
a definitive agreement to sell to Advance Paradigm, Inc. ("Advance Paradigm")
certain pharmacy benefit processing services, which it expects to complete on
March 31, 1999. The Company's pharmacy benefit management business consists of
claims processing, retail pharmacy network management, drug manufacturer rebate
management, mail service pharmacy and payment of claims with respect to pharmacy
benefits. As part of the sale, the Company and Advance Paradigm entered into a
services agreement, whereby Advance Paradigm will provide to the Company's
Health Plan Divisions at competitive rates the pharmacy management services
being sold. See "Discontinued Operations and Anticipated Divestitures."
PROVIDER RELATIONSHIPS AND RESPONSIBILITIES
PHYSICIAN RELATIONSHIPS. Upon enrollment in most of the Company's HMO
plans, each member selects a participating physician group ("PPG") or primary
care physician from the HMO's provider panel. The primary care physicians and
PPGs assume overall responsibility for the care of members. Medical care
provided directly by such physicians includes the treatment of illnesses not
requiring referral, as well as physical examinations, routine immunizations,
maternity and child care, and other preventive health services. The primary care
physicians and PPGs are responsible for making referrals (approved by the HMO's
or PPG's medical director) to specialists and hospitals. Certain Company HMOs
offer enrollees "open panels" under which members may access any physician in
the network without first consulting a primary care physician.
The following table sets forth the number of primary care and specialist
physicians with whom the Company's HMOs (and certain of such HMOs' PPGs)
contracted as of December 31, 1998 in each of the four Health Plan Divisions of
the Company:
<TABLE>
<CAPTION>
ARIZONA CALIFORNIA CENTRAL NORTHEAST
DIVISION DIVISION DIVISION DIVISION
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Primary Care Physicians............................ 1,054 8,758 20,772 12,453
Specialist Physicians.............................. 2,708 49,472 29,419 27,152
Total.............................................. 3,762 58,230 50,191 39,605
</TABLE>
PPG and physician contracts are generally for a period of at least one year
and are automatically renewable unless terminated, with certain requirements for
maintenance of good professional standing and compliance with the Company's
quality, utilization and administrative procedures. In California and Arizona,
PPGs generally receive a monthly "capitation" fee for every member served. The
capitation fee represents payment in full for all medical and ancillary services
specified in the provider agreements. The non-physician component of all
hospital services is covered by a combination of capitation and/or per diem
charges. In such capitated arrangements, in cases where the capitated provider
cannot provide the health care services needed, such providers generally
contract with specialists and other ancillary service providers
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to furnish the requisite services pursuant to capitation agreements or
negotiated fee schedules with specialists. Many of the Company's HMOs outside
California and Arizona reimburse physicians according to a discounted
fee-for-service schedule, although several HMOs have commenced capitation
arrangements with certain providers and provider groups in their market areas.
HOSPITAL RELATIONSHIPS. The Company's HMOs arrange for hospital care
primarily through contracts with selected hospitals in their service areas. Such
hospital contracts generally provide for multi-year terms and provide for
payments on a variety of bases, including capitation, per diem rates, case
rates, and discounted fee-for-service schedules.
Covered inpatient hospital care for a member is comprehensive; it includes
the services of physicians, nurses and other hospital personnel, room and board,
intensive care, laboratory and x-ray services, diagnostic imaging, and generally
all other services normally provided by acute-care hospitals. HMO or PPG nurses
and medical directors are actively involved in discharge planning and case
management, which often involves the coordination of community support services,
including visiting nurses, physical therapy, durable medical equipment and home
intravenous therapy.
The Company owns and operates 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. As noted below
in the section of this Annual Report on Form 10-K entitled "Discontinued
Operations and Anticipated Divestitures," the Company is reviewing the
possibility of divesting its ownership of these hospitals.
COST CONTAINMENT. In most HMO plan designs, the primary care physician or
PPG is responsible for authorizing all needed medical care except for emergency
medical services. By coordinating care through such physicians in cases where
reimbursement includes risk-sharing arrangements, the Company believes that
inappropriate use of medical resources is reduced and efficiencies are achieved.
To limit possible abuse in utilization of hospital services in non-emergency
situations, a certification process precedes the inpatient admission of each
member, followed by continuing review during the member's hospital stay. In
addition to reviewing the appropriateness of hospital admissions and continued
hospital stay, the Company plays an active role in evaluating alternative means
of providing care to members and encourages the use of outpatient care, when
appropriate, to reduce the cost that would otherwise be associated with an
inpatient admission.
QUALITY ASSESSMENT. Quality assessment is a continuing priority for the
Company. Most of the Company's HMOs have a quality assessment plan administered
by a committee comprised of medical directors and primary care and specialist
physicians. The committees' responsibilities include periodic review of medical
records, development and implementation of standards of care based on current
medical literature and community standards, and the collection of data relating
to results of treatment. All of the Company's HMOs also have a subscriber
grievance procedure and/or a member satisfaction program designed to respond
promptly to member grievances. Aspects of such member service programs take
place both within the PPGs and within the Company's HMOs. Set forth under the
heading "National Committee for Quality Assurance" below is information
regarding certain quality assessment accreditations received by the Company's
subsidiaries.
The Company's quality initiatives department also implements various
programs to attempt to enhance access to quality health care and services for
the Company's members. The mission of such department is to improve the health
status and quality of life of the Company's members through the development and
implementation of various programs including disease management programs, health
assessment and member satisfaction surveys, data collection and tracking for the
Health Plan Employer Data and Information Set ("HEDIS") initiative, and
assistance with performance-based contracting with provider groups.
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<PAGE>
In December 1998, the Company sold the clinical content of its member
support center services located in Philadelphia for approximately $36.3 million
in net proceeds. The member support center is a telecommunications center
staffed by nurses who respond to member calls through the retrieval of detailed
clinical and demographic data regarding plan members and provider information
and the use of clinical algorithms to guide members to the most appropriate
level of care for their condition. As part of the sale, the Company's members
who had access to the support center prior to the sale will continue to have
access to similar services provided by the purchaser of the center for a period
of up to ten years. See "Discontinued Operations and Anticipated Divestitures"
below.
MANAGEMENT INFORMATION SYSTEMS
Effective information technology systems are critical to the Company's
operation. The Company's information technology systems include several computer
systems, each utilizing a combination of packaged and customized software and a
network of on-line terminals. The information technology systems gather and
store data on the Company's members and physician and hospital providers. The
systems contain all of the Company's necessary membership and claims-processing
capabilities as well as marketing and medical utilization programs. These
systems provide the Company with an integrated and efficient system of billing,
reporting, member services and claims processing, and the ability to examine
member encounter information for the optimization of clinical outcomes.
The Company also recognizes that the arrival of the Year 2000 poses a
challenge to the ability of computer systems to recognize the date change from
1999 to 2000 (the "Year 2000 Issue") and is in the process of modifying its
computer applications and business processes to provide for their continued
functionality given the Year 2000 Issue. 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 (both external and
internal) that have date/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 material miscalculations causing disruptions of operations,
including, among other things, the inability to process transactions, prepare
invoices or engage in normal business activities.
The costs of the Company's Year 2000 Issue projects and the timetable in
which the Company plans to complete the Year 2000 Issue compliance requirements
are set forth under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Company's 1998 Annual
Report to Stockholders attached as an exhibit to this Annual Report on Form 10-K
and 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 be no assurance that these
estimates will be achieved and actual results could differ materially from these
plans and estimates.
DISCONTINUED OPERATIONS AND ANTICIPATED DIVESTITURES
RISK-BASED WORKERS' COMPENSATION OPERATIONS. In 1997, the Company revised
its strategy of maintaining a presence in the workers' compensation insurance
business as a result of various factors, including adverse developments arising
in the workers' compensation insurance business, primarily related to the
workers' compensation claims environment in California. In 1997 the Company
adopted a plan to completely discontinue this segment of its business, through
divestiture of its workers' compensation risk-assuming insurance subsidiaries.
On December 10, 1998, the Company consummated the sale of Business Insurance
Group, Inc. ("BIG"), its risk-based workers' compensation subsidiary. As part of
the transaction, the Company funded the purchase of third party reinsurance to
cover up to $175 million in adverse loss development related to BIG and its
subsidiaries. The Company received approximately $200 million in cash for the
sale, net of its costs and expenses for the transaction. Certain of the
Company's subsidiaries entered into agreements with the buyer to continue to
provide certain administrative services related to such operations for a period
of five years.
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<PAGE>
LOUISIANA, OKLAHOMA AND TEXAS HMO OPERATIONS. On November 4, 1998, the
Company entered into a definitive agreement for the sale of its HMO operations
in the states of Texas, Louisiana and Oklahoma to AmCareco, Inc. As part of the
transaction, the Company will receive convertible preferred stock of the buyer.
The Company is pursuing a divestiture of these HMOs due to, among other reasons,
inadequate returns on invested capital. Although the Company has entered into a
definitive agreement for the foregoing sale, consummation of the sale is subject
to numerous conditions and certain regulatory approvals.
ALABAMA HMO OPERATIONS. In December 1997, the Company entered into a
definitive agreement to sell its non-operational HMO license in Alabama to an
unaffiliated third party, which sale was consummated in January 1998.
PHARMACY BENEFITS MANAGEMENT SERVICES. In February 1999, the Company
entered into a definitive agreement to sell to Advance Paradigm the capital
stock of Foundation Health Pharmaceutical Services, Inc., and certain pharmacy
benefit processing services of Integrated Pharmaceutical Services, Inc., for
approximately $70 million in cash. In addition, the Company and Advance Paradigm
entered into a services agreement, whereby Advance Paradigm will provide to the
Company's Health Plan Divisions at competitive rates claims processing, retail
network management, and payment of claims pharmacy benefits services. Advance
Paradigm will also provide pharmacy mail service to the Health Plan Divisions.
For a period of five years, the Company may not compete with respect to such
services in any market in which Advance Paradigm conducts business, subject to
certain exceptions. It is anticipated that the sale will be consummated on March
31, 1999.
MEMBER SUPPORT CENTER OPERATIONS. During 1998, the Company operated a
regional member support center located in Philadelphia. The support center was a
telecommunications center staffed by nurses who responded to member calls
through the retrieval of detailed clinical and demographic data regarding plan
members and provider information, and the use of clinical algorithms to guide
members to the most appropriate level of care for their condition. In December
1998, the Company sold the clinical content used in its member support center
operations to Access Health, Inc. ("Access Health") for approximately $36.3
million in cash net proceeds. In addition, the Company entered into a long-term
services agreement with Access Health pursuant to which all members who had
access to the support center at the time of sale will continue to have such
access for a period of ten years, with available annual extensions by the
Company. In addition, as part of the transaction the Company agreed not to
compete in such services for a period commencing on the closing date and ending
two years after members cease to have access to the support center.
SOUTHERN CALIFORNIA HOSPITALS. The Company is reviewing the possibility of
divesting its 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. The Company is presently responding to inquiries of parties which have
expressed an interest in the purchase of such businesses.
GEM INSURANCE COMPANY. Since October of 1997, Gem Insurance Company
("Gem"), a subsidiary of the Company, has implemented a restructuring plan to
reduce operating losses and its in-force insurance risk. In 1997, Gem initiated
a withdrawal from the Nevada insurance markets, and began restructuring its
insurance products in Utah and then in certain other markets. Gem also reduced
commissions to market-level rates and terminated certain general agents. Gem
continued to implement such restructuring plan in 1998. As a result, the number
of Gem's insureds dropped from over 100,000 at the start of 1998 to
approximately 2,500 at December 31, 1998. Gem has filed notices of intention to
withdraw from Nebraska and the small group market in Colorado. Currently,
Foundation Health Systems Life and Health Insurance Company, a subsidiary of the
Company, services Gem's insureds through an administrative services agreement
between the companies. The Company is reviewing the possibility of winding up
the operations
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<PAGE>
of Gem or merging such operations into another insurance subsidiary of the
Company. Upon completion of its current withdrawals, Gem will be licensed in
only five states.
COLORADO OPERATIONS. In March 1999, the Company entered into a letter of
intent to sell the capital stock of QualMed Plans for Health of Colorado, Inc.,
the Company's HMO subsidiary in the state of Colorado, to Wellpoint Health
Networks Inc. The Company anticipates closing the sale in the first half of
1999. Although the Company has entered into a letter of intent for the foregoing
sale, consummation of the sale is subject to execution of a definitive agreement
mutually satisfactory to the parties and satisfaction of all conditions to be
set forth therein, including obtaining certain regulatory approvals. In
addition, the Company has decided to close its regional service center in
Pueblo, Colorado in the first half of 1999.
NEW MEXICO OPERATIONS. In March 1999, the Company also entered into a
definitive agreement to sell the capital stock of QualMed Plans for Health,
Inc., the Company's HMO subsidiary in the state of New Mexico, to Health Care
Horizons, Inc. Although the Company has entered into a definitive agreement for
the foregoing sale, consummation of the sale is subject to numerous conditions
and certain regulatory approvals.
CERTAIN OTHER OPERATIONS. 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.
ADDITIONAL INFORMATION CONCERNING THE COMPANY'S BUSINESS
MARKETING AND SALES. Marketing for group Health Plan business is a two-step
process in which the Company first markets to employer groups and then provides
information directly to employees once the employer has selected a Company HMO.
The Company typically uses its internal sales staff to serve the large employer
groups while independent brokers work with the Company's internal sales staff to
develop business with smaller employer groups. Once selected by an employer, the
Company solicits enrollees from the employee base directly. In 1998, the Company
marketed its programs and services primarily through its direct sales staff and
independent brokers, agents and consultants. During "open enrollment" periods
when employees are permitted to change health care programs, the Company uses
direct mail, work day and health fair presentations, telemarketing, outdoor
print, radio and television advertisements to attract new enrollees. The
Company's sales efforts are supported by its marketing division which includes
research and product development, corporate communications, public relations and
marketing services.
Premiums for each employer group are generally contracted for on a yearly
basis, payable monthly. Numerous factors are considered by the Company in fixing
its monthly premiums, including employer group needs and anticipated health-care
utilization rates as forecasted by the Company's management based on the
demographic composition of, and the Company's prior experience in, its service
areas. Premiums are also affected by applicable regulations that prohibit
experience rating of group accounts (i.e., setting the premium for the group
based on its past use of health care services) and by state regulations
governing the manner in which premiums are structured.
The Company believes that the importance of the ultimate health care
consumer (or member) in the health care product purchasing process is likely to
increase in the future. Accordingly, the Company intends to focus its marketing
strategies on the development of distinct brand identities and innovative
product service offerings that will appeal to potential Health Plan members.
COMPETITION. HMOs operate in a highly competitive environment in an
industry currently subject to significant changes from business consolidations,
new strategic alliances, legislative reform, and market pressures brought about
by a better informed and better organized customer base. The Company's HMOs face
substantial competition from for-profit and nonprofit HMOs, PPOs, self-funded
plans (including self-insured employers and union trust funds), Blue Cross/Blue
Shield plans, and traditional indemnity
14
<PAGE>
insurance carriers, some of which have substantially larger enrollments and
greater financial resources than the Company. The Company believes that the
principal competitive features affecting its ability to retain and increase
membership include the range and prices of benefit plans offered, provider
network, quality of service, responsiveness to user demands, financial
stability, comprehensiveness of coverage, diversity of product offerings, and
market presence and reputation. The relative importance of each of these
features and key competitors vary by market. The Company believes that it
competes effectively with respect to all of these factors.
Kaiser Foundation Health Plan ("Kaiser") is the largest HMO in California
and in the United States and is a competitor of the Company in the California
HMO industry. In addition to Kaiser, the Company's other HMO competitors include
PacifiCare of California, California Care (Blue Cross), Blue Shield, Aetna and
CIGNA Healthplans of California, Inc. In addition, there are a number of other
types of competitors including self-directed plans, traditional indemnity
insurance plans, and other managed care plans.
The Company also competes in California against a variety of PPOs. The
establishment of PPOs has been encouraged by legislation in California that
enables insurance companies to negotiate fees with health care providers and to
extend economic incentives to insureds to utilize such providers without
significant legal restrictions. But the California Department of Corporations
(the "DOC"), which regulates all California HMOs, has interpreted California law
to prohibit California PPOs that lack an HMO license from compensating providers
on a capitated or other prepaid or periodic basis unless those providers
themselves have an HMO license. Thus, only HMOs may legally enter into such
financial arrangements with providers, while PPOs are limited to fee-for-service
arrangements.
The Company's Colorado HMO competes primarily against other HMOs including
Kaiser, United Healthcare, and PacifiCare of Colorado, as well as with a Blue
Cross/Blue Shield HMO, other commercial carriers, and various hospital or
physician-owned HMOs. The Company's largest competitor in New Mexico is
Presbyterian Health Plan. The Company's New Mexico HMO also competes with
Lovelace Health Plan (an HMO owned by CIGNA Corporation) and Blue Cross/Blue
Shield. The Company's largest competitor in Arizona is Health Partners. The
Company's Arizona HMO also competes with CIGNA, PacifiCare, Aetna, and Blue
Cross/Blue Shield. In Utah, the Company competes with Intermountain Health Plan
and PacifiCare, among other companies.
The Company's Oregon HMO competes primarily against other HMOs including
Kaiser, PacifiCare of Oregon, The Good Health Plan, Blue Cross Lifewise and Blue
Shield Regions, and with various PPOs. The Company's Washington HMO competes
primarily with Group Health Cooperative of Puget Sound, Kaiser, HealthPlus (Blue
Cross), and with commercial carriers, self-funded plans, and other Blue Cross/
Blue Shield organizations.
The Company's HMOs in Connecticut compete for business with commercial
insurance carriers, Blue Cross and Blue Shield of Connecticut, Aetna/U.S.
Healthcare, and more than ten other HMOs. The Company's main competitors in
Pennsylvania, New York, and New Jersey are Aetna/U.S. Healthcare, Independence
Blue Cross, Empire Blue Cross, Oxford Health Plans, AmeriHealth, and Keystone
East. The Company's HMO operations in Florida compete for business with Humana
Medical Plan, United HealthCare, Health Options, and Prudential HealthCare,
among others.
GOVERNMENT REGULATION. The Company believes it is in compliance in all
material respects with all current state and federal regulatory requirements
applicable to the business to be conducted by its subsidiaries. Certain of these
requirements are discussed below.
FEDERAL HMO STATUTES. Under the Federal Health Maintenance Organization Act
of 1973 (the "HMO Act"), services to members must be provided substantially on a
fixed, prepaid basis without regard to the actual degree of utilization of
services. Although premiums established by an HMO may vary from account to
account through composite rate factors and special treatment of certain broad
classes of members, traditional experience rating of accounts (i.e.,
retrospective adjustments for a group account
15
<PAGE>
based on that group's past use of health care services) is not permitted under
the HMO Act; prospective rating adjustments are, however, allowed. Several of
the Company's HMOs are federally qualified in certain parts of their respective
service areas under the HMO Act and are therefore subject to the requirements of
such act to the extent federally qualified products are offered and sold.
Additionally, there are a number of proposed federal laws currently before
Congress to further regulate managed health care. The Company cannot predict the
ultimate fate of any of these legislative proposals. The Company's Medicare risk
contracts are subject to regulation by HCFA. HCFA has the right to audit HMOs
operating under Medicare contracts to determine the quality of care being
rendered and the degree of compliance with HCFA's contracts and regulations. The
Company's Medicaid business is also subject to regulation by HCFA, as well as
state agencies.
CALIFORNIA HMO REGULATIONS. California HMOs such as Health Net and certain
of the Company's specialty plans are subject to state regulation, principally by
the DOC under the Knox-Keene Act. Among the areas regulated by the Knox-Keene
Act are: (i) adequacy of administrative operations, (ii) the scope of benefits
required to be made available to members, (iii) manner in which premiums are
structured, (iv) procedures for review of quality assurance, (v) enrollment
requirements, (vi) composition of policy making bodies to assure that plan
members have access to representation, (vii) procedures for resolving
grievances, (viii) the interrelationship between HMOs and their health care
providers, (ix) adequacy and accessibility of the network of health care
providers, (x) provider contracts, and (xi) initial and continuing financial
viability. Any material modifications to the organization or operations of
Health Net are subject to prior review and approval by the DOC. This approval
process can be lengthy and there is no certainty of approval. Other significant
changes require filing with the DOC, which may then comment and require changes.
In addition, under the Knox-Keene Act, Health Net and certain other Company
subsidiaries must file periodic reports with, and are subject to periodic review
by, the DOC.
The DOC has also required the Company and its Knox-Keene licensed
subsidiaries to provide the DOC with a number of undertakings in connection with
the FHS Combination and the merger of the Company's two California, full-service
HMOs. These undertakings obligate the affected companies to certain requirements
not applicable to licensees generally, or prohibit or require regulatory
approval preceding the institution of certain changes. While the Company has
been permitted to withdraw a number of these undertakings, others remain in
effect and constrain the Company's flexibility of operations. The Company does
not believe, however, that the remaining undertakings have a material adverse
effect on the Company and its licensees taken as a whole.
Currently, the California legislature is considering a number of significant
managed health care measures which could materially alter California's
regulatory environment. Among such measures are proposals to establish an
entirely new regulatory structure for managed care, in lieu of the DOC. Other
legislative proposals focus on medical care dispute resolution mechanisms,
medical malpractice liability, and mandated benefits, such as mental health
coverage. The Company cannot predict the ultimate fate of any of these
legislative proposals in California.
OTHER HMO REGULATIONS. In each state in which the Company does business,
HMOs must file periodic reports with, and their operations are subject to
periodic examination by, state licensing authorities. In addition, each HMO must
meet numerous state licensing criteria and secure the approval of state
licensing authorities before implementing certain operational changes, including
the development of new product offerings and, in some states, the expansion of
service areas. To remain licensed, each HMO must continue to comply with state
laws and regulations and may from time to time be required to change services,
procedures or other aspects of its operations to comply with changes in
applicable laws and regulations. HMOs are required by state law to meet certain
minimum capital and deposit and/or reserve requirements in each state and may be
restricted from paying dividends to their parent corporations under certain
circumstances from time to time. Several states have increased minimum capital
requirements, pursuant to proposals by the National Association of Insurance
Commissioners to institute risk-based
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<PAGE>
capital requirements. Regulations in these and other states may be changed in
the future to further increase equity requirements. Such increases could require
the Company to contribute additional capital to its HMOs. Any adverse change in
governmental regulation or in the regulatory climate in any state could
materially impact the HMOs operating in that state. The HMO Act and state laws
place various restrictions on the ability of HMOs to price their products
freely. The Company must comply with certain provisions of certain state
insurance and similar laws, especially as it seeks ownership interests in new
HMOs, PPOs and insurance companies, or otherwise expands its geographic markets
or diversifies its product lines.
INSURANCE REGULATIONS. State departments of insurance (the "DOIs") regulate
insurance and third-party administrator business conducted by certain
subsidiaries of the Company (the "Insurance Subsidiaries") pursuant to various
provisions of state insurance codes and regulations promulgated thereunder. The
Insurance Subsidiaries are subject to various capital reserve and other
financial requirements established by the DOIs. The Insurance Subsidiaries must
also file periodic reports regarding their activities regulated by the DOIs and
are subject to periodic reviews of those activities by the DOIs. The Company
must also obtain approval from, or file copies with, the DOIs for all of its
group and individual policies prior to issuing those policies. The Company does
not believe that the requirements imposed by the DOIs will have a material
impact on the ability of the Insurance Subsidiaries to conduct their business
profitably.
NATIONAL COMMITTEE FOR QUALITY ASSURANCE ("NCQA"). NCQA is an independent,
non-profit organization that reviews and accredits HMOs and assesses an HMO's
quality improvement, utilization management, credentialing process, commitment
to members' rights, and preventive health services. HMOs that comply with NCQA's
review requirements and quality standards receive NCQA accreditation. After an
NCQA review is completed, NCQA will issue one of four designations. These are
(i) accreditation for three years; (ii) accreditation for one year; (iii)
provisional accreditation for twelve to eighteen months to correct certain
problems with a follow-up review to determine qualification for accreditation;
and (iv) not accredited. Foundation Health, A Florida Health Plan, Inc.; Health
Net, the Company's HMO in California; Intergroup Prepaid Health Services of
Arizona, Inc., the Company's HMO in Arizona; and QualMed Washington Health Plan,
Inc. (Spokane region), have all received NCQA accreditations for three years.
QualMed Plans for Health, Inc. (Pennsylvania), QualMed Plans for Health of
Colorado, Inc. and QualMed Washington Health Plan, Inc. (Seattle region) have
all received one year accreditation from NCQA. Certain of the Company's other
Health Plan subsidiaries are in the process of applying for NCQA accreditation.
SERVICE MARKS
The Company's service marks and/or trademarks include, among others: THE
ACUTE CARE ALTERNATIVE-Registered Trademark-, Alliance 2000(sm) Alliance
1000(sm), Asthmawise(sm), AVP(sm), AVP Vision Plans(sm), BabyWell(sm), BEING
WELL-Registered Trademark-, CARECAID-Registered Trademark-,
CMP-Registered Trademark-, COMBINED CARE-Registered Trademark-, COMBINED CARE
PLUS(sm), COMMUNITY MEDICAL PLAN, INC. and design-Registered Trademark-, A CURE
FOR THE COMMON HMO-Registered Trademark-, Feetbeat Worksite Walking Program(sm),
FIRM SOLUTIONS-Registered Trademark-, FLEX ADVANTAGE-Registered Trademark-, FLEX
NET(sm), FOUNDATION HEALTH and design-Registered Trademark-, FOUNDATION HEALTH
GOLD-Registered Trademark-, Foundation Health Systems(sm), GOOD HEALTH IS JUST
AROUND THE CORNER-Registered Trademark-, HANK-Registered Trademark-, HANK and
design-Registered Trademark-, HEALTH NET-Registered Trademark-, Health Net
ACCESS(sm), Health Net Comp.24(sm), Health Net ELECT(sm), Health Net
INSIGHT(sm), Health Net OPTIONS(sm), Health Net SELECT(sm), Health Net Seniority
Plus(sm), Health Smart and design(sm), Healthworks (stylized)(sm), Heart &
Soul(sm), IMET and design-Registered Trademark-, Indian
design-Registered Trademark-, INDIVIDUAL PREFERRED PPO-Registered Trademark-,
InterCare(sm), InterComp(sm), InterFlex(sm), Inter Mountain Employers Trust(sm),
InterPlus(sm), LIFE WITH DIGNITY AND HOPE-Registered Trademark-, MAKING QUALITY
HEALTH CARE AFFORDABLE-Registered Trademark-, M.D. Health Plan Personal Medical
Management(sm), On the Road to Good Health(sm), PHYSICIANS HEALTH
SERVICES-Registered Trademark-, Premier Medical Network(sm), Premier Medical
Network It's Your Choice(sm), QUALASSIST-Registered Trademark-,
QUALADMIT-Registered Trademark-, QUALCARE-Registered Trademark-, QUALCARE
PREFERRED-Registered Trademark-, QUAL-MED-Registered Trademark-, QUALMED(sm),
QUALMED HEALTH & LIFE INSURANCE COMPANY-Registered Trademark-, QUALMED PLANS FOR
HEALTH-Registered Trademark-, Rapid Access(sm), SENIOR
SECURITY-Registered Trademark-, SENIOR VALUE-Registered Trademark-, Someone at
Your Side(sm), Sun/Mountain design-Registered Trademark-,The Final Piece
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of the Healthcare Puzzle(sm), VitalLine(sm), VITALTEAM-Registered Trademark-,
WELL MANAGED CARE RIGHT FROM THE START-Registered Trademark-, WELL
REWARDS-Registered Trademark-, Well Woman(sm), Wise Choice(sm), WORKING WELL
TOGETHER-Registered Trademark-, and Your Partner in Healthy Living(sm), and
certain designs related to the foregoing.
The Company utilizes these and other marks in connection with the marketing
and identification of products and services. The Company believes such marks are
valuable and material to its marketing efforts.
EMPLOYEES
The Company currently employs approximately 14,000 employees, excluding
temporary employees. Such employees perform a variety of functions, including
administrative services for employers, providers, and members, negotiation of
agreements with physician groups, hospitals, pharmacies, and other health care
providers, handling claims for payment of hospital and other services, and
providing data processing services. The Company's employees are not unionized
and the Company has not experienced any work stoppage since its organization.
The Company considers its relations with its employees to be very good.
In connection with the FHS Combination, the Company adopted a significant
restructuring plan which provides for a workforce reduction, the consolidation
of employee benefit plans and the consolidation of certain office locations,
which the Company has been effectuating.
ITEM 2. PROPERTIES
The Company owns certain of its offices in Pueblo, Colorado and leases
office space for its principal executive offices in Woodland Hills and its
offices in Rancho Cordova, California.
The Woodland Hills facility, with approximately 410,000 square feet, is
leased pursuant to two leases, the earliest of which expires in December 2001
with respect to 300,000 square feet. The aggregate rent for the two leases for
1998 totaled approximately $11.7 million. The Company's principal executive
offices are located in the Woodland Hills facility, and such facility contains
much of the Company's California HMO operations.
The Company and its subsidiaries also lease an aggregate of approximately
515,000 square feet of office space in Rancho Cordova, California. The Company's
aggregate rent obligations under these leases were approximately $7.2 million in
1998. These leases expire at various dates through July 2002. The Rancho Cordova
facilities serve as a regional data processing center.
The Pueblo facility consists of approximately 311,000 square feet of office
space. The facility is subject to a mortgage in the aggregate principal amount
of approximately $280,000 as of December 31, 1998. The Pueblo facility includes
three properties which the Company renovated in 1998. The Company has received
public funds for certain of such properties' renovation from the City and County
of Pueblo in return for certain employment commitments. In addition, the Company
leases approximately 34,000 square feet of office space in Pueblo pursuant to
three leases, the earliest of which expires in August 1999, at an aggregate rent
of approximately $330,000 per year. As set forth elsewhere in this Annual Report
on Form 10-K the Company has decided to close its regional services center in
Pueblo in the first half of 1999.
In addition to the Company's office space in Pueblo, Woodland Hills and
Rancho Cordova, the Company and its subsidiaries lease approximately 165 sites
in 26 states, comprising roughly 1.7 million square feet of space.
The Company owns in total approximately 1.6 million square feet of space.
The Company owns approximately 375,000 aggregate square feet of space for health
care centers in California and Arizona and approximately 250,000 square feet of
space for two hospitals in Southern California. The Company also owns
approximately one dozen office buildings located in Arizona, California,
Colorado and Connecticut, which collectively encompass approximately 960,000
square feet of space.
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Management believes that its ownership and rental costs are consistent with
those available for similar space in the applicable local area. The Company's
properties are well maintained, considered adequate and are being utilized for
their intended purposes.
The Company is currently considering the sale of certain care centers and
unimproved real estate owned by the Company, and the sale and leaseback of
certain of its occupied facilities in Arizona, California and Connecticut.
ITEM 3. 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 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.
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 appealed such decision. In addition, the trial court
granted a stay of the case in order to permit the law firm to appeal. On
November 30, 1998, the Appellate Court affirmed the trial court's decision. New
counsel has been substituted in as counsel for certain of the individual
defendants. The court ordered stay has been lifted and, therefore, discovery is
now permitted to resume. The case is in the early stages of discovery.
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
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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.
Gem planned to appeal the verdict, but the parties agreed to settle the matter
in May 1998 and avoid the uncertainties and cost of an appeal.
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. Gem agreed to settle its claims against Mr. and Mrs. Davis in December
1998.
FPA MEDICAL MANAGEMENT, INC.
Since May 1998, several complaints (the "FPA Complaints") have been filed in
federal and state courts seeking an unspecified amount of damages on behalf of
an alleged class of persons who purchased shares of common stock, convertible
into debentures and options to purchase common stock of FPA Medical Management,
Inc. ("FPA") at various times between February 3, 1997 and May 15, 1998. The FPA
Complaints name as defendants FPA, certain of FPA's auditors, the Company and
certain of the Company's former officers. The FPA Complaints allege that the
Company and such former officers violated federal and state securities laws by
misrepresenting and failing to disclose certain information about a 1996
transaction between the Company and FPA, about FPA's business and about the
Company's 1997 sale of FPA common stock held by the Company. The Company has
filed a motion to dismiss all claims asserted against it in the consolidated
federal class actions but has not formally responded to the other complaints.
Management believes these suits against the Company and its former officers
are without merit and intends to defend the actions vigorously.
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.
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 solicitation of proxies or otherwise, during the fourth
quarter of the year ended December 31, 1998.
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OTHER INFORMATION
REVOLVING CREDIT FACILITY
The Company has an unsecured, five-year $1.5 billion revolving credit
facility pursuant to a Credit Agreement dated July 8, 1997 (the "Credit
Agreement") with the banks identified in the Credit Agreement (the "Banks") and
Bank of America National Trust and Savings Association ("Bank of America") as
Administrative Agent. All previous revolving credit facilities were terminated
and rolled into the Credit Agreement. 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 the First Amendment and
Waiver to Credit Agreement dated as of April 6, 1998, the Second Amendment to
Credit Agreement dated as of July 31, 1998, the Third Amendment to Credit
Agreement dated as of November 6, 1998 and the Fourth Amendment to Credit
Agreement dated March 26, 1999 (collectively, the "Amendments") 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
(which sale the Company completed on December 10, 1998); 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 Amendments 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 to be an "Adverse Person," or any person
commences a tender offer for 15% or more 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
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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 per share. 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 became 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.
THE CALIFORNIA WELLNESS FOUNDATION
Pursuant to the Amended Foundation Shareholder Agreement, dated as of
January 28, 1992 (the "CWF Shareholder Agreement"), by and among the Company,
the California Wellness Foundation (the "CWF"), and certain stockholders (the
"HNMH Stockholders") of HN Management Holdings, Inc. (a predecessor to the
Company) ("HNMH") named therein, the CWF was subject to various volume and
manner of sale restrictions specified in the CWF Shareholder Agreement which
limited the number of shares of Class B Common Stock that the CWF could 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.
Pursuant to certain agreements with the CWF, the Company redeemed 4,550,000
shares of Class B Common Stock from the CWF on June 27, 1997. The CWF has also
sold shares of Class B Common Stock to unrelated third parties, which shares of
common stock automatically converted into shares of Class A Common Stock at the
time of such sales.
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. Pursuant to the terms of a letter
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agreement dated June 1, 1998 between the CWF and the Company (the "Letter
Agreement"), the Company provided its consent under the CWF Registration Rights
Agreement to permit the CWF to sell certain shares of Class B Common Stock in
private sales transactions (subject to the terms and conditions set forth in the
Letter Agreement) in lieu of such underwritten public offering. Effective June
18, 1998, the CWF sold 5,250,000 shares of Class B Common Stock to unrelated
third parties in accordance with the Letter Agreement, which shares of Class B
Common Stock sold by the CWF automatically converted on a one-for-one basis into
shares of Class A Common Stock. Pursuant to the terms of the Letter Agreement,
all of such 5,250,000 shares sold reduced the number of shares subject to
registration under the CWF Registration Rights Agreement on a one-for-one basis.
As a result of such sales, the CWF currently holds 5,047,642 shares of Class B
Common Stock and CWF Notes in the principal amount of approximately $17,646,000.
CAUTIONARY STATEMENTS
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company is hereby filing 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 following 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 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.
HEALTH CARE COSTS. A large portion of the revenue received by the Company
is expended to pay the costs of health care services or supplies delivered to
its members. The total health care costs incurred by the Company are affected by
the number of individual services rendered and the cost of each service. Much of
the Company's premium revenue is set in advance of the actual delivery of
services and the related incurring of the cost, usually on a prospective annual
basis. While the Company attempts to base the premiums it charges at least in
part on its estimate of expected health care costs over the fixed premium
period, competition, regulations, and other circumstances may limit the
Company's ability to fully base premiums on estimated costs. In addition, many
factors may and often do cause actual health care costs to exceed those costs
estimated and reflected in premiums. These factors may include increased
utilization of services, increased cost of individual services, catastrophes,
epidemics, seasonality, new mandated benefits or other regulatory changes, and
insured population characteristics.
The managed health care industry is labor intensive and its profit margin is
low. Hence, it is especially sensitive to inflation. Health care industry costs
have been rising annually at rates higher than the Consumer Price Index.
Increases in medical expenses without corresponding increases in premiums could
have a material adverse effect on the Company.
PHARMACEUTICAL COSTS. The costs of pharmaceutical products and services are
increasing faster than the costs of other medical products and services. Thus,
the Company's HMOs face ever higher pharmaceutical expenses. The inability to
manage pharmaceutical costs could have an adverse effect on the Company's
financial condition.
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MEDICAL MANAGEMENT. The Company's profitability is dependent, to a large
extent, upon its ability to accurately project and manage health care costs,
including without limitation, appropriate benefit design, utilization review and
case management programs, and its risk sharing arrangements with providers,
while providing members with quality health care. For example, high
out-of-network utilization of health care providers and services may have
significant adverse affects on the Company's ability to manage health care costs
and member utilization of health care. There can be no assurance that the
Company through its medical management programs will be able to continue to
manage medical costs sufficiently to restore and/or maintain profitability in
all of its product lines.
MARKETING. The Company markets its products and services through both
employed sales people and independent sales agents. Although the Company has a
number of such sales employees and agents, if certain key sales employees or
agents or a large subset of such individuals were to leave the Company, its
ability to retain existing customers and members could be impaired. In addition,
certain of the Company's customers or potential customers consider rating,
accreditation, or certification of the Company by various private or
governmental bodies or rating agencies necessary or important. Certain of the
Company's health plans or other business units may not have obtained or may not
desire or be able to obtain or maintain such accreditation or certification
which could adversely affect the Company's ability to obtain or retain business
with such customers.
The managed health care industry has recently received a significant amount
of negative publicity. Such general publicity, or any negative publicity
regarding the Company in particular, could adversely affect the Company's
ability to sell its products or services or could create regulatory problems for
the Company. Furthermore, the managed care industry recently has experienced
significant merger and acquisition activity. Speculation or uncertainty about
the Company's future could adversely affect the ability of the Company to market
its products.
COMPETITION. The Company competes with a number of other entities in the
geographic and product markets in which it operates, some of which other
entities may have certain characteristics or capabilities which give them an
advantage in competing with the Company. These competitors include HMOs, PPOs,
self-funded employers, insurance companies, hospitals, health care facilities,
and other health care providers. The Company believes there are few barriers to
entry in these markets, so that the addition of new competitors can readily
occur. Certain of the Company's customers may decide to perform for themselves
functions or services currently provided by the Company, which could result in a
decrease in the Company's revenues. Certain of the Company's providers may
decide to market products and services to Company customers in competition with
the Company. In addition, significant merger and acquisition activity has
occurred in the industry in which the Company operates as well as in industries
which act as suppliers to the Company such as the hospital, physician,
pharmaceutical, and medical device industries. This activity may create stronger
competitors and/or result in higher health care costs. Provider service
organizations may be created by health care providers to offer competing managed
care products. To the extent that there is strong competition or that
competition intensifies in any market, the Company's ability to retain or
increase customers, its revenue growth, its pricing flexibility, its control
over medical cost trends, and its marketing expenses may all be adversely
affected.
PROVIDER RELATIONS. One of the significant techniques the Company uses to
manage health care costs and utilization and to monitor the quality of care
being delivered is to contract with physicians, hospitals, and other providers.
Because of the large number of providers with which the Company's health plans
contract, the Company currently believes it has a limited exposure to provider
relations issues. In any particular market, however, providers could refuse to
contract with the Company, demand higher payments or take other actions which
could result in higher health care costs, less desirable products for customers
and members, insufficient provider access for current members or to support
growth, or difficulty in meeting regulatory or accreditation requirements.
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In some markets, certain providers, particularly hospitals,
physician/hospital organizations or multi-specialty physician groups, may have
significant market positions or even monopolies. Many of these providers may
compete directly with the Company. If such providers refuse to contract with the
Company or utilize their market position to negotiate favorable contracts or
place the Company at a competitive disadvantage, the Company's ability to market
products, or to be profitable in those areas could be adversely affected.
The Company contracts with providers in California and Arizona, and to a
lesser degree in other areas, primarily through capitation fee arrangements.
Under a capitation fee arrangement, the Company pays the provider a fixed amount
per member on a regular basis and the provider accepts the risk of the frequency
and cost of member utilization of services. Providers who enter into such
arrangements generally contract with specialists and other secondary providers
to provide services not offered by the primary provider. The inability of
providers to properly manage costs under capitation arrangements can result in
financial instability of such providers and the termination of their
relationship with the Company. In addition, payment or other disputes between
the primary provider and specialists with whom it contracts can result in a
disruption in the provision of services to the Company's members or a reduction
in the services available. A primary provider's financial instability or failure
to pay secondary providers for services rendered could lead secondary providers
to demand payment from the Company, even though the Company has made its regular
capitated payments to the primary provider. There can be no assurance that
providers with whom the Company contracts will properly manage the costs of
services, maintain financial solvency or avoid disputes with secondary
providers, the failure of any of which could have an adverse effect on the
provision of services to members and the Company's operations.
ADMINISTRATION AND MANAGEMENT. The level of administrative expense is a
partial determinant of the Company's profitability. While the Company attempts
to effectively manage such expenses, increases in staff-related and other
administrative expenses may occur from time to time due to business or product
start-ups or expansions, growth or changes in business, acquisition, regulatory
requirements, or other reasons. Such expense increases are not clearly
predictable and increases in administrative expenses may adversely affect
results.
The Company currently believes it has a relatively experienced, capable
management staff. Loss of certain managers or a number of such managers could
adversely affect the Company's ability to administer and manage its business.
FEDERAL AND STATE LEGISLATION. There are numerous legislative proposals
currently before Congress and the state legislatures which, if enacted, could
materially affect the managed health care industry and the regulatory
environment. Recent financial troubles of certain health care service providers
could alter or increase legislative consideration of these or additional
proposals. The Company cannot predict the outcome of any of these legislative
proposals, nor the extent to which the Company may be affected by the enactment
of any such legislation. Legislation which causes the Company to change its
current manner of operation could have a material adverse effect on the
Company's results of operations and ability to compete.
RESTRUCTURING COSTS. During 1998, the Company initiated the consolidation
and centralization of its corporate functions and continued its workforce
reduction in selected health plans. In addition, the Company initiated a formal
plan to dispose of certain Central Division health plans included in the
Company's Health Plan Services segment during the fourth quarter of 1998. It is
anticipated that the divestiture of these plans will be completed during the
first half of 1999. The Company evaluated the carrying values of the assets of
these health plans and determined that the carrying value exceeded estimated
fair values. The Company had previously recorded charges in the second and third
quarters of 1998 related to management's best estimate of recovery for the real
estate and the impairment of notes receivable and other Company assets due to
the bankruptcy filing of FPA in July 1998.
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During the second and third quarters of 1998, the Company recorded $78.1
million related to FPA's bankruptcy and $146.9 million of restructuring and
other charges. These charges were primarily related to severance costs of $21.2
million related to staff reduction in selected health plans and corporate
centralization and consolidation; other special charges totaling $38.7 million
related to the adjustment of amounts due from a hospital system that filed
bankruptcy totaling $18.6 million, premium deficiency reserves for certain of
the Company's non-core health plans totaling $12.0 million, and $8.1 million
related to other items. Other charges totaling $87.0 million were mostly related
to contractual adjustments and were primarily included in health care costs
within the consolidated statement of operations. As of December 31, 1998,
approximately $27.5 million is expected to require future outlays of cash.
As a direct consequence of the Company's evaluation of the estimated fair
value of its anticipated divestitures and other items, the Company recorded
asset impairment and other charges amounting to $185.9 million in the fourth
quarter of 1998. Of this amount, approximately $112.4 million related to the
carrying value of health plans anticipated to be divested; approximately $54.9
million primarily related to bad debts, claims and premium deficiency reserves;
and approximately $18.6 million primarily related to litigation in the normal
course of business. Of the charges in the fourth quarter, approximately $6
million resulted in cash outlays. The Company anticipates future cash outlays
from the charges of approximately $50.1 million. The cash generated from the
divestitures, however, is expected to exceed the cash impact of all such charges
in both 1998 and 1999 combined. Although the Company continually seeks to
integrate new operations and restructure existing operations efficiently,
unforeseen difficulties could delay or substantially impede any one or more of
the Company's restructuring efforts causing a material adverse effect on the
Company's future profitability. There can be no assurance that the anticipated
divestitures which are essential to the restructuring will be consummated.
MANAGEMENT INFORMATION SYSTEMS. The Company's business is significantly
dependent on effective information systems. The information gathered and
processed by the Company's management information systems assists the Company
in, among other things, pricing its services, monitoring utilization and other
cost factors, processing provider claims, billing its customers on a timely
basis, and identifying accounts for collection. The Company's customers and
providers also depend upon the Company's information systems for membership
verification, claims status, and other information. The Company has many
different information systems for its various businesses. Moreover, the merger,
acquisition and divestiture activity of the Company requires frequent
transitions to or from, and the integration of, various information management
systems. The Company is in the process of attempting to reduce the number of
systems and also to upgrade and expand its information systems capabilities. Any
difficulty associated with or failure to successfully implement such updated
management information systems, or any inability to expand processing capability
in the future in accordance with its business needs, could result in a loss of
existing customers and difficulty in attracting new customers, customer and
provider disputes, regulatory problems, increases in administrative expenses, or
other adverse consequences. In addition, the Company may, from time-to-time,
obtain significant portions of its systems-related or other services or
facilities from independent third parties which may make the Company's
operations vulnerable to such third parties' failure to perform adequately.
The Company also recognizes that the arrival of the Year 2000 poses a unique
worldwide challenge to the ability of virtually all computer systems to
recognize the date change from 1999 to 2000 and has substantially completed its
assessment of the Year 2000 Issue and is in the process of implementing remedial
measures. 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 (both external and internal) that have date/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 material miscalculations
causing disruptions of operations, including, among other things, the inability
to process transactions, prepare invoices, or engage in normal business
activities.
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<PAGE>
There can be no assurance that the systems of the Company or of other
companies on which the Company's systems rely will be timely converted and/or
modified, and such failure could have a material adverse effect on the Company
and its operations. The costs of the Company's Year 2000 Issue projects and the
timetable in which the Company plans to complete the Year 2000 Issue compliance
requirements set forth under the heading "Management's Discussion and Analysis
of Financial Condition and Results of Operations" in the Company's 1998 Annual
Report to Stockholders attached as an exhibit to this Annual Report on Form 10-K
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 be no assurance that these
estimates will be achieved and actual results could differ materially from these
plans and estimates.
The Company is also assessing the extent to which, if at all, the Company's
existing insurance policies cover these potential Year 2000 Issue liabilities.
MANAGEMENT OF GROWTH. The Company has made several large acquisitions in
recent years, and continues to explore acquisition opportunities. Failure to
effectively integrate acquired operations could result in increased
administrative costs or customer confusion or dissatisfaction. The Company may
also not be able to manage this growth effectively, including not being able to
continue to develop processes and systems to support its growing operations.
There can be no assurance that the Company will be able to maintain its
historical growth rate.
POTENTIAL DIVESTITURES. 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 its businesses or operations
should be divested. In this regard the Company (i) has entered into definitive
agreements to sell its HMOs in the states of New Mexico, Texas, Louisiana and
Oklahoma, (ii) has entered into a letter of intent to sell its HMO operations in
the state of Colorado, (iii) is considering divestiture of its ownership of two
southern California hospitals, (iv) has entered into a definitive agreement to
sell certain pharmacy benefit processing services, which sale is anticipated to
be consummated on March 31, 1999 and (v) is reviewing the possibility of
divesting its ownership of certain non-core operations. There can be no
assurance that the Company will complete any of these transactions. Further,
entering into, evaluating or consummating these transactions may entail certain
risks and uncertainties in addition to those which may result from any such
change in the Company's business operations, including but not limited to
extraordinary transaction costs, unknown indemnification liabilities or
unforeseen administrative needs, any of which could result in reduced revenues,
increased charges, post transaction administrative costs or could otherwise have
a material adverse effect on the Company's business, financial condition or
results of operations. See "Item 1. Business--Discontinued Operations and
Anticipated Divestitures."
GOVERNMENT PROGRAMS AND REGULATION. The Company's business is subject to
extensive federal and state laws and regulations, including, but not limited to,
financial requirements, licensing requirements, enrollment requirements, and
periodic examinations by governmental agencies. The laws and rules governing the
Company's business and interpretations of those laws and rules are subject to
frequent change. For example, as described earlier in this Annual Report on Form
10-K, in the section entitled "California HMO Regulations," the California
legislature may in 1999 make significant changes in the laws regulating HMOs
operating in that state, particularly in light of the bankruptcy of FPA in July
1998 and the state installation of a conservator over MedPartners Provider
Network, a California health plan, in March 1999. Existing or future laws and
rules could force the Company to change how it does business and may restrict
the Company's revenue and/or enrollment growth and/or increase its health care
and administrative costs. In particular, the Company's HMO and insurance
subsidiaries are subject to regulations relating to cash reserves, minimum net
worth, premium rates, and approval of policy language and benefits. Although
such regulations have not significantly impeded the growth of the Company's
business to date, there can be no assurance that the Company will be able to
continue to obtain or maintain required governmental approvals or licenses or
that regulatory changes will not have a material adverse
27
<PAGE>
effect on the Company's business. Delays in obtaining or failure to obtain or
maintain such approvals, or moratoria imposed by regulatory authorities, could
adversely affect the Company's revenue or the number of its members, could
increase costs, or could adversely affect the Company's ability to bring new
products to market as forecasted. In addition, efforts to enact changes to
Medicare could impact the structure of the Medicare program, benefit designs and
reimbursement. Changes to the current operation of the Company's Medicare
services could have a material adverse affect on the Company's results of
operations.
A significant portion of the Company's revenues relate to federal, state,
and local government health care coverage programs, such as Medicare and
Medicaid programs. Such contracts carry certain risks such as higher comparative
medical costs, government regulatory and reporting requirements, the possibility
of reduced or insufficient government reimbursement in the future, and higher
marketing and advertising costs per member as a result of marketing to
individuals as opposed to groups. Such risk contracts also are generally subject
to frequent change including changes which may reduce the number of persons
enrolled or eligible, reduce the revenue received by the Company or increase the
Company's administrative or health care costs under such programs. In the event
government reimbursement were to decline from projected amounts, the Company's
failure to reduce the health care costs associated with such programs could have
a material adverse effect upon the Company's business. Changes to such
government programs in the future may also affect the Company's willingness to
participate in such programs.
The Company is also subject to various governmental audits and
investigations. Such activities could result in the loss of licensure or the
right to participate in certain programs, or the imposition of fines, penalties
and other sanctions. In addition, disclosure of any adverse investigation or
audit results or sanctions could negatively affect the Company's reputation in
various markets and make it more difficult for the Company to sell its products
and services.
The amount of government receivables represents the Company's best estimate
of the government's liability. As of December 31, 1998, the Company's government
receivables were $321.4 million. The receivables are generally subject to
government audit and negotiation and the final amounts actually received may be
greater or less than the amounts recognized by the Company.
LOSS RESERVES. The Company's loss reserves are estimates of future costs
based on various assumptions. The accuracy of these estimates may be affected by
external forces such as changes in the rate of inflation, the regulatory
environment, the judicious administration of claims, medical costs, and other
factors. Included in the loss reserves are estimates for the costs of services
which have been incurred but not reported ("IBNR"). Estimates are continually
monitored and reviewed and, as settlements are made or estimates adjusted,
differences are reflected in current operations. Such estimates are subject to
the impact of changes in the regulatory environment and economic conditions.
Given the inherent variability of such estimates, the actual liability could
differ significantly from the amounts provided. Moreover, if the assumptions on
which the estimates are based prove to be incorrect and reserves are inadequate
to cover the Company's actual experience, the Company's profitability could be
adversely affected.
LITIGATION AND INSURANCE. The Company is subject to a variety of legal
actions to which any corporation may be subject, including employment and
employment discrimination-related suits, employee benefit claims, breach of
contract actions, tort claims, shareholder suits, including for securities
fraud, and intellectual property related litigation. In addition, because of the
nature of its business, the Company incurs and likely will continue to incur
potential liability for claims related to its business, such as failure to pay
for or provide health care, poor outcomes for care delivered or arranged,
provider disputes, including disputes over withheld compensation, and claims
related to self-funded business. In some cases, substantial non-economic or
punitive damages may be sought. While the Company currently has insurance
coverage for some of these potential liabilities, others may not be covered by
insurance (such as punitive damages), the insurers may dispute coverage or the
amount of insurance may not be enough to cover the damages awarded. In addition,
insurance coverage for all or certain forms of liability may become unavailable
or prohibitively expensive in the future.
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STOCK MARKET. Recently, the market prices of the securities of certain of
the publicly-held companies in the industry in which the Company operates have
shown volatility and sensitivity in response to many factors, including public
communications regarding managed care, legislative or regulatory actions, health
care cost trends, pricing trends, competition, earning or membership reports of
particular industry participants, and acquisition activity. There can be no
assurances regarding the level of stability of the Company's share price at any
time or the impact of these or any other factors on the share price.
RECENT DEVELOPMENTS
FOHP. In 1997, the Company purchased convertible debentures (the "FOHP
Debentures") of FOHP, Inc., a New Jersey corporation ("FOHP"), in the aggregate
principal amount of approximately $80.7 million and converted approximately
$70.6 million principal amount of the FOHP Debentures into shares of Common
Stock of FOHP. As a result, the Company owned approximately 98% of the
outstanding shares of FOHP common stock.
Effective December 31, 1997, the Company purchased nonconvertible debentures
in the amount of $24 million from FOHP. The debentures mature on December 31,
2002. The debentures were issued to the Company in consideration for additional
capital contributions made by the Company pursuant to the Amended and Restated
Securities Purchase Agreement, dated February 10, 1997, and as amended March 13,
1997, among the Company, FOHP, and First Option Health Plan of New Jersey, Inc.
("FOHP-NJ"), a wholly-owned subsidiary of FOHP (collectively, the "Definitive
Agreements"). Pursuant to the Definitive Agreements, at any time during the 1999
calendar year, the Company may acquire any remaining shares of FOHP not owned by
the Company pursuant to a tender offer, merger, combination or other business
combination transaction for consideration (to be paid in cash or stock of the
Company) equal to the value of such FOHP stock based on appraiser
determinations.
Pursuant to an Agreement and Plan of Merger dated as of October 26, 1998,
Physicians Health Services of New Jersey, Inc., a New Jersey HMO wholly-owned by
the Company, merged with and into FOHP-NJ on January 1, 1999 and FOHP-NJ changed
its name to Physicians Health Services of New Jersey, Inc. ("PHS-NJ"). On
December 31, 1998, the Company converted $1,197,183 principal amount of its
remaining convertible debentures of FOHP into common stock of FOHP. As a result,
the Company now owns approximately 99.6% of the outstanding equity of FOHP. The
minority shareholders of FOHP are physicians, hospitals and other health care
providers.
Pursuant to an Agreement and Plan of Merger dated as of November 16, 1998, a
wholly-owned subsidiary of the Company will merge into FOHP and FOHP will become
a wholly-owned subsidiary of the Company. The merger is anticipated to occur in
the second quarter of 1999. In connection with the merger, the current minority
shareholders of FOHP will be entitled to either the value of their shares as of
December 31, 1998 as determined by an appraiser or payment rights which entitle
the holders to receive not less than $15.00 per payment right on or about July
1, 2001, provided that, with respect to the payment rights (i) for a provider
shareholder, such shareholder agrees to remain a provider to PHS-NJ until
December 31, 2001 and a specified number of hospital providers in the provider
network does not leave the network prior to December 31, 2001, (ii) for a
hospital provider shareholder, such payment rights will be subject to additional
conditions to payment relating to reimbursement rates, enrollment of hospital
employees in PHS-NJ health plans, and payments of premiums to PHS-NJ and (iii)
for a non-provider shareholder, such shareholder will be entitled to receive
additional consideration of $2.25 per payment right and a pro rata portion of a
bonus to be funded by monies forfeited by provider shareholders, provided that
PHS-NJ achieves certain annual returns on common equity.
FOHP (headquartered in Neptune, New Jersey) is the sole shareholder of
PHS-NJ, a New Jersey corporation. PHS-NJ is a managed health care company
providing commercial products for businesses and individuals, along with
Medicare, Medicaid and workers' compensation programs. PHS-NJ currently has more
than 250,000 members in New Jersey enrolled in its commercial, Medicare,
Medicaid and PPO programs.
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QUALMED PLANS FOR HEALTH OF PENNSYLVANIA, INC. Effective December 31, 1998,
the Company purchased the minority interests in QualMed Plans for Health of
Pennsylvania, Inc. ("QualMed-PA"), a then majority-owned subsidiary of the
Company, for approximately $2 million. Previously, the Company owned
approximately 83% of the common stock of QualMed-PA. In January 1999, the
Company transferred the assets of QualMed-PA, including the assets relating to
its preferred provider organization ("MaxNet-Registered Trademark-") and managed
workers' compensation ("CompTek-Registered Trademark-") business and operations,
to Preferred Health Network, Inc., another wholly-owned subsidiary of the
Company.
MEDPARTNERS PROVIDER NETWORK, INC. On March 11, 1999, MedPartners Provider
Network, Inc. ("MPN"), a Knox-Keene licensed entity and a subsidiary of
MedPartners, Inc., a publicly-held physician practice and pharmacy benefit
management company, was placed into conservatorship by the State of California
under Section 1393(c) of the California Health and Safety Code. The conservator
immediately filed a petition under Chapter 11 of the Bankruptcy Code on behalf
of MPN. MPN and various provider groups and clinics affiliated with MedPartners,
Inc. provide health care services to approximately 215,000 enrollees of the
Company's Health Net HMO subsidiary.
The Company continues to monitor the situation closely and has been involved
in discussions with various parties to attempt to maintain continuity of care
and to minimize the impact that MPN's conservatorship and bankruptcy could have
on affected Health Net members. The Company understands from various public
statements made by MedPartners, Inc. that it intends to divest its California
clinic operations.
Although at this time the Company is unable to fully assess the potential
financial implications of the foregoing actions, management of the Company
believes that such actions will not have a material adverse effect on either the
financial or operating condition of the Company.
CONSOLIDATION. In a continuing effort to streamline its operations, the
Company effectuated numerous consolidation transactions among its subsidiaries
in 1998. In January 1998, Midwest Business Medical Association, Ltd., a PPO
subsidiary of the Company, merged into Preferred Health Network, Inc. In May
1998, Foundation Health Medical Group Florida, Inc., a holding company whose
assets had been previously sold, merged into its immediate parent company
Foundation Health, A Florida Health Plan, Inc. In July 1998, the Company merged
two subsidiaries operating in managed behavioral health services: Foundation
Health Psychcare Services, Inc. and Managed Health Network, Inc. Intergroup
Healthcare Corporation of Utah, a holding company which owns the Company's Utah
HMO, merged into its immediate parent company, Foundation Health Corporation, in
July 1998. Also in July 1998, Foundation Health, A California Health Plan, Inc.
merged into Health Net, thereby consolidating the Company's California HMO
plans. In December 1998, the Company merged its Connecticut health plans, M.D.
Health Plan, Inc. and Physicians Health Services of Connecticut, Inc. Also in
December 1998, Preferred Health Providers, Inc., a PPO subsidiary of the
Company, merged into Foundation Health, A Florida Health Plan. In 1998, the
Company also completed the integration of its Colorado health plans, Foundation
Health, A Colorado Health Plan, Inc. and QualMed Plans for Health of Colorado,
Inc., which merged in August 1997.
INSURANCE SUBSIDIARIES. The Company is in the process of restructuring its
insurance subsidiaries to merge Foundation Health National Life Insurance
Company ("FHNL") and Foundation Health Systems Life and Health Insurance Company
("FHS Life") under a newly-formed holding company subsidiary of the Company, FHS
Life Holdings Company, Inc.
RISK-BASED WORKERS' COMPENSATION OPERATIONS. In 1997, the Company revised
its strategy of maintaining a presence in the workers' compensation insurance
business as a result of various factors, including adverse developments arising
in the workers' compensation insurance business, primarily related to the
workers' compensation claims environment in California. In 1997 the Company
adopted a plan to completely discontinue this segment of its business, through
divestiture of its workers' compensation
30
<PAGE>
risk-assuming insurance subsidiaries. On December 10, 1998, the Company
consummated the sale of Business Insurance Group, Inc. ("BIG"), its risk-based
workers' compensation subsidiary. As part of the transaction, the Company funded
the purchase of third party reinsurance to cover up to $175 million in adverse
loss development related to BIG and its subsidiaries. The Company received
approximately $200 million in cash for the sale, net of its costs and expenses
for the transaction. Certain of the Company's subsidiaries entered into
agreements with the buyer to continue to provide certain administrative services
related to such operations for a period of five years.
LOUISIANA, OKLAHOMA AND TEXAS HMO OPERATIONS. On November 4, 1998, the
Company entered into a definitive agreement for the sale of its HMO operations
in the states of Texas, Louisiana and Oklahoma to AmCareco, Inc. As part of the
transaction, the Company will receive convertible preferred stock of the buyer.
The Company is pursuing a divestiture of these HMOs due to, among other reasons,
inadequate returns on invested capital. Although the Company has entered into a
definitive agreement for the foregoing sale, consummation of the sale is subject
to numerous conditions and certain regulatory approvals.
ALABAMA HMO OPERATIONS. In December 1997, the Company entered into a
definitive agreement to sell its non-operational HMO license in Alabama to an
unaffiliated third party, which sale was consummated in January 1998.
PHARMACY BENEFITS MANAGEMENT SERVICES. In February 1999, the Company
entered into a definitive agreement to sell to Advance Paradigm the capital
stock of Foundation Health Pharmaceutical Services, Inc., and certain pharmacy
benefit processing services of Integrated Pharmaceutical Services, Inc., for
approximately $70 million in cash. In addition, the Company and Advance Paradigm
entered into a services agreement, whereby Advance Paradigm will provide to the
Company's Health Plan Divisions at competitive rates claims processing, retail
network management and payment of claims pharmacy benefits services. Advance
Paradigm will also provide pharmacy mail service to the Health Plan Divisions.
For a period of five years, the Company may not compete with respect to such
services in any market in which Advance Paradigm conducts business, subject to
certain exceptions. It is anticipated that the sale will be consummated on March
31, 1999.
MEMBER SUPPORT CENTER OPERATIONS. During 1998, the Company operated a
regional member support center located in Philadelphia. The support center was a
telecommunications center staffed by nurses who responded to member calls
through the retrieval of detailed clinical and demographic data regarding plan
members and provider information, and the use of clinical algorithms to guide
members to the most appropriate level of care for their condition. In December
1998, the Company sold the clinical content used in its member support center
operations to Access Health, Inc. ("Access Health") for approximately $36.3
million in cash net proceeds. In addition, the Company entered into a long-term
services agreement with Access Health pursuant to which all members who had
access to the support center at the time of sale will continue to have such
access for a period of ten years, with available annual extensions by the
Company. In addition, as part of the transaction the Company agreed not to
compete in such services for a period commencing on the closing date and ending
two years after members cease to have access to the support center.
SOUTHERN CALIFORNIA HOSPITALS. The Company is reviewing the possibility of
divesting its 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. The Company is presently responding to inquiries of parties which have
expressed an interest in the purchase of such businesses.
GEM INSURANCE COMPANY. Since October of 1997, Gem Insurance Company
("Gem"), a subsidiary of the Company, has implemented a restructuring plan to
reduce operating losses and its in-force insurance risk. In 1997, Gem initiated
a withdrawal from the Nevada insurance markets, and began restructuring its
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insurance products in Utah and then in certain other markets. Gem also reduced
commissions to market-level rates and terminated certain general agents. Gem
continued to implement such restructuring plan in 1998. As a result, the number
of Gem's insureds dropped from over 100,000 at the start of 1998 to
approximately 2,500 at December 31, 1998. Gem has filed notices of intention to
withdraw from Nebraska and the small group market in Colorado. Currently,
Foundation Health Systems Life and Health Insurance Company, a subsidiary of the
Company, services Gem's insured through an administrative services agreement
between the companies. The Company is reviewing the possibility of winding up
the operations of Gem or merging such operations into another insurance
subsidiary of the Company. Upon completion of its current withdrawals, Gem will
be licensed in only five states.
COLORADO OPERATIONS. In March 1999, the Company entered into a letter of
intent to sell the capital stock of QualMed Plans for Health of Colorado, Inc.,
the Company's HMO subsidiary in the state of Colorado, to Wellpoint Health
Networks Inc. The Company anticipates closing the sale in the first half of
1999. Although the Company has entered into a letter of intent for the foregoing
sale, consummation of the sale is subject to executing a definitive agreement
mutually satisfactory to the parties and satisfaction of all conditions to be
set forth therein, including obtaining regulatory approvals. In addition, the
Company has decided to close its regional service center in Pueblo, Colorado in
the first half of 1999.
NEW MEXICO OPERATIONS. In March 1999, the Company also entered into a
definitive agreement to sell the capital stock of QualMed Plans for Health,
Inc., the Company's HMO subsidiary in the state of New Mexico, to Health Care
Horizons, Inc. Although the Company has entered into a definitive agreement for
the foregoing sale, consummation of the sale is subject to numerous conditions
and certain regulatory approvals.
CERTAIN OTHER OPERATIONS. 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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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The following table sets forth the high and low sales prices of the
Company's Class A Common Stock, par value $.001 per share (the "Class A Common
Stock"), on The New York Stock Exchange, Inc. ("NYSE") since January 2, 1996.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
Calendar Quarter--1996
First Quarter.................................................................................. 37 1/8 30 3/8
Second Quarter................................................................................. 37 1/8 26 7/8
Third Quarter.................................................................................. 28 7/8 19 3/8
Fourth Quarter................................................................................. 29 1/8 22 5/8
Calendar Quarter--1997
First Quarter.................................................................................. 30 3/4 23 1/8
Second Quarter................................................................................. 33 24 1/4
Third Quarter.................................................................................. 33 15/16 29 11/16
Fourth Quarter................................................................................. 33 3/8 22 1/16
Calendar Quarter--1998
First Quarter.................................................................................. 29 1/16 22 1/4
Second Quarter................................................................................. 32 5/8 25 3/8
Third Quarter.................................................................................. 26 7/8 9
Fourth Quarter................................................................................. 15 3/4 5 7/8
Calendar Quarter--1999
First Quarter (through March 29, 1999)......................................................... 12 7/16 7 11/16
</TABLE>
On March 29, 1999, the last reported sales price per share of the Class A
Common Stock was $11.0625 per share.
DIVIDENDS
No dividends have been paid by the Company during the preceding two fiscal
years. The Company has no present intention of paying any dividends on its
Common Stock.
The Company is a holding company and, therefore, its ability to pay
dividends depends on distributions received from its subsidiaries, which are
subject to regulatory net worth requirements and certain additional state
regulations which may restrict the declaration of dividends by HMOs, insurance
companies and licensed managed health care plans. The payment of any dividend is
at the discretion of the Company's Board of Directors and depends upon the
Company's earnings, financial position, capital requirements and such other
factors as the Company's Board of Directors deems relevant.
Under the Credit Agreement entered into on July 8, 1997 with Bank of America
as agent, the Company cannot declare or pay cash dividends to its stockholders
or purchase, redeem or otherwise acquire shares of its capital stock or
warrants, rights or options to acquire such shares for cash except to the extent
permitted under such Credit Agreement as described elsewhere in this Annual
Report on Form 10-K.
HOLDERS
As of March 29, 1999, there were approximately 2,000 holders of record of
Class A Common Stock. The California Wellness Foundation (the "CWF") is the only
holder of record of the Company's Class B
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Common Stock, par value $.001 per share (the "Class B Common Stock"), which
constitutes approximately 4% of the Company's aggregate equity. Under the
Company's Fourth Amended and Restated Certificate of Incorporation, shares of
the Company's Class B Common Stock have the same economic benefits as shares of
the Company's Class A Common Stock, but are non-voting. Upon the sale or other
transfer of shares of Class B Common Stock by the CWF to an unrelated third
party, such shares automatically convert into Class A Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is set forth in the Company's Annual
Report to Stockholders on page 1, and is incorporated herein by reference and
made a part hereof.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this Item is set forth in the Company's Annual
Report to Stockholders on pages 17 through 27, and is incorporated herein by
reference and made a part hereof.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this Item is set forth in the Company's Annual
Report to Stockholders on pages 27 through 28, and is incorporated herein by
reference and made a part hereof.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is set forth in the Company's Annual
Report to Stockholders on pages 29 through 56, and is incorporated herein by
reference and made a part hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is set forth in the Company's
definitive proxy statement, which will be filed with the Securities and Exchange
Commission within 120 days of December 31, 1998. Such information is
incorporated herein by reference and made a part hereof.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is set forth in the Company's
definitive proxy statement, which will be filed with the Securities and Exchange
Commission within 120 days of December 31, 1998. Such information is
incorporated herein by reference and made a part hereof.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is set forth in the Company's
definitive proxy statement, which will be filed with the Securities and Exchange
Commission within 120 days of December 31, 1998. Such information is
incorporated herein by reference and made a part hereof.
34
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is set forth in the Company's
definitive proxy statement, which will be filed with the Securities and Exchange
Commission within 120 days of December 31, 1998. Such information is
incorporated herein by reference and made a part hereof.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
(A) FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS
1. FINANCIAL STATEMENTS
The following consolidated financial statements are incorporated by
reference into this Annual Report on Form 10-K from pages 29 to 56 of the
Company's Annual Report to Stockholders for the year ended December 31, 1998:
Report of Deloitte & Touche LLP
Consolidated balance sheets at December 31, 1998 and 1997
Consolidated statements of operations for each of the three years in the
period ended December 31, 1998
Consolidated statements of stockholders' equity for each of the three
years in the period ended December 31, 1998
Consolidated statements of cash flows for each of the three years in the
period ended December 31, 1998
Notes to consolidated financial statements
35
<PAGE>
2. FINANCIAL STATEMENT SCHEDULES
The following financial statement schedules are filed as a part of this
Annual Report on Form 10-K:
Schedule I--Condensed Financial Information of Registrant
All other schedules are omitted because they are not applicable, not
required or because the required information is included in the consolidated
financial statements or notes thereto which are incorporated by reference into
this Annual Report on Form 10-K from the Company's 1998 Annual Report to
Stockholders.
3. EXHIBITS
The following exhibits are filed as part of this Annual Report on Form 10-K
or are incorporated herein by reference:
<TABLE>
<C> <S>
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 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).
4.4 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).
</TABLE>
36
<PAGE>
<TABLE>
<C> <S>
10.1 Letter Agreement dated June 1, 1998 between The California Wellness Foundation and
the Company (filed as Exhibit 10.75 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998, 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 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).
*10.4 Letter Agreement dated June 25, 1998 between B. Curtis Westen and the Company
(filed as Exhibit 10.73 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998, which is incorporated by reference herein).
*10.5 Letter Agreement dated July 31, 1998 between Michael P. White and the Company
(filed as Exhibit 10.74 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998 which is incorporated by reference herein).
*10.6 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).
*10.7 Early Retirement Agreement dated August 6, 1998 between the Company and Malik M.
Hasan, M.D. (filed as Exhibit 10.77 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998).
*10.8 Employment Letter Agreement dated July 3, 1996 between Jay M. Gellert and the
Company (filed as Exhibit 10.37 to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1996, which is incorporated by reference herein).
*10.9 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).
*10.10 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).
*10.11 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).
*10.12 Employment Agreement between the Company and Maurice Costa 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).
*+10.13 Employment Letter Agreement between the Company and Gary S. Velasquez dated May 1,
1996, a copy of which is filed herewith.
*+10.14 Employment Agreement between Foundation Health Corporation and Edward J. Munno
dated November 8, 1993, a copy of which is filed herewith.
</TABLE>
37
<PAGE>
<TABLE>
<C> <S>
*+10.15 Amendment Number One to Employment Agreement between Foundation Health Corporation
and Edward J. Munno dated May 1, 1996, a copy of which is filed herewith.
*+10.16 Employment Letter Agreement between the Company and Cora Tellez dated November 16,
1998, a copy of which is filed herewith.
*+10.17 Employment Letter Agreement between the Company and Karen Coughlin dated March 12,
1998, a copy of which is filed herewith.
*+10.18 Employment Letter Agreement between the Company and J. Robert Bruce dated September
22, 1998, a copy of which is filed herewith.
*+10.19 Employment Letter Agreement between the Company and Robert Natt dated December 31,
1997 (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).
*+10.20 Waiver and Release of Claims between the Company and Robert Natt, a copy of which
is filed herewith.
*+10.21 Form of Severance Payment Agreement dated December 4, 1998 by and between the
Company and various of its executive officers, a copy of which is filed herewith.
*10.22 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).
*+10.23 Severance Payment Agreement between the Company and J. Robert Bruce dated September
15, 1998, a copy of which is filed herewith
*+10.24 Severance Payment Agreement between the Company and Maurice Costa dated April 6,
1998, a copy of which is filed herewith.
*10.25 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).
*10.26 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).
*10.27 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).
*10.28 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).
*10.29 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).
</TABLE>
38
<PAGE>
<TABLE>
<C> <S>
*10.30 Trust Agreement for Deferred Compensation Arrangement for Malik M. Hasan, M.D.,
dated as of March 3, 1995, by and between the Company and Norwest Bank Colorado
N.A. (filed as Exhibit 10.32 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1994, which is incorporated by reference herein).
*+10.31 The Company's Deferred Compensation Plan Trust Agreement dated as of September 1,
1998 between the Company and Union Bank of California.
*10.32 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).
*10.33 The Company's 401(k) Associate Savings Plan (filed as Exhibit 4.5 to the Company's
Registration Statement on Form S-8 filed on March 31, 1998).
*10.34 The Company's 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).
*10.35 The Company's 1998 Stock Option Plan (filed as Exhibit 4.5 to the Company's
Registration Statement on Form S-8 filed on December 4, 1998).
*10.36 The Company's 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).
*10.37 The Company's 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).
*10.38 The Company's 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).
*10.39 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).
*10.40 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).
*10.41 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).
*10.42 Foundation Health Corporation Employee Stock Purchase Plan (filed as Exhibit 4.3 to
the Company's Registration Statement on Form S-8 (File No. 333-24621), which is
incorporated by reference herein).
*10.43 Foundation Health Corporation Profit Sharing and 401(k) Plan (Amended and Restated
effective January 1, 1994) (filed as Exhibit 4.4 to the Company's Registration
Statement on Form S-8 (File No. 333-24621), which is incorporated by reference
herein).
*10.44 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).
</TABLE>
39
<PAGE>
<TABLE>
<C> <S>
*10.45 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).
*10.46 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).
*10.47 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).
10.48 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).
*10.49 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).
*10.50 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).
*10.51 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).
10.52 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).
10.53 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).
10.54 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).
10.55 First Amendment and Waiver to Credit Agreement dated April 6, 1998 among the
Company, Bank of America National Trust and Savings Association and the Banks (as
defined therein) (filed as Exhibit 10.64 to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1998, which is incorporated by reference
herein).
</TABLE>
40
<PAGE>
<TABLE>
<C> <S>
10.56 Second Amendment to Credit Agreement dated July 31, 1998 among the Company, Bank of
America National Trust and Savings Association and the Banks (as defined therein)
(filed as Exhibit 10.65 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998, which is incorporated by reference herein).
10.57 Third Amendment to Credit Agreement, dated November 6, 1998, among the Company,
Bank of America National Trust and Savings Association and the Banks (as defined
therein) (filed as Exhibit 10.65 to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1998, which is incorporated by reference herein).
10.58 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).
10.59 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).
10.60 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).
10.61 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).
+10.62 Asset Purchase Agreement dated December 31, 1998 by and between the Company and
Access Health, Inc., a copy of which is filed herewith.
+10.63 Purchase Agreement dated February 26, 1999 by and among the Company, Foundation
Health Pharmaceutical Services, Inc., Integrated Pharmaceutical Services, Inc., and
Advance Paradigm, Inc., a copy of which is filed herewith.
+10.64 Fourth Amendment to Credit Agreement, dated as of March 26, 1999, 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 The Company's Supplemental Executive Retirement Plan effective as of January 1,
1996, a copy of which is filed herewith.
*+10.66 The Company's Deferred Compensation Plan effective as of May 1, 1998, a copy of
which is filed herewith.
11.1 Statement relative to computation per share earnings of the Company (included in
the notes to the Financial Statements, which are incorporated by reference from
pages to of the Annual Report to Stockholders for the year ended
December 31, 1998).
+13.1 1998 Annual Report to Stockholders, a copy of which is filed herewith.
+21.1 Subsidiaries of the Company, a copy which is filed herewith.
+23.1 Consent and Report on Schedule of Deloitte & Touche LLP, a copy of which is filed
herewith.
+27.1 Financial Data Schedule for 1998, a copy of which has been filed with the EDGAR
version of this filing.
</TABLE>
41
<PAGE>
<TABLE>
<C> <S>
99.1 Report of Deloitte & Touche LLP on the consolidated balance sheets of Foundation
Health Systems, Inc. as of December 31, 1998 and 1997, and the related statements
of operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1998, which is incorporated by reference from page 29
of the Annual Report to Stockholders for the fiscal year ended December 31, 1998.
</TABLE>
- ------------------------
* Management contract or compensatory plan or arrangement required to be filed
(and/or incorporated by reference) as an exhibit to this Annual Report on
Form 10-K pursuant to Item 14(c) of Form 10-K.
+ A copy of the exhibit is being filed with this Annual Report on Form 10-K.
(b) Reports on Form 8-K
The following Current Report on Form 8-K was filed by the Company during the
quarterly period ended December 31, 1998:
A Current Report on Form 8-K dated December 23, 1998 announcing the
Company's completion of its sale of Business Insurance Group, Inc., a
wholly-owned subsidiary of the Company.
No other Current Reports on Form 8-K were filed by the Company during the
quarterly period ended December 31, 1998.
42
<PAGE>
SUPPLEMENTAL SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
FOUNDATION HEALTH SYSTEMS, INC.
CONDENSED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................................... $ 74,767 $ 16,740
Investments available for sale..................................................... 3,352 9,007
Other assets....................................................................... 6,654 46,902
Due from subsidiaries.............................................................. 597,321 473,431
Net assets from discontinued operations............................................ -- 267,713
------------ ------------
Total current assets................................................................. 682,094 813,793
Property and equipment, net.......................................................... 7,854 22,895
Investment in subsidiaries........................................................... 1,459,335 1,389,190
Other assets......................................................................... 65,881 70,342
------------ ------------
Total assets..................................................................... $2,215,164 $2,296,220
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Due to subsidiaries................................................................ 185,516 73,283
Other current liabilities.......................................................... 46,883 35,907
------------ ------------
Total current liabilities........................................................ 232,399 109,190
Notes payable........................................................................ 1,235,500 1,287,500
Other liabilities.................................................................... 3,223 3,556
------------ ------------
Total liabilities................................................................ 1,471,122 1,400,246
------------ ------------
Stockholders' equity:
Common stock and additional paid-in capital........................................ 641,945 628,735
Common stock held in treasury, at cost............................................. (95,831) (95,831)
Retained earnings.................................................................. 205,236 370,394
Accumulated other comprehensive loss............................................... (7,308) (7,324)
------------ ------------
Total stockholders' equity....................................................... 744,042 895,974
------------ ------------
Total liabilities and stockholders' equity..................................... $2,215,164 $2,296,220
------------ ------------
------------ ------------
</TABLE>
See accompanying note to condensed financial statements.
43
<PAGE>
SUPPLEMENTAL SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(CONTINUED)
FOUNDATION HEALTH SYSTEMS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
<S> <C> <C> <C>
1998 1997 1996
----------- ----------- ----------
Investment and other income................................................. $ 11,366 $ 6,485 $ 5,171
Expenses:
General and administrative................................................ 27,480 17,288 11,879
Amortization and depreciation............................................. 2,197 1,315 1,155
Interest.................................................................. 91,717 42,118 22,063
Asset impairment, merger, restructuring and other charges................. 39,602 42,189 2,500
----------- ----------- ----------
160,996 102,910 37,597
----------- ----------- ----------
Loss from continuing operations before income taxes and equity in net income
of subsidiaries........................................................... (149,630) (96,425) (32,426)
Income tax benefit.......................................................... 61,333 39,533 11,861
Equity in net income (loss) of subsidiaries................................. (76,861) (10,938) 59,395
----------- ----------- ----------
Income (loss) from continuing operations.................................... (165,158) (67,830) 38,830
Discontinued operations:
Income (loss) from operations, net of tax................................. -- (30,409) 25,084
Gain (loss) on disposition, net of tax.................................... -- (88,845) 20,317
----------- ----------- ----------
Net income (loss)....................................................... $ (165,158) $ (187,084) $ 84,231
----------- ----------- ----------
----------- ----------- ----------
</TABLE>
See accompanying note to condensed financial statements.
44
<PAGE>
SUPPLEMENTAL SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(CONTINUED)
FOUNDATION HEALTH SYSTEMS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
<S> <C> <C> <C>
1998 1997 1996
---------- ----------- ----------
Net Cash Flows from Operating Activities..................................... $ (39,871) $ (521,154) $ 11,091
---------- ----------- ----------
Cash Flows from Investing Activities:
Sales or maturity of investments available for sale........................ 8,777 11,400 --
Purchases of investments available for sale................................ (6,264) (309) (20,160)
Sales of property and equipment............................................ 16,376 -- --
Purchases of property and equipment........................................ (3,532) (20,695) (3,273)
Other assets............................................................... 4,771 (130,755) (2,941)
Sale of net assets of discontinued operations.............................. 257,100 -- --
Acquisition of businesses.................................................. -- (293,625) (4,113)
---------- ----------- ----------
Net cash provided by (used in) investing activities.......................... 277,228 (433,984) (30,487)
---------- ----------- ----------
Cash Flows from Financing Activities:
Proceeds from exercise of stock options and employee stock purchases....... 13,209 21,506 17,483
Proceeds from sale of stock................................................ -- -- 95,831
Proceeds from issuance of notes payable.................................... 155,000 946,000 9,000
Principal payments on notes payable........................................ (207,000) (873) --
Redemption of common stock................................................. -- (111,334) (105,419)
Cash dividends received from subsidiaries.................................. 2,900 140,994 --
Capital contributions to subsidiaries...................................... (143,439) (33,875) (700)
---------- ----------- ----------
Net cash provided by (used in) financing activities.......................... (179,330) 962,418 16,195
---------- ----------- ----------
Net increase (decrease) in cash and cash equivalents......................... 58,027 7,280 (3,201)
Cash and cash equivalents, beginning of period............................... 16,740 9,460 12,661
---------- ----------- ----------
Cash and cash equivalents, end of period..................................... $ 74,767 $ 16,740 $ 9,460
---------- ----------- ----------
---------- ----------- ----------
</TABLE>
See accompanying note to condensed financial statements.
45
<PAGE>
SUPPLEMENTAL SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(CONTINUED)
FOUNDATION HEALTH SYSTEMS, INC.
NOTE TO CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 1--BASIS OF PRESENTATION
Foundation Health Systems, Inc.'s ("FHS") investment in subsidiaries is
stated at cost plus equity in undistributed earnings (losses) of subsidiaries.
FHS' share of net income (loss) of its unconsolidated subsidiaries is included
in consolidated income (loss) using the equity method. This condensed financial
information of registrant should be read in conjunction with the consolidated
financial statements of Foundation Health Systems, Inc. and subsidiaries.
46
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Company has duly caused this Report to be
signed on its behalf by the undersigned thereunto duly authorized, on the day
of March, 1999.
FOUNDATION HEALTH SYSTEMS, INC.
By: /s/ JAY M. GELLERT
-----------------------------------------
Jay M. Gellert
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
By: /s/ STEVEN P. ERWIN
-----------------------------------------
Steven P. Erwin
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(PRINCIPAL ACCOUNTING AND FINANCIAL
OFFICER)
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Report has been signed below by the following persons on behalf of
the Company and in the capacities indicated on the day of March, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
<S> <C> <C>
/s/ J. THOMAS BOUCHARD Director
- ------------------------------ March 31, 1999
J. Thomas Bouchard
/s/ GEORGE DEUKMEJIAN Director
- ------------------------------ March 31, 1999
Gov. George Deukmejian
/s/ THOMAS T. FARLEY Director
- ------------------------------ March 31, 1999
Thomas T. Farley
/s/ PATRICK FOLEY Director
- ------------------------------ March 31, 1999
Patrick Foley
/s/ EARL B. FOWLER Director
- ------------------------------ March 31, 1999
Admiral Earl B. Fowler
/s/ JAY M. GELLERT Director
- ------------------------------ March 31, 1999
Jay M. Gellert
/s/ ROGER F. GREAVES Director
- ------------------------------ March 31, 1999
Roger F. Greaves
/s/ RICHARD W. HANSELMAN Director
- ------------------------------ March 31, 1999
Richard W. Hanselman
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
<S> <C> <C>
/s/ RICHARD J. STEGEMEIER Director
- ------------------------------ March 31, 1999
Richard J. Stegemeier
/s/ RAYMOND S. TROUBH Director
- ------------------------------ March 31, 1999
Raymond S. Troubh
</TABLE>
48
<PAGE>
Ex. 10.13
EMPLOYMENT AGREEMENT
THIS AGREEMENT is entered into as of May 1, 1996 by and between GARY
VELASQUEZ (the "Employee") and FOUNDATION HEALTH CORPORATION, a Delaware
corporation (the "Company").
1. TERM OF EMPLOYMENT.
(a) BASIC RULE. The Company agrees to continue the Employee's
employment, and the Employee agrees to remain in employment with the Company,
for a three-year period commencing as of the date hereof and ending May 1,
1999, unless sooner terminated pursuant to Subsection (b), (c), or (d) below.
(b) EARLY TERMINATION. Subject to Sections 6 and 7, the Company
may terminate the Employee's employment by giving the Employee 30 days'
advance notice in writing. The Employee may terminate his employment by
giving the Company 30 days' advance notice in writing. The Employee's
employment shall terminate automatically in the event of his death. Any
waiver of notice shall be valid only if it is made in writing and expressly
refers to the applicable notice requirement of this Section 1.
(c) CAUSE. The Company may terminate the Employee's employment for
Cause at any time by giving the Employee notice in writing. For all purposes
under this Agreement, "Cause" shall mean (i) a failure by the Employee to
perform his duties, other than a failure resulting from the Employee's
complete or partial incapacity due to physical or mental illness or
impairment, (ii) misconduct or fraud or (iii) conviction of, or a plea of
"guilty" or "no contest" to, a felony.
(d) DISABILITY. The Company may terminate the Employee's active
employment due to Disability by giving the Employee 30 days' advance notice
in writing. For all purposes under this Agreement, "Disability" shall mean
that the Employee, at the time notice is given, has not performed his duties
under this Agreement for at least 90 working days in a period of not more
than 365 consecutive days as the result of his incapacity due to physical or
mental illness.
(e) RIGHTS UPON TERMINATION. Upon the termination of the
Employee's employment pursuant to this Section 1, the Employee shall only be
entitled to legally mandated benefits accruing during the period preceding
the effective date of the termination, except as expressly provided in
Section 6 or 7, as applicable. The payments under this Agreement shall fully
discharge all responsibilities of the Company to the Employee upon the
termination of his employment.
(f) TERMINATION OF AGREEMENT. This Agreement shall terminate when
all obligations of the parties hereunder have been satisfied.
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<PAGE>
2. EMPLOYEE'S DUTIES.
During the term of his employment under this Agreement, the Employee
shall serve the Corporation as President and Chief Operating Officer -
Foundation Health, a California Health Plan and shall devote his full
business efforts and time to the Company and its subsidiaries and shall not
render services to any other person or entity without the prior written
consent of the Company's President and Chief Executive Officer or his
designee. The foregoing, however, shall not preclude the Employee from
engaging in appropriate civic, charitable or religious activities or from
devoting a reasonable amount of time to private investments that do not
interfere or conflict with his responsibilities to the Company.
3. BASE COMPENSATION.
During the term of his employment under this Agreement, the Company
agrees to pay the Employee as compensation for his services a base salary at
the annual rate of $275,000 or at such higher rate as the Company may
determine from time to time. Such salary shall be payable in accordance with
the Company's standard payroll procedures. (The annual compensation specified
in this Section 3, together with any changes in such compensation that the
Company may grant from time to time, is referred to in this Agreement as
"Base Compensation.")
4. EMPLOYEE BENEFITS.
(a) During the term of his employment under this Agreement, the
Employee shall be eligible to participate in employee benefit plans and
compensation programs maintained by the Company, subject in each case to the
generally applicable terms and conditions of the plan or program in question
and to the determinations of any person or committee administering such plan
or program.
(b) Employee shall be eligible to participate in the Company's
Executive Bonus Plan (or such other management incentive program adopted by
the Board to replace such Bonus Plan) which may entitle Employee to an annual
bonus for the fiscal year ending June 30, 1996, and for each fiscal year
thereafter during the term. The bonus shall continue at 50% of Employee's
Base Compensation. During the first year of employment, the bonus, if any,
shall be prorated from date of employment.
-2-
<PAGE>
5. BUSINESS EXPENSES.
During the term of his employment under this Agreement, the Employee
shall be authorized to incur necessary and reasonable travel, entertainment
and other business expenses in connection with his duties hereunder. The
Company shall reimburse the Employee for such expenses upon presentation of
an itemized account and appropriate supporting documentation, all in
accordance with the Company's generally applicable policies.
6. CHANGE IN CONTROL.
(a) DEFINITION. For all purposes under this Agreement, "Change in
Control" shall mean the occurrence of any of the following events after the
date of this Agreement:
(i) A change in the composition of the Company's Board of Directors
(the "Board"), as a result of which fewer than two-thirds of the incumbent
directors are directors who either (A) had been directors of the
Company 24 months prior to such change or (B) were elected, or nominated
for election, to the Board with the affirmative votes of at least a
majority of the directors who had been directors of the Company 24 months
prior to such change and who were still in office at the time of the
election or nomination; or
(ii) Any "person" (as such term is used in sections 13(d) and 14(d)
of the Exchange Act) through the acquisition or aggregation of securities
is or becomes the beneficial owner, directly or indirectly, of securities
of the Company representing 20 percent or more of the combined voting power
of the Company's then outstanding securities ordinarily (and apart from
rights accruing under special circumstances) having the right to vote at
elections of directors (the "Base Capital Stock"), except that any change
in the relative beneficial ownership of the Company's securities by any
person resulting solely from a reduction in the aggregate number of
outstanding shares of Base Capital Stock, and any decrease thereafter in
such person's ownership of securities, shall be disregarded until such
person increases in any manner, directly or indirectly, such person's
beneficial ownership of any securities of the Company.
(b) GOOD REASON. For purposes of Section 6 under this Agreement,
unless otherwise consented to by Employee, "Good Reason" shall mean that the
Employee:
(i) Has been demoted;
(ii) Has incurred a substantial reduction in his authority or
responsibility; or
(iii) Has incurred a reduction in his Base Compensation;
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<PAGE>
except that a mere change in reporting relationship or title as a result of
organizational restructuring shall not be considered "Good Reason".
(c) SEVERANCE PAYMENT. If, during the term of this Agreement and
within two years after the occurrence of a Change in Control, the Employee
voluntarily resigns his employment for Good Reason or the Company terminates
the Employee's employment for any reason other than Cause, then the Employee
shall be entitled to receive a severance payment from the Company (the
"Severance Payment"). The Severance Payment shall be made in a lump sum not
more than five business days following the date of the employment termination
and shall be in an amount determined under Subsection (d) below. The
Severance Payment shall be in lieu of any further payments to the Employee
under Section 3 and any further accrual of benefits under Section 4 with
respect to periods subsequent to the date of the employment termination.
(d) AMOUNT. The amount of the Severance Payment shall be equal to
1.5 times the Employee's annual rate of Base Compensation, as in effect on
the date of the employment termination.
(e) INCENTIVE PROGRAMS. If, during the term of this Agreement, a
Change in Control occurs with respect to the Company, the Employee shall
become fully vested in all awards heretofore or hereafter granted to him
under all incentive compensation, deferred compensation, bonus, stock option,
stock appreciation rights, restricted stock, phantom stock or similar plans
maintained by the Company, any contrary provisions of such plans
notwithstanding.
(f) INSURANCE COVERAGE. During the 12-month period commencing upon
a termination of employment described in Subsection (c) above, the Employee
(and, where applicable, his dependents) shall be entitled to continue
participation in the basic group insurance plans maintained by the Company,
including life, disability and health insurance programs, as if he were still
an employee of the Company. Where applicable, the Employee's salary for
purposes of such plans shall be deemed to be equal to his Base Compensation.
To the extent that the Company finds it impossible to cover the Employee
under its group insurance policies during such 12-month period, the Company
shall provide the Employee with the same level of coverage at the same cost
under individual policies.
(g) NO MITIGATION. The Employee shall not be required to mitigate
the amount of any payment contemplated by this Section 6 (whether by seeking
new employment or in any other manner).
(h) POOLING-OF-INTEREST ACCOUNTING RULES. Any other provision of
this Agreement shall be invalid to the extent that the implementation of such
provision would preclude the application of pooling-of-interests accounting
treatment to a transaction (including a Change in Control) for which such
treatment is to be adopted by the Company and which has been approved by the
Board of Directors of the Company. If the pooling-of-interests accounting
rules require the invalidation of one or more provisions of this Agreement,
the adverse impact on
-4-
<PAGE>
the Employee shall be proportionate to the adverse impact on all similarly
situated employees of the Company, as determined by the Board of Directors of
the Company. All determinations regarding the pooling-of-interests accounting
rules for purposes off this Subsection (h) shall be made by the independent
auditors retained by the Company most recently prior to the Change of Control
("the Auditors").
7. TERMINATION BY COMPANY WITHOUT CAUSE.
(a) CONTINUATION PERIOD. If, during the term of this Agreement,
the Company terminates the Employee's employment for any reason other than
Cause or Disability and if Section 6 does not apply, then the Employee shall
be entitled to receive all of the payments and benefit coverage described
in this Section 7. Such payments and benefit coverage shall continue for the
period commencing on the date when the employment termination is effective
and ending on the earlier of (i) the day 12 months after such date or (ii)
the date of the Employee's death (the "Continuation Period").
(b) BASE COMPENSATION. During the Continuation Period, the Company
shall pay the Employee, in accordance with Section 3, his Base Compensation
at the annual rate in effect on the date of the employment termination.
(c) INSURANCE COVERAGE. During the Continuation Period, the
Employee (and, where applicable, his dependents) shall be entitled to
continue participation in all insurance or similar plans maintained by the
Company, including (without limitation) life, disability, health and accident
insurance programs, as if he were still an employee of the Company. Where
applicable, the Employee's salary for purposes of such plans shall be deemed
to be equal to his Base Compensation. To the extent that the Company finds it
impossible to cover the Employee under its group insurance policies during
the Continuation Period, the Company shall provide the Employee with the same
level of coverage at the same cost under individual policies.
(d) INCENTIVE PROGRAMS. The Continuation Period shall not be
counted as employment with the Company for purposes of vesting under all
executive compensation programs maintained by the Company, including (without
limitation) incentive compensation, deferred compensation, bonus, stock
option, stock appreciation rights, restricted stock, phantom stock or similar
plans maintained by the Company (any contrary provisions of such plans
notwithstanding), including any pension, thrift or profit-sharing plan
intended to qualify under section 401(a) of the Internal Revenue Code of
1986, as amended (the "Code"), nor shall the Company be required to grant any
new awards to the Employee under such executive compensation programs during
the Continuation Period. The Continuation Period shall not be counted as
employment with the Company for purposes of determining the expiration date
of any stock option granted by the Company and held by the Employee when his
employment terminates.
(e) MITIGATION AND NEW EMPLOYMENT. The Employee shall not be
required to mitigate the amount of any cash payment contemplated by this
Section 7, except that any such
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<PAGE>
payment shall be reduced by any earnings that the Employee may receive from
any other source. All of the Employee's insurance coverage under Subsection
(c) above shall be discontinued (subject to applicable law) when the Employee
becomes eligible for any group insurance coverage in connection with new
employment or self-employment, regardless of whether the new group insurance
coverage is equivalent to the coverage described in Subsection (c) above.
8. LIMITATION ON PAYMENTS.
(a) BASIC RULE. Any other provision of this Agreement
notwithstanding, the Company shall not be required to make any payment or
transfer any property to, or for the benefit of, the Employee (under this
Agreement or otherwise) that would be nondeductible by the Company by reason
of section 280G of the Code or that would subject the Employee to the excise
tax described in section 4999 of the Code. All calculations required by this
Section 10 shall be performed by the Auditors, based on information supplied
by the Company and the Employee, and shall be binding on the Company and the
Employee. All fees and expenses of the Auditors shall be paid by the Company.
(b) REDUCTIONS. If the amount of the aggregate payments or
property transfers to the Employee must be reduced under this Section 8, then
the Employee shall direct in which order the payments or transfers are to be
reduced, but no change in the timing of any payment or transfer shall be made
without the Company's consent. As a result of uncertainty in the application
of sections 280G and 4999 of the Code at the time of an initial determination
by the Auditors hereunder, it is possible that a payment will have been made
by the Company that should not have been made (an "Overpayment") or that an
additional payment that will not have been made by the Company could have
been made (an "Underpayment"). In the event that the Auditors, based upon the
assertion of a deficiency by the Internal Revenue Service against the Company
or the Employee that the Auditors believe has a high probability of success,
determine that an Overpayment has been made, such Overpayment shall be
treated for all purposes as a loan to the Employee that he shall repay to the
Company, together with interest at the applicable federal rate specified in
section 7872(f)(2) of the Code; provided, however, that no amount shall be
payable by the Employee to the Company if and to the extent that such payment
would not reduce the amount that is nondeductible under section 280G of the
Code or is subject to an excise tax under section 4999 of the Code. In the
event that the Auditors determine that an Underpayment has occurred, such
Underpayment shall promptly be paid or transferred by the Company to, or for
the benefit of, the Employee, together with interest at the applicable
federal rate specified in section 7872(f)(2) of the Code.
9. SUCCESSORS.
(a) COMPANY'S SUCCESSORS. The Company shall require any successor
(whether direct or indirect and whether by purchase, lease, merger,
consolidation, liquidation or otherwise) to all or substantially all of the
Company's business and/or assets, by an agreement in substance and form
satisfactory to the Employee, to assume this Agreement and to agree
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<PAGE>
expressly to perform this Agreement in the same manner and to the same extent
as the Company would be required to perform it in the absence of a
succession. The Company's failure to obtain such agreement prior to the
effectiveness of a succession shall be a breach of this Agreement and shall
entitle the Employee to all of the compensation and benefits to which he
would have been entitled hereunder if the Company had involuntarily
terminated his employment without Cause immediately after such succession
becomes effective. For all purposes under this Agreement, the term "Company"
shall include any successor to the Company's business and/or assets which
executes and delivers the assumption agreement described in this Subsection
(a) or which becomes bound by this Agreement by operation of law.
(b) EMPLOYEE'S SUCCESSORS. This Agreement and all rights of the
Employee hereunder shall inure to the benefit of, and be enforceable by, the
Employee's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees.
10. NO DISCLOSURE OR SOLICITATION.
(a) CONFIDENTIAL INFORMATION. During the term of this Agreement
and at all times thereafter, the Employee shall not, without the prior
written consent of the Board, disclose or use for any purpose (except in the
course of his employment under this Agreement and in furtherance of the
business of the Company) confidential information, proprietary data and
customer lists of the Company, except as required by applicable law or legal
process; provided, however, that "confidential information, proprietary data
and customer lists" shall not include any information known generally to the
public or ascertainable from public or published information (other than as a
result of unauthorized disclosure by the Employee) or any information of a
type not otherwise considered confidential by persons engaged in the same
business or a business similar to that conducted by the Company. The Employee
agrees to deliver to the Company at the termination of his employment, or at
any other time the Company may request, all memoranda, notes, plans, records,
lists, reports and other documents (and copies thereof) relating to the
business of the Company which he may then possess or have under his control.
(b) SOLICITATION OF EMPLOYEES. During the term of this Agreement
and, in the event of a termination under Section 7, during the Continuation
Period, the Employee shall not, directly or indirectly:
(i) Contact any employee or consultant of the Company or any of
its subsidiaries to solicit such employee or consultant (or any entity in
which such employee or consultant has a significant equity interest) to
become an employee, partner or independent contractor of the Employee or
any other person; or
(ii) Employ or engage any present or former employee or consultant
of the Company or any of its subsidiaries (or any entity in which such
employee or consultant has a significant equity interest) as an employee,
partner or independent contractor of the Employee or any other person,
except an employee or consultant who has performed no
-7-
<PAGE>
work for the company or any of its subsidiaries for three consecutive
calendar years prior to employment or engagement by Employee.
11. MISCELLANEOUS PROVISIONS.
(a) NOTICE. Notices and all other communications contemplated by
this Agreement shall be in writing and shall be deemed to have been duly
given when personally delivered or when mailed by U.S. registered mail,
return receipt requested and postage prepaid. In the case of the Employee,
mailed notices shall be addressed to him at the home address which he most
recently communicated to the Company in writing. In the case of the Company,
mailed notices shall be addressed to its corporate headquarters, and all
notices shall be directed to the attention of its Secretary.
(b) WAIVER. No provision of this Agreement shall be modified,
waived or discharged unless the modification, waiver or discharge is agreed
to in writing and signed by the Employee and by an authorized officer of the
Company (other than the Employee). No waiver by either party of any breach
of, or of compliance with, any condition or provision of this Agreement by
the other party shall be considered a waiver of any other condition or
provision or of the same condition or provision at another time.
(c) WHOLE AGREEMENT. No agreements, representations or
understandings (whether oral or written and whether express or implied) which
are not expressly set forth in this Agreement have been made or entered into
by either party with respect to the subject matter hereof. This Agreement
supersedes, without limitation, any prior agreement entered into by the
parties (or by any wholly owned subsidiary of the Company and the Employee)
hereto.
(d) WITHHOLDING TAXES. All payments made under this Agreement
shall be subject to reduction to reflect taxes required to be withheld by law.
(e) CHOICE OF LAW. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
California.
(f) SEVERABILITY. The invalidity or unenforceability of any
provision or provisions of this Agreement shall not affect the validity or
enforceability of any other provision hereof, which shall remain in full
force and effect.
(g) ARBITRATION. Except as otherwise provided in Section 8, any
controversy or claim arising out of or relating to this Agreement, or the
breach thereof, shall be settled by binding arbitration in accordance with
the California Code of Civil Procedure, Section 1280 et seq., except where
federal law requires otherwise, and judgment on the award rendered by the
arbitrator may be entered in any court having jurisdiction thereof. All fees
and expenses of the arbitrator and such Association shall be paid as
determined by the arbitrator.
-8-
<PAGE>
(h) NO ASSIGNMENT. The rights of any person to payments or
benefits under this Agreement shall not be made subject to option or
assignment, either by voluntary or involuntary assignment or by operation of
law, including (without limitation) bankruptcy, garnishment, attachment or
other creditor's process, and any action in violation of this Subsection (h)
shall be void.
IN WITNESS WHEREOF, each of the parties has executed this Agreement,
in the case of the Company by its duly authorized officer, as of the day and
year first above written.
/s/ GARY A. VELASQUEZ
---------------------------------------
Employee
FOUNDATION HEALTH CORPORATION
By /s/ DANIEL D. CROWLEY
-------------------------------------
Title Chairman, President & CEO
----------------------------------
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<PAGE>
Ex. 10.14
EMPLOYMENT AGREEMENT
THIS AGREEMENT is entered into as of November 8, 1993, by and
between ED MUNNO (the "Employee") and FOUNDATION HEALTH CORPORATION, a
Delaware corporation (the "Company").
1. TERM OF EMPLOYMENT.
(a) BASIC RULE. The Company agrees to continue the Employee's
employment, and the Employee agrees to remain in employment with the Company,
for a three-year period commencing as of the date hereof and ending November
8, 1996, and thereafter automatically renewable from year to year unless
sooner terminated pursuant to Subsection (b), (c), (d) or (e) below.
(b) EARLY TERMINATION. Subject to Sections 6 and 7, the Company
may terminate the Employee's employment by giving the Employee 30 days'
advance notice in writing. The Employee may terminate his employment by
giving the Company 30 days' advance notice in writing. The Employee's
employment shall terminate automatically in the event of his death. Any
waiver of notice shall be valid only if it is made in writing and expressly
refers to the applicable notice requirement of this Section 1.
(c) CAUSE. The Company may terminate the Employee's employment for
Cause at any time by giving the Employee notice in writing. For all purposes
under this Agreement, "Cause" shall mean (i) a failure by the Employee to
perform his duties, other than a failure resulting from the Employee's
complete or partial incapacity due to physical or mental illness or
impairment, (ii) misconduct or fraud or (iii) conviction of, or a plea of
"guilty" or "no contest" to, a felony.
(d) DISABILITY. The Company may terminate the Employee's active
employment due to Disability by giving the Employee 30 days' advance notice
in writing. For all purposes under this Agreement, "Disability" shall mean
that the Employee, as the time notice is given, has not performed his duties
under this Agreement for at least 90 working days in a period of not more
than 365 consecutive days as the result of his incapacity due to physical or
mental illness.
<PAGE>
(e) RETIREMENT. The Company may terminate the Employee's
employment due to the Employee having attained the later of (i) the Company's
normal retirement age or (ii) 65 years old (hereinafter referred to as
"Retirement") by giving the Employee 30 days advance notice in writing.
(f) RIGHTS UPON TERMINATION. Except as expressly provided in
Sections 6 and 7, upon the termination of the Employee's employment pursuant
to this Section 1, the Employee shall only be entitled to the compensation,
benefits and reimbursements described in Sections 3, 4 and 5 for the period
preceding the effective date of the termination. The payments under this
Agreement shall fully discharge all responsibilities of the Company to the
Employee upon the termination of his employment.
(g) TERMINATION OF AGREEMENT. This Agreement shall terminate when
all obligations of the parties hereunder have been satisfied.
2. EMPLOYEE'S DUTIES.
During the term of his employment under this Agreement, the Employee
shall devote his full business efforts and time to the Company and its
subsidiaries and shall not render services to any other person or entity
without the prior written consent of the Company's President and Chief
Executive Officer. The foregoing, however, shall not preclude the Employee
from engaging in appropriate civic, charitable or religious activities or
from devoting a reasonable amount of time to private investments that do not
interfere or conflict with his responsibilities to the Company.
3. BASE COMPENSATION.
During the term of his employment under this Agreement, the Company
agrees to pay the Employee as compensation for his services a base salary at
the annual rate of $129,996 or at such higher rate as the Company may
determine from time to time. Such salary shall be payable in accordance with
the Company's standard payroll procedures. Once the Company has increased
such salary, it thereafter shall not be reduced. (The annual compensation
specified in this Section 3, together with any increases in such
compensation that the Company may grant from time to time, is referred to in
this Agreement as "Base Compensation.")
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<PAGE>
4. EMPLOYEE BENEFITS.
During the term of his employment under this Agreement, the Employee
shall be eligible to participate in employee benefit plans and executive
compensation programs maintained by the Company, subject in each case to the
generally applicable terms and conditions of the plan or program in question
and to the determination of any person or committee administering such plan
or program.
5. BUSINESS EXPENSES.
During the term of his employment under this Agreement, the Employee
shall be authorized to incur necessary and reasonable travel, entertainment
and other business expenses in connection with his duties hereunder. The
Company shall reimburse the Employee for such expenses upon presentation of
an itemized account and appropriate supporting documentation, all in
accordance with the Company's generally applicable policies.
6. CHANCE IN CONTROL.
(a) DEFINITION. For all purposes under this Agreement, "Change in
Control" shall mean the occurrence of any of the following events after the
date of this Agreement:
(i) A change in the composition of the Company's Board of Directors
(the "Board"), as a result of which fewer than two-thirds of the
incumbent directors are directors who either (A) had been directors of the
Company 24 months prior to such change or (B) were elected, or nominated
for election, to the Board with the affirmative votes of at least a
majority of the directors who had been directors of the Company 24 months
prior to such change and who were still in office at the time of the
election or nomination; or
(ii) Any "person" (as such term is used in sections 13(d) and 14(d)
of the Exchange Act) through the acquisition or aggregation of securities
is or becomes the beneficial owner, directly or indirectly, of securities
of the Company representing 20 percent or more of the combined voting
power of the Company's then outstanding securities ordinarily (and apart
from rights accruing under special circumstances) having the right to vote
at elections of directors (the "Base Capital Stock"), except that any
change in the relative beneficial
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<PAGE>
ownership of the Company's securities by any person resulting solely from
a reduction in the aggregate number of outstanding shares of Base Capital
Stock, and any decrease thereafter in such person's ownership of
securities, shall be disregarded until such person increases in any
manner, directly or indirectly, such person's beneficial ownership of any
securities of the Company.
(b) GOOD REASON. For purposes of Section 6 under this
Agreement, unless otherwise consented to by Employee, "Good Reason" shall mean
that the Employee:
(i) Has been demoted;
(ii) Has incurred a substantial reduction in his authority or
responsibility; or
(iii) Has incurred a reduction in his Base Compensation;
except that a mere change in reporting relationship as a result of
organizational restructuring shall not be considered "Good Reason".
(c) SEVERANCE PAYMENT. If, during the term of this Agreement and
within two years after the occurrence of a Change in Control, the Employee
voluntarily resigns his employment for Good Reason or the Company terminates
the Employee's employment for any reason other than Cause or Retirement, then
the Employee shall be entitled to receive a severance payment from the
Company (the "Severance Payment"). The Severance Payment shall be made in a
lump sum not more than five business days following the date of the
employment termination and shall be in an amount determined under Subsection
(d) below. The Severance Payment shall be in lieu of any further payments to
the Employee under Section 3 and any further accrual of benefits under
Section 4 with respect to periods subsequent to the date of the employment
termination.
(d) AMOUNT. The amount of the Severance Payment shall be equal to
1.5 times the Employee's annual rate of Base Compensation, as in effect on
the date of the employment termination.
(e) INCENTIVE PROGRAMS. If, during the term of this Agreement, a
Change in Control occurs with respect to the Company, the Employee shall
become fully vested in all awards heretofore or hereafter granted to him
under all incentive compensation, deferred compensation, bonus, stock
-4-
<PAGE>
option, stock appreciation rights, restricted stock, phantom stock or similar
plans maintained by the Company, any contrary provisions of such plans
notwithstanding.
(f) INSURANCE COVERAGE. During the 18-month period commencing
upon a termination of employment described in Subsection (c) above, the
Employee (and, where applicable, his dependents) shall be entitled to
continue participation in the basic group insurance plans maintained by the
Company, including life, disability and health insurance programs, as if he
were still an employee of the Company. Where applicable, the Employee's
salary for purposes of such plans shall be deemed to be equal to his Base
Compensation. To the extent that the Company finds it impossible to cover
the Employee under its group insurance policies during such 18-month period,
the Company shall provide the Employee with the same level of coverage at the
same cost under individual policies.
(g) NO MITIGATION. The Employee shall not be required to mitigate
the amount of any payment contemplated by this Section 6 (whether by seeking
new employment or in any other manner), nor shall any such payment be reduced
by any earnings that the Employee may receive from any other source.
(h) POOLING-OF-INTEREST ACCOUNTING RULES. Any other provisions of
this Agreement shall be invalid to the extent that the implementation of such
provision would preclude the application of pooling-of-interests accounting
treatment to a transaction (including a Change in Control) for which such
treatment is to be adopted by the Company and which has been approved by the
Board of Directors of the Company. If the pooling-of-interests accounting
rules require the invalidation of one or more provisions of this Agreement,
the adverse impact on the Employee shall be proportionate to the adverse
impact on all similarly situated employees of the Company, as determined by
the Board of Directors of the Company. All determinations regarding the
pooling-of-interests accounting rules for purposes of this Subsection (h)
shall be made by the independent auditors retained by the Company most
recently prior to the Change of Control ("the Auditors").
7. TERMINATION BY COMPANY WITHOUT CAUSE.
(a) CONTINUATION PERIOD. If, during the term of this Agreement,
the Company terminates the Employee's employment for any reason other than
Cause, Retirement or Disability and if Section 6 does not apply, then the
Employee shall be entitled to receive all of the payments
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<PAGE>
and benefit coverage described in this Section 7. Such payments and benefit
coverage shall continue for the period commencing on the date when the
employment termination is effective and ending on the earlier of (i) the day
12 months after such date of (ii) the date of the Employee's death (the
"Continuation Period").
(b) BASE COMPENSATION. During the Continuation Period, the
Company shall pay the Employee, in accordance with Section 3, his Base
Compensation at the annual rate in effect on the date of the employment
termination.
(c) INSURANCE COVERAGE. During the Continuation Period, the
Employee (and, where applicable, his dependents) shall be entitled to
continue participation in all insurance or similar plans maintained by the
Company, including (without limitation) life, disability, health and accident
insurance programs, as if he were still an employee of the Company. Where
applicable, the Employee's salary for purposes of such plans shall be deemed
to be equal to his Base Compensation. To the extent that the Company finds
it impossible to cover the Employee under its group insurance policies during
the Continuation Period, the Company shall provide the Employee with the same
level of coverage at the same cost under individual policies.
(d) INCENTIVE PROGRAMS. The Continuation Period shall be counted
as employment with the Company for purposes of vesting under all executive
compensation programs maintained by the Company, including (without
limitation) incentive compensation, deferred compensation, bonus, stock
option, stock appreciation rights, restricted stock, phantom stock or similar
plans maintained by the Company (any contrary provisions of such plans
notwithstanding), but not including any pension, thrift or profit-sharing
plan intended to qualify under section 401(a) of the Internal Revenue Code of
1986, as amended (the "Code"). The preceding sentence shall not be
construed to require the Company to grant any new awards to the Employee
under such executive compensation programs during the Continuation Period.
The Continuation Period shall also be counted as employment with the Company
for purposes of determining the expiration date of any stock option granted
by the Company and held by the Employee when his employment terminates.
(e) MITIGATION AND NEW EMPLOYMENT. The Employee shall not be
required to mitigate the amount of any cash payment contemplated by this
Section 7, nor shall any such payment be reduced by any earnings that the
Employee may receive from any other source. All of the Employee's insurance
coverage under Subsection (c) above shall be
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<PAGE>
discontinued (subject to applicable law) when the Employee becomes eligible
for any group insurance coverage in connection with new employment or
self-employment, regardless of whether the new group insurance coverage is
equivalent to the coverage described in Subsection (c) above.
8. LIMITATION ON PAYMENTS.
(a) BASIC RULE. Any other provision of this Agreement
notwithstanding, the Company shall not be required to make any payment or
transfer any property to, or for the benefit of, the Employee (under this
Agreement or otherwise) that would be nondeductible by the Company by reason
of section 280G of the Code or that would subject the Employee to the excise
tax described in section 4999 of the Code. All calculations required by this
Section 8 shall be performed by Auditors, based on information supplied by
the Company and the Employee, and shall be binding on the Company and the
Employee. All fees and expenses of the Auditors shall be paid by the Company.
(b) REDUCTIONS. If the amount of the aggregate payments or
property transfers to the Employee must be reduced under this Section 8, then
the Employee shall direct in which order the payments or transfers are to be
reduced, but no change in the timing of any payment or transfer shall be made
without the Company's consent. As a result of uncertainty in the application
of sections 280G and 4999 of the Code at the time of an initial determination
by the Auditors hereunder, it is possible that a payment will have been made
by the Company that should not have been made (an "Overpayment") or that an
additional payment that will not have been made by the Company could have been
made (an "Underpayment"). In the event that the Auditors, based upon the
assertion of a deficiency by the Internal Revenue Service against the Company
or the Employee that the Auditors believe has a high probability of success,
determine that an Overpayment has been made, such Overpayment shall be treated
for all purposes as a loan to the Employee that he shall repay to the
Company, together with interest at the applicable federal rate specified in
section 7872(f) (2) of the Code; provided, however, that no amount shall be
payable by the Employee of the Company if and to the extent that such payment
would not reduce the amount that is nondeductible under section 280G of the
Code or is subject to an excise tax under sections 4999 of the Code. In the
event that the Auditors determine that an Underpayment has occurred, such
Underpayment shall promptly be paid or transferred by the Company to, or for
the benefit of, the Employee, together with interest at the applicable
federal rate specified in section 7872(f) (2) of the Code.
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<PAGE>
9. SUCCESSORS.
(a) COMPANY'S SUCCESSORS. The Company shall require any successor
(whether direct or indirect and whether by purchase, lease, merger,
consolidation, liquidation or otherwise) to all substantially all of the
Company's business and/or assets, by an agreement in substance and form
satisfactory to the Employee, to assume this Agreement and to agree expressly
to perform this Agreement in the same manner and to the same extent as the
Company would be required to perform it in the absence of a succession. The
Company's failure to obtain such agreement prior to the effectiveness of a
succession shall be a breach of this Agreement and shall entitle the Employee
to all of the compensation and benefits to which he would have been entitled
hereunder if the Company had involuntarily terminated his employment without
Cause immediately after such succession becomes effective. For all purposes
under this Agreement, the term "Company" shall include any successor to the
Company's business and/or assets which executes and delivers the assumption
agreement described in this Subsection (a) or which becomes bound by this
Agreement by operation of law.
(b) EMPLOYEE'S SUCCESSORS. This Agreement and all rights of the
Employee hereunder shall inure to the benefit of, and be enforceable by, the
Employees' personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees.
10. NO DISCLOSURE OR SOLICITATION.
(a) CONFIDENTIAL INFORMATION. During the term of this Agreement
and at all times thereafter, the Employee shall not, without the prior
written consent of the Board, disclose or use for any purpose (except in the
course of his employment under this Agreement and in furtherance of the
business of the Company) confidential information, proprietary data and
customer lists of the Company, except as required by applicable law or legal
process; provided, however, that "confidential information, proprietary data
and customer lists" shall not include any information known generally to the
public or ascertainable from public or published information (other than as a
result of unauthorized disclosure by the Employee) or any information of a
type not otherwise considered confidential by persons engaged in the same
business or a business similar to that conducted by the Company. The
Employee agrees to deliver to the Company at the termination of his
employment, or at any other time the Company may request, all memoranda,
notes, plans, records, lists, reports and any other documents (and
-8-
<PAGE>
copies thereof) relating to the business of the Company which he may then
possess or have under his control.
(b) SOLICITATION OF EMPLOYEES. During the term of this Agreement
and, in the event of a termination under Section 7, during the Continuation
Period, the Employee shall not, directly or indirectly:
(i) Contact any employee or consultant of the Company or any of its
subsidiaries to solicit such employee or consultant (or any entity in
which such employee or consultant has a significant equity interest) to
become an employee, partner or independent contractor of the Employee or
any other person; or
(ii) Employ or retain any present or former employee or consultant
of the Company or any of its subsidiaries (or any entity in which such
employee or consultant has a significant equity interest) as an employee,
partner or independent contractor of the Employee or any other person.
11. MISCELLANEOUS PROVISIONS.
(a) NOTICE. Notices and all other communications contemplated by
this Agreement shall be in writing and shall be deemed to have been duly
given when personally delivered or when mailed by U.S. registered mail,
return receipt requested and postage prepaid. In the case of the Employee,
mailed notices shall be addressed to him at the home address which he most
recently communicated to the Company in writing. In the case of the Company,
mailed notices shall be addressed to its corporate headquarters, and all
notices shall be directed to the attention of its Secretary.
(b) WAIVER. No provisions of this Agreement shall be modified,
waived or discharged unless the modification, waiver or discharge is agreed
to in writing and signed by the Employee and by an authorized officer of the
Company (other than the Employee). No waiver by either party of any breach
of, or of compliance with, any condition or provision of this Agreement by
the other party shall be considered a waiver of any other condition or
provision or of the same condition or provision at another time.
(c) WHOLE AGREEMENT. No agreements, representations or
understandings (whether oral or written and whether express or implied) which
are not expressly set forth in this Agreement have been made or entered into
by either party with respect to the subject matter hereof. This Agreement
supersedes, without limitation, any prior
-9-
<PAGE>
agreement entered into by the parties (or by any wholly owned subsidiary of
the Company and the Employee) hereto.
(d) WITHHOLDING TAXES. All payments made under this Agreement
shall be subject to reduction to reflect taxes required to be withheld by law.
(e) CHOICE OF LAW. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
California.
(f) SEVERABILITY. The invalidity or unenforceability of any
provision or provisions of this Agreement shall not affect the validity or
enforceability of any other provision hereof, which shall remain in full
force and effect.
(g) ARBITRATION. Except as otherwise provided in Section 8, any
controversy or claim arising out of or relating to this Agreement, or the
breach thereof, shall be settled by binding arbitration in accordance with
the California Code of Civil Procedure, Section 1280 et seq., except where
federal law requires otherwise, and judgment on the award rendered by the
arbitrator may be entered in any court having jurisdiction thereof. All fees
and expenses of the arbitrator and such Association shall be paid as
determined by the arbitrator.
(h) NO ASSIGNMENT. The rights of any person to payments or
benefits under this Agreement shall not be made subject to option or
assignment, either by voluntary or involuntary assignment or by operation of
law, including (without limitation) bankruptcy, garnishment, attachment or
other creditor's process, and any action in violation of this Subsection (h)
shall be void.
IN WITNESS WHEREOF, each of the parties has executed this Agreement,
in the case of the Company by its
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<PAGE>
duly authorized officer, as of the day and year first above written.
/s/ ED MUNNO
-------------------------------------------
Employee
FOUNDATION HEALTH CORPORATION
By /s/ DANIEL D. CROWLEY
----------------------------------------
Title PRESIDENT
-------------------------------------
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<PAGE>
Ex. 10.15
AMENDMENT NUMBER ONE TO EMPLOYMENT AGREEMENT
This Amendment Number One to the Employment Agreement entered into as of
November 8, 1993, by and between Ed Munno (the "Employee") and Foundation
Health Corporation, a Delaware corporation (the "Company") (the "Employment
Agreement") is effective as of May 1, 1996.
WHEREAS, the Company desires to amend certain provisions of the
Employment Agreement to, among other matters, clarify certain provisions
thereof; and
WHEREAS, the Employee is amendable to such amendments;
NOW THEREFORE, for good and valuable consideration the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
1. Subsection 1(a) of the Employment Agreement shall be amended by
deleting such subsection it its entirety and replacing it with the following
Subsection 1(a):
"(a) BASIC RULE. The Company agrees to continue the Employee's
employment, and the Employee agrees to remain in employment with the
Company for a three-year period commencing as of the date hereof and
ending May 1, 1999, unless sooner terminated pursuant to Subsection (b),
(c) or (d)."
2. Subsection 1(e) shall be deleted in its entirety.
3. Subsection 1(f) shall be amended by renumbering it Subsection 1(e).
4. Subsection 1(g) shall be amended by renumbering it Subsection 1(f).
5. Section 3 shall be amended by stating the annual rate of
compensation as $240,000.
6. Subsection 6(c) shall be amended by deleting the word "Retirement"
in the first sentence thereof.
7. Subsection 7(a) shall be amended by deleting the word "Retirement"
in the first sentence thereof.
8. REMAINING TERMS The remaining terms of the Employment Agreement
shall remain in full force and effect.
1
<PAGE>
IN WITNESS WHEREOF, each of the parties has executed this Amendment
Number One, in the case of the Company, by its duly authorized officer, as of
the day and year first above written.
/s/ ED MUNNO
-----------------------------------------
Employee
FOUNDATION HEALTH CORPORATION
By: /s/ DANIEL D. CROWLEY
--------------------------------------
Its: CHAIRMAN, PRESIDENT & CEO
-------------------------------------
2
<PAGE>
Ex. 10.16
[LOGO]
November 16, 1998
Cora Tellez
1932 Cortereal Avenue
Oakland, CA 94611
Re: Terms of Employment
Dear Cora:
On behalf of Foundation Health Systems, Inc. (hereinafter the "Company"), I
would like to confirm our offer to you for the exempt position of President
and Chief Executive Officer of Health Net. The position will be located in
Woodland Hills, California and your anticipated start date is November 16,
1998. In this position you will report directly to the President and Chief
Executive Officer of the Company. You will earn a monthly salary of
$29,166.67. As is our current practice, you will be paid on a bi-weekly
basis with 26 pay periods per year. Performance of each of the Company's
Associates is generally reviewed on an annual basis, and any adjustment to
salary is ordinarily made upon the completion of such performance review.
Any adjustment to your compensation must be made with the approval of the
Compensation and Stock Option Committee of the Company's Board of Directors
("the Committee"). You will be provided a $1,000 per month automobile
allowance, subject to normal payroll deductions, and subject to any changes
that may be made from time to time to the overall automobile allowance
program.
Upon your employment, FHS will provide to you a one-time $400,000 loan (with
interest accrued at the Prime Rate) payable by you upon demand in the event
of voluntary termination of your employment or should the Company terminate
you for "Cause." The principal and any accrued interest will be forgiven,
one-half on each of the first and second anniversaries of your date of hire.
Additionally, the loan plus accrued interest will be forgiven in total prior
to the second anniversary if you depart from the Company involuntarily
without Cause, due to "Good Reason" following a Change of Control, or due to
death or disability. Good Reason, Change of Control and Cause are defined
below in this letter agreement. The Company agrees that it will consider
your reasonable requests, if any, to restructure the timing, nature and/or
characterization of such loan as may be suggested by your tax/financial
advisers; provided that such restructuring would not disadvantage the Company
and would not result in a modification of your obligation to repay such
amount in the instances set forth above.
In addition, beginning January 1, 1999 you will be eligible to participate in
the Executive Incentive Plan as it may be modified from time to time by the
Committee. Under the Plan, bonus payments are dependent upon Company and
individual performance measures. You will be eligible to participate in the
Plan in 1999 with a target bonus opportunity of 70 percent of your base
salary. The maximum bonus payable to you under provisions of the Plan is 105
percent of base salary.
<PAGE>
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Offer ltr/Cora Tellez
November 16, 1998
Any bonus payout for 1999 will be paid in 2000 following outside audit of the
Company's performance and determination of your success in accomplishing
individual performance objectives. To be eligible for any bonus payment, you
must be actively employed and on the Company payroll at the time the bonus is
paid. Bonus calculations are based on the base annual salary in effect on
December 31st of the respective Plan year. It is understood that the
Committee and the Company will award bonus amounts, if any, as it deems
appropriate consistent with the guidelines of the Plan. You acknowledge that
in the event you are one of the top five highest paid executive officers of
the Company for a given year under applicable federal securities laws, your
bonus for that year, if any, will be subject to the Company's Performance
Based 162(m) Plan in lieu of the Executive Incentive Plan. Incentive
compensation payments are subject to normal payroll deductions.
As part of our long-term incentive program, you will be eligible to
participate in the Company's stock option program. The Committee has
approved a stock option grant to you on the date you commence employment with
the Company (the "Grant Date") to purchase an aggregate of 200,000 shares of
the Company's Class A Common Stock with an exercise price equal to the last
sales price for such common stock on the New York Stock Exchange as of the
Grant Date. The option will vest at the rate of 1/3 of the shares covered
thereby on each of the first through third anniversaries of the Grant Date.
At the end of three years, that portion of the option representing 25,000 of
the underlying shares may be "put" back to the Company by you for $250,000 or
retained by you, at your discretion. A stock option agreement formalizing
this grant will be provided to you under separate cover following your date
of hire containing the standard terms and conditions currently used by the
Company. Any future recommendation for additional options made by the
Company's management will be made consistent with your performance and
generally comparable to peer managers of the Company at the time option
recommendations are presented to the Committee. It is further agreed that
this initial grant to you will be considered a three-year "mega-grant" and
you will therefore not be eligible to receive additional option grants for a
period of three years except (i) to the extent other executive officers in a
similar situation become so eligible and the Committee reasonably determines
that it is equitable that such eligibility should extend to you or (ii) in
such other circumstances where the Committee, in its sole discretion,
determines to grant additional stock options to you based upon your future
performance. At all times, all stock option grants remain within the sole
discretion of the Committee.
In lieu of relocation benefits, the Company will provide to you a furnished
business apartment in Woodland Hills (subject to reasonable approval by the
Company's President and Chief Executive Officer) and air travel as required
between Oakland and Woodland Hills for the duration of your employment with
the Company.
In addition to the foregoing, and subject to your continued employment with
the Company, you will be eligible to participate in Company-offered benefits
if you meet certain criteria. These benefits include group medical, dental,
vision, life insurance, short-term and long-term disability insurance, 401(k)
plan, Company-recognized holidays, tuition reimbursements and participation
in our deferred compensation program. In our 401(k) plan, the Company
currently matches your
<PAGE>
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Offer ltr/Cora Tellez
November 16, 1998
contribution at $.50 for every dollar contributed up to six percent (6%) of
your compensation (subject to certain limitations). The Company's Paid Time
Off ("PTO") benefit is provided to you for illness, vacation and personal
time off. Under the PTO program you accrue PTO at a rate of 23 days per year
between your date of hire and 120 months of service, and 25 days per year
thereafter. In case of a conflict between this summary and the official
documents, the official documents will always govern. In addition, the
Company reserves the right to change, amend or terminate the benefits plans
at any time, with or without notice.
You will also be eligible to participate in the Company's existing
Supplemental Executive Retirement Plan ("SERP") or a successor plan. Under
provisions of the SERP you can vest and accrue a retirement benefit of up to
50 percent of your base salary plus incentive compensation. As discussed, as
of your date of hire, you will receive two years of vesting credit under this
SERP. This benefit is integrated (offset) with other retirement benefits
provided by the Company and with 50 percent of your social security benefits.
To assist you in tax preparation and financial planning activities, the
Company will also provide to you up to $5,000 in annual reimbursement for
expenses related to that activity.
The Company will provide you with protection in the event of the termination
of your employment without Cause (absent a Change of Control). Under the
terms of this agreement "Cause" is defined as (i) clear and willful failure
to perform your duties not resulting from complete or partial incapacity due
to physical or mental illness or impairment that continues after reasonable
written notice and an opportunity to correct such failure; (ii) gross
misconduct or fraud; or (iii) conviction of, or a plea of "guilty" or "no
contest" to, a felony except in the case such conviction or plea is the
result of your good-faith efforts to act in a way that would reasonably be
construed to be in the best interests of the Company and its stockholders and
such action does not violate clauses (i) or (ii) above. In the event that
your employment is terminated involuntarily without Cause, and you agree and
sign the Company's standard Separation Agreement and Release of Claims
document, you will be provided a severance package which will include a lump
sum severance payment totaling twenty-four (24) months of base salary in
effect at the date of your termination, together with all other severance
benefits payable under the Company's "Separation Agreement and Release of
Claims". Should you elect to continue your medical benefits, the Company
will pay the premium to provide you and your dependents medical and dental
coverage under COBRA, or if not available under COBRA, some other plan
substantially similar to that which the Company provided you as an active
employee for period of twenty-four months after termination of employment in
the event the severance payment set forth in this paragraph becomes payable.
If within the first two years following a Change of Control, your employment
is involuntarily terminated by the Company without Cause, as defined above,
or should you voluntarily terminate your employment for "Good Reason", then
within thirty (30) days of your termination from the Company, you will be
provided a change of control severance package which will include a lump-sum
severance payment totaling thirty-six (36) months of base salary in effect at
the date of your termination provided you sign the Company's standard
Separation Agreement and Release of Claims. During the thirty-six (36)
month period from and after the date of your termination of
<PAGE>
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Offer ltr/Cora Tellez
November 16, 1998
employment, should you elect to continue your medical benefits, the Company
will also provide you and your covered dependents medical and dental coverage
by paying the COBRA premium, if eligible under COBRA, or the premium to
provide coverage substantially similar to that which the Company provided
you as an active employee provided you sign the Company's standard Separation
Agreement and Release of Claims.
For the purposes of this agreement, Change of Control shall mean any of the
following which occurs subsequent to the date of this offer:
(a) Any person (as such term is defined under Section 13(d)(3) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")),
corporation or other entity (other than the company or any employee
benefit plan sponsored by the Company or any of its subsidiaries) is or
becomes the beneficial owner (as such term is defined in Rule 13d-3 under
the Exchange Act) of securities of the Company representing twenty
percent (20%) or more of the combined voting power of the outstanding
securities of the Company which ordinarily (and apart from rights
accruing under special circumstances) have the right to vote in the
election of directors (calculated as provided in paragraph (d) of such
Rule 13d-3 in the case of rights to acquire the Company's securities)
(the "Securities");
b) As a result of a tender offer, merger, sale of assets or other major
transaction, the persons who are directors of the Company immediately
prior to such transaction cease to constitute a majority of the Board of
Directors of the Company (or any successor corporations) immediately
after such transaction;
c) The Company is merged or consolidated with any other person, firm,
corporation or other entity and, as a result, the shareholders of the
Company, as determined immediately before such transaction, own less than
eighty percent (80%) of the outstanding Securities of the surviving or
resulting entity immediately after such transaction;
d) A tender offer or exchange offer is made and consummated for the
ownership of twenty percent (20%) or more of the outstanding Securities
of the Company;
e) The Company transfers substantially all its assets to another
person, firm, corporation or other entity that is not a wholly-owned
subsidiary of the Company; or
f) The Company enters into a management agreement with another person,
firm, corporation or other entity that is not a wholly-owned subsidiary of
the Company and such management agreement extends hiring and firing
authority over Employee to an individual or organization other than the
Company.
For the purposes of this agreement, "Good Reason" is defined as any one of
the following:
a) A demotion or substantial reduction in the scope of your position,
duties, responsibilities or status with the Company or any new parent
company of the Company,
<PAGE>
Page 5
Offer ltr/Cora Tellez
November 16, 1998
or any removal of you from or any failure to reelect you to any of the
positions (or functional equivalent of such positions) held by you
immediately prior to a Change of Control, except in connection with the
termination of your employment for disability, normal retirement or Cause
or by you voluntary other than for Good Reason;
b) A reduction by the Company in your annual base salary or a material
reduction in the benefits or perquisites available to you as in effect
immediately prior to any such reduction;
c) A relocation of you to a work location more than fifty (50) miles
from your work location immediately prior to such proposed relocation:
provided that such proposed relocation results in a materially greater
commute for you based on your residence immediately prior to such
relocation; or
d) The failure of the Company to obtain an assumption agreement,
encompassing this agreement, from any successor resulting from a
Change of Control.
You agree, through the signing of this letter agreement, that your employment
with the Company is at the mutual consent of you and the Company and is an
"at-will" employment relationship. Nothing in this letter is intended to
guarantee your continued employment with the Company or employment for any
specific length of time. While the Company hopes that your employment
relationship will be mutually beneficial and rewarding, both you and the
company retain the right to terminate the employment relationship at will, at
any time, with or without cause. The at-will nature of your employment with
the Company cannot be modified or superseded except by a written agreement,
signed by you and the President and Chief Executive Officer of the Company,
that clearly and expressly specifies the intent to modify the at-will
relationship. In accepting employment with the Company, you acknowledge that
no Company representative has made any oral or written promise or
representation contrary to this paragraph. Furthermore, you acknowledge that
this paragraph represents the only agreement between you and the Company
concerning the duration of your employment and the at-will nature of the
employment relationship.
During your employment with the Company, you will have access to and become
acquainted with certain proprietary and confidential information and
practices ("Confidential Information"). Confidential Information includes
all information that is not generally known to the Company's competitors and
the public, and that has or could have commercial value to the Company's
business. It includes, but is not limited to, customer information, customer
lists, and pricing methodology.
In accepting this new position with the Company, you acknowledge and agree
that all documents, memoranda, reports, files, correspondence, lists and
other written, electronic and graphic records affecting or relating to the
Company's business that you may prepare, use, observe, possess or control
(including, but not limited to, any materials containing Confidential
Information) shall be and remain the Company's sole property, and you agree
not to make use of or disclose to any third party any such material,
confidential or otherwise, except for the benefit of the Company and in
<PAGE>
Page 6
Offer ltr/Cora Tellez
November 16, 1998
the course of your employment with the Company. If your employment is
terminated (voluntary or otherwise), you agree to deliver to the Company
within five business days of termination all written and/or graphic records
affecting or relating to the Company's business, including but not limited to
material containing Confidential Information.
You have agreed and certify that you have no other agreement, relationship,
or commitment to any other person or entity that conflicts with your
obligations to the Company under this offer letter. If you are unable to so
certify, all such agreement(s) must be identified here:
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
You agree not to use or disclose any confidential information or trade
secrets of others, including all prior employers, in your work at the
Company. Should a situation arise in which you believe that your job duties
may lead to the use or disclosure of confidential information or trade
secrets of another, you agree to notify the Company's Corporate Human
Resources Department of the situation immediately.
Finally, this letter sets forth all the terms of this offer of employment.
It supersedes all previous and contemporaneous oral and written
communications and representations. To confirm your acceptance of these
terms, please sign, date and return a copy of this letter to the Senior Vice
President, General Counsel and Secretary, Foundation Health Systems, Inc.
21600 Oxnard Street, Woodland Hills, CA 91367.
Cora, we are pleased to offer you this professional opportunity and are
excited about the contributions that you can make to the Company as part of
our management team. Should you have any questions please feel free to
contact me at (818) 676-6703.
Sincerely,
/s/ JAY GELLERT
- -------------------------------------
Jay M. Gellert
President and Chief Executive Officer
I HEREBY ACCEPT AND AGREE TO THE TERMS OF THIS OFFER OF EMPLOYMENT AS
OUTLINED ABOVE.
/s/ CORA M. TELLEZ 12/1/98
- ---------------------------------------- --------------------------------
Signature Date
<PAGE>
EX. 10.17
March 12, 1999
Karen Coughlin
100 E. Huron Street
Apt. 3505
Chicago, Illinois 60611
Re: Terms of Employment
Dear Karen:
On behalf of Foundation Health Systems, Inc. (hereinafter the "Company"), I
would like to confirm our offer to you for the exempt position of President
and Chief Executive Officer for the Northeast Division. In this position you
will report directly to the President and Chief Executive Officer of the
Company. You will earn a monthly salary of $29,166.67 commencing as of
November 2, 1998, although your formal "start date" for employment purposes
will be as of October 23, 1998 (the date you commenced providing services to
the Company). As is our current practice, you will be paid on a bi-weekly
basis with 26 pay periods per year. Performance of each of the Company's
Associates is generally reviewed on an annual basis, and any adjustment to
salary is ordinarily made upon the completion of such performance review.
Any adjustment to your compensation must be made with the approval of the
Compensation and Stock Option Committee of the Company's Board of Directors
(the "Committee"). You will be provided a $1,000 per month automobile
allowance, subject to normal payroll deductions, and subject to any changes
that may be made from time to time to the overall automobile allowance
program.
Upon your employment, FHS will provide to you a one-time $100,000 loan (with
interest accrued at the Prime Rate) payable by you upon demand in the event
of voluntary termination of your employment or should the Company terminate
you for "Cause." The principal and any accrued interest will be forgiven,
one-half on each of the first and second anniversaries of your date of hire.
Additionally, the loan plus accrued interest will be forgiven in total prior
to the second anniversary if you depart from the Company involuntarily
without Cause, due to "Good Reason" following a Change of Control, or due to
death or disability. Good Reason, Change of Control and Cause are defined
below in this letter agreement. The Company agrees that it will consider
your reasonable requests, if any, to restructure the timing, nature and/or
characterization of such loan as may be suggested by your tax/financial
advisors, provided that such restructuring would
<PAGE>
Karen Coughlin
March 12, 1999
Page 2
not disadvantage the Company and would not result in a modification of your
obligation to repay such amount in the instances set forth above.
In addition, beginning January 1, 1999 you will be eligible to participate in
the Company's Executive Incentive Plan as it may be modified from time to
time by the Committee. Under the Plan, bonus payments are dependent upon
Company and individual performance measures. You will be eligible to
participate in the Plan in 1999 with a target bonus opportunity of 70 percent
of your base salary. The maximum bonus payable to you under provisions of the
Plan is 105 percent of base salary. Any bonus payout for 1999 will be paid
in 2000 following outside audit of the Company's performance and
determination of your success in accomplishing individual performance
objectives. To be eligible for any bonus payment, you must be actively
employed and on the Company payroll at the time the bonus is paid. Bonus
calculations are based on the annual base salary in effect on December 31st
of the respective Plan year. It is understood that the Committee and the
Company will award bonus amounts, if any, as it deems appropriate consistent
with the guidelines of the Plan. You acknowledge that in the event you are
one of the top five highest paid executive officers of the Company for any
year subsequent to 1999 under applicable federal securities laws, your bonus
for that year, if any, will be subject to the Company's Performance Based
162(m) Plan (the "162(m) Plan") in lieu of the Executive Incentive Plan. It
is agreed that you shall not participate in the 162(m) Plan for the 1999 plan
year notwithstanding the terms of such plan. Furthermore, the President and
Chief Executive Officer of the Company will discuss with the Committee the
performance targets contained in the Company's 162(m) Plan in the context of
the Company's financial performance at an upcoming Committee meeting.
Incentive compensation payments are subject to normal payroll deductions.
As part of our long-term incentive program, you will be eligible to
participate in the Company's stock option program. The Committee has
approved a stock option grant to you effective as of October 23, 1998, the
date you commenced employment with the Company (the "Grant Date"), to
purchase an aggregate of 400,000 shares of the Company's Class A Common Stock
with an exercise price equal to $10.84. The option will vest at the rate of
44,000 options, 88,000 options, 133,000 options, 88,000 options and 47,000
options on each of the first through fifth anniversaries of the Grant Date,
respectively. As discussed, the Committee is willing to consider a
performance-based acceleration with respect to the fourth and fifth year
option vesting. A stock option agreement formalizing this grant will be
provided to you under separate cover containing the standard terms and
conditions currently used by the Company. Any future recommendation for
additional options made by the Company's management will
<PAGE>
Karen Coughlin
March 12, 1999
Page 3
be made consistent with your performance and generally comparable to peer
managers of the Company at the time option recommendations are presented to
the Committee. It is further agreed that this initial grant to you will be
considered a three-year "mega-grant" and you will therefore not be eligible
to receive additional option grants for a period of three years. At all
times, all stock option grants remain within the sole discretion of the
Committee.
In lieu of relocation benefits (other than the transport of household goods
already arranged for by the Company), the Company will provide to you an
apartment in New York City (subject to reasonable approval by the Company's
President and Chief Executive Officer) and travel to and from Chicago for you
or your significant other or one of your family members on a weekly basis for
the duration of your employment with the Company.
In addition to the foregoing, and subject to your continued employment with
the Company, you will be eligible to participate in Company-offered benefits
if you meet certain criteria. These benefits include group medical, dental,
vision, life insurance, short-term and long-term disability insurance, 401(k)
plan, Company-recognized holidays, tuition reimbursement and participation in
our deferred compensation program. In our 401(k) Plan, the Company currently
matches your contribution at $.50 for every dollar contributed up to six
percent (6%) of your compensation (subject to certain limitations). The
Company's Paid Time Off ("PTO") benefit is provided to you for illness,
vacation and personal time off. Under the PTO program you accrue PTO at a
rate of 23 days per year between your date of hire and 120 months of service,
and 25 days per year thereafter. In case of a conflict between this summary
and the official documents, the official documents will always govern. In
addition, the Company reserves the right to change, amend or terminate the
benefits plans at any time, with or without notice.
You will also be eligible to participate in the Company's existing
Supplemental Executive Retirement Plan ("SERP") or a successor plan. Under
provisions of the SERP you can vest and accrue a retirement benefit of up to
50 percent of your base salary plus incentive compensation. This benefit is
integrated (offset) with other retirement benefits provided by the Company
and with 50 percent of your social security benefits.
To assist you in tax preparation and financial planning activities, the
Company will also provide you up to $5,000 in annual reimbursement for
expenses related to that activity.
<PAGE>
Karen Coughlin
March 12, 1999
Page 4
The Company will provide you with protection in the event of the termination
of your employment without Cause (absent a Change of Control). Under the
terms of this agreement "Cause" is defined as clear and willful failure to
perform your duties not resulting from complete or partial incapacity due to
physical or mental illness or impairment that continues after reasonable
written notice and an opportunity to correct such failure; gross misconduct
or fraud; or conviction of, or a plea of "guilty" or "no contest" to, a
felony. In the event that your employment is terminated involuntarily
without Cause, and you sign the Company's standard Separation Agreement and
Release of Claims document, you will be provided a severance package which
will include a lump-sum severance payment totaling twenty-four (24) months of
base salary in effect at the date of your termination, together with all
other severance benefits payable under the Company's "Separation Agreement
and Release of Claims". Should you elect to continue your medical benefits,
the Company will pay the premium to provide you and your dependents medical
and dental coverage under COBRA, or if not available under COBRA, some other
plan substantially similar to that which the Company provided you as an
active employee, for a period of twenty-four months after termination of
employment in the event the severance payment set forth in this paragraph
becomes payable.
If within the first two years following a Change of Control, your employment
is involuntarily terminated by the Company without Cause as defined above, or
should you voluntarily terminate your employment for "Good Reason", then
within thirty (30) days of your termination from the Company, you will be
provided a change of control severance package which will include a lump-sum
severance payment totaling thirty-six (36) months of base salary in effect at
the date of your termination provided you sign the Company's standard
Separation Agreement and Release of Claims. During the thirty-six (36) month
period from and after the date of your termination of employment, should you
elect to continue your medical benefits, the Company will also provide you
and your covered dependents medical and dental coverage by paying the COBRA
premium, if eligible under COBRA, or the premium to provide coverage
substantially similar to that which the Company provided you as an active
employee provided you sign the Company's standard Separation Agreement and
Release of Claims.
For the purposes of this agreement, Change of Control shall mean any of the
following which occurs subsequent to the date of this offer:
a) Any person (as such term is defined under Section 13(d)(3) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")),
<PAGE>
Karen Coughlin
March 12, 1999
Page 5
corporation or other entity (other than the Company or any employee benefit
plan sponsored by the Company or any of its subsidiaries) is or becomes the
beneficial owner (as such term is defined in Rule 13d-3 under the Exchange
Act) of securities of the Company representing twenty percent (20%) or more
of the combined voting power of the outstanding securities of the Company
which ordinarily (and apart from rights accruing under special
circumstances) have the right to vote in the election of directors
(calculated as provided in paragraph (d) of such Rule 13d-3 in the case of
rights to acquire the Company's securities ) (the "Securities");
b) As a result of a tender offer, merger, sale of assets or other
major transaction, the persons who are directors of the Company immediately
prior to such transaction cease to constitute a majority of the Board of
Directors of the Company (or any successor corporations) immediately after
such transaction;
c) The Company is merged or consolidated with any other person, firm,
corporation or other entity and, as a result, the shareholders of the
Company, as determined immediately before such transaction, own less than
eighty percent (80%) of the outstanding Securities of the surviving or
resulting entity immediately after such transaction;
d) A tender offer or exchange offer is made and consummated for the
ownership of twenty percent (20%) or more of the outstanding Securities of
the Company;
e) The Company transfers sustantially all its assets to another
person, firm, corporation or other entity that is not a wholly-owned
subsidiary of the Company; or
f) The Company enters into a management agreement with another
person, firm, corporation or other entity that is not a wholly-owned
subsidiary of the Company and such management agreement extends hiring and
firing authority over Employee to an individual or organization other than
the Company.
For the purposes of this agreement, "Good reason" is defined as any one of the
following:
a) A demotion or substantial reduction in the scope of your position,
duties, responsibilities or status with the Company or any new parent
company of the Company, or any removal of you from or any failure to
<PAGE>
Karen Coughlin
March 12, 1999
Page 6
reelect you to any of the positions (or functional equivalent of such
positions) held by you immediately prior to a Change of Control, except in
connection with the termination of your employment for disability, normal
retirement or Cause or by you voluntarily other than for Good Reason;
b) A reduction by the Company in your annual base salary or a
material reduction in the benefits or perquisites available to you as in
effect immediately prior to any such reduction;
c) A relocation of you to a work location more than fifty (50) miles
from your work location immediately prior to such proposed relocation;
provided that such proposed relocation results in a materially greater
commute for you based on your residence immediately prior to such
relocation;
d) The consummation by the Company of any transaction resulting in
Greg Wolf (currently with Humana) being in a supervisory or management
position over you, or the hire or retention of Greg Wolf by the Company
resulting in the foregoing, or the consummation by the Company of any
transaction with Humana if following such transaction Greg Wolf remains
with the combined entity; or
e) The failure of the Company to obtain an assumption agreement,
encompassing this agreement, from any successor resulting from a Change of
Control.
You agree, through the signing of this letter agreement, that your employment
with the Company is at the mutual consent of you and the Company and is an
"at-will" employment relationship. Nothing in this letter is intended to
guarantee your continued employment with the Company or employment for any
specific length of time. While the Company hopes that your employment
relationship will be mutually beneficial and rewarding, both you and the
Company retain the right to terminate the employment relationship at will, at
any time, with or without cause. The at-will nature of your employment with
the Company cannot be modified or superseded except by a written agreement,
signed by you and the President and Chief Executive Officer of the Company,
that clearly and expressly specifies the intent to modify the at-will
relationship. In accepting employment with the Company, you acknowledge that
no Company representative has made any oral or written promise or
representation contrary to this paragraph. Furthermore, you acknowledge that
this paragraph represents the only agreement between you and the Company
concerning the duration of your employment and the at-will nature of the
employment relationship.
<PAGE>
Karen Coughlin
March 12, 1999
Page 7
During your employment with the Company, you will have access to and become
acquainted with certain proprietary and confidential information and practices
("Confidential Information"). Confidential Information includes all information
that is not generally known to the Company's competitors and the public, and
that has or could have commercial value to the Company's business. It includes,
but is not limited to, customer information, customer lists, and pricing
methodology.
In accepting this new position with the Company, you acknowledge and agree that
all documents, memoranda, reports, files, correspondence, lists and other
written, electronic and graphic records affecting or relating to the Company's
business that you may prepare, use, observe possess or control (including, but
not limited to, any materials containing Confidential Information) shall be and
remain the Company's sole property, and you agree not to make use of or disclose
to any third party any such material, confidential or otherwise, except for the
benefit of the Company and in the course of your employment with the Company.
If your employment is terminated (voluntary or otherwise), you agree to deliver
to the Company within five business days of termination all written and/or
graphic records affecting or relating to the Company's business, including but
not limited to material containing Confidential Information.
You have agreed and certify that you have no other agreement, relationship, or
commitment to any other person or entity that conflicts with your obligations to
the Company under this offer letter. If you are unable to so certify, all such
agreement(s) must be identified here:
- ------------------------------------------------------------------
(None other than previously disclosed to the Company)
- ------------------------------------------------------------------
- ------------------------------------------------------------------
You agree not to use or disclose any confidential information or trade secrets
of others, including all prior employers, in your work at the Company. Should a
situation arise in which you believe that your job duties may lead to the use or
disclosure of confidential information or trade secrets of another, you agree to
notify the Company's Corporate Human Resources Department of the situation
immediately.
<PAGE>
Karen Coughlin
March 12, 1999
Page 8
Finally, this letter sets forth all the terms of this offer of employment. It
supercedes all previous and contemporaneous oral and written communications and
representations. To confirm your acceptance of these terms, please sign, date
and return a copy of this letter to the Senior Vice President, General Counsel
and Secretary, Foundation Health Systems, Inc., 21650 Oxnard Street, Woodland
Hills, CA 91367.
Karen, we are pleased to offer you this professional opportunity and are excited
about the contributions that you can make to the Company as part of our
management team. Should you have any questions please feel free to contact me
at (818) 676-6703.
Sincerely,
/s/ Jay M. Gellert
- -------------------------------------
Jay M. Gellert
President and Chief Executive Officer
I HEREBY ACCEPT AND AGREE TO THE TERMS OF THIS OFFER OF EMPLOYMENT AS OUTLINED
ABOVE.
Karen A. Coughlin 3-19-99
- -------------------------------------- --------------------------------------
SIGNATURE DATE
<PAGE>
Ex. 10-18
[LOGO]
September 22, 1998
Mr. Robert Bruce
Foundation Health Systems, Inc.
225 North Main Street
Pueblo, Colorado 81003
Re: Terms of Employment
Dear Bob:
On behalf of Foundation Health Systems, Inc. (hereinafter the "Company"), I
would like to confirm our offer to you for the exempt position of President
of FHS Central Division. In this position you will report directly to the
President and Chief Executive Officer of the Company. Effective June 1, 1998,
you will earn a monthly salary of $26,250.00. As is our current practice,
you will continue to be paid on a bi-weekly basis with 26 pay periods per
year. Performance of each of the Company's Associates is generally reviewed
on an annual basis, and any adjustment to salary is ordinarily made upon the
completion of such performance review. You will continue to receive a $1,000
per month automobile allowance and an annual reimbursement of up to $5,000
for financial/tax planning, subject to any changes that might be made from
time to time to the overall programs.
As part of this offer, within thirty days of acceptance or no later than
January 31, 1999, at your option, you will receive a $50,000 engagement
bonus. This engagement bonus will be "grossed up" to compensate you for any
related income tax obligations.
In addition, during 1998 you will be eligible to participate in the Executive
Incentive Plan as a Group 1 participant. The plan allows you an opportunity
to earn an incentive bonus each year of 70 to 105 percent of your base salary
if target EPS is achieved or exceeded, subject to terms of such plan. The
receipt of any such incentive compensation is contingent upon achieving
corporate and individual objectives that will be approved by the President
and Chief Executive Officer of the Company. However, it is anticipated that
your personal objectives will reflect Florida financial results, modified to
take into account the FHNI, reforecast and a reforecast of the Western
Division to be agreed upon by October 1, 1998 between yourself and the
President and Chief Executive Officer. You must be actively employed and on
the Company payroll at the time incentive compensation is paid. Incentive
compensation calculations are based on the base salary in effect on December
31st of the prior fiscal year. Incentive compensation payments are subject
to normal payroll deductions.
<PAGE>
The Compensation and Stock Option Committee of the Company's Board of
Directors (hereinafter the "Committee") has agreed that you will be granted
the following options to purchase shares of the Company's Class A Common
Stock under the Company's 1997 Stock Option Plan (the "Plan") as of the dates
set forth:
75,000 Shares (7-1-98)
25,000 Shares (1-1-99)
25,000 Shares (7-1-99)
The exercise price for the options will be equal to the fair market value of
a share of the Company's Class A Common Stock on the date of grant as set
forth in the Plan. These grants will be evidenced by the Company's standard
agreement which will be forwarded to you following the dates of the grants.
Any future recommendation for additional options made by the Company's
management will be made consistent with your performance and generally
comparable to peer managers of the Company at the time option recommendations
are presented to the Committee. At all times, all stock option grants remain
within the sole discretion of the Committee.
In addition to the foregoing, and subject to your continued employment with
the Company, you will be eligible to continue participation in Company-
offered benefits if you meet certain criteria. These benefits include group
medical, dental, vision, life insurance, short-term and long-term disability
insurance, 401(k) plan, Company-recognized holidays, the employee stock
purchase plan, tuition reimbursement and participation in our deferred
compensation program. In our 401(k) plan, the Company currently matches your
contribution at $.50 for every dollar contributed up to six percent (6%) of
base salary (subject to certain limits). The Company's Paid Time Off ("PTO")
benefit is provided to you for illness, vacation and personal time off.
Under the PTO program you accrue PTO at a rate of 23 days per year between
your date of hire and 120 months of services, and 25 days per year
thereafter. However, you will not accrue less than your current rate of PTO
accrual. In case of a conflict between this summary and the official
documents, the official documents will always govern. In addition, the
Company reserves the right to change, amend, or terminate these or any other
benefit plans of the Company at any time, with or without notice.
You will also be eligible to continue to participate in the Company's
existing Supplemental Executive Retirement Plan ("SERP") or a successor plan.
Under provisions of the SERP you can vest and accrue a retirement benefit of
up to 50 percent of your base salary plus incentive compensation. This
benefit is integrated (offset) with other retirements benefits provided by
the Company and with 50 percent of your social security benefits.
Specific terms and conditions of the severance and change of control program
applicable to you that have been approved by the Committee will be evidenced
by a Severance Payment Agreement which will be prepared by our Legal
Department and forwarded to you under separate cover.
<PAGE>
Should you be required to relocate from your current primary work location
the Company will provide you relocation assistance as outlined in our
Relocation Benefits program. This reimbursement of relocation expense will
be grossed up to cover the associated income tax liability that you would
likely incur. A copy of the Relocation Benefits program is attached. In
addition to the relocation benefits provided under our Relocation Benefits
program, the Company and you have agreed to the following:
- - You will continue to maintain your primary residence and business office in
Philadelphia for the immediate future.
- - The Company will provide you with a leased corporate apartment and a
business office in the Denver, Colorado area.
- - You will travel to the Denver based office as often as business needs may
require and during these visits will utilize the corporate apartment
provided.
- - If following discussion between yourself and the Company regarding a new
primary assignment it is determined that relocation is required, you will
immediately offer your home in Philadelphia for sale. In the event that
the home does not sell within 90 days of its placement on the real estate
market, the Company will arrange to purchase the home at a price determined
by the average of two independent certified appraisals.
- - You will be reimbursed by the Company for up to three (3) points (in total)
to reduce the finance interest rate and pay for the loan origination fee for
your new residence at your new location.
- - If you purchase a residence in a new employment location and the closing
precedes the sale of your house in Pennsylvania, the Company will provide
a bridge loan necessary to cover the down payment on the new residence
purchase and advance you the good faith estimate of approvable closing
costs. Following the actual close of the real estate transaction, any
necessary reconciliation on the closing costs will be completed. The bridge
loan will be repaid to the Company immediately following the close on the
sale of your Pennsylvania residence.
- - Should you purchase a residence in a new employment location prior to
selling your residence in Pennsylvania and consequently you have two
mortgage payments, in lieu of continuing temporary living expense payments,
the Company will reimburse you the interest portion of the lesser of the two
mortgage payments. The dual mortgage payment reimbursement will continue
until the Pennsylvania residence is sold.
- - Following relocation to a new employment location and until your family is
relocated, the Company will reimburse you for bi-weekly weekend travel for
you or your spouse. Trips may be taken every other weekend and effort
should be made by you to book the travel well in advance to reduce the
expense.
<PAGE>
PAGE 4
You agree, through the signing of this letter, that your employment with the
Company is at the mutual consent of each of the employee and the Company and
is an "at-will" employment relationship. Nothing in this letter is intended
to guarantee your continued employment with the Company or employment for any
specific length of time. While the Company hopes that your employment
relationship will be mutually beneficial and rewarding, both you and the
Company retain the right to terminate the employment relationship at will, at
any time, with or without cause. The at-will nature of your employment with
the Company cannot be modified or superseded except by a written agreement,
signed by you and the President and Chief Executive Officer of the Company,
that clearly and expressly specifies the intent to modify the at-will
relationship. In accepting employment with the Company, you acknowledge that
no Company representative has made any oral or written promise or
representation contrary to this paragraph. Furthermore, you acknowledge that
this paragraph represents the only agreement between you and the Company
concerning the duration of your employment and the at-will nature of the
employment relationship.
During your employment with the Company, you will have access to and become
acquainted with certain proprietary and confidential information and
practices ("Confidential Information"). Confidential Information includes
all information that is not generally known to the Company's competitors and
the public, and that has or could have commercial value to the Company's
business. It includes, but is not limited to, customer information, customer
lists, and pricing methodology.
In accepting this new position with the Company, you acknowledge and agree
that all documents, memoranda, reports, files, correspondence, lists and
other written, electronic and graphic records affecting or relating to the
Company's business that you may prepare, use, observe, possess or control
(including, but not limited to, any materials containing Confidential
Information) shall be and remain the Company's sole property, and you agree
not to make use of or disclose to any third party any such material,
confidential or otherwise, except for the benefit of the Company and in the
course of your employment with the Company. If your employment is terminated
(voluntary or otherwise), you agree to deliver to the Company within five
business days of termination all written and/or graphic records affecting or
relating to the Company's business, including but not limited to material
containing Confidential Information.
You have agreed and certify that you have no other agreement, relationship,
or commitment to any other person or entity that conflicts with your
obligations to the Company under this offer letter. If you are unable to so
certify, all such agreement(s) must be identified here:
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
<PAGE>
PAGE 5
You agree not to use or disclose any confidential information or trade
secrets of others, including all prior employers, in your work at the
Company. Should a situation arise in which you believe that your job duties
may lead to the use or disclosure of confidential information or trade
secrets of another, you agree to notify the President and Chief Operating
Officer of the Company or myself in the Human Resources Department of the
situation immediately.
Finally, this letter sets forth all the terms of this offer of employment.
It supersedes all previous and contemporaneous oral and written
communications and representations including but not limited to your prior
employment letter agreement. To confirm your acceptance of these terms,
please sign, date and return a copy of this letter to the Senior Vice
President of Human Resources.
Bob, we are pleased to offer you this opportunity and are excited about the
contributions that you can make to the Company in this expanded
responsibility. Should you have any questions please feel free to contact me
at (916) 631-5061.
Sincerely,
/s/ Danny O. Smithsen
Danny O. Smithsen
Senior Vice President
Corporate Human Resources
Attachment: Relocation Benefit guideline
CC: Jay Gellert
I HEREBY ACCEPT AND AGREE TO THE TERMS OF THIS OFFER OF EMPLOYMENT AS
OUTLINED ABOVE.
- ---------------------------------------- -------------------------------
SIGNATURE DATE
<PAGE>
Ex. 10.19
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (this "Agreement") made and entered into as of the
31st day of December, 1997, by and between Foundation Health Systems, Inc., a
Delaware corporation ("Parent") and Robert L. Natt (the "Executive").
WHEREAS, Parent and PHS have entered into an Agreement and Plan of
Merger (the "Merger Agreement"), dated as of May 8, 1997, pursuant to which,
among other things, a wholly owned subsidiary of Parent will be merged with
and into Physicians Health Services, Inc. ("PHS") as of the "Effective Time,"
as defined in the Merger Agreement (such transaction, the "Merger");
WHEREAS, the Executive is currently serving as President and Co-Chief
Executive Officer of PHS and the Board of Directors of Parent (the "Board")
desires to secure the continued employment of the Executive in accordance
herewith;
WHEREAS, PHS is party with the Executive to an employment agreement,
effective as of October 29, 1996, and a conditional employment agreement,
effective as of March 13, 1995 (such agreements, collectively, the "Prior
Agreements");
WHEREAS, Parent desires to employ the Executive, and the Executive
desires to be employed by Parent, on the terms and conditions herein set
forth and in lieu of the terms and conditions of the Prior Agreements; and
WHEREAS, the parties desire to enter into this Agreement effective as of
the Effective Time, setting forth the terms and conditions for the employment
relationship of the Executive with Parent and PHS;
NOW, THEREFORE, in consideration of the mutual premises and the
respective covenants and agreements of the parties herein contained, the
parties hereto agree as follows:
1. OPERATION OF AGREEMENT; EMPLOYMENT AND TERM.
(a) This Agreement shall be effective and binding immediately upon its
execution by all parties hereto, but anything in this Agreement to the
contrary notwithstanding, this Agreement shall not be operative
<PAGE>
unless and until the Effective Time occurs. Upon the occurrence of the
Effective Time, without further action, this Agreement shall become
immediately operative.
(b) EMPLOYMENT. Parent agrees to employ the Executive, and the
Executive agrees to be employed by Parent, in accordance with the terms and
provisions of this Agreement.
(c) TERM. The term of this Agreement (the "Term") shall commence on
the date (the "Effective Date") on which the Effective Time occurs and shall
continue until December 31, 2000 (such period, the "Initial Term"); PROVIDED,
HOWEVER, that, commencing on January 1, 2001 and each successive January 1
thereafter, the Initial Term shall automatically be extended for one (1)
additional year unless, not later than July 1 of the preceding year, either
party shall have given notice (i) of nonrenewal of the Term or (ii) that such
party wishes to renegotiate the terms of this Agreement.
2. DUTIES AND POWERS OF EXECUTIVE.
(a) POSITION AND DUTIES. For the period during which the Executive
provides services to Parent under this Agreement (the "Employment Period"),
the Executive shall be responsible for and manage the tri-state (New York,
Connecticut and New Jersey) operations of Parent. The Executive in this
capacity agrees to use his best efforts during the Employment Period to
protect, encourage and promote the interests of Parent and to perform such
other duties consistent with his position that may be reasonably assigned to
him by the President or Chief Executive Officer of Parent and/or by the
Board. During the Employment Period, and excluding any periods of vacation
and sick leave to which the Executive is entitled, the Executive shall devote
substantially all of his attention and time during normal business hours to
the business and affairs of the Company and shall use his reasonable best
efforts to carry out his duties and responsibilities faithfully and
efficiently. It shall not be considered a violation of the foregoing for the
Executive to serve on corporate, industry, civic or charitable boards or
committees, as long as such activities do not materially interfere with the
performance of his duties and responsibilities with Parent in accordance with
this Agreement.
2
<PAGE>
(b) LOCATION. The Executive's services shall be performed primarily at
One Far Mill Crossing, Shelton, Connecticut, 06484 (the "Principal Place of
Employment"), or in such other place as such offices are relocated.
Throughout the Employment Period, the Executive shall be provided with
appropriate office space and secretarial services commensurate with his title
and position.
3. COMPENSATION. The Executive shall receive the following compensation for
his services hereunder to the Company:
(a) SALARY. During the Employment Period, the Executive's annual base
salary ("Base Salary") shall be $320,000, payable in accordance with Parent's
general payroll practices as in effect from time to time.
(b) CASH-BASED INCENTIVE COMPENSATION.
(i) GENERAL. During the Employment Period, the Executive shall be
eligible to participate in Parent's short-term and long-term incentive
compensation plans, including equity-based compensation plans, on a basis no
less favorable than that of other similarly situated executives of Parent.
The Executive hereby acknowledges that the Compensation and Stock Option
Committee of the Board (the "Committee") has sole discretion to determine the
amount of annual cash bonus or other incentives that may be earned by the
Executive under Parent's Annual Management Bonus Plan (as adopted by the
Committee on June 6, 1997) or any other such plan in which the Executive may
participate during the Employment Period; however, Parent hereby agrees to
recommend to the Committee that the Executive's annual cash bonus for that
annual period of the Term commencing on January 1, 1998, will be targeted to
70% of his Base Salary if performance goals are met, and that such percentage
of Base Salary may be increased if and to the extent that performance goals
for such plan year are exceeded. If he is deemed to be one of Parent's five
highest-paid executive officers for any given year during the Employment
Period, the Executive shall participate in Parent's Performance-Based Annual
Bonus Plan as adopted by Parent's stockholders in 1997 (or any successor plan
thereto), in lieu of the Annual Management Bonus Plan (or any successor plan
thereto).
(ii) 1997 BONUS. Parent and the Executive hereby agree that the
Executive's bonus in respect
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of the period ending on December 31, 1997, shall be determined in accordance
with the terms of PHS's existing bonus plan, which amount shall be subject to
the attainment of the goals set forth in such plan and which amount must be
fully budgeted and accrued for in the financial statements of PHS presented
to Parent pursuant to the terms of the Merger Agreement.
(iii) SIGNING BONUS. As soon as practicable, but in no event later
than five (5) business days following the Effective Time, Parent shall pay to
the Executive a lump sum in cash equal to $46,500 (net of applicable
withholding tax).
(iv) RETENTION BONUS. Parent shall pay to the Executive an
aggregate amount in cash equal to $500,000 (such aggregate amount, the
"Retention Bonus"), as follows: $250,000 (less applicable withholding tax)
no later than five (5) days following the first anniversary of the Effective
Time; and $250,000 (less applicable withholding tax) no later than five (5)
days following the second anniversary of the Effective Time. The Retention
Bonus shall become payable to the Executive only if he is employed hereunder
upon such anniversary dates; PROVIDED, HOWEVER, that any portion of the
Retention Bonus not yet paid to the Executive shall become immediately due
and payable upon the Executive's Date of Termination (as defined herein) in
the event that such termination of employment occurs prior to the second
anniversary of the Effective Time and is (A) by Parent for other than "Cause"
or (B) by the Executive for "Good Reason" (as each such term is defined
herein).
(c) EQUITY-BASED INCENTIVE COMPENSATION.
(i) The Executive hereby acknowledges and agrees that he will not
be eligible for participation in any equity-based compensation or incentive
plans of Parent until after the third anniversary of the Effective Time, and
except as provided in this Section 3(c)(i), the Executive is not entitled
to be granted any equity-based awards during the three (3) year period
commencing upon the Effective Time and ending upon the third anniversary
thereof. In lieu of participation in Parent's equity-based compensation
plans until the third anniversary of the Effective Time, Parent shall grant
to the Executive, as of the Effective Time, a nonqualified option (the
"Special Option") under Parent's 1997 Stock Option Plan (the "Parent Option
Plan") to purchase an aggregate of
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150,000 shares of the common stock (the "Common Stock") of Parent on the
terms and conditions set forth in the Option Agreement attached hereto as
Exhibit A at an exercise price equal to the Fair Market Value (as defined in
the Parent Option Plan) of the Common Stock as of the Effective Time.
(ii) Beginning on the third anniversary of the Effective Time, for
the remainder of the Employment Period, the Executive will be eligible to
participate in Parent's equity-based compensation plans on terms, if any, to
be determined by the Committee.
(d) OTHER BENEFITS. During the Employment Period, the Executive shall
be eligible to participate in savings, retirement, supplemental retirement,
welfare (including without limitation medical, dental, hospitalization and
life insurance, and short-term and long-term disability) and fringe benefit
plans, practices, policies and programs of Parent on a basis no less
favorable to the Executive than in effect with respect to similarly situated
executives of Parent. Except as provided in the Merger Agreement, the
Executive shall also be entitled to carry-over all accrued benefits, such as
vacation and sick days, that he would have received from his former
employment but for the fact of the termination of the Prior Agreements.
During the Employment Period, Parent shall make available to the Executive,
at its cost and expense, (i) a leased automobile on terms substantially
similar to that in effect with respect to similarly situated executives of
Parent, which terms shall include reasonable insurance and maintenance costs
and (ii) membership at two (2) private clubs in New York City, which
memberships shall be used by the Executive for the purposes of business
entertainment on behalf of Parent.
4. EXPENSES. Parent shall reimburse the Executive for all reasonable
expenses, including expenses for first-class air travel, other travel and
entertainment and parking fees in New York City, properly incurred by him in
the performance of his duties hereunder in accordance with policies
established from time to time by the Board. Parent shall also pay all
reasonable legal expenses of the Executive, up to a maximum of $15,000, that
are incurred in connection with negotiating this Agreement.
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5. TERMINATION OF EMPLOYMENT.
(a) DEATH. The Employment Period shall be terminated automatically by
Parent upon the Executive's death during such period, in which case the
Executive shall be entitled to the payments and benefits set forth in Section
6(d) of this Agreement.
(b) BY PARENT FOR CAUSE. Parent may terminate the Executive's
employment hereunder for Cause, in which case the Executive shall be entitled
to the payments and benefits set forth in Section 6(d) of this Agreement.
For purposes of this Agreement, "Cause" includes, without limitation,
acts of dishonesty, insubordination, incompetence or moral turpitude,
conviction of a felony which is materially and demonstrably injurious to the
Company, habitual drunkenness, narcotic drug addiction, or other material
misconduct of any kind. Poor performance of the Company shall not, in and of
itself, be considered "Cause." In the event that the Executive receives a
Notice of Termination for Cause in accordance with Sections 5(f) and 10(b)
hereof which indicates that the Executive has acted (or failed to act) in a
manner constituting insubordination, incompetence or other material
misconduct, the Executive shall have the opportunity, during a fourteen (14)
day period beginning on the date of receipt of such Notice, to cure such act
or failure to act. Further, actions taken at the direction of the Board, or
actions based on the recommendations of Parent's legal counsel or qualified
outside advisors shall be presumed to be taken in good faith and for the best
interest of the Company.
(c) BY THE EXECUTIVE FOR GOOD REASON. The Executive may terminate his
employment hereunder for Good Reason, unless Parent shall have previously
delivered to the Executive written notice that Cause exists (except that such
notice shall not be required in the case of a termination resulting from the
Executive's conviction of the type of felony set forth in Section 5(b)
above), in which case the Executive shall be entitled to the payments and
benefits set forth in Section 6(a) or 6(b) of this Agreement, as applicable.
For purposes of this Agreement, "Good Reason" shall mean (i) a reduction in
the Executive's reporting duties, such that he no longer reports directly to
the President of Parent; (ii) a material reduction by Parent in the Execu-
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tive's annual base salary as in effect on the date hereof (except for
across-the-board salary reductions similarly affecting all senior executives
of Parent); (iii) the relocation of the Executive's Principal Place of
Employment to a location more than 50 miles from the Executive's Principal
Place of Employment (except for required travel on Parent's or PHS's
business); or (iv) the failure of Parent to pay to the Executive any portion
of the Executive's compensation (except pursuant to an across-the-board
compensation deferral similarly affecting all senior executives of Parent)
within five (5) business days of the date such compensation is due. In order
for any termination for Good Reason to be effective, the Executive shall have
delivered to Parent written notice of the act or failure to act giving rise
to such termination for Good Reason with thirty (30) days following the first
occurrence of such event or condition, and Parent shall have been given ten
(10) business days from the receipt of such written notice to cure such act
or failure to act.
(d) BY PARENT OTHER THAN FOR CAUSE OR DEATH. Notwithstanding any other
provision of this Agreement, Parent may terminate the Executive's employment
other than for Cause or death, in which case the Executive shall be entitled
to the payments and benefits set forth under Section 6(a) or (6)(b) of this
Agreement, as applicable.
(e) BY THE EXECUTIVE OTHER THAN FOR GOOD REASON. Notwithstanding any
other provision of this Agreement, the Executive may terminate his employment
other than for Good Reason, in which case the Executive shall be entitled to
the payments and benefits set forth under Section 6(d) of the Agreement.
(f) NOTICE OF TERMINATION. Any termination by Parent or by the
Executive shall be communicated by Notice of Termination to the other party
hereto given in accordance with Section 10(b) of this Agreement. For purposes
of this Agreement, a "Notice of Termination" means a written notice which (i)
indicates the specific termination provision in this Agreement relied upon,
(ii) to the extent applicable, sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated, and (iii) if the Date of
Termination (as defined in paragraph (g) of this Section 5) is other than the
date of receipt of such
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<PAGE>
notice, specifies the termination date (which date shall be not more than
thirty (30) days after the giving of such notice).
The failure by the Executive or Parent to set forth in the Notice of
Termination any fact or circumstance which contributes to a showing of Good
Reason shall not waive any right of the Executive hereunder or preclude the
Executive from asserting such fact or circumstance in enforcing the
Executive's rights hereunder.
(g) DATE OF TERMINATION. "Date of Termination" means (i) if the
Executive's employment is terminated by the Executive for Good Reason, the
date of receipt of the Notice of Termination or any later date specified
therein, as the case may be, (ii) if the Executive's employment hereunder is
terminated by Parent other than on account of death, or by the Executive
other than for Good Reason, the date on which Notice of Termination is
delivered and (iii) if the Executive's employment is terminated by reason of
death, the date of death.
6. OBLIGATIONS OF PARENT UPON TERMINATION.
(a) TERMINATION DURING FIRST TWO YEARS OF TERM BY THE EXECUTIVE FOR GOOD
REASON OR BY PARENT OTHER THAN FOR CAUSE. If, during the first two (2) years
of the Term, the Executive shall terminate his employment for Good Reason or
Parent shall terminate the Executive's employment for any reason other than
Cause or death, the Executive shall be entitled to the following benefits:
(i) Parent shall pay to the Executive all vested benefits to which
the Executive is entitled under the terms of the employee benefit plans in
which the Executive is a participant as of the Date of Termination and a lump
sum amount in cash equal to the sum of (A) the Executive's Base Salary through
the Date of Termination to the extent not theretofore paid, (B) any
compensation previously deferred by the Executive (together with any accrued
interest or earnings thereon) and any accrued vacation pay and (C) any other
amounts due the Executive as of the Date of Termination, in each case to the
extent not theretofore paid (hereinafter referred to as the "Accrued
Obligation"). The amounts specified in this Section 6(a)(i) shall be paid
within thirty (30) days after the Date of Termination; and
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(ii) in lieu of any severance benefit otherwise payable to the
Executive,
(A) Parent shall pay to the Executive, within
five (5) days following the Date of Termination, a lump sum amount in
cash equal to the product of (x) the Executive's Base Salary as in
effect as of the Date of Termination and (y) (I) if such termination is
by the Executive under Section 5(c)(i) hereof, the number two (2) or
(II) if such termination is by the Executive under clause (ii), (iii)
or (iv) of paragraph 5(c) hereof (or by Parent other than for Cause or
death), the number 2.99; and
(B) for a period of one (1) year following the
Date of Termination, Parent shall continue to provide the Executive and
his dependents with medical (including hospital, surgical, and major
medical) insurance coverage as in effect as of the Date of Termination;
PROVIDED, HOWEVER, that Parent's obligation to provide benefits under
this Section 5(a)(ii)(B) shall be reduced to the extent similar
benefits are provided by a subsequent employer.
(b) TERMINATION DURING REMAINDER OF TERM BY THE EXECUTIVE FOR GOOD
REASON OR BY PARENT OTHER THAN FOR CAUSE OR DEATH. During the period
commencing on the second anniversary of the Effective Time and continuing
until the end of the Term (as such Term may be extended), if the Executive
shall terminate his employment for Good Reason or Parent shall terminate the
Executive's employment for any reason other than Cause or death, the
Executive shall be entitled to the following benefits:
(i) Parent shall pay to the Executive a lump sum amount in
cash equal to the Accrued Obligation; and
(ii) in lieu of any severance benefit otherwise payable to the
Executive.
(A) Parent shall pay the Executive a lump sum
amount in cash, within five (5) days following the Date of Termination,
equal to the product of (x) the Executive's Base Salary as in
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effect as of the Date of Termination and (y) the number one and one-half
(1.5); and
(B) for a period of one (1) year following the
Date of Termination, Parent shall continue to provide the Executive and
his dependents with medical (including hospital, surgical, and major
medical) insurance coverage as in effect as of the Date of Termination;
PROVIDED, HOWEVER, that Parent's obligation to provide benefits under
this Section 5(b)(ii)(B) shall be reduced to the extent similar benefits
are provided by a subsequent employer.
(c) NON-RENEWAL OF TERM. In the event that either party gives
notice that it will not renew or extend the Term (as such Term may be
extended), Parent shall, within five (5) business days following the
expiration of the Term, pay the Executive a lump sum amount in cash equal to
(i) the Accrued Obligation and (ii) the product of (A) the Executive's Base
Salary as in effect as of the date of the expiration of the Term and (B) the
number one and one-half (1.5).
(d) TERMINATION FOR OTHER REASON. If the Executive's employment
shall be terminated by Parent for Cause or death, or by the Executive other
than for Good Reason, Parent shall have no further obligations to the
Executive under this Agreement other than the obligation to pay the Executive
the Accrued Obligation.
(e) GROSS-UP IN CONNECTION WITH THE MERGER. If any of the payments
or benefits received or to be received by the Executive in connection with
the Merger (whether pursuant to the terms of this Agreement or any other
plan, arrangement or agreement with PHS or Parent (such payments or benefits,
excluding the Gross-Up Payment (as defined below), being hereinafter referred
to as the "PHS Total Payments") will be subject to the excise tax (the
"Excise Tax") imposed pursuant to section 4999 of the Internal Revenue Code
of 1986, as amended (the "Code"), Parent shall pay to the Executive an
additional amount, in cash (the "Gross-Up Payment"), such that the net amount
retained by the Executive, after deduction of any Excise tax on the PHS Total
Payments and any federal, state and local income and employment taxes and
Excise Tax upon any Gross-Up Payment, shall be equal to the Total Payments.
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For purposes of determining whether any of any PHS Total Payments will
be subject to the Excise Tax and the amount of such Excise Tax, (i) all of
the PHS Total Payments shall be treated as "parachute payments" (within the
meaning of section 280G(b)(2) of the Code unless, in the opinion of tax
counsel ("Tax Counsel") reasonably acceptable to the Executive, paid for by
Parent and selected by the accounting firm which is Parent's independent
auditor (the "Auditor"), such payments or benefits (in whole or in part) do
not constitute parachute payments, including by reason of section
280G(b)(4)(A) of the Code, (ii) all "excess parachute payments" within the
meaning of section 280G(b)(1) of the Code shall be treated as subject to the
Excise Tax unless, in the opinion of Tax Counsel, such excess parachute
payments (in whole or in part) represent reasonable compensation for services
actually rendered (within the meaning of section 280G(b)(4)(B) of the Code)
in excess of the "Base Amount," as defined in section 280G(b)(3) of the Code,
allocable to such reasonable compensation, or are otherwise not subject to
the Excise Tax, and (iii) the value of any noncash benefits or any deferred
payment or benefit shall be determined by the Auditor in accordance with the
principles of sections 280G(d)(3) and (4) of the Code. For purposes of
determining the amount of the Gross-Up Payment, the Executive shall be deemed
to pay federal income tax at the highest marginal rate of federal income
taxation in the calendar year in which the Gross-Up Payment is to be made and
state and local income taxes at the highest marginal rate of taxation in the
state and locality of the Executive's residence on the Date of Termination
(or if there is no Date of Termination, then the date on which the Gross-Up
Payment is calculated for purposes of this Section 6(e)), net of the maximum
reduction in federal income taxes which could be obtained from deduction of
such state and local taxes.
In the event that the Excise Tax is finally determined to be less than
the amount taken into account hereunder in calculating the Gross-Up Payment,
the Executive shall repay to Parent, within five (5) business days following
the time that the amount of such reduction in the Excise Tax is finally
determined, the portion of the Gross-Up Payment attributable to such
reduction (plus that portion of the Gross-Up Payment attributable to the
Excise Tax and federal, state and local income and employment taxes imposed
on the Gross-Up Payment being repaid by the Executive), plus
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interest on the amount of such repayment at the rate provided in section
1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to
exceed the amount taken into account hereunder in calculating the Gross-Up
Payment (including by reason of any payment the existence or amount of which
cannot be determined at the time of the Gross-Up Payment), Parent shall make
an additional Gross-Up Payment in cash in respect of such excess (plus any
interest, penalties or additions payable by the Executive with respect to
such excess) within five (5) business days following the time that the amount
of such excess is finally determined. The Executive and Parent shall each
reasonably cooperate with the other in connection with any administrative or
judicial proceedings concerning the existence or amount of liability for
Excise Tax with respect to the PHS Total Payments.
7. FULL SETTLEMENT; NO MITIGATION. Except as provided in Sections
6(a)(ii)(B) and 6(b)(ii)(B) hereof, Parent's obligation to make the payments
provided for in this Agreement and otherwise to perform their obligations
hereunder shall not be subject to any set-off, counterclaim, recoupment,
defense or other claim, right or action which Parent may have against the
Executive or others. In no event shall the Executive be obligated to seek
other employment or take any other action by way of mitigation of the amounts
(including amounts for damages for breach) payable to the Executive under any
of the provisions of this Agreement.
8. CONFIDENTIAL INFORMATION; NON-COMPETITION.
(a) During the Employment Period and at all times thereafter, the
Executive shall not, without the prior written consent of the Board, disclose
or use for any purpose (except in the course of his employment under this
Agreement and in furtherance of the business of the Company) confidential
information, proprietary data and customer lists of Parent of PHS, except as
required by applicable law or legal process; provided, however, that
"confidential information, proprietary data and customer lists" shall not
include any information known generally to the public or ascertainable from
public or published information (other than as a result of unauthorized
disclosure by the Employee) or any information of a type not otherwise
considered confidential by persons engaged in the same business or a business
similar to that conducted by Parent. The Executive
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agrees to deliver to Parent at the termination of his employment all memoranda,
notes, plans, records, lists, reports and other documents (and copies
thereof) relating to the business of Parent and PHS which he may then possess
or have under his control.
(b) (i) During the Employment Period, the Executive shall not
engage in "Competition" with Parent. For purposes of this Agreement,
Competition by the Executive shall mean the Executive's engaging in, or
otherwise directly or indirectly being employed by or acting as a consultant
or lender to, or being a director, officer, employee, principal, agent,
stockholder, member, owner or partner of, or permitting his name to be used
in connection with the activities of any other business or organization
anywhere in the United States which competes, directly or indirectly, with
the business of Parent as the same shall be constituted at any time during or
following the Term (and any extensions thereof).
(ii) For the twelve (12) month period following the
Employment Period, the Executive shall not engage in Competition (as defined
above and modified herein for purposes of this subsection (b)(ii) only), with
Parent in (a) any locality or region of the United States, and (b) any
substantive area, for which the Executive had responsibility during the
Employment Period; PROVIDED, that it shall not be a violation of this
sub-paragraph for the Executive to become the registered or beneficial owner
of up to two percent (2%) of any class of the capital stock of a competing
corporation registered under the Securities Exchange Act of 1934, as amended,
provided that the Executive does not actively participate in the business of
such corporation until such time as this covenant expires.
(iii) For the twelve (12) month period following the
termination of this Agreement for any reason, the Executive agrees that he
will not, directly or indirectly, for his benefit or for the benefit of any
other person, firm or entity, do any of the following:
(A) solicit from any customer doing business
with Parent as of such termination, business of the same or of a similar
nature to the business of Parent with such customer;
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(B) solicit from any known potential customer
of Parent business of the same or of a similar nature to that which has
been the subject of a known written or oral bid, offer or proposal by
Parent, or of substantial preparation with a view to making such a bid,
proposal or offer, within six (6) months prior to such termination;
(C) solicit the employment or services of, or
hire, any person who was known to be employed by or was a known
consultant to Parent upon the termination of this Agreement, or within
six (6) months prior thereto; or
(D) otherwise knowingly interfere with the
business or accounts of Parent.
9. SUCCESSORS.
(a) ASSIGNMENT BY EXECUTIVE. This Agreement is personal to the
Executive and, without the prior written consent of Parent, shall not be
assignable by the Executive otherwise than by will or the laws of descent and
distribution. This Agreement shall inure to the benefit of and be enforceable
by the Executive's legal representatives.
(b) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the
benefit of and be binding upon Parent, and their respective successors and
assigns.
(c) ASSUMPTION. Parent shall require any successor (whether direct
or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets thereof to expressly assume
and agree to perform this Agreement in the same manner and to the same extent
that Parent, as the case may be, would be required to perform this Agreement
if no such succession had taken place. As used in this Agreement, Parent
shall mean Parent, as hereinbefore defined and any successor to its
businesses and/or assets as aforesaid that assumes and agrees to perform this
Agreement by operation of law, or otherwise.
10. MISCELLANEOUS.
(a) GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of
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New York, without reference to its principles of conflict of laws. The
captions of this Agreement are not part of the provisions hereof and shall
have no force or effect. This Agreement may not be amended, modified,
repealed, waived, extended or discharged except by an agreement in writing
signed by the party against whom enforcement of such amendment, modification,
repeal, waiver, extension or discharge is sought.
(b) NOTICES. All notices and other communications hereunder shall
be in writing and shall be given by hand delivery to the other party or by
registered or certified mail, return-receipt requested, postage prepaid,
addressed, in the case of Parent, to Parent's headquarters and, in the case
of the Executive, to the address on the signature page of this Agreement or,
in either case, to such other address as any party shall have subsequently
furnished to the other parties in writing. Notice and communications shall be
effective when actually received by the addressee.
(c) ARBITRATION. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration.
The parties shall utilize the services of the American Arbitration
Association ("AAA"). Pursuant to its standard procedures, the AAA shall
appoint one neutral arbitrator from its panel of arbitrators, unless the
parties mutually agree that a panel of three (3) arbitrators be appointed,
which will make decisions by a majority vote. The arbitrator or arbitrators
shall have the power to award all appropriate relief as if the claims heard
in this proceeding had been brought in a state court of general jurisdiction
over the specific claim in question. The arbitration hearing shall be
conducted in New York, New York or another location agreed to by the parties
in accordance with the rules of the AAA then in effect. A Judgment may be
entered on the arbitrator's or arbitrators' award in any court having
jurisdiction.
(d) SEVERABILITY. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability
of any other provision of this Agreement.
(e) TAXES. Parent may withhold from any amounts due and payable
under this Agreement such federal, state or local taxes as shall be required
to be withheld pursuant to any applicable law or regulation.
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(f) NO WAIVER. Any party's failure to insist upon strict
compliance with any provision hereof or the failure to assert any right such
party may have hereunder shall not be deemed to be a waiver of such provision
or right or any other provision or right of this Agreement.
(g) ENTIRE AGREEMENT; SURVIVAL. This Agreement entered into as of
the date hereof among Parent and the Executive and contains the entire
agreement of the Executive and Parent or their respective predecessors or
subsidiaries with respect to the subject matter of the Agreement, and all
promises, representations, understandings, arrangements and prior agreements,
including without limitation the Prior Agreements, are superseded by this
Agreement. Any provision hereof which by its terms applies in whole or part
after a termination of the Executive's employment hereunder shall survive
such termination.
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IN WITNESS WHEREOF, the Executive has executed this Agreement and,
pursuant to due authorization from its Board, the Company has caused this
Agreement to be executed, as of the day and year first above written.
FOUNDATION HEALTH SYSTEMS, INC.
By /s/ Jay M. Gellert
----------------------------
Name:
Title:
ROBERT L. NATT
/s/ Robert L. Natt
------------------------------
Address: 51 TUCKAHOE ROAD
EASTON, CT 06612
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Ex 10.20
ROBERT L. NATT
WAIVER AND RELEASE OF CLAIMS
This WAIVER and RELEASE OF CLAIMS (this "Release") is made and entered
into by and between Foundation Health Systems, Inc. and its affiliates and
subsidiaries (hereinafter referred to as the "Company") and Robert L. Natt
(hereinafter referred to as the "Employee").
WHEREAS, the Company and Employee are parties to an Employment
Agreement dated December 31, 1997 (the "Employment Agreement") and desire to
terminate the Employment Agreement as of the Termination Date.
WHEREAS, the Company and Employee are entering into this Release as a
condition to Employee's receipt of severance pay and certain other payments
and benefits described below upon his or her termination of employment with
the Company.
NOW, THEREFORE, the Company and Employees agree as follows:
1. Employee's employment with the Company shall terminate on December 31,
1998 (the "Termination Date"). Upon execution of this Agreement, Employee
shall not represent to anyone that he is an employee of the Company and
shall not say or do anything purporting to bind the Company.
2. The Company shall provide Employee with the following payments and
benefits:
A. Following the Termination Date upon Employee's acceptance of the
terms set forth herein as evidenced by Employee's signature set forth
below and the expiration of the seven (7) day revocation period set
forth below, Employee shall be entitled to:
(i) a lump sum payment equal to $956,800 less applicable
deductions and withholdings, representing 2.99 times Employee's
base salary of $320,000 per year (the "Base Salary");
(ii) a lump sum payment equal to $250,000 less applicable
deductions and withholdings representing Employee's retention bonus;
(iii) medical, health, disability, life and accident insurance
coverage for Employee and his dependents (i.e. his wife, unmarried
dependent children ages 19-24 who are dependent on Employee for at
least 50% of their financial support or are full-time students),
at the levels and in the amounts existing at the Termination Date
("the Benefits"), through the FHS choices plan or another plan or
plans of the Company's choosing, until the first to occur of the
following: (a) Employee reaches age 65, or (b) Employee secures
similar coverage through another employer.
(iv) use of the automobile leased by the Company for Employee
through September 14, 2001, the end of the lease term. The Company
will continue to pay maintenance, repair insurance and other costs
for the leased automobile associated with the lease through the end
of the lease term provided Employee submits to the Company receipts
for such repairs and maintenance. Employee shall have the option to
purchase said automobile at the end of the lease term in accordance
with the terms of said lease, provided Employee pays any applicable
sales tax, transfer fees or other fees associated with said option
to purchase;
(v) payment of an amount not to exceed $12,000 to defray
Employee's legal and financial planning expenses which amount shall
be paid by Company directly to Employee's attorneys, Cummings &
Lockwood, upon presentation of documentation by Cummings & Lockwood
evidencing that such expenses have been incurred by Employee;
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(vi) outplacement services commensurate with that provided to
other employees of the Company at Employee's level of
responsibility;
(vii) Employee's office chair and computer.
(viii) reimbursement of Employee's University Club initiation fee
and 1998 dues upon receipt of documentation showing that Employee
has paid these fees and dues.
B. Employee acknowledges and agrees that he has received all
compensation and all earned and unused vacation/paid-time-off owing
to Employee as of the Termination Date.
C. The Company agrees that any stock options that were granted to
Employee during his employment, will be fully vested as of the
Termination Date and shall be exercisable through December 31,
2000, notwithstanding anything to the contrary contained in the
applicable stock option plan of the Company. Employee further
acknowledges and agrees that he is not entitled to receive or be
granted and will not receive or be granted any additional stock,
units, options or shares.
3. In consideration of the Company providing Employee those payments and
benefits set forth in Section 2A above, and as a condition to receiving
such payments and benefits, Employee freely and voluntarily enters into
this Release and by signing this Release Employee, on his own behalf and
on behalf of his heirs, beneficiaries, successors, representatives,
trustees, administrators and assigns, hereby waives and releases the
Company, and each of its past, present and future officers, directors,
shareholders, employees, consultants, accountants, attorneys, agents,
managers, insurers, sureties, parent and sister corporations, divisions,
subsidiary corporations and entities, partners, joint venturers,
affiliates, beneficiaries, successors, representatives and assigns, from
any and all claims, demands, damages, debts, liabilities, controversies,
obligations, actions or causes of action of any nature whatsoever,
whether based on tort, statute, contract, indemnity, rescission or any
other theory or recovery, including by not limited to claims arising
under federal, state or local laws prohibiting discrimination in
employment, including the Fair Employment and Housing Act, Title VII of
the Civil Rights Act of 1964, as amended, the Civil Rights Act of 1870,
as amended, claims of disability discrimination under the Americans with
Disabilities Act, claims under the Age Discrimination in Employment Act,
as amended ("ADEA"), the Worker Adjustment and Retraining Notification
Act ("WARN") or claims for wrongful termination, breach of contract, breach
of public policy, termination in violation of public policy, physical
or mental harm or distress or claims arising out of the Company's right
to terminate its employees, whether for compensatory, punitive,
equitable or other relief, whether known, unknown, suspected or
unsuspected, including without limitation claims which may have arisen
or may in the future arise in connection with any event which occurred on
or before the date of Employee's execution of this Release. The
provisions in this paragraph are not intended to prohibit Employee from
filing a claim for unemployment insurance or worker's compensation
insurance.
4. Employee shall not initiate or cause to be initiated against the Company
any compliance review, suit, action, investigation or proceeding of any
kind, or voluntarily participate in same, individually or as a
representative, witness or member of a class, under contract, law or
regulation, federal, state or local, pertaining to any matter related to
his employment with the Company.
5. Except as otherwise provided herein, Employee agrees he shall return to
the Company immediately on execution of this Agreement any building
key(s), security pass or other access or identification cards and any
Company property in his possession, including but not limited to any
documents, credit cards, computer equipment, mobile phones or data
files. Employee agrees to submit all expense accounts and to pay
promptly the outstanding balance on each corporate credit card that the
Company previously issued to Employee.
6. Employee shall not, without the Company's written consent by an
authorized representative, at any time prior or subsequent to the
execution of this Release, disclose, use, remove or copy any confidential
information, trade secret or proprietary information or customer lists
of the Company, including without limitation, any technical, actuarial,
economic, financial, procurement, provider, customer, underwriting,
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contractual, managerial, marketing or other information of any type that
has economic value in the business in which the Company is engaged,
provided however, that confidential information, trade secret or
proprietary information and customer lists shall not include any
previously published information, information generally in the public
domain or information required to be disclosed by applicable law or
legal process.
7. A. For purposes of the Agreement, "Competition" by the Employees shall
mean the Employee's engaging in, or otherwise directly or indirectly
being employed by or acting as a consultant or lender to, or being a
director, officer, employee, principal, agent, stockholder, member,
owner or partner of, or permitting his name to be used in connection
with the activities of any other business or organization anywhere
in the United States which competes, directly or indirectly, with
the business of the Company as the same shall be constituted at any
time following the Termination Date.
B. For the twelve (12) month period following the Termination Date, the
Employee shall not engage in Competition (as defined above and
modified herein for purposes of this subsection 7B only), with the
Company in (a) any locality or region of the United States, and (b)
any substantive area, for which the Employee had responsibility
while employed by the Company; PROVIDED, that it shall not be a
violation of this sub-paragraph for the Employee to become the
registered or beneficial owner of up to two percent (2%) of any
class of the capital stock of a competing corporation registered
under the Securities Exchange Act of 1934, as amended, provided that
the Employee does not actively participate in the business of such
corporation until such time as this covenant expires.
C. For the twelve (12) month period following the Termination Date,
Employee agrees that he will not, directly or indirectly, for his
benefit or for the benefit of any other person, firm or entity, do any
of the following:
(i) solicit from any customer doing business with the Company as of
the Termination Date, business of the same or of a similar nature to
the business of the Company with such customer;
(ii) solicit from any known potential customer of the Company
business of the same or of a similar nature to that which has been
the subject of a known written or oral bid, offer or proposal by the
Company, or of substantial preparation with a view to making such a
bid, proposal or offer, within six (6) months prior to the
Termination Date;
(iii) solicit the employment or services of, or hire, any person who
was known to be employed by or was a known consultant to the Company as
of the Termination Date, or within six (6) months prior thereto; or
(iv) otherwise knowingly interfere with the business or accounts of
the Company.
8. Any developments or discoveries by Employee during the course of his
employment with the Company through the Termination Date resulting in
patents, lists of customers, trade secrets, specialized know-how or other
intellectual property useful in the then current business of the Company
shall be for the sole benefit of the Company.
9. Employee agrees to cooperate with the Company in defending or
investigating any claim against the Company arising in whole or in part out
of the Company's business during Employee's employment with the Company for
which the Company requests Employee's assistance. The Company will use its
reasonable best efforts to assure that any request for such cooperation
will not unduly interfere with Employee's other material business and
personal obligations and commitments.
10. Nothing contained herein shall be construed as an admission of any
wrongful act, including but not limited to violation of any contract,
express or implied, or any federal, state or local employment laws or
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regulations, and nothing contained herein shall be used for any purpose
except in proceedings related to the enforcement of this Release.
11. If any part or term of this Release is held invalid or unenforceable,
such invalidity or unenforceability shall not affect in any way the
validity or enforceability of any other part or term of this Release.
This Release supersedes all other understandings and agreements of the
parties, whether written or oral, including but not limited to the
Employment Agreement.
12. Employee acknowledges that he has had an opportunity to consult and be
represented by counsel of Employee's choosing in the review of this
Release, and that he has been advised by the Company to do so, that the
Employee is fully aware of the contents of the Release and of its legal
effect, that the preceding paragraphs recite the sole consideration for
this Release, and that Employee enters into this Release freely, without
coercion, and based on the Employee's own judgment and not in reliance
upon any representation or promise made by the other party, other than
those contained herein. There may be no modification of the terms of
this Release except in writing signed by the parties hereto.
13. Employee agrees and acknowledges that this Release recites all payments
and benefits Employee is entitled to receive and that no other payments or
benefits will be asserted or requested by Employee.
14. The Release shall be construed and governed by the laws of the State of
California. Employee expressly waives the provisions of California Civil
Code Section 1542 (or any applicable provision under any applicable state
law) regarding the waiver of unknown claims. California Civil Code Section
1542 provides as follows:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES
NOT KNOW OR EXPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
SETTLEMENT WITH THE DEBTOR."
15. Solely for the purposes of the computation of payments to be made
pursuant to this Agreement and notwithstanding any other provisions
hereof, payments to the Employee under this Release (other than the
payments required to be made pursuant to Section 2B hereof) shall be
reduced (but not below zero) so that the present value, as determined in
accordance with Section 280G(d)(4) of the Internal Revenue Code of 1986,
as amended (the "Code"), of such payments plus any other payments that
must be taken into account for purposes of any computation relating to
the Employee under Section 280G(b)(2)(a)(ii) of the Code, shall not, in
the aggregate, exceed 2.99 times the Employee's "base amount" as such
term is defined in Section 280G(b)(3) of the Code. Notwithstanding any
other provision hereof, no reduction in payments under the limitation
contained in the immediately preceding sentence shall be applied to
payments hereunder which do not constitute "excess parachute payments"
within the meaning of the Code. Any payments in excess of the
limitation of this Section 14 or otherwise determined to be "excess
parachute payments" made to the Employee hereunder shall be deemed to be
overpayments which shall constitute an amount owing from the Employee to
the Company with interest from the date of receipt by the Employee to
the date of repayment (or offset) at the applicable federal rate under
Section 1274(d) of the Code, compounded semi-annually, which shall be
payable to the Company upon demand; PROVIDED, HOWEVER, that no repayment
shall be required under this sentence if in the written opinion of tax
counsel satisfactory to the Employee and delivered to the Employee and the
Company such repayment does not allow such overpayment to be excluded
for federal income and excise tax purposes from the Employee's income
for the year of receipt or afford the Employee a compensating federal
income tax deduction for the year of repayment.
EMPLOYEE ACKNOWLEDGES BY SIGNING BELOW that (i) Employee has not relied
upon any representations, written or oral, not set forth in this Release;
(ii) at the time Employee was given this Release Employee was informed in
writing by the Company that (a) Employee had at least 21 days in which to
consider whether Employee would sign the Release and (b) Employee should
consult with an attorney before signing the Release; and (iii) Employee
had an opportunity to consult with an attorney and either had such
consultations or has freely decided to sign this Release without consulting
an attorney.
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<PAGE>
Employee further acknowledges that he may revoke acceptance of this
Release by delivering a letter of revocation within seven (7) days after the
date set forth below addressed to: FHS Corporate Legal Department, 21600
Oxnard Street, Woodland Hills, CA 01367.
Finally, Employee acknowledges that he understands that this Release
shall not become effective until the eighth (8th) day following his signing
this Release and that if Employee does not revoke his acceptance of the terms
of this Release within the seven (7) day period following the date on which
Employee signs this Release, then this Release shall be binding and
enforceable.
IN WITNESS WHEREOF, the parties hereto have executed this Release as
of the dates set forth below.
Employee Foundation Health Systems, Inc.
By: /s/ Robert L. Natt By: /s/ B. Curtis Westen
----------------------------- -----------------------------
Name: Robert L. Natt Name:
Title:
Dated: 2/4/99 Dated: 2/4/99
-------------------------- --------------------------
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[NAME]
TIER 1
FORM OF
SEVERANCE PAYMENT AGREEMENT
This Severance Payment Agreement (this "Agreement") is entered into as of
December 4, 1998 between Foundation Health Systems, Inc., a Delaware corporation
(the "Company"), on the one hand, and [NAME] ("Employee"), on the other hand.
WHEREAS, Employee currently serves as [TITLE]; and
WHEREAS, Employee is currently party to a Severance Payment Agreement,
dated April 6, 1998 (the "Existing Severance Payment Agreement"), with the
Company and to an Employment Letter Agreement, dated ____, 199__ (the "Existing
Employment Letter Agreement") with [a subsidiary of] the Company; and
WHEREAS, in consideration for past efforts of the Employee and to entice
Employee to continue to provide such efforts, the Company proposes to make the
payments set forth in this Agreement in the event Employee's employment with the
Company is terminated on the terms and conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties hereto agree as follows:
1. TERM OF AGREEMENT. The term of this Agreement (the "Covered
Period") shall commence on the date hereof (the "Effective Date") and continue
throughout Employee's term of employment with the Company. Any payments to be
made pursuant to Section 3 hereof shall only be made if Employee is terminated
by the Company without Cause or terminated by Employee with Good Reason as
provided in said Section 3.
2. DUTIES OF EMPLOYEE. Employee shall serve as [TITLE]. During the
term of employment, except as otherwise provided herein, Employee shall devote
his/her entire productive time, energies and abilities to the business of the
Company and shall at all times loyally and conscientiously perform all the
duties and obligations required of him/her expressly or implicitly by the terms
of this Agreement.
3. TERMINATION OF EMPLOYMENT.
3.1 TERMINATION BY THE COMPANY WITHOUT CAUSE. The Company may
terminate Employee's employment without Cause (as defined below) at any time.
In the event that the Company does so terminate Employee's employment without
Cause at any time within two (2) years after a Change of Control (as defined
below) of the Company Employee shall nevertheless be entitled, as a severance
allowance, to (i) continuation of all medical, health, disability, life and
accident insurance maintained for Employee's benefit immediately prior to the
date of Employee's termination (collectively, "Benefits") for a period of three
(3) years from the date of termination and (ii) a lump sum cash payment equal to
three (3) times the base salary of the Employee in effect
<PAGE>
immediately prior to the date of Employee's termination ("Base Salary"). In the
event that the Company does so terminate Employee's employment without Cause at
any time that is not within two (2) years after a Change of Control of the
Company Employee shall nevertheless be entitled, as a severance allowance, to
(i) continuation of all Benefits maintained immediately prior to the date of
Employee's termination for a period of two (2) years from the date of
termination and (ii) a lump sum cash payment equal to two (2) times the Base
Salary of the Employee in effect immediately prior to the date of Employee's
termination.
3.2 TERMINATION BY THE COMPANY FOR CAUSE. The Company may
terminate Employee's employment for Cause at any time without notice. In the
event of such termination, Employee shall not be eligible to receive any
payments set forth in this Section 3. For purposes of this Agreement, Cause
shall include, without limitation, (a) an act of dishonesty causing harm to the
Company, (b) the knowing disclosure of confidential information relating to the
Company's business, (c) habitual drunkenness or narcotic drug addiction, (d)
conviction of a felony, (e) willful refusal to perform or gross neglect of the
duties assigned to Employee, (f) the willful breach of any law that, directly or
indirectly, affects the Company, (g) a material breach by the Employee following
a Change of Control of those duties and responsibilities of the Employee that do
not differ in any material respect from the duties and responsibilities of the
Employee during the 90-day period immediately prior to such Change of Control
(other than as a result of incapacity due to physical or mental illness) which
is demonstrably willful and deliberate on the Employee's part, which is
committed in bad faith or without reasonable belief that such breach is in the
best interests of the Company and which is not remedied in a reasonable period
of time after receipt of written notice form the Company specifying such breach
or (h) breach of the provisions of Section 8 of this Agreement.
3.3 VOLUNTARY TERMINATION BY EMPLOYEE WITHOUT GOOD REASON.
Notwithstanding anything to the contrary in this Agreement, whether express or
implied, Employee may at any time terminate his employment for any reason by
giving the Company fourteen (14) days prior written notice of the effective date
of termination. In the event that Employee's employment with the Company is
voluntarily terminated by Employee without Good Reason (as defined below),
Employee shall not be eligible to receive any payments set forth in this
Section 3.
3.4 VOLUNTARY TERMINATION BY EMPLOYEE WITH GOOD REASON.
Notwithstanding the preceding Section 3.3, in the event that Employee's
employment with the Company is voluntarily terminated by Employee with Good
Reason within two (2) years after a Change of Control of the Company, Employee
shall nevertheless be entitled, as a severance allowance, to (i) continuation of
his/her Benefits for a period of three (3) years from the date of termination
and (ii) a lump sum cash payment equal to three (3) times the Base Salary of the
Employee in effect immediately prior to the date of Employee's termination
provided that, in the event the Company requests, in writing, prior to such
voluntary termination that Employee continue in the employ of the Company for a
period of time up to 90 days following such Change of Control, then Employee
shall forfeit such severance allowance if he/she voluntarily leaves the employ
of the Company prior to the expiration of such period of time. For purposes of
this Agreement, Good Reason shall mean any of the following which occurs
subsequent to the Effective Date:
(i) A demotion or a substantial reduction in the scope of
Employee's position, duties, responsibilities or status with the Company,
or any removal of Employee from or any
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failure to reelect Employee to any of the positions (or functional
equivalent of such positions) referred to in the introductory paragraphs
hereof, except in connection with the termination of his/her employment for
Disability, normal retirement or Cause or by Employee voluntarily other
than for Good Reason;
(ii) A reduction by the Company in Employee's Base Salary or a
material reduction in the benefits or perquisites available to Employee as
in effect immediately prior to such reduction;
(iii) A relocation of Employee to a work location more than fifty
(50) miles from Employee's work location immediately prior to such proposed
relocation; provided that such proposed relocation results in a materially
greater commute for Employee based on Employee's residence immediately
prior to such relocation; or
(iv) The failure of the Company to obtain the assumption agreement
from any successor as contemplated in Section 10.5 of this Agreement.
For purposes of this Agreement, Change of Control shall mean any of the
following which occurs subsequent to the Effective Date:
(a) Any person (as such term is defined under Section 13(d)(3) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act")),
corporation or other entity (other than the Company or any employee benefit
plan sponsored by the Company or any of its subsidiaries) is or becomes the
beneficial owner (as such term is defined in Rule 13d-3 under the Exchange
Act) of securities of the Company representing twenty percent (20%) or more
of the combined voting power of the outstanding securities of the Company
which ordinarily (and apart from rights accruing under special
circumstances) have the right to vote in the election of directors
(calculated as provided in paragraph (d) of such Rule 13d-3 in the case of
rights to acquire the Company's securities) (the "Securities");
(b) As a result of a tender offer, merger, sale of assets or
other major transaction, the persons who are directors of the Company
immediately prior to such transaction cease to constitute a majority of the
Board of Directors of the Company (or any successor corporations)
immediately after such transaction;
(c) The Company is merged or consolidated with any other person,
firm, corporation or other entity and, as a result, the shareholders of the
Company, as determined immediately before such transaction, own less than
eighty percent (80%) of the outstanding Securities of the surviving or
resulting entity immediately after such transaction;
(d) A tender offer or exchange offer is made and consummated for
the ownership of twenty percent (20%) or more of the outstanding Securities
of the Company;
(e) The Company transfers substantially all its assets to another
person, firm, corporation or other entity that is not a wholly-owned
subsidiary of the Company; or
(f) The Company enters into a management agreement with another
person, firm, corporation or other entity that is not a wholly-owned
subsidiary of the Company and such
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management agreement extends hiring and firing authority over Employee to
an individual or organization other than the Company.
4. PAYMENTS UPON TERMINATION OF EMPLOYMENT. In the event that the
Employee's employment is terminated for any reason, then the Company shall pay
to the Employee (or his/her beneficiaries or estate) in addition to any payments
that may be due under Section 3 above or Section 5 below, within 30 days
following the date of termination, a cash amount equal to the sum of the
following (in each case to the extent not theretofore paid): the Employee's Base
Salary from the Company until the date of termination, any compensation
previously deferred by the Employee (together with any interest and earnings
thereon), any vacation pay accrued prior to the termination date, any
reimbursable expenses incurred by the Employee prior to the termination date and
any other compensatory plan, arrangement or program payment to which Employee
may be entitled.
5. TERMINATION OF EMPLOYEE DUE TO DEATH OR DISABILITY. In the event
that Employee's employment is terminated at any time during the Covered Period
due to death or Disability, Employee (or his beneficiaries or estate) shall
nevertheless be entitled, as a severance allowance, to (i) continuation of all
Benefits for a period of one (1) year from the date of termination and (ii) a
lump sum cash payment equal to one (1) times the Base Salary of the Employee in
effect immediately prior to the date of Employee's termination. For purposes of
this Agreement, a termination for "Disability" shall mean a termination of
Employee's employment due to the Employee's absence from his duties with the
Company on a full-time basis for at least 180 consecutive days as a result of
the Employee's incapacity due to physical or mental illness.
6. WITHHOLDING. All payments required to be made by the Company
hereunder to Employee or his estate or beneficiaries shall be subject to the
withholding of such amounts relating to taxes as the Company may reasonably
determine should be withheld pursuant to any applicable law or regulation.
7. TAX CONSEQUENCES.
7.1 Notwithstanding any other provisions of this Agreement, in
the event that any payment or benefit received or to be received by Employee in
connection with a Change of Control or the termination of the Employee's
employment (whether pursuant to the terms of this Agreement or any other plan,
arrangement or agreement with the Company, any person whose actions result in a
Change of Control or any person affiliated with the Company or such person) (all
such payments and benefits, including the severance payments and benefits
provided for in Section 3 hereof (the "Severance Payments"), being hereinafter
called "Total Payments") would be subject (in whole or part), to the excise tax
(the "Excise Tax") imposed under section 4999 of the Internal Revenue Code of
1986, as amended (the "Code"), then, after taking into account any reduction in
the Total Payments provided by reason of section 280G of the Code in such other
plan, arrangement or agreement, the cash Severance Payments shall first be
reduced, and the noncash severance benefits shall thereafter be reduced, to the
extent necessary so that no portion of the Total Payments is subject to the
Excise Tax but only if (a) the net amount of such Total Payments, as so reduced
(and after subtracting the net amount of federal, state and local income taxes
on such reduced Total Payments) is greater than or equal to (b) the net amount
of such Total Payments without such reduction (but after subtracting the net
amount of federal, state and local income taxes on such Total Payments and the
amount of Excise Tax to which the Employee would be subject in respect of such
unreduced
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Total Payments); PROVIDED, HOWEVER, that the Employee may elect to have the
noncash Severance Payments reduced (or eliminated) prior to any reduction of the
cash Severance Payments.
7.2 For purposes of determining whether and the extent to which
the Total Payments will be subject to the Excise Tax, (i) no portion of the
Total Payments the receipt or enjoyment of which the Employee shall have waived
at such time and in such manner as not to constitute a "payment" within the
meaning of section 280G(b) of the Code shall be taken into account, (ii) no
portion of the Total Payments shall be taken into account which, in the opinion
of tax counsel ("Tax Counsel") reasonably acceptable to the Employee and
selected by the accounting firm (the "Auditor") which was, immediately prior to
the Change of Control, the Company's independent auditor, does not constitute a
"parachute payment" within the meaning of section 280G(b)(2) of the Code
(including by reason of section 280G(b)(4)(A) of the Code) and, in calculating
the Excise Tax, no portion of such Total Payments shall be taken into account
which, in the opinion of Tax Counsel, constitutes reasonable compensation for
services actually rendered, within the meaning of section 280G(b)(4)(B) of the
Code, in excess of the Base Amount allocable to such reasonable compensation,
and (iii) the value of any non-cash benefit or any deferred payment or benefit
included in the Total Payments shall be determined by the Auditor in accordance
with the principles of sections 280G(d)(3) and (4) of the Code.
7.3 At the time that payments are made under this Agreement, the
Company shall provide the Employee with a written statement setting forth the
manner in which such payments were calculated and the basis for such
calculations including, without limitation, any opinions or other advice the
Company has received from Tax Counsel, the Auditor or other advisors or
consultants (and any such opinions or advice which are in writing shall be
attached to the statement).
8. CONFIDENTIALITY. Employee acknowledges and agrees that, during the
period of his/her employment by the Company, he/she has and will continue to
have access to and become acquainted with various trade secrets, including, but
not limited to, various procedures, practices, information regarding the
organization and operation of the Company, confidential customer information,
marketing methods, compilations of information and records that are owned by the
Company and that are regularly used in the operation of its business. The
parties stipulate that such items of information are important, material and
confidential trade secrets and affect the successful conduct of the Company's
business and its goodwill, and that any breach of this Section shall be a
material breach of this Agreement. All documents, memoranda, reports, files,
correspondence, lists and other written and graphic records affecting or
relating to the Company's business that Employee may prepare, use, observe,
possess or control shall be and remain the Company's sole property. Employee
shall not disclose any of these trade secrets, directly or indirectly, or use
them in any way, either during the term of this Agreement or at any time
thereafter, except as required in the course of his employment by the Company or
as otherwise authorized in writing by the Company. In the event of the
termination of Employee's employment with the Company, Employee shall deliver
promptly to the Company all written or graphic records containing such trade
secrets or confidential information of the Company.
9. NON-COMPETITION.
9.1 The Employee hereby agrees that, during (i) the six-month
period following a termination of the Employee's employment with the Company
that entitles the Employee to receive
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severance benefits under a written agreement with or policy of the Company or
(ii) the twelve-month period following a termination of the Employee's
employment with the Company that does not entitle the Employee to receive such
severance benefits (the period referred to in either clause (i) or (ii), the
"Noncompetition Period"), the Employee shall not undertake any employment or
activity (including, but not limited to, consulting services) with a Competitor
(as defined below), in any geographic areas in which the Company or its
Subsidiaries operate (the "Market Area") where the loyal and complete
fulfillment of the duties of the competitive employment or activity would call
upon the Employee to reveal, to make judgments on or otherwise use any
confidential business information or trade secrets of the business of the
Company or any Subsidiary to which the Employee had access during his employment
with the Company. For purposes of this Section, "Competitor" shall refer to any
health maintenance organization, health care management company, physician
group, insurance company or similar entity that provides managed health care or
related services similar to those provided by the Company or any Subsidiary.
9.2 In addition, the Employee agrees that, during the
Noncompetion Period applicable to the Employee following termination of
employment with the Company, the Employee shall not, directly or indirectly,
solicit, interfere with, hire, offer to hire or induce any person, who is or was
an employee of the Company or any of its Subsidiaries at the time of such
solicitation, interference, hiring, offering to hire or inducement, to
discontinue his or her relationship with the Company or any of its Subsidiaries
or to accept employment by, or enter into a business relationship with, the
Employee or any other entity or person.
9.3 It is hereby further agreed that if any court of competent
jurisdiction shall determine that the restrictions imposed in this Section 9 are
unreasonable (including, but not limited to, the definition of Market Area or
Competitor or the time period during which this provision is applicable), the
parties hereto hereby agree to any restrictions that such court would find to be
reasonable under the circumstances.
9.4 The Employee acknowledges that the services to be rendered by
him/her to the Company are of a special and unique character, which gives this
Agreement a peculiar value to the Company, the loss of which may not be
reasonably or adequately compensated for by damages in an action at law, and
that a material breach or threatened breach by him/her of any of the provisions
contained in this Section 9 will cause the Company irreparable injury. Employee
therefore agrees that the Company may be entitled, in addition to the remedies
set forth above in this Section and any other right or remedy, to a temporary,
preliminary and permanent injunction, without the necessity of proving the
inadequacy of monetary damages or the posting of any bond or security, enjoining
or restraining Employee from any such violation or threatened violations.
10. MISCELLANEOUS.
10.1 ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement between the parties and supercedes any and all other agreements,
whether oral or written, between the parties hereto with respect to the subject
matter hereof. In this connection, it is expressly agreed that (a) the Existing
Severance Payment Agreement shall be superceded by this Agreement and have no
futher force or effect and (b) all severance payment provisions and provisions
dealing with the application of Section 280G (of the Code) limitations set forth
in the Existing Employment Letter Agreement shall be superseded by this
Agreement and have no further force or effect. However, it is agreed that
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all other terms and conditions contained in the Existing Employment Letter
Agreement not referenced in sub-clause (b) of this Section 10.1 (including, but
not limited to, provisions dealing with relocation matters and the Company's
SERP) shall continue in full force and effect through the term thereof. Each
party to this Agreement acknowledges than no representations, inducements,
promises or agreements, oral or written, have been made by any party or anyone
acting on behalf of any party that are not embodied herein, and that no other
agreement, statement or promise not contained in this Agreement shall be valid
or binding.
10.2 RIGHT TO TERMINATE EMPLOYMENT. It is hereby agreed that the
relationship between the Company and Employee is merely an "at-will" employment
relationship and that nothing in this Agreement shall confer upon Employee the
right to continue in the employment of the Company or affect any right which the
Company has to terminate the employment of Employee.
10.3 AMENDMENTS. This Agreement may not be amended or terminated
other than by a written instrument signed by the party against whom enforcement
of such amendment or termination is sought. No amendments to this Agreement or
interpretations hereof or any waivers or modifications of any of the provisions
hereof may be made on behalf of the Company without the approval of the Board of
Directors of the Company or the Compensation and Stock Option Committee of the
Board of Directors of the Company.
10.4 WAIVER. No waiver of any default under this Agreement shall
constitute or operate as waiver of any subsequent default, and no delay, failure
or omission in exercising or enforcing any right, privilege or option hereunder
shall constitute a waiver, abandonment or relinquishment thereof. No waiver of
any provision hereof by either party hereto shall be deemed to have been made
unless or until such waiver shall have been reduced to writing and signed by the
party making such waiver. Failure by either party to enforce any of the terms,
covenants or conditions of this Agreement for any length of time or from time to
time shall not be deemed to waive or decrease the rights of such party to insist
thereafter upon strict performance by the other party.
10.5 SUCCESSORS; BINDING AGREEMENT.
(a) This Agreement shall not be terminated by any merger or
consolidation of the Company whereby the Company is or is not the surviving or
resulting corporation or as a result of any transfer of all or substantially all
of the assets of the Company. In the event of any such
merger, consolidation or transfer of assets, the provisions of this Agreement
shall be binding upon the surviving or resulting corporation or the person or
entity to which such assets are transferred.
(b) The Company agrees that concurrently with any merger,
consolidation or transfer of assets referred to in paragraph (a) of this Section
10.5, it will cause any successor or transferee unconditionally to assume, by
written instrument delivered to the Employee (or his beneficiary or estate), all
of the obligations of the Company hereunder. Failure of the Company to obtain
such assumption prior to the effectiveness of any such merger, consolidation or
transfer of assets shall be a breach of this Agreement and shall entitle the
Employee to compensation and other benefits from the Company in the same amount
and on the same terms as the Employee would be entitled hereunder if the
Employee's employment were terminated following a Change of Control other than
by the Company for Cause. For purposes of implementing the foregoing, the date
on which any such merger, consolidation or transfer becomes effective shall be
deemed the date of termination.
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(c) This Agreement shall inure to the benefit of and be enforceable
by the Employee's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If the Employee shall
die while any amounts would be payable to the Employee hereunder had the
Employee continued to live, all such amounts, unless otherwise provided herein,
shall be paid in accordance with the terms of this Agreement to such person or
persons appointed in writing by the Employee to receive such amounts or, if no
person is so appointed, to the Employee's estate.
10.6 NOTICES.
(a) For purposes of this Agreement, all notices and other
communications required or permitted hereunder shall be in writing and shall be
deemed to have been duly given when delivered or five days after deposit in the
United States mail, certified and return receipt requested, postage prepaid,
addressed (i) if to the Employee, to the most recent address set forth in the
Company's personnel files of the Employee, and if to the Company, to Foundation
Health Systems, Inc., 21650 Oxnard Street, Woodland Hills, CA 91367, attention:
General Counsel, or (ii) to such other address as either party may have
furnished to the other in writing in accordance herewith, except that notices of
change of address shall be effective only upon receipt.
(b) A written notice of the Employee's date of termination by the
Company or the Employee, as the case may be, to the other, shall (i) indicate
the specific termination provision in this Agreement relied upon, (ii) to the
extent applicable, set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of the Employee's employment under
the provision so indicated and (iii) specify the termination date (which date
shall be not less than 15 days after the giving of such notice). The failure by
the Employee or the Company to set forth in such notice any fact or circumstance
which contributes to a showing of Good Reason or Cause shall not waive any right
of the Employee or the Company hereunder or preclude the Employee or the Company
from asserting such fact or circumstance in enforcing the Employee's or the
Company's rights hereunder.
10.7 FULL SETTLEMENT.
(a) The Company's obligation to make any payments provided for in
this Agreement and otherwise to perform its obligations hereunder shall not be
affected by any set-off, counterclaim, recoupment, defense or other claim, right
or action which the Company may have against the Employee or others. In no
event shall the Employee be obligated to seek other employment or take any other
action by way of mitigation of the amounts payable to the Employee under any of
the provisions of this Agreement, and such amounts shall not be reduced whether
or not the Employee obtains other employment.
(b) The Company's obligation to make any payment provided for in
this Agreement shall be expressly subject to Employee entering into a full
release of all claims against the Company substantially in the form of the
Waiver and Release of Claims attached as EXHIBIT A hereto. Employee hereby
expressly agrees to execute such a Waiver and Release of Claims upon his or her
termination of employment. It is acknowledged that such Waiver and Release of
Claims contains various other obligations of Employee, including but not limited
to certain obligations to cooperate with and assist the Company in the
preparation for the defense of any actual or threatened third party claim,
investigation or proceeding that pertains to matters under Employee's
supervision or control
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while he/she was an officer or employee of the Company or one of its
subsidiaries and to forego certain competitive activity with the Company.
10.8 EMPLOYMENT WITH SUBSIDIARIES. Employment with the Company
for purposes of this Agreement shall include employment with any corporation or
other entity in which the Company has a direct or indirect ownership interest of
50% or more of the total combined voting power of the then outstanding
securities of such corporation or other entity entitled to vote generally in the
election of directors.
10.9 GOVERNING LAW; VALIDITY. The interpretation, construction
and performance of this Agreement shall be governed by and construed and
enforced in accordance with the internal laws of the State of Delaware without
regard to the principle of conflicts of laws. The invalidity or
unenforceability of any provision of this Agreement shall not affect the
validity or enforceability of any other provisions of this Agreement, which
other provisions shall remain in full force and effect.
10.10 This Agreement may be executed in two or more counterparts,
each of which shall be deemed to be an original and all of which together shall
constitute one and the same instrument.
10.11 SURVIVAL AND ENFORCEMENT. Sections 8 and 9 of this Agreement
and any rights and remedies arising out of this Agreement shall survive and
continue in full force and effect in accordance with the respective terms
thereof, notwithstanding any termination of this Agreement or the Employee's
employment. The parties agree that the Company would be damaged irreparably in
the event any provision of Sections 8 or 9 of this Agreement were not performed
in accordance with its terms or were otherwise breached and that money damages
would be an inadequate remedy for any such nonperformance or breach. Therefore,
the Company or its successors or assigns shall be entitled, in addition to other
rights and remedies existing in their favor, to an injunction or injunctions to
prevent any breach or threatened breach of any of such provisions and to enforce
such provisions specifically (without posting a bond or other security).
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
FOUNDATION HEALTH SYSTEMS, INC.
By:
----------------------------------
Name: Jay M. Gellert
Title: President and Chief Executive Officer
-------------------------------------
Employee: [ name ]
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EXHIBIT A
FORM OF
WAIVER AND RELEASE OF CLAIMS
This WAIVER AND RELEASE OF CLAIMS (this "Release") is made and entered into
by and between Foundation Health Systems, Inc. and it affiliates and
subsidiaries (hereinafter referred to as the "Company") and ______________
(hereinafter referred to as the "Employee").
WHEREAS, the Company and Employee are parties to a Severance Payment
Agreement dated as of December 4, 1998 (the "Severance Payment Agreement"), and
are entering into this Release pursuant to Section ____ of the Severance Payment
Agreement as a condition to Employee's receipt of a severance payment thereunder
(capitalized terms used but not defined herein shall have the meanings set forth
in the Severance Payment Agreement).
NOW, THEREFORE, the Company and Employee agree as follows:
1. Employee's employment with the Company will terminate on _________________.
Upon termination of employment, Employee will not represent to anyone that
he or she is an employee of the Company and will not say or do anything
purporting to bind the Company.
2. Employee's termination of employment with the Company shall be considered a
[describe type of termination] under Section ___ of the Severance Payment
Agreement, and Employee is therefore eligible to receive a lump sum payment
equal to ___ times Base Salary and Benefits for a period of _____ after
termination.
3. In partial consideration of the Company providing Employee those benefits
and payments set forth above and as required by and in the Severance
Payment Agreement as a condition to receive such payments and benefits,
Employee freely and voluntarily enters into this Release and by signing
this Release Employee, on his/her own behalf and on behalf of his or her
heirs, beneficiaries, successors, representatives, trustees, administrators
and assigns, hereby waives and releases the Company, and each of its past,
present and future officers, directors, shareholders, employees,
consultants, accountants, attorneys, agents, managers, insurers, sureties,
parent and sister corporations, divisions, subsidiary corporations and
entities, partners, joint venturers, affiliates, beneficiaries, successors,
representatives and assigns, from any and all claims, demands, damages,
debts, liabilities, controversies, obligations, actions or causes of action
of any nature whatsoever, whether based on tort, statute, contract,
indemnity, rescission or any other theory or recovery, including but not
limited to claims arising under federal, state or local laws prohibiting
discrimination in employment, including Title VII of the Civil Rights Act
of 1964, as amended, the Civil Rights Act of 1866, as amended, claims of
disability discrimination under the Americans with Disabilities Act, the
Age Discrimination in Employment Act, as amended ("ADEA"), the Worker
Adjustment and Retraining Notification Act ("WARN"), the California Fair
Employment and Housing Act, the California Labor Code and the California
Constitution (all as amended) or claims growing out of any legal
restrictions on the Company's right to terminate its employees and whether
for compensatory, punitive, equitable or other relief,
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whether known, unknown, suspected or unsuspected, against the Company,
including without limitation claims which may have arisen or may in the
future arise in connection with any event which occurred on or before the
date of Employee's execution of this Relase. The provisions in this
paragraph are not intended to prohibit Employee from filing a claim for
unemployment insurance.
4. Employee expressly waives any right or claim of right to assert hereafter
that any claim, demand, obligation and/or cause of action has, through
ignorance, oversight or error, been omitted from the terms of this Release.
Employee makes this waiver with full knowledge of his/her rights and with
specific intent to release both his/her known and unknown claims, and
therefore specifically waives the provisions of Section 1542 of the Civil
Code of California or other similar provisions of any other applicable law,
which reads as follows:
"A general release does not extend to claims which the
creditor does not know or suspect to exist in his favor
at the time of executing the release, which if known by
him must have materially affected his settlement with the
debtor."
. Employee understands and acknowledges the significance and consequence of
this Release and of such specific waiver of Section 1542, and expressly
agrees that this Agreement shall be given full force and effect according
to each and all of its express terms and provisions, including those
relating to unknown and unsuspected claims, demands, obligations and causes
of action herein above specified.
5. Employee shall not initiate or cause to be initiated against the Company
any compliance review, suit, action, investigation or proceeding of any
kind, or voluntarily participate in same, individually or as a
representative, witness or member of a class, under contract, law or
regulation, federal, state or local, pertaining to any matter related to
his/her employment with the Company, unless Employee first cooperates in
making his/her allegations known to the Company for the Company to take
corrective action at a time and place designated by the Company. In
addition, Employee shall, without further compensation, cooperate with and
assist the Company in the investigation of, preparation for or defense of
any actual or threatened third party claim, investigation or proceeding
involving the Company or its predecessors or affiliates and arising from or
relating to, in whole or in part, Employee's employment with the Company or
its predecessors or affiliates for which the Company requests Employee's
assistance, which cooperation and assistance shall include, but not be
limited to, providing testimony and assisting in information and document
gathering efforts. In this connection, it is agreed that the Company will
use its reasonable best efforts to assure that any request for such
cooperation will not unduly interfere with Employee's other material
business and personal obligations and commitments.
6. Employee agrees he or she will return to the Company immediately upon
termination any building key(s), security pass or other access or
identification cards and any Company property that was in his or her
possession, including but not limited to any documents, credit cards,
computer equipment, mobile phones or data files. Employee agrees to clear
all expense accounts and pay all amounts owed on any corporate credit
card(s) which the Company previously issued to Employee.
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7. Employee shall not, without the Company's written consent by an authorized
representative, at any time prior or subsequent to the execution of this
Release, disclose, use, remove or copy any confidential, trade secret or
proprietary information he/she acquired during the course of his/her
employment by the Company, including without limitation, any technical,
actuarial, economic, financial, procurement, provider, customer,
underwriting, contractual, managerial, marketing or other information of
any type that has economic value in the business in which the Company is
engaged, but not including any previously published information or other
information generally in the public domain.
8. In addition to any other part or term of this Release or the Severance
Payment Agreement, Employee agrees that he or she will not, (a) for a
period of one (1) year from the date of this Agreement, irrespective of the
reason for the termination, either directly or indirectly, on his or her
own behalf or on behalf of any other person: 1) make known to any person,
firm, corporation or other entity of any type, the names and addresses of
any of the Company's customers, enrollees or providers or any other
information pertaining to them; or 2) disrupt, solicit or influence or
attempt to solicit, disrupt or influence any of the Company's customers,
employees, providers, vendors, agents or independent contractors with whom
the Employee became acquainted during the course of employment or service
for the purpose of terminating such a person's or entity's relationship
with the Company or causing such a person or entity to associate with a
competitor of the Company, and (b) for the six month period following the
Termination Date, undertake any employment or activity prohibited by
Section 9 of the Severance Payment Agreement. The prohibitions of this
paragraph are not intended to deny employment opportunities within the
Employee's field of employment but are limited only to those prohibitions
necessary to protect the Company from unfair competition.
9. Any developments or discoveries by Employee during the course of his or her
employment with the Company through the date of execution of this Release
resulting in patents, lists of customers, trade secrets, specialized
know-how or other intellectual property useful in the then current business
of the Company shall be for the sole benefit of the Company.
10. Nothing contained herein shall be construed as an admission of any wrongful
act, including but not limited to violation of any contract, express or
implied, or any federal, state or local employment laws or regulations, and
nothing contained herein shall be used for any purpose except in
proceedings related to the enforcement of this Release or the Severance
Payment Agreement.
11. If any part or term of this Release is held invalid or unenforceable, such
invalidity or
unenforceability shall not affect in any way the validity or enforceability
of any other part or term of this Release.
12. The Employee acknowledges that he/she has had an opportunity to consult and
be represented by counsel of his/her own choosing in the review of this
Release, and that he/she has been advised by the Company to do so, that the
Employee is fully aware of this Release and of its legal effect, that the
preceding paragraphs recite the sole consideration for this Release, and
that Employee enters into this Release freely, without coercion, and based
on the Employee's
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own judgment and not in reliance upon any representation or promise made by
the other party, other than those contained herein. There may be no
modification of the terms of this Release except in writing signed by the
parties hereto.
13. This Release shall be construed and governed by the laws of the State of
Delaware.
EMPLOYEE ACKNOWLEDGES BY SIGNING BELOW that (i) Employee has not relied
upon any representations, written or oral, not set forth in this Release; (ii)
at the time Employee was given this Release Employee was informed in writing by
the Company that (a) Employee had at least [21 DAYS] [45 DAYS (IF IN CONNECTION
WITH AN EXISTING INCENTIVE OR EMPLOYMENT TERMINATION PROGRAM OFFERED TO A GROUP
OR CLASS OF EMPLOYEES)] in which to consider whether Employee would sign the
Release and (b) Employee should consult with an attorney before signing the
Release; and (iii) Employee had an opportunity to consult with an attorney and
either had such consultations or has freely decided to sign this Release without
consulting an attorney. [IF EMPLOYEE IS AGE 40 OR OLDER AND THE 45 DAY
CONSIDERATION PERIOD APPLIES (I.E., THE EMPLOYMENT TERMINATION IS IN CONNECTION
WITH THE TERMINATION OF A GROUP OR CLASS OF EMPLOYEES), THEN THE FOLLOWING
ACKNOWLEDGMENT SHOULD BE INCLUDED:] [Employee also acknowledges that at the time
Employee was given this Release Employee was given written notice of the
eligibility criteria for the program and the time limits applicable to the
program, the job titles and ages (or dates of birth) of all individuals eligible
for the program and the ages of the individuals in the same job classification
or organizational unit who are not eligible for the program].
Employee further acknowledges that he or she may revoke acceptance of this
Release by delivering a letter of revocation within seven (7) days after the
date set forth below addressed to: FHS Corporate Legal Department, 21650 Oxnard
Street, Woodland Hills, California 91367.
Finally, Employee acknowledges that he or she understands that this Release
will not become effective until the eighth (8th) day following his or her
signing this Release and that if Employee does not revoke his or her acceptance
of the terms of this Release within the seven (7) day period following the date
on which Employee signs this Release, this Release will be binding and
enforceable.
IN WITNESS WHEREOF, the parties hereto have executed this Release as of the
dates set forth below.
Employee Foundation Health Systems, Inc.
By: [ EXHIBIT COPY ] By: [EXHIBIT COPY ]
------------------------- -------------------------
Name: Name:
Title:
Dated: [TO BE INSERTED] Dated: [TO BE INSERTED]
---------------------- ----------------------
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Ex. 10.23
SEVERANCE PAYMENT AGREEMENT
This Severance Payment Agreement (this "Agreement") is entered into as of
September 15, 1998, between Foundation Health Systems, Inc., a Delaware
corporation (the "Company"), on the one hand, and J. Robert Bruce ("Employee"),
on the other hand.
WHEREAS, the Company currently employs Employee as its President and Chief
Operating Officer FHS Central Division; and
WHEREAS, the Company and the Employee desire to enter into this Agreement
to provide for the continued employment of the Employee by the Company upon the
terms and conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the Company and Employee hereto agree as follows:
1. TERM OF AGREEMENT. The term of this Agreement (the "Covered Period")
shall commence on the date hereof (the "Effective Date") and continue throughout
Employee's term of employment with the Company. Any payments to be made
pursuant to Section 3 hereof shall only be made if Employee is terminated by the
Company without Cause or terminated by Employee with Good Reason as provided in
said Section 3.
2. DUTIES OF EMPLOYEE. Employee shall serve as President and Chief
Operating Officer FHS Central Division. During the term of employment, except
as otherwise provided herein, Employee shall devote his/her entire business
time, attention and effort to the business of the Company and shall use his/her
reasonable best efforts to promote the interests of the Company.
3. TERMINATION OF EMPLOYMENT.
3.1 TERMINATION BY THE COMPANY WITHOUT CAUSE. The Company may
terminate Employee's employment without Cause (as defined below) at any time.
In the event that the Company does so terminate Employee's employment without
Cause at any time within two (2) years after a Change of Control (as defined
below) of the Company Employee shall nevertheless be entitled, as a severance
allowance, to (i) continuation of all medical, health, disability, life and
accident insurance maintained for Employee's benefit immediately prior to the
date of Employee's termination (collectively, "Benefits") for a period of three
(3) years from the date of termination and (ii) a lump sum cash payment equal to
three (3) times the base salary ("Base Salary") of the Employee in effect
immediately prior to the date of Employee's termination. In the event that the
Company does so terminate Employee's employment without Cause at any time that
is not within two (2) years after a Change of Control of the Company, Employee
shall nevertheless be entitled, as a severance allowance, to (i) continuation of
all Benefits for a period of one (1) year from the date of termination and (ii)
a lump sum cash payment equal to one (1) times the Base Salary of the Employee
in effect immediately prior to the date of Employee's termination.
<PAGE>
3.2 TERMINATION BY THE COMPANY FOR CAUSE. The Company may terminate
Employee's employment for Cause at any time without notice. In the event of
such termination, Employee shall not be eligible to receive any payments set
forth in this Section 3. For purposes of this Agreement, Cause shall include,
without limitation, (a) an act of dishonesty causing harm to the Company, (b)
the knowing disclosure of confidential information relating to the Company's
business, (c) habitual drunkenness or narcotic drug addiction, (d) conviction of
a felony or a misdemeanor involving moral turpitude, (e) willful refusal to
perform or gross neglect of the duties assigned to Employee, (f) the willful
breach of any law that, directly or indirectly, affects the Company, (g) a
material breach by the Employee following a Change of Control of those duties
and responsibilities of the Employee that do not differ in any material respect
from the duties and responsibilities of the Employee during the 90-day period
immediately prior to such Change of Control (other than as a result of
incapacity due to physical or mental illness) which is demonstrably willful and
deliberate on the Employee's part, which is committed in bad faith or without
reasonable belief that such breach is in the best interests of the Company and
which is not remedied in a reasonable period of time after receipt of written
notice form the Company specifying such breach, or (h) breach of the provisions
of Section 9 of this Agreement.
3.3 VOLUNTARY TERMINATION BY EMPLOYEE WITHOUT GOOD REASON.
Notwithstanding anything to the contrary in this Agreement, whether express or
implied, Employee may at any time terminate his/her employment for any reason by
giving the Company fourteen (14) days prior written notice of the effective date
of termination. In the event that Employee's employment with the Company is
voluntarily terminated by Employee without Good Reason (as defined below),
Employee shall not be eligible to receive any payments set forth in this
Section 3.
3.4 VOLUNTARY TERMINATION BY EMPLOYEE WITH GOOD REASON.
Notwithstanding the preceding Section 3.3, in the event that Employee's
employment with the Company is voluntarily terminated by Employee with Good
Reason within two (2) years after a Change of Control of the Company, Employee
shall nevertheless be entitled, as a severance allowance, to (i) continuation of
his/her Benefits for a period of three (3) years from the date of termination
and (ii) a lump sum cash payment equal to three (3) times Base Salary of the
Employee in effect immediately prior to the date of Employee's termination;
provided that, in the event the Company requests, in writing, prior to such
voluntary termination that Employee continue in the employ of the Company for a
period of time up to 90 days following such Change of Control, then Employee
shall forfeit such severance allowance if he/she voluntarily leaves the employ
of the Company prior to the expiration of such period of time. For purposes of
this Agreement, Good Reason shall mean any of the following which occurs
subsequent to the Effective Date:
(i) a demotion or a substantial reduction in the scope of Employee's
position, duties, responsibilities or status with the Company or any new
parent company of the Company, or any removal of Employee from or any
failure to reelect Employee to any of the positions (or functional
equivalent of such positions) referred to in the introductory
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paragraphs hereof, except in connection with the termination of his/her
employment for Disability (as defined below), normal retirement or Cause or
by Employee voluntarily other than for Good Reason;
(ii) a reduction by the Company in Employee's Base Salary or a
material reduction in the benefits or perquisites available to Employee as
in effect immediately prior to any such reduction;
(iii) a relocation of Employee to a work location more than fifty
(50) miles from Employee's work location immediately prior to such proposed
relocation; provided that such proposed relocation results in a materially
greater commute for Employee based on Employee's residence immediately
prior to such relocation; or
(iv) the failure of the Company to obtain the assumption agreement
from any successor as contemplated in Section 12.5 of this Agreement.
For purposes of this Agreement, Change of Control shall mean any of the
following which occurs subsequent to the Effective Date:
(a) Any person (as such term is defined under Section 13(d)(3) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")),
corporation or other entity (other than the Company or any employee benefit
plan sponsored by the Company or any of its subsidiaries) is or becomes the
beneficial owner (as such term is defined in Rule 13d-3 under the Exchange
Act) of securities of the Company representing twenty percent (20%) or more
of the combined voting power of the outstanding securities of the Company
which ordinarily (and apart from rights accruing under special
circumstances) have the right to vote in the election of directors
(calculated as provided in paragraph (d) of such Rule 13d-3 in the case of
rights to acquire the Company's securities) (the "Securities");
(b) As a result of a tender offer, merger, sale of assets or other
major transaction, the persons who are directors of the Company immediately
prior to such transaction cease to constitute a majority of the Board of
Directors of the Company (or any successor corporations) immediately after
such transaction;
(c) The Company is merged or consolidated with any other person,
firm, corporation or other entity and, as a result, the shareholders of the
Company, as determined immediately before such transaction, own less than
eighty percent (80%) of the outstanding Securities of the surviving or
resulting entity immediately after such transaction;
(d) A tender offer or exchange offer is made and consummated for the
ownership of twenty percent (20%) or more of the outstanding Securities of
the Company;
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(e) The Company transfers substantially all its assets to another
person, firm, corporation or other entity that is not a wholly-owned
subsidiary of the Company; or
(f) The Company enters into a management agreement with another
person, firm, corporation or other entity that is not a wholly-owned
subsidiary of the Company and such management agreement extends hiring and
firing authority over Employee to an individual or organization other than
the Company.
4. PAYMENTS UPON TERMINATION OF EMPLOYMENT. In the event that the
Employee's employment is terminated for any reason, then the Company shall pay
to the Employee (or his/her beneficiaries or estate) in addition to any payments
that may be due under Section 3 above or Section 5 below, within 30 days
following the date of termination, a cash amount equal to the sum of the
Employee's annual Base Salary from the Company through the date of termination,
any compensation previously deferred by the Employee (together with any interest
and earnings thereon), any vacation pay accrued prior to the termination date,
any reimbursable expenses incurred by the Employee prior to the termination date
and any other compensatory plan, arrangement or program payment to which
Employee may be entitled, in each case to the extent not theretofore paid.
5. TERMINATION OF EMPLOYEE DUE TO DEATH OR DISABILITY. In the event that
Employee's employment is terminated at any time during the Covered Period due to
death or Disability, Employee (or his beneficiaries or estate) shall
nevertheless be entitled, as a severance allowance, to (i) continuation of all
Benefits for a period of one (1) year from the date of termination and (ii) a
lump sum cash payment equal to one (1) times the Base Salary of the Employee in
effect immediately prior to the date of Employee's termination. For purposes of
this Agreement, a termination for "Disability" shall mean a termination of
Employee's employment due to the Employee's absence from his duties with the
Company on a full-time basis for at least 180 consecutive days as a result of
the Employee's incapacity due to physical or mental illness.
6. WITHHOLDING TAXES. The Company shall withhold from all payments due to
the Employee (or his/her beneficiaries or estate) hereunder all taxes which, by
applicable federal, state, local or other law, the Company may reasonably
determine should be withheld therefrom.
7. TAX CONSEQUENCES. The Company shall have no obligation to any person
entitled to the benefits of this Agreement with respect to any tax obligation
any such person may incur as a result of or attributed to this Agreement or
arising from any payments made or to be made hereunder. Nothing contained
herein shall be construed as a warranty or representation of any kind by the
Company to Employee with respect to the tax consequences of him or her with
respect to this Agreement.
8. LIMITATION ON PAYMENTS BY THE COMPANY. Solely for the purposes of the
computation of payments to be made pursuant to this Agreement and
notwithstanding any other provisions hereof, payments to the Employee under this
Agreement (other than the payments required to be made pursuant to Section 4
hereof) shall be reduced (but not below zero) so that the present value, as
determined in accordance with Section 280G(d)(4) of the Internal Revenue Code of
1986, as amended (the "Code"), of such payments plus any other payments that
must be taken
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into account for purposes of any computation relating to the Employee under
Section 280G(b)(2)(a)(ii) of the Code, shall not, in the aggregate, exceed 2.99
times the Employee's "base amount," as such term is defined in Section
280G(b)(3) of the Code. Notwithstanding any other provision hereof, no
reduction in payments under the limitation contained in the immediately
preceding sentence shall be applied to payments hereunder which do not
constitute "excess parachute payments" within the meaning of the Code. Any
payments in excess of the limitation of this Section 8 or otherwise determined
to be "excess parachute payments" made to the Employee hereunder shall be deemed
to be overpayments which shall constitute an amount owing from the Employee to
the Company with interest from the date of receipt by the Employee to the date
of repayment (or offset) at the applicable federal rate under Section 1274(d) of
the Code, compounded semi-annually, which shall be payable to the Company upon
demand; PROVIDED, HOWEVER, that no repayment shall be required under this
sentence if in the written opinion of tax counsel satisfactory to the Employee
and delivered to the Employee and the Company such repayment does not allow such
overpayment to be excluded for federal income and excise tax purposes from the
Employee's income for the year of receipt or afford the Employee a compensating
federal income tax deduction for the year of repayment.
9. CONFIDENTIALITY. Employee acknowledges and agrees that, during the
period of his/her employment by the Company, he/she has and will continue to
have access to and become acquainted with various trade secrets, including, but
not limited to, various procedures, practices, information regarding the
organization and operation of the Company, confidential customer information,
marketing methods, compilations of information and records that are owned by the
Company and that are regularly used in the operation of its business. The
parties stipulate that such items of information are important, material and
confidential trade secrets and affect the successful conduct of the Company's
business and its goodwill, and that any breach of this Section 9 shall be a
material breach of this Agreement. All documents, memoranda, reports, files,
correspondence, lists and other written and graphic records affecting or
relating to the Company's business that Employee may prepare, use, observe,
possess or control shall be and remain the Company's sole property. Employee
shall not disclose any of these trade secrets, directly or indirectly, or use
them in any way, either during the term of this Agreement or at any time
thereafter, except as required in the course of his employment by the Company or
as otherwise authorized in writing by the Company. In the event of the
termination of Employee's employment with the Company, Employee shall deliver
promptly to the Company all written or graphic records containing such trade
secrets or confidential information of the Company.
10. ENFORCEMENT. The parties hereto agree that the Company would be
damaged irreparably in the event any provision of Section 9 of this Agreement
were not performed in accordance with its terms or were otherwise breached and
that money damages would be inadequate remedy for any such nonperformance or
breach. Therefore, the Company or its successors or assigns shall be entitled,
in addition to other rights and remedies existing in their favor, to an
injunction or injunctions to prevent any breach or threatened breach of any of
such provisions and to enforce such provisions specifically (without posting a
bond or other security).
11. SURVIVAL. Sections 9 and 10 of this Agreement and any rights and
remedies arising out of this Agreement shall survive and continue in full force
and effect in accordance with the
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respective terms thereof, notwithstanding any termination of this Agreement or
the Employee's employment.
12. MISCELLANEOUS.
12.1 ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement between the parties and supersedes any and all other agreements,
whether oral or written, between the parties hereto with respect to the subject
matter hereof except that existing written severance arrangements or policies
applicable to Employee shall continue in full force and effect for the term
thereof to the extent, but only to the extent, such written arrangements or
policies afford Employee a greater severance payment benefit than that provided
for herein. Each party to this Agreement acknowledges that no representations,
inducements, promises or agreements, oral or written, have been made by any
party or anyone acting on behalf of any party that are not embodied herein, and
that no other agreement, statement or promise not contained in this Agreement
shall be valid or binding.
12.2 RIGHT TO TERMINATE EMPLOYMENT. It is hereby agreed that the
relationship between the Company and Employee is merely an "at-will" employment
relationship and that nothing in this Agreement shall confer upon Employee the
right to continue in the employment of the Company or affect any right which the
Company has to terminate the employment of Employee.
12.3 AMENDMENTS. This Agreement may not be amended or terminated
other than by a written instrument signed by the party against whom enforcement
of such amendment or termination is sought. No amendments to this Agreement or
interpretations hereof or any waivers or modifications of any of the provisions
hereof may be made on behalf of the Company without the approval of the Board of
Directors or the Compensation and Stock Option Committee of the Company.
12.4 WAIVER. No waiver of any default under this Agreement shall
constitute or operate as waiver of any subsequent default, and no delay, failure
or omission in exercising or enforcing any right, privilege or option hereunder
shall constitute a waiver, abandonment or relinquishment thereof. No waiver of
any provision hereof by either party hereto shall be deemed to have been made
unless or until such waiver shall have been reduced to writing and signed by the
party making such waiver. Failure by either party to enforce any of the terms,
covenants or conditions of this Agreement for any length of time or from time to
time shall not be deemed to waive or decrease the rights of such party to insist
thereafter upon strict performance by the other party.
12.5 SUCCESSORS; BINDING AGREEMENT.
(a) This Agreement shall not be terminated by any merger or
consolidation of the Company whereby the Company is or is not the surviving or
resulting corporation or as a result of any transfer of all or substantially all
of the assets of the Company. In the event of any such merger, consolidation or
transfer of assets, the provisions of this Agreement shall be binding
upon the surviving or resulting corporation or the person or entity to which
such assets are
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transferred.
(b) The Company agrees that concurrently with any merger,
consolidation or transfer of assets referred to in paragraph (a) of this Section
12.5, it will cause any successor or transferee unconditionally to assume, by
written instrument delivered to the Employee (or his beneficiary or estate), all
of the obligations of the Company hereunder. Failure of the Company to obtain
such assumption prior to the effectiveness of any such merger, consolidation or
transfer of assets shall be a breach of this Agreement and shall entitle the
Employee to compensation and other benefits from the Company in the same amount
and on the same terms as the Employee would be entitled hereunder if the
Employee's employment were terminated following a Change of Control other than
by the Company for Cause. For purposes of implementing the foregoing, the date
on which any such merger, consolidation or transfer becomes effective shall be
deemed the date of termination.
(c) This Agreement shall inure to the benefit of and be enforceable
by the Employee's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If the Employee shall
die while any amounts would be payable to the Employee hereunder had the
Employee continued to live, all such amounts, unless otherwise provided herein,
shall be paid in accordance with the terms of this Agreement to such person or
persons appointed in writing by the Employee to receive such amounts or, if no
person is so appointed, to the Employee's estate.
12.6 NOTICES.
(a) For purposes of this Agreement, all notices and other
communications required or permitted hereunder shall be in writing and shall be
deemed to have been duly given when delivered or five days after deposit in the
United States mail, certified and return receipt requested, postage prepaid,
addressed (i) if to the Employee, to the most recent address set forth in the
Company's personnel files of the Employee, and if to the Company, to Foundation
Health Systems, Inc., 21600 Oxnard Street, Woodland Hills, CA 91367, attention:
General Counsel, or (ii) to such other address as either party may have
furnished to the other in writing in accordance herewith, except that notices of
change of address shall be effective only upon receipt.
(b) A written notice of the Employee's date of termination by the
Company or the Employee, as the case may be, to the other, shall (i) indicate
the specific termination provision in this Agreement relied upon, (ii) to the
extent applicable, set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of the Employee's employment under
the provision so indicated and (iii) specify the termination date (which date
shall be not less than 15 days after the giving of such notice). The failure by
the Employee or the Company to set forth in such notice any fact or circumstance
which contributes to a showing of Good Reason or Cause shall not waive any right
of the Employee or the Company hereunder or preclude the Employee or the Company
from asserting such fact or circumstance in enforcing the Employee's or the
Company's rights hereunder.
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12.7 FULL SETTLEMENT.
(a) The Company's obligation to make any payments provided for in
this Agreement and otherwise to perform its obligations hereunder shall not be
affected by any set-off, counterclaim, recoupment, defense or other claim, right
or action which the Company may have against the Employee or others. In no
event shall the Employee be obligated to seek other employment or take any other
action by way of mitigation of the amounts payable to the Employee under any of
the provisions of this Agreement, and such amounts shall not be reduced whether
or not the Employee obtains other employment.
(b) The Company's obligation to make any payment provided for in this
Agreement shall be expressly subject to Employee entering into a full release of
all claims against the Company substantially in the form of the Waiver and
Release of Claims attached as EXHIBIT A hereto. Employee hereby expressly
agrees to execute such a Waiver and Release of Claims upon his or her
termination of employment.
12.8 EMPLOYMENT WITH SUBSIDIARIES. Employment with the Company for
purposes of this Agreement shall include employment with any corporation or
other entity in which the Company has a direct or indirect ownership interest of
50% or more of the total combined voting power of the then outstanding
securities of such corporation or other entity entitled to vote generally in the
election of directors.
12.9 GOVERNING LAW; VALIDITY. The interpretation, construction and
performance of this Agreement shall be governed by and construed and enforced in
accordance with the internal laws of the State of Delaware without regard to the
principle of conflicts of laws. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provisions of this Agreement, which other provisions shall remain in
full force and effect.
12.10 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original and all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
FOUNDATION HEALTH SYSTEMS, INC.
By: Jay M. Gellert
----------------------------------------------
Name: Jay M. Gellert
Title: President and Chief Executive Officer
J. Robert Bruce
-------------------------------------------------
Employee: J. Robert Bruce
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Ex. 10.24
SEVERANCE PAYMENT AGREEMENT
This Severance Payment Agreement (this "Agreement") is entered into as of
April 6, 1998, between Foundation Health Systems, Inc., a Delaware corporation
(the "Company"), on the one hand, and Maurice A. Costa ("Employee"), on the
other hand.
WHEREAS, the Company currently employs Employee as its President of FHS
Workers' Compensation Division; and
WHEREAS, the Company and the Employee desire to enter into this Agreement
to provide for the continued employment of the Employee by the Company upon the
terms and conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the Company and Employee hereto agree as follows:
1. TERM OF AGREEMENT. The term of this Agreement (the "Covered Period")
shall commence on the date hereof (the "Effective Date") and continue throughout
Employee's term of employment with the Company. Any payments to be made
pursuant to Section 3 hereof shall only be made if Employee is terminated by the
Company without Cause or terminated by Employee with Good Reason as provided in
said Section 3.
2. DUTIES OF EMPLOYEE. Employee shall serve as President of FHS Workers'
Compensation Division of the Company. During the term of employment, except as
otherwise provided herein, Employee shall devote his/her entire business time,
attention and effort to the business of the Company and shall use his/her
reasonable best efforts to promote the interests of the Company.
3. TERMINATION OF EMPLOYMENT.
3.1 TERMINATION BY THE COMPANY WITHOUT CAUSE. The Company may
terminate Employee's employment without Cause (as defined below) at any time.
In the event that the Company does so terminate Employee's employment without
Cause at any time within two (2) years after a Change of Control (as defined
below) of the Company Employee shall nevertheless be entitled, as a severance
allowance, to (i) continuation of all medical, health, disability, life and
accident insurance maintained for Employee's benefit immediately prior to the
date of Employee's termination (collectively, "Benefits") for a period of three
(3) years from the date of termination and (ii) a lump sum cash payment equal to
three (3) times the base salary ("Base Salary") of the Employee in effect
immediately prior to the date of Employee's termination. In the event that the
Company does so terminate Employee's employment without Cause at any time that
is not within two (2) years after a Change of Control of the Company, Employee
shall nevertheless be entitled, as a severance allowance, to (i) continuation of
all Benefits for a period of one (1) year from the date of termination and (ii)
a lump sum cash payment equal to one (1) times the Base Salary of the Employee
in effect immediately prior to the date of Employee's termination.
<PAGE>
3.2 TERMINATION BY THE COMPANY FOR CAUSE. The Company may terminate
Employee's employment for Cause at any time without notice. In the event of
such termination, Employee shall not be eligible to receive any payments set
forth in this Section 3. For purposes of this Agreement, Cause shall include,
without limitation, (a) an act of dishonesty causing harm to the Company, (b)
the knowing disclosure of confidential information relating to the Company's
business, (c) habitual drunkenness or narcotic drug addiction, (d) conviction of
a felony or a misdemeanor involving moral turpitude, (e) willful refusal to
perform or gross neglect of the duties assigned to Employee, (f) the willful
breach of any law that, directly or indirectly, affects the Company, (g) a
material breach by the Employee following a Change of Control of those duties
and responsibilities of the Employee that do not differ in any material respect
from the duties and responsibilities of the Employee during the 90-day period
immediately prior to such Change of Control (other than as a result of
incapacity due to physical or mental illness) which is demonstrably willful and
deliberate on the Employee's part, which is committed in bad faith or without
reasonable belief that such breach is in the best interests of the Company and
which is not remedied in a reasonable period of time after receipt of written
notice form the Company specifying such breach, or (h) breach of the provisions
of Section 9 of this Agreement.
3.3 VOLUNTARY TERMINATION BY EMPLOYEE WITHOUT GOOD REASON.
Notwithstanding anything to the contrary in this Agreement, whether express or
implied, Employee may at any time terminate his/her employment for any reason by
giving the Company fourteen (14) days prior written notice of the effective date
of termination. In the event that Employee's employment with the Company is
voluntarily terminated by Employee without Good Reason (as defined below),
Employee shall not be eligible to receive any payments set forth in this
Section 3.
3.4 VOLUNTARY TERMINATION BY EMPLOYEE WITH GOOD REASON.
Notwithstanding the preceding Section 3.3, in the event that Employee's
employment with the Company is voluntarily terminated by Employee with Good
Reason within two (2) years after a Change of Control of the Company, Employee
shall nevertheless be entitled, as a severance allowance, to (i) continuation of
his/her Benefits for a period of three (3) years from the date of termination
and (ii) a lump sum cash payment equal to three (3) times Base Salary of the
Employee in effect immediately prior to the date of Employee's termination;
provided that, in the event the Company requests, in writing, prior to such
voluntary termination that Employee continue in the employ of the Company for a
period of time up to 90 days following such Change of Control, then Employee
shall forfeit such severance allowance if he/she voluntarily leaves the employ
of the Company prior to the expiration of such period of time. For purposes of
this Agreement, Good Reason shall mean any of the following which occurs
subsequent to the Effective Date:
(i) a demotion or a substantial reduction in the scope of Employee's
position, duties, responsibilities or status with the Company or any new
parent company of the Company, or any removal of Employee from or any
failure to reelect Employee to any of the positions (or functional
equivalent of such positions) referred to in the introductory
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paragraphs hereof, except in connection with the termination of his/her
employment for Disability (as defined below), normal retirement or Cause or
by Employee voluntarily other than for Good Reason;
(ii) a reduction by the Company in Employee's Base Salary or a
material reduction in the benefits or perquisites available to Employee as
in effect immediately prior to any such reduction;
(iii) a relocation of Employee to a work location more than fifty
(50) miles from Employee's work location immediately prior to such proposed
relocation; provided that such proposed relocation results in a materially
greater commute for Employee based on Employee's residence immediately
prior to such relocation; or
(iv) the failure of the Company to obtain the assumption agreement
from any successor as contemplated in Section 12.5 of this Agreement.
For purposes of this Agreement, Change of Control shall mean any of the
following which occurs subsequent to the Effective Date:
(a) Any person (as such term is defined under Section 13(d)(3) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")),
corporation or other entity (other than the Company or any employee benefit
plan sponsored by the Company or any of its subsidiaries) is or becomes the
beneficial owner (as such term is defined in Rule 13d-3 under the Exchange
Act) of securities of the Company representing twenty percent (20%) or more
of the combined voting power of the outstanding securities of the Company
which ordinarily (and apart from rights accruing under special
circumstances) have the right to vote in the election of directors
(calculated as provided in paragraph (d) of such Rule 13d-3 in the case of
rights to acquire the Company's securities) (the "Securities");
(b) As a result of a tender offer, merger, sale of assets or other
major transaction, the persons who are directors of the Company immediately
prior to such transaction cease to constitute a majority of the Board of
Directors of the Company (or any successor corporations) immediately after
such transaction;
(c) The Company is merged or consolidated with any other person,
firm, corporation or other entity and, as a result, the shareholders of the
Company, as determined immediately before such transaction, own less than
eighty percent (80%) of the outstanding Securities of the surviving or
resulting entity immediately after such transaction;
(d) A tender offer or exchange offer is made and consummated for the
ownership of twenty percent (20%) or more of the outstanding Securities of
the Company;
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(e) The Company transfers substantially all its assets to another
person, firm, corporation or other entity that is not a wholly-owned
subsidiary of the Company; or
(f) The Company enters into a management agreement with another
person, firm, corporation or other entity that is not a wholly-owned
subsidiary of the Company and such management agreement extends hiring and
firing authority over Employee to an individual or organization other than
the Company.
4. PAYMENTS UPON TERMINATION OF EMPLOYMENT. In the event that the
Employee's employment is terminated for any reason, then the Company shall pay
to the Employee (or his/her beneficiaries or estate) in addition to any payments
that may be due under Section 3 above or Section 5 below, within 30 days
following the date of termination, a cash amount equal to the sum of the
Employee's annual Base Salary from the Company through the date of termination,
any compensation previously deferred by the Employee (together with any interest
and earnings thereon), any vacation pay accrued prior to the termination date,
any reimbursable expenses incurred by the Employee prior to the termination date
and any other compensatory plan, arrangement or program payment to which
Employee may be entitled, in each case to the extent not theretofore paid.
5. TERMINATION OF EMPLOYEE DUE TO DEATH OR DISABILITY. In the event that
Employee's employment is terminated at any time during the Covered Period due to
death or Disability, Employee (or his beneficiaries or estate) shall
nevertheless be entitled, as a severance allowance, to (i) continuation of all
Benefits for a period of one (1) year from the date of termination and (ii) a
lump sum cash payment equal to one (1) times the Base Salary of the Employee in
effect immediately prior to the date of Employee's termination. For purposes of
this Agreement, a termination for "Disability" shall mean a termination of
Employee's employment due to the Employee's absence from his duties with the
Company on a full-time basis for at least 180 consecutive days as a result of
the Employee's incapacity due to physical or mental illness.
6. WITHHOLDING TAXES. The Company shall withhold from all payments due to
the Employee (or his/her beneficiaries or estate) hereunder all taxes which, by
applicable federal, state, local or other law, the Company may reasonably
determine should be withheld therefrom.
7. TAX CONSEQUENCES. The Company shall have no obligation to any person
entitled to the benefits of this Agreement with respect to any tax obligation
any such person may incur as a result of or attributed to this Agreement or
arising from any payments made or to be made hereunder. Nothing contained
herein shall be construed as a warranty or representation of any kind by the
Company to Employee with respect to the tax consequences of him or her with
respect to this Agreement.
8. LIMITATION ON PAYMENTS BY THE COMPANY. Solely for the purposes of the
computation of payments to be made pursuant to this Agreement and
notwithstanding any other provisions hereof, payments to the Employee under this
Agreement (other than the payments required to be made pursuant to Section 4
hereof) shall be reduced (but not below zero) so that the present value, as
determined in accordance with Section 280G(d)(4) of the Internal Revenue Code of
1986, as amended (the "Code"), of such payments plus any other payments that
must be taken
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into account for purposes of any computation relating to the Employee under
Section 280G(b)(2)(a)(ii) of the Code, shall not, in the aggregate, exceed 2.99
times the Employee's "base amount," as such term is defined in Section
280G(b)(3) of the Code. Notwithstanding any other provision hereof, no
reduction in payments under the limitation contained in the immediately
preceding sentence shall be applied to payments hereunder which do not
constitute "excess parachute payments" within the meaning of the Code. Any
payments in excess of the limitation of this Section 8 or otherwise determined
to be "excess parachute payments" made to the Employee hereunder shall be deemed
to be overpayments which shall constitute an amount owing from the Employee to
the Company with interest from the date of receipt by the Employee to the date
of repayment (or offset) at the applicable federal rate under Section 1274(d) of
the Code, compounded semi-annually, which shall be payable to the Company upon
demand; PROVIDED, HOWEVER, that no repayment shall be required under this
sentence if in the written opinion of tax counsel satisfactory to the Employee
and delivered to the Employee and the Company such repayment does not allow such
overpayment to be excluded for federal income and excise tax purposes from the
Employee's income for the year of receipt or afford the Employee a compensating
federal income tax deduction for the year of repayment.
9. CONFIDENTIALITY. Employee acknowledges and agrees that, during the
period of his/her employment by the Company, he/she has and will continue to
have access to and become acquainted with various trade secrets, including, but
not limited to, various procedures, practices, information regarding the
organization and operation of the Company, confidential customer information,
marketing methods, compilations of information and records that are owned by the
Company and that are regularly used in the operation of its business. The
parties stipulate that such items of information are important, material and
confidential trade secrets and affect the successful conduct of the Company's
business and its goodwill, and that any breach of this Section 9 shall be a
material breach of this Agreement. All documents, memoranda, reports, files,
correspondence, lists and other written and graphic records affecting or
relating to the Company's business that Employee may prepare, use, observe,
possess or control shall be and remain the Company's sole property. Employee
shall not disclose any of these trade secrets, directly or indirectly, or use
them in any way, either during the term of this Agreement or at any time
thereafter, except as required in the course of his employment by the Company or
as otherwise authorized in writing by the Company. In the event of the
termination of Employee's employment with the Company, Employee shall deliver
promptly to the Company all written or graphic records containing such trade
secrets or confidential information of the Company.
10. ENFORCEMENT. The parties hereto agree that the Company would be
damaged irreparably in the event any provision of Section 9 of this Agreement
were not performed in accordance with its terms or were otherwise breached and
that money damages would be inadequate remedy for any such nonperformance or
breach. Therefore, the Company or its successors or assigns shall be entitled,
in addition to other rights and remedies existing in their favor, to an
injunction or injunctions to prevent any breach or threatened breach of any of
such provisions and to enforce such provisions specifically (without posting a
bond or other security).
11. SURVIVAL. Sections 9 and 10 of this Agreement and any rights and
remedies arising out of this Agreement shall survive and continue in full force
and effect in accordance with the
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respective terms thereof, notwithstanding any termination of this Agreement or
the Employee's employment.
12. MISCELLANEOUS.
12.1 ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement between the parties and supersedes any and all other agreements,
whether oral or written, between the parties hereto with respect to the subject
matter hereof except that existing written severance arrangements or policies
applicable to Employee shall continue in full force and effect for the term
thereof to the extent, but only to the extent, such written arrangements or
policies afford Employee a greater severance payment benefit than that provided
for herein. Each party to this Agreement acknowledges that no representations,
inducements, promises or agreements, oral or written, have been made by any
party or anyone acting on behalf of any party that are not embodied herein, and
that no other agreement, statement or promise not contained in this Agreement
shall be valid or binding.
12.2 RIGHT TO TERMINATE EMPLOYMENT. It is hereby agreed that the
relationship between the Company and Employee is merely an "at-will" employment
relationship and that nothing in this Agreement shall confer upon Employee the
right to continue in the employment of the Company or affect any right which the
Company has to terminate the employment of Employee.
12.3 AMENDMENTS. This Agreement may not be amended or terminated
other than by a written instrument signed by the party against whom enforcement
of such amendment or termination is sought. No amendments to this Agreement or
interpretations hereof or any waivers or modifications of any of the provisions
hereof may be made on behalf of the Company without the approval of the Board of
Directors or the Compensation and Stock Option Committee of the Company.
12.4 WAIVER. No waiver of any default under this Agreement shall
constitute or operate as waiver of any subsequent default, and no delay, failure
or omission in exercising or enforcing any right, privilege or option hereunder
shall constitute a waiver, abandonment or relinquishment thereof. No waiver of
any provision hereof by either party hereto shall be deemed to have been made
unless or until such waiver shall have been reduced to writing and signed by the
party making such waiver. Failure by either party to enforce any of the terms,
covenants or conditions of this Agreement for any length of time or from time to
time shall not be deemed to waive or decrease the rights of such party to insist
thereafter upon strict performance by the other party.
12.5 SUCCESSORS; BINDING AGREEMENT.
(a) This Agreement shall not be terminated by any merger or
consolidation of the Company whereby the Company is or is not the surviving or
resulting corporation or as a result of any transfer of all or substantially all
of the assets of the Company. In the event of any such
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merger, consolidation or transfer of assets, the provisions of this Agreement
shall be binding upon the surviving or resulting corporation or the person or
entity to which such assets are transferred.
(b) The Company agrees that concurrently with any merger,
consolidation or transfer of assets referred to in paragraph (a) of this Section
12.5, it will cause any successor or transferee unconditionally to assume, by
written instrument delivered to the Employee (or his beneficiary or estate), all
of the obligations of the Company hereunder. Failure of the Company to obtain
such assumption prior to the effectiveness of any such merger, consolidation or
transfer of assets shall be a breach of this Agreement and shall entitle the
Employee to compensation and other benefits from the Company in the same amount
and on the same terms as the Employee would be entitled hereunder if the
Employee's employment were terminated following a Change of Control other than
by the Company for Cause. For purposes of implementing the foregoing, the date
on which any such merger, consolidation or transfer becomes effective shall be
deemed the date of termination.
(c) This Agreement shall inure to the benefit of and be enforceable
by the Employee's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If the Employee shall
die while any amounts would be payable to the Employee hereunder had the
Employee continued to live, all such amounts, unless otherwise provided herein,
shall be paid in accordance with the terms of this Agreement to such person or
persons appointed in writing by the Employee to receive such amounts or, if no
person is so appointed, to the Employee's estate.
12.6 NOTICES.
(a) For purposes of this Agreement, all notices and other
communications required or permitted hereunder shall be in writing and shall be
deemed to have been duly given when delivered or five days after deposit in the
United States mail, certified and return receipt requested, postage prepaid,
addressed (i) if to the Employee, to the most recent address set forth in the
Company's personnel files of the Employee, and if to the Company, to Foundation
Health Systems, Inc., 21600 Oxnard Street, Woodland Hills, CA 91367, attention:
General Counsel, or (ii) to such other address as either party may have
furnished to the other in writing in accordance herewith, except that notices of
change of address shall be effective only upon receipt.
(b) A written notice of the Employee's date of termination by the
Company or the Employee, as the case may be, to the other, shall (i) indicate
the specific termination provision in this Agreement relied upon, (ii) to the
extent applicable, set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of the Employee's employment under
the provision so indicated and (iii) specify the termination date (which date
shall be not less than 15 days after the giving of such notice). The failure by
the Employee or the Company to set forth in such notice any fact or circumstance
which contributes to a showing of Good Reason or Cause shall not waive any right
of the Employee or the Company hereunder or preclude the Employee or the Company
from asserting such fact or circumstance in enforcing the Employee's or the
Company's rights hereunder.
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12.7 FULL SETTLEMENT.
(a) The Company's obligation to make any payments provided for in
this Agreement and otherwise to perform its obligations hereunder shall not be
affected by any set-off, counterclaim, recoupment, defense or other claim, right
or action which the Company may have against the Employee or others. In no
event shall the Employee be obligated to seek other employment or take any other
action by way of mitigation of the amounts payable to the Employee under any of
the provisions of this Agreement, and such amounts shall not be reduced whether
or not the Employee obtains other employment.
(b) The Company's obligation to make any payment provided for in this
Agreement shall be expressly subject to Employee entering into a full release of
all claims against the Company substantially in the form of the Waiver and
Release of Claims attached as EXHIBIT A hereto. Employee hereby expressly
agrees to execute such a Waiver and Release of Claims upon his or her
termination of employment.
12.8 EMPLOYMENT WITH SUBSIDIARIES. Employment with the Company for
purposes of this Agreement shall include employment with any corporation or
other entity in which the Company has a direct or indirect ownership interest of
50% or more of the total combined voting power of the then outstanding
securities of such corporation or other entity entitled to vote generally in the
election of directors.
12.9 GOVERNING LAW; VALIDITY. The interpretation, construction and
performance of this Agreement shall be governed by and construed and enforced in
accordance with the internal laws of the State of Delaware without regard to the
principle of conflicts of laws. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provisions of this Agreement, which other provisions shall remain in
full force and effect.
12.10 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original and all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
FOUNDATION HEALTH SYSTEMS, INC.
By: /s/ B. Curtis Westen
--------------------------------------------------
Name: B. Curtis Westen, Esq.
Title: Senior Vice President, General Counsel
and Secretary
Maurice Costa
-----------------------------------------------------
Employee: Maurice A. Costa
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TRUST UNDER THE FOUNDATION HEALTH SYSTEMS, INC. DEFERRED
COMPENSATION PLAN
This Trust Agreement (the "Trust Agreement") is made and dated this ___
day of September, 1998 by and between Foundation Health Systems, Inc., a
Delaware corporation, (the "Employer") and Union Bank of California (the
"Trustee").
PURPOSE
(a) WHEREAS, the Employer [and its designated affiliates, each such
affiliate being included in the definition of Employer where the context
requires] has adopted the plan or plans attached as Exhibit A or which
subsequently may be designated in writing by the Employer (the "Plans")
pursuant to which the Employer expects to incur unfunded deferred
compensation liabilities with respect to certain employees of the Employer.
(b) WHEREAS, Employer wishes to establish a trust (hereinafter called
"Trust") and to contribute to the Trust assets that shall be held therein,
subject to the claims of Employer's creditors in the event of Employer's
Insolvency, as herein defined, until the amounts payable pursuant to the
Plans are paid to Plan participants in such manner and at such times as
specified in the Plan(s);
(c) WHEREAS, it is the intention of the parties that this Trust shall
constitute an unfunded arrangement and shall not affect the status of the
Plan(s) as an unfunded plan maintained for the purpose of providing deferred
compensation for a select group of management or highly compensated employees
for purposes of Title I of the Employee Retirement Income Security Act of
1974;
(d) WHEREAS, it is the intention of Employer to make contributions to
the Trust to provide itself with a source of funds to assist it in the
meeting of its liabilities under the Plan(s);
NOW, THEREFORE, the parties do hereby establish the Trust and agree that
the Trust shall be comprised, held and disposed of as follows:
<PAGE>
ARTICLE I
ESTABLISHMENT OF TRUST
1.1 ESTABLISHMENT OF TRUST. The Employer hereby deposits with Trustee in
Trust, which shall become the principal of the Trust to be held,
administered and disposed of by Trustee as provided in this Trust
Agreement.
REVOCABILITY
1.2 TRUST IS IRREVOCABLE. The Trust hereby established shall be
irrevocable.
1.3 The Trust is intended to be a grantor trust, of which
Employer is the grantor, within the meaning of Subpart E, Part I,
Subchapter J, Chapter 1, Subtitle A of the Internal Revenue Code of
1986, as amended, and shall be construed accordingly.
1.4 All money and property of every kind held by Trustee
under this Trust Agreement (the Trust Fund ), including the
principal of the Trust, and any earnings thereon shall be held
separate and apart from other funds of Employer and shall be used
exclusively for the uses and purposes of Participants and
Employer's general creditors as herein set forth. Plan
participants and beneficiaries of deceased participants
(hereinafter called "Participants") shall have no preferred claim
on, or any beneficial ownership interest in, any assets of the
Trust. Any rights created under the Plan(s) and this Trust
Agreement shall be mere unsecured contractual rights of
Participants against Employer. Any assets held by the Trust will be
subject to the claims of Employer's general creditors under federal
and state law in the event of Insolvency, as defined in Article XI
herein.
1.5 PAYMENTS TO EMPLOYER
Employer shall have no right or power to direct Trustee
to return to Employer or to divert to others any of the Trust
assets before all payment(s) of benefits have been made to
Participants pursuant to the terms of the Plan(s).
1.6 SIGNING AUTHORITY; ADMINISTRATOR. The Employer shall
certify in writing to the Trustee the names and specimen signatures
of all those who are authorized to act as or on behalf of the
Employer, and those names and specimen signatures shall be updated
as necessary by a duly authorized official of the Employer. The
Employer shall promptly notify the Trustee if any person so
designated is no longer authorized to act on behalf of the
Employer. Until the Trustee receives written notice that a person
is no longer authorized to act on behalf of the Employer, the
Trustee may continue to rely on the Employer's designation of such
person.
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1.7 ACCEPTANCE OF ASSETS; TRUST COMPOSITION. All contributions or
transfers shall be received by the Trustee in cash or in any other
property acceptable to the Trustee. The Trust shall consist of the
contributions and transfers received by the Trustee, together with the
income and earnings from them and any increments to them. The Trustee
shall hold, manage and administer the Trust in accordance with this Trust
Agreement without distinction between principal and income.
CONTRIBUTIONS
1.8 Employer, in its sole discretion, may at any time, or from
time to time, make additional deposits of cash or other property in
trust with Trustee to augment the principal to be held,
administered and disposed of by Trustee as provided in this Trust
Agreement. Neither Trustee nor any Participant shall have any
right to compel such additional deposits.
1.9 NO DUTY OF TRUSTEE TO ENFORCE COLLECTION. Notwithstanding anything
herein to the contrary, Trustee shall have no authority or obligation to
enforce the collection of any contribution or transfer to the Trust.
1.10 PLAN ADMINISTRATION. The Employer and not the Trustee shall
be responsible for administering the Plans (including without
limitation determining the rights of the Employer's employees to
participate in a Plan, determining any Participant's right to
benefits under such Plan), and issuing statements to Participants
of their interest in the Trust and Plan.
1.11 CHANGE IN CONTROL. For purposes of this Trust Agreement, a
"Change in Control" shall be deemed to have occurred if (i) any
person (as such term is used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended), other than a trustee
(such as Trustee) or other fiduciary holding securities under an
employee benefit plan of the Company or a corporation owned
directly or indirectly by the stockholders of the Company in
substantially the same proportions as their ownership of stock of
the Company, becomes the beneficial owner (as defined in Rule
13d-3 under said Act), directly or indirectly, of securities of the
Company representing 20% or more of the total voting power
represented by the Company's then outstanding voting securities;
(ii) during any period of two consecutive years, individuals who at
the beginning of such period constitute the Board of Directors of
the Company and any new director whose election by the Board of
Directors or nomination for election by the Company's stockholders
was approved by a vote of at least two-thirds (2/3) of the
directors then still in office who either were directors at the
beginning of the period or whose election or nomination for
election was previously so approved, cease for any reason to
constitute a majority thereof; or (iii) the stockholders of the
Company approve a merger or consolidation of the Company with any
other corporation, other than a merger or consolidation which would
result in the voting securities of the Company outstanding
immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities
of the surviving entity) at least 80% of the total voting power
represented by the voting securities of the Company or such
surviving entity outstanding immediately after such merger or
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<PAGE>
consolidation, or the stockholders of the Company approve a plan of
complete liquidation of the Company or an agreement for the sale or
disposition by the Company of (in one transaction or series of
transactions) all or substantially all of the Company's assets.
For purposes of this subsection, voting securities means any
securities which vote generally in the election of directors.
The Trustee shall have no independent duty to determine
that a Change in Control has occurred and shall not be required to
take any action or refrain from taking any actions hereunder which
are based on a Change in Control having occurred prior to the time
it receives written notice from the Employer or a Participant that
a Change in Control has occurred or will occur and has had a
reasonable opportunity to determine whether a Change in Control, in
fact, has occurred.
At the Trustee's request, the Employer shall furnish such
evidence as may be necessary to enable the Trustee to determine
whether a Change in Control has occurred. In taking or refraining
from any action under this Trust Agreement, the Trustee may rely on
its determination, including an opinion of counsel (who may be
counsel to the Employer or the Trustee), that a Change in Control
has occurred. The Trustee's determination as to whether a Change
in Control has occurred shall be binding and conclusive on all
persons.
1.12 PARTICIPANT ACCOUNTS. The Employer shall maintain in an
equitable manner a separate account for each Participant under a
Plan ( Account ) in which it shall keep a record of the share of
such Participant under such Plan in the Trust. The Employer may
appoint a third-party administrator to maintain such Accounts. A
Participant's Account under a Plan shall represent the portion of
the Trust allocated to provide such Participant benefits under
such Plan. If the Trustee is directed by the Employer to segregate
the Trust into separate Accounts for each Participant, at the time
it makes a contribution to the Trust, the Employer shall certify to
the Trustee the amount of such contribution being made in respect
of each Participant under each Plan.
The Trustee may rely on information provided to the Trustee by
the Employer and the Trustee's and Employer's determination of
Account values shall be conclusive and binding on all interested
parties.
1.13 TAX REPORTING. The Employer and not the Trustee shall be
responsible for all income tax reporting and calculation and
payment of any wage withholding or other tax requirements in
connection with the Trust and any contributions thereto, and any
income earned thereby, and payments or distributions therefrom, and
Employer agrees to indemnify and defend Trustee against any
liability for any such taxes, interest or penalties resulting from
or relating to the Trust.
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ARTICLE II
INVESTMENTS
2.1 EMPLOYER IS INVESTMENT MANAGER. The Employer shall have the
power over and responsibility for the management and investment of
Trust assets. The Employer may appoint an Investment Manager to
direct the investment of Trust assets, provided the Trustee is
notified in writing prior to such appointment.
The Trustee shall have no duty to make recommendations
regarding Trust assets and shall retain assets until directed in
writing by Employer or Investment Manager to dispose of them.
2.2 FUNDING POLICY AND INVESTMENT GUIDELINES. The Employer shall
have the responsibility for establishing and carrying out a funding
policy and method, consistent with the objectives of the Plans,
taking into consideration the Plans' short-term and long-term
financial needs. The Trustee's responsibility for investment and
diversification of the assets in the portion of the Trust for which
the Trustee has investment discretion shall be subject to, and is
limited by, the investment guidelines issued to it by the Employer.
It is understood that, unless otherwise agreed in writing, the
Employer, rather than the Trustee, shall be responsible for the
overall diversification of Trust assets.
2.3 DISPOSITION OF INCOME. During the term of this Trust, all
income received by the Trust, net of expenses and taxes, shall be
accumulated and reinvested.
ARTICLE III
TRUSTEE'S POWERS
3.1 GENERAL TRUSTEE'S POWERS. Trustee shall have, without
exclusion, all powers conferred on Trustees by applicable law,
unless expressly provided otherwise herein, provided, however, that
if an insurance policy is held as an asset of the Trust, Trustee
shall have no power to name a beneficiary of the policy other than
the Trust, to assign the policy (as distinct from conversion of the
policy to a different form) other than to a successor Trustee, or
to loan to any person the proceeds of any borrowing against such
policy.
(a) To invest and reinvest the Trust or any part
thereof in any one or more kind, type, class, item or parcel
of property, real, personal or mixed, tangible or intangible;
or in any one or more kind, type, class, item or issue of
investment or security; or in any one or more kind, type
class or item of obligation, secured or unsecured; or in any
combination of them;
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(b) To acquire, sell and exercise options to buy
securities ("call" options) and to acquire, sell and exercise
options to sell securities ("put" options);
(c) To buy, sell, assign, transfer, acquire, loan,
lease (for any purpose, including beyond the life of this
Trust), exchange and in any other manner to acquire, manage,
deal with and dispose of all or any part of the Trust
property, for cash or credit;
(d) To make deposits with any bank or savings and loan
institution, including any such facility of the Trustee or an
affiliate thereof, provided that the deposit bears a
reasonable rate of interest;
(e) To retain all or any portion of the Trust in cash
temporarily awaiting investment or for the purpose of making
distributions or other payments, without liability for
interest thereon, notwithstanding trustee's receipt of float;
(f) To borrow money for any purpose connected with the
protection, preservation or improvement of the Trust from any
source other than a party in interest of the Plans, with or
without giving security; to pay interest; to issue promissory
notes and to secure the repayment thereof by pledging all or
any part of the Trust assets;
(g) To take all of the following actions: to vote
proxies of any stocks, bonds or other securities; to give
general or special proxies or powers of attorney with or
without power of substitution; to exercise any conversion
privileges, subscription rights or other options, and to make
any payments incidental thereto; to consent to or otherwise
participate in corporate reorganizations or other changes
affecting corporate securities and to delegate discretionary
powers and to pay any assessments or charges in connection
therewith; and generally to exercise any of the powers of an
owner with respect to stocks, bonds, securities or other
property held in the Trust;
(h) To make, execute, acknowledge and deliver any and
all documents of transfer and conveyance and any and all
other instruments that may be necessary or appropriate to
carry out the powers herein granted;
(i) To raze or move existing buildings; to make
ordinary or extraordinary repairs, alterations or additions
in and to buildings; to construct buildings and other
structures and to install fixtures and equipment therein;
(j) To pay or cause to be paid from the Trust any and
all real or personal property taxes, income taxes or other
taxes or assessments of any or all kinds levied or assessed
upon or with respect to the Trust or the Plans;
(k) Subject to the limitations of 3.1, to hold term or
ordinary life insurance contracts or to acquire annuity
contracts on the lives of Participants
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(but in the case of conflict between any such contract and a
Plan, the terms of the Plan shall prevail); to pay from the
Trust the premiums on such contracts; to distribute,
surrender or otherwise dispose of such contracts; to pay the
proceeds, if any, of such contracts to the proper persons in
the event of the death of the insured Participant; to enter
into, modify, renew and terminate annuity contracts of
deposit administration, of immediate participation or other
group or individual type with one or more insurance companies
and to pay or deposit all or any part of the Trust
thereunder; to provide in any such contract for the
investment of all or any part of funds so deposited with the
insurance company in securities under separate accounts; to
exercise and claim all rights and benefits granted to the
contract holder by any such contracts. All payments and
exercise of all powers with respect to insurance contracts
shall be solely on the direction of Employer;
(l) To exercise all the further rights, powers, options
and privileges granted, provided for, or vested in trustees
generally under applicable federal or state laws, as amended
from time to time, it being intended that, except as
otherwise provided in this Trust, the powers conferred upon
the Trustee herein shall not be construed as being in
limitation of any authority conferred by law, but shall be
construed as in addition thereto.
(m) Notwithstanding any powers granted to Trustee
pursuant to this Trust Agreement or to applicable law,
Trustee shall not have any power that could give this Trust
the objective of carrying on a business and dividing the
gains therefrom, within the meaning of section 301.7701-2 of
the Procedure and Administrative Regulations promulgated
pursuant to the Internal Revenue Code.
3.2 ADDITIONAL POWERS. In addition to the other powers enumerated above, the
Trustee is authorized and empowered:
(a) To invest funds in any type of interest-bearing
account including, without limitation, time certificates of
deposit or interest-bearing accounts issued by FOUNDATION
HEALTH SYSTEMS, INC. To use other services or facilities
provided by the UnionBanCal Corporation (UNBC), its
subsidiaries or affiliates including Foundation Health
Systems, Inc. (Bank), to the extent allowed by applicable law
and regulation. Such services may include but are not
limited to (1) the placing of orders for the purchase,
exchange, investment or reinvestment of securities through
any brokerage service conducted by, and (2) the purchase of
units of any registered investment company managed or advised
by Bank, UNBC, or their subsidiaries or affiliates and/or for
which Bank, UNBC or their subsidiaries or affiliates act as
custodian or provide other services for a fee, including,
without limitation, the HighMark Group of mutual funds or the
Stepstone Funds. The parties hereby acknowledge that the
Bank may receive fees for such services in addition to the
fees payable under this Agreement. Fee schedules for
additional services shall be delivered to the appropriate
party in advance of the provision of such services.
Independent fiduciary approval of compensation
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being paid to the Bank will be sought in advance to the
extent required under applicable law and regulation.
If Foundation Health Systems, Inc. does not have investment
discretion, the services referred to above, as well as any
additional services, shall be utilized only upon the
appropriate direction of an authorized party.
(b) To cause all or any part of the Trust to be held in
the name of the Trustee (which in such instance need not
disclose its fiduciary capacity) or, as permitted by law, in
the name of any nominee, including the nominee name of any
depository, and to acquire for the Trust any investment in
bearer form; but the books and records of the Trust shall at
all times show that all such investments are a part of the
Trust and the Trustee shall hold evidences of title to all
such investments as are available;
(c) To serve as custodian with respect to the Trust
assets, to hold assets or to hold eligible assets at the
Depository Trust Company or other depository;
(d) To employ such agents and counsel as may be
reasonably necessary in administration and protection of the
Trust assets and to pay them reasonable compensation; to
employ any broker-dealer covered in the self-dealing section,
and pay to such broker-dealer its standard commissions; to
settle, compromise or abandon all claims and demands in favor
of or against the Trust; and to charge any premium on bonds
purchased at par value to the principal of the Trust without
amortization from the Trust, regardless of any law relating
thereto;
(e) To abandon, compromise, contest, arbitrate or
settle claims or demands; to prosecute, compromise and defend
lawsuits, but without obligation to do so, all at the risk
and expense of the Trust;
(f) To permit such inspections of documents at the
principal office of the Trustee as are required by law,
subpoena or demand by United States or state agency during
normal business hours of the Trustee;
(g) To comply with all requirements imposed by law;
(h) To seek written instructions from the Employer on
any matter and await written instructions without incurring
any liability. If at any time the Employer should fail to
give directions to the Trustee, the Trustee may act in the
manner that in its discretion it deems advisable under the
circumstances for carrying out the purposes of this Trust.
Such actions shall be conclusive on the Employer and the
Participants on any matter if written notice of the proposed
action is given to Employer five (5) days prior to the action
being taken, and the Trustee receives no response;
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(i) To compensate such executive, consultant,
actuarial, accounting, investment, appraisal, administrative,
clerical, secretarial, custodial, depository and legal firms,
personnel and other employees or assistants as are engaged by
the Employer in connection with the administration of the
Plans and to pay from the Trust the necessary expenses of
such firms, personnel and assistants, to the extent not paid
by the Employer;
(j) To impose a reasonable charge to cover the cost of
furnishing to Participants statements or documents;
(k) To act upon proper written directions of the
Employer or any Participant including directions given by
photostatic teletransmission using facsimile signature. If
oral instructions are given, to act upon those in Trustee's
discretion prior to receipt of written instructions.
Trustee's recording or lack of recording of any such oral
instructions taken in Trustee's ordinary course of business
shall constitute conclusive proof of Trustee's receipt or
non-receipt of the oral instructions;
(l) To pay from the Trust the expenses reasonably
incurred in the administration of the Trust;
(m) To maintain insurance for such purposes, in such
amounts and with such companies as the Employer shall elect,
including insurance to cover liability or losses occurring by
reason of the acts or omissions of fiduciaries (but only if
such insurance permits recourse by the insurer against the
fiduciary in the case of a breach of a fiduciary obligation
by such fiduciary);
(n) As directed by the Employer, to cause the benefits
provided under the Plans to be paid directly to the persons
entitled thereto under the Plans, and in the amounts and at
the times and in the manner specified by the Plans, and to
charge such payments against the Trust and Accounts with
respect to which such benefits are payable;
(o) To exercise and perform any and all of the other
powers and duties specified in this Trust Agreement or the
Plans; and in addition to the powers listed herein, to do all
other acts necessary or desirable for the proper
administration of the Trust, as though the absolute owner
thereof.
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ARTICLE IV
TRUSTEE AND EMPLOYER DUTIES
4.1 LEGAL DUTIES. The Trustee and Employer shall exercise any of the foregoing
powers from time to time as required by law.
4.2 PAYMENTS TO PARTICIPANTS
(a) Employer shall deliver to Trustee a schedule (the
"Payment Schedule") that indicates the amounts payable in
respect of each Participant, that provides a formula or other
instructions acceptable to Trustee for determining the amount
so payable, the form in which such amount is to be paid (as
provided for or available under the Plan(s)), and the time of
commencement for payment of such amounts. Except as
otherwise provided herein, Trustee shall make payments to the
Participants in accordance with such Payment Schedule. As
directed by Employer, the Trustee shall make provision for
the reporting and withholding of any federal, state or local
taxes that may be required to be withheld with respect to the
payment of benefits pursuant to the terms of the Plan(s) and
shall pay amounts withheld to the appropriate taxing
authorities or determine that such amounts have been
reported, withheld and paid by Employer.
(b) The entitlement of a Participant to benefits under
the Plan(s) shall be determined by Employer or such party as
it shall designate under the Plan(s), and any claim for such
benefits shall be considered and reviewed under the
procedures set out in the Plan(s).
(c) Employer may make payment of benefits directly to
Participants as they become due under the terms of the
Plan(s). Employer shall notify Trustee of its decision to
make payment of benefits directly prior to the time amounts
are payable to Participants. In addition, if the principal
of the Trust, and earnings thereon, are not sufficient to
make payments of benefits in accordance with the terms of the
Plan(s), Employer shall make the balance of each such payment
as it falls due. Trustee shall notify Employer where
principal and earnings are not sufficient. Trustee shall
have no duty or obligation to enforce or compel Employer to
make payments hereunder. Employer may direct Trustee to
reimburse Employer for payments made directly by Employer to
Participants.
(1) In the event payments are made by Employer
directly to Participants, Employer shall have sole
responsibility for the reporting and withholding of any
federal, state, or local taxes that may be required to be
withheld with respect to the payment of benefits pursuant to
the terms of the Plan(s) and shall pay amounts withheld to
the appropriate taxing authority.
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(2) Trustee shall have no duty or responsibility
with respect to the above stated reporting, withholding or
payment of taxes and shall have no responsibility to
determine that Employer has provided for such reporting,
withholding or payment of such taxes.
(3) Employer shall indemnify and hold Trustee harmless
from any and all losses, claims, penalties or damages which
may occur as a result of Trustee following in good faith the
written direction of the Employer to reimburse Employer for
payments made hereunder to Participants and arising from
Employer's tax reporting, withholding and payment obligations
hereunder.
(d) Upon the satisfaction of all liabilities
of the Employer under all Plans to all Participants the
Trustee shall distribute any remaining Trust Fund to the
Employer. Except as provided in (c) above, at no time prior
to the Employer's Insolvency, as defined in Article XI, or
the satisfaction of all liabilities of the Employer under the
Plans in respect of all Participants having Accounts
hereunder shall any part of the Trust revert to the Employer.
4.3 ACCOUNTS AND RECORDS. The Trustee shall keep accurate and detailed
records of all investments, receipts, disbursements and all other
transactions required to be done, including such specific records as shall
be agreed upon in writing between the Employer and the Trustee. All such
accounts, books and records shall be open to inspection and audit at all
reasonable times by the Employer and by the Participants. Within sixty
(60) days after the close of each quarter and Plan year and within sixty
(60) days after the resignation or removal of the Trustee as provided in
Article VI hereof, the Trustee shall render to the Employer a written
account showing in reasonable summary the investments, receipts,
disbursements and other transactions engaged in by the Trustee during the
preceding Plan Year or accounting period with respect to the Trust. Such
account shall set forth the assets and liabilities of the Trust. The
Employer shall have sixty (60) days after the Trustee's mailing of each
such quarterly or final account within which to file with the Trustee
written objections to such account. Upon the expiration of each such
period, the Trustee shall be forever released and discharged from all
liability and accountability to the Employer with respect to the propriety
of its acts and transactions shown in such account except with respect to
any such acts or transactions as to which the Employer files written
objections within such sixty-day period with the Trustee.
Notwithstanding anything herein to the contrary, the Trustee shall
have no duty or responsibility to obtain valuations of any assets of the
Trust Fund, the value of which is not readily determinable on an
established market. Employer shall bear sole responsibility for
determining said valuations and shall be responsible for providing said
valuations to Trustee in a timely manner. Trustee may conclusively rely
on such valuations provided by Employer and shall be indemnified and held
harmless by Employer with respect to such reliance.
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4.4 REPORTS. The Trustee shall file such descriptions and reports and
shall furnish such information and make such other publications,
disclosures, registrations and other filings as are required of the
Trustee by law. The Trustee shall have no responsibility to file reports
or descriptions, publish information or make disclosures, registrations or
other filings unless directed by the Employer.
4.5 FOLLOW EMPLOYER DIRECTION. The Trustee shall have the power and duty
to comply promptly with all proper directions of the Employer.
4.6 INFORMATION TO BE PROVIDED TO TRUSTEE. The Employer shall maintain
and furnish the Trustee with all reports, documents and information as
shall be required by the Trustee to perform its duties and discharge its
responsibilities under this Trust Agreement, including without limitation
a certified copy of each of the Plans and all amendments thereto.
The Trustee shall be entitled to rely on the most recent reports,
documents and information furnished to it by the Employer. The Employer
shall be required to notify the Trustee as to the termination of
employment of any Participant by death, retirement or otherwise.
The Employer shall arrange for each Investment Manager if appointed
pursuant to Section 2.1, and each insurance company issuing contracts
held by the Trustee pursuant to Section 3.1(k), to furnish the Trustee
with such valuations and reports as are necessary to enable the Trustee
to fulfill its obligations under this Trust Agreement, and the Trustee
shall be fully protected in relying upon such valuations and reports.
4.7
(a) PAYMENTS TO PARTICIPANTS. Following a Change in Control, the
Trustee shall not be subject to the provisions of Section 4.2(a) (regarding
payments to Participants directed by the Employer), but rather shall
commence distributions from the separate Account of a Participant upon the
receipt of written notification by the Employer or by the Participant that
such Participant has become entitled to receive benefit payments under a
Plan. Such notification shall include the amount of such payments, the
form and method of payment, the basis for the Participant's claim and the
Participant's name, address and social security number.
The Trustee may take any reasonable steps it deems necessary to
verify that the Participant is entitled to receive the benefits claimed
under the Plans. All benefits payable from the trust to a Participant
under a Plan shall be paid solely from the separate Account established
with respect to such Participant, and only to the extent the amounts
credited to the Participant's Account are sufficient therefor, and such
Participant's Account shall be charged with the amount of such payments.
The Trustee shall have no responsibility for and shall incur no liability
with respect to any payment made pursuant to a direction received in
accordance with this Section 4.7(b) or with respect to the
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Trustee's good faith determination that a Participant is or is not
entitled to the payments claimed hereunder.
(b) RECORDKEEPING AFTER CHANGE IN CONTROL. Upon Change in Control,
the Trustee shall maintain all records regarding the Trust and its
investment and such other Participant records specified in this Trust
Agreement, including the maintenance of the Separate Accounts of each
Participant as provided in Section 1.12. All such records shall be made
available promptly on the request of the Employer. The Trustee shall also
prepare and distribute annual statements to the Participants.
ARTICLE V
RESTRICTIONS ON TRANSFER
5.1 PERSONS TO RECEIVE PAYMENT.
(a) The Trustee shall, except as otherwise provided
in section 4.2(d) and subsection (b) hereunder, pay all amounts
payable hereunder only to the person or persons designated under the
Plans or deposit such amounts to the Participant's checking or
savings account as directed by the Employer and not to any other
person or corporation, and only to the extent of assets held in the
Trust, and shall follow written instructions by the Employer. The
Employer's written instructions, to the Trustee to make
distributions or not to make distributions, and the amount thereof,
shall be conclusive on all Participants.
(b) Should any controversy arise as to the person or
persons to whom any distribution or payment is to be made by the
Trustee, or as to any other matter arising in the administration of
the Plans or Trust, the Trustee may retain the amount in controversy
pending resolution of the controversy or the Trustee may file an
action seeking declaratory relief and/or may interplead the Trust
assets in issue, and name as necessary parties the Employer, the
Participants and/or any or all persons making conflicting demands.
(c) The Trustee shall not be liable for the payment
of any interest or income, except for that earned as a Trust
investment, on any amount withheld or interpleaded under subsection
(b).
(d) The expense of the Trustee for taking any action
under subsection (b) shall be paid to the Trustee from the Trust.
5.2 ASSIGNMENT AND ALIENATION PROHIBITED. Benefits payable to
Participants under this Trust Agreement may not be anticipated,
assigned (either at law or in equity),
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alienated, pledged, encumbered or subjected to attachment,
garnishment, levy, execution or other legal or equitable process.
Notwithstanding the foregoing, the Trust shall at all times remain
subject to the claims of creditors of the Employer in the event the
Employer becomes Insolvent as provided in Article XI.
ARTICLE VI
RESIGNATION, REMOVAL AND SUCCESSION
6.1 RESIGNATION OR REMOVAL OF TRUSTEE. Trustee may resign at any time by
written notice to the Employer, which shall be effective thirty (30) days
after receipt of such notice unless Employer and Trustee agree otherwise.
Prior to a Change in Control, the Employer may remove Trustee upon thirty
(30) days' written notice to the Trustee (which notice may be waived by
the Trustee). Upon and after the occurrence of a Change in Control, the
Trustee may be removed only (i) by the Employer with the written consent
of a majority of Participants; or (ii) by the written notice of a majority
of Participants. Trustee may conclusively rely on Employer's
certification that a majority has consented to the removal of the Trustee.
6.2 DESIGNATION OF SUCCESSOR. Upon notice of the Trustee's
resignation or removal, the Employer shall promptly designate a successor
Trustee who will accept transfer of the assets of the Trust; provided
that, upon and after the occurrence of a Change in Control, such
appointment shall be effected only (i) by the Employer with the written
consent of a majority of the Participants; or (ii) by the written notice
of a majority of the Participants.
If, prior to a Change in Control, no successor Trustee is designated
within thirty (30) days of notice of Trustee's resignation or removal,
then the President and Chief Financial Officer of Employer are hereby
designated as the successor Co-Trustees.
6.3 UPON RESIGNATION or removal of Trustee and appointment of a
successor Trustee, all assets shall subsequently be transferred to the
successor Trustee. The transfer shall be completed as soon as
administratively feasible after receipt of notice of resignation, removal
or transfer and appointment of and acceptance by successor Trustee, unless
Employer extends the time limit.
6.4 COURT APPOINTMENT OF SUCCESSOR. If Trustee resigns or is
removed, a successor shall be appointed, in accordance with Section 6.2
hereof, by the effective date of resignation or removal under paragraph
6.1 of this section. If no such appointment has been made after a Change
in Control, Trustee may apply to a court of competent jurisdiction for
appointment of a successor or for instructions. All expenses of Trustee
in connection with the proceeding shall be allowed as administrative
expenses of the Trust. Until a successor Trustee is appointed, the
Trustee shall be entitled to be compensated for its services according to
its published fee schedule then in effect for acting as Trustee.
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6.5 SUCCESSOR'S POWERS. A successor Trustee shall have the same powers
and duties as those conferred upon the original Trustee hereunder. A
resigning Trustee shall transfer the Trust assets and shall deliver the
assets of the Trust to the successor Trustee as soon as practicable. The
resigning Trustee is authorized, however, to reserve such amount as may be
necessary for the payment of its fees and expenses incurred prior to its
resignation, and the Trust assets shall remain liable to reimburse the
resigning Trustee for all fees and costs, expenses or attorneys' fees or
losses incurred, whether before or after resignation, due solely to
Trustee's holding title to and administration of Trust assets.
6.6 SUCCESSOR'S DUTIES. A successor Trustee shall have no duty to audit
or otherwise inquire into the acts and transactions of its predecessor.
ARTICLE VII
AMENDMENT
7.1 POWER TO AMEND. This Trust Agreement may be amended by a written
instrument executed by Trustee and Employer. No such amendment shall
conflict with the terms of the Plan(s) nor shall it make the Trust
revocable after it has become irrevocable in accordance with Section 1.2.
7.2 LIMITATION ON AMENDMENTS FOLLOWING A CHANGE IN CONTROL. Following a
Change in Control, no amendment signed by the Employer and the Trustee
shall become effective without the written consent of a two-thirds
majority of the Participants then participating in the Plan.
Trustee may conclusively rely on Employer's certification that two-thirds
majority has voted in favor of amendment.
ARTICLE VIII
LIABILITIES
8.1 DECLARATION OF INTENT. To the full extent permitted by law, it is
the intent of this Article to relieve each fiduciary from all liability
for any acts or omissions of any other fiduciary or any other person and
to declare the absence of liabilities of all persons referred to in this
Article to the extent not imposed by law or by provisions of this Trust
Agreement. Each of the following Sections, in declaring such limitation,
is set forth without limiting the generality of this Section but in each
case shall be subject to the provisions, limitations and policies set
forth in this Section.
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8.2 LIABILITY OF THE TRUSTEE.
(a) The Trustee shall have no powers, duties or
responsibilities with regard to the administration of the Plans or
to determine the rights or benefits of any person having or claiming
an interest under the Plans or in the Trust or under this Trust
Agreement or to examine or control any disposition of the Trust or
part thereof which is directed by the Employer, as applicable.
(b) The Trustee shall have no liability for the adequacy of
contributions for the purposes of the Plans or for enforcement of
the payment thereof.
(c) The Trustee shall have no liability for the acts or
omissions of the Employer or Fiduciaries.
(d) The Trustee shall have no liability for following proper
directions of Employer or Employer's designated Fiduciaries, or any
Participant when such directions are made in accordance with this
Trust Agreement and the Plans.
(e) During such period or periods of time, if any, as Employer
or Investment Manager (collectively, "Fiduciary") is directing the
investment and management of Trust assets, the Trustee shall have no
obligation to determine the existence of any conversion, redemption,
exchange, subscription or other right relating to any securities
purchased on the directions of such Fiduciary if notice of any such
right was given prior to the purchase of such securities. If such
notice is given after the purchase of such securities, the Trustee
shall notify such Fiduciary. The Trustee shall have no obligation
to exercise any such right unless it is instructed to exercise such
right, in writing, by the Fiduciary within a reasonable time prior
to the expiration of such right.
(f) During such period or periods of time, if any, as a
Fiduciary is directing the investment and management of Trust
assets, if such Fiduciary directs the Trustee to purchase securities
issued by any foreign government or agency thereof, or by any
corporation domiciled outside of the United States, it shall be the
responsibility of the Fiduciary to advise the Trustee in writing
with respect to any laws or regulations of any foreign countries or
any United States territories or possessions which shall apply, in
any manner whatsoever, to such securities, including, but not
limited to, receipt of dividends or interest by the Trustee for such
securities.
16
<PAGE>
8.3 INDEMNIFICATION.
(a) The Employer hereby agrees to indemnify and hold harmless
the Trustee, its officers, directors, employees or agents, from and
against any and all liabilities, claims for breach of fiduciary duty
or otherwise, demands, damages, costs and expenses, including
reasonable attorney's fees, arising from (i) any act taken or
omitted by the Trustee in good faith in accordance with or due to
the absence of directions from the Employer, its agents, or any Plan
Participant, (ii) any act taken or omitted by a Fiduciary other than
the Trustee in breach of such Fiduciary responsibilities under the
Plan or this Agreement, and (iii) any action taken by the Trustee
pursuant to a notification of an order to purchase or sell
securities issued by Employer or a Plan Participant directly to a
broker or dealer.
(b) If the Trustee is named as a defendant in any lawsuit or
other proceeding involving the Plan or the Trust for any reason
including, without limitation, an alleged breach by the Trustee of
its responsibilities under this Agreement, the Employer hereby
agrees to indemnify the Trustee against all liabilities, costs, and
expenses, including reasonable attorneys' fees, incurred by the
Trustee unless the final judgment entered in the lawsuit or
proceeding holds the Trustee guilty of gross negligence, willful
misconduct, or a breach of fiduciary responsibility. If the final
judgment holds the Trustee guilty of gross negligence, willful
misconduct or a breach of fiduciary responsibility, the Employer
hereby agrees to indemnify the Trustee only against liability in
excess of the Trustee's allocable share of such liability.
(c) The Employer shall have the right, but not the obligation,
to conduct the defense of the Trustee in any legal proceeding
covered by this section. However, any legal counsel selected to
defend the Trustee must be acceptable to the Trustee, and the
Trustee may elect to choose counsel, including in-house counsel,
other than that selected by the Employer. The Employer may satisfy
all or any part of its obligations under this section through
insurance arrangements acceptable to the Trustee.
ARTICLE IX
DURATION, TERMINATION AND REPAYMENTS TO EMPLOYER
9.1 REVOCATION AND TERMINATION. The Trust shall not terminate until the
date on which Participants are no longer entitled to benefits pursuant to
the terms of the Plan(s). Upon termination of the Trust any assets
remaining in the Trust shall be returned to Employer. In the event the
Trust is terminated following the distribution of all payments and
benefits called for herein, from the date of such termination of the Trust
and until the final distribution of the remaining Trust assets, if any,
the Trustee shall continue to have all the powers provided under this
Trust Agreement that are necessary or desirable for the orderly
liquidation and distribution of the Trust.
17
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9.2 DURATION. This Trust shall continue in full force and effect for the
maximum period of time permitted by law and in any event until the
expiration of twenty-one years after the death of the last surviving
person who was living at the time of execution hereof who at any time
becomes a Participant in a Plan, unless this Trust is sooner terminated in
accordance with this Trust Agreement.
9.3 PAYMENTS TO THE EMPLOYER PRIOR TO TERMINATION. No part of the Trust
shall revert to the Employer at any time prior to the earlier of the
Employer's Insolvency, as defined in Article XI, or the satisfaction of
all liabilities under the Plans, as described in Section 9.1.
9.4 REVOCATION BY ALL PARTICIPANTS. Unless the Trust is revocable, upon
written approval of all Participants entitled to payment of benefits
pursuant to the terms of the Plan(s), Employer may terminate this Trust
prior to the time all benefit payments under the Plan(s) have been made.
All assets in the Trust at termination shall be returned to Employer.
Trustee may rely conclusively on Employer's directive that all
Participants have consented to such revocation and termination.
ARTICLE X
MISCELLANEOUS
10.1 EMERGENCIES AND DELEGATION.
(a) In case of an emergency, the Trustee may act in the
absence of directions from any other person having the power and
duty to direct the Trustee with respect to the matter involved and
shall incur no liability in so acting.
(b) By written notice to the Trustee, the Employer may
authorize the Trustee to act on matters in the ordinary course of
the business of the Trust or on specific matters upon the signature
of its delegate.
10.2 EXPENSES AND TAXES.
(a) The Employer, or at its option, the Trust, shall quarterly
pay the Trustee its expenses in administering the Trust and
reasonable compensation for its services as Trustee at a rate to be
agreed upon by the parties to this Trust Agreement, based upon
Trustee's published fee schedule. However, the Trustee reserves the
right to alter this rate of compensation at any time by providing
the Employer with notice of such change at least thirty (30) days
prior to its effective date. Reasonable compensation shall include
compensation for any extraordinary services or computations
required, such as determination of valuation of assets when current
market values are not published and interest on funds to cover
overdrafts. The Trustee shall have a lien on the Trust for
compensation and for any reasonable expenses including counsel,
appraisal, or accounting
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<PAGE>
fees, and these shall be withdrawn from the Trust and may be
reimbursed by the Employer.
(b) Reasonable counsel fees, reasonable costs, expenses and
charges of the Trustee incurred or made in the performance of its
duties, expenses relating to investment of the Trust such as
broker's commissions, stamp taxes, and similar items and all taxes
of any and all kinds that may be levied or assessed under existing
or future laws upon or in respect to the Trust or the income
thereof, and the Trustee's charges for issuing distribution checks
to Participants or their representatives shall be paid from, and
shall constitute a charge upon the Trust.
(c) The Employer shall pay any federal, state or local taxes
on the Trust, or any part thereof, and/or the income therefrom. In
the event any Participant is determined to be subject to federal
income tax on any amount under this Trust Agreement prior to the
time of payment hereunder, the entire amount determined to be so
taxable shall, at the Employer's direction, be distributed by the
Trustee to such Participant from the Trust. For the above purposes,
a Participant shall be determined to be subject to federal income
tax with respect to the Trust upon the earlier of: (a) a final
determination by the United States Internal Revenue Service ("IRS")
addressed to the Participant which is not appealed to the courts;
(b) an opinion of legal counsel designated in writing by the
Employer, addressed to the Employer and the Trustee, that, by reason
of Treasury Regulations, amendments to the Code, published IRS
rulings, court decisions or other substantial precedent, amounts
hereunder subject the Participant to federal income tax prior to
payment. The Employer shall undertake at its discretion and at its
sole expense to defend any tax claims described herein which are
asserted by the IRS against any Participant, including attorney fees
and costs of appeal, and shall have the sole authority to determine
whether or not to appeal any determination made by the IRS or by a
lower court. The Employer also agrees to reimburse any Participant
under this Section for any interest or penalties in respect of tax
claims hereunder upon receipt of documentation thereof.
10.3 THIRD PARTIES.
(a) No person dealing with the Trustee shall be required to
follow the application of purchase money paid or money loaned to the
Trustee nor inquire as to whether the Trustee has complied with the
requirements hereof.
(b) In any judicial or administrative proceedings, only the
Employer and the Trustee shall be necessary parties and no
Participant or other person having or claiming any interest in the
Trust shall be entitled to any notice or service of process (except
as required by law). Any judgment, decision or award entered in any
such proceeding or action shall be conclusive upon all interested
persons.
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10.4 ADOPTION BY AFFILIATED EMPLOYER. Any affiliate of the Employer (an
"Affiliated Employer") may adopt one or more of the Employer's Plans with
the approval of the Employer, and the Affiliated Employer shall
concurrently become a party to this Trust Agreement by giving written
notice of its adoption of the Plans and this Trust Agreement to the
Trustee. Upon such written notice, the Affiliated Employer shall become a
signatory to this Trust Agreement.
10.5 BINDING EFFECT; SUCCESSOR EMPLOYER. This Trust Agreement shall be
binding upon and inure to the benefit of any successor to the Employer or
its business as the result of merger, consolidation, reorganization,
transfer of assets or otherwise and any subsequent successor thereto. In
the event of any such merger, consolidation, reorganization, transfer of
assets or other similar transaction, the successor to the Employer or its
business or any subsequent successor thereto shall promptly notify the
Trustee in writing of its successorship and shall promptly supply
information required by the Trustee.
10.6 RELATION TO PLANS. All words and phrases used herein shall have the
same meaning as in the Plans, and this Trust Agreement and the Plans shall
be read and construed together. Whenever in the Plans it is provided that
the Trustee shall act as therein prescribed, the Trustee shall be and is
hereby authorized and empowered to do so for all purposes as fully as
though specifically so provided herein or so directed by the Employer.
10.7 MEDIATION AND ARBITRATION OF DISPUTES. If a dispute arises under
this Trust Agreement between or among the Employer and Trustee or any
Participant, except as provided in Sections 5.1(b) and 6.4, the parties
agree first to try in good faith to settle the dispute by mediation under
the Commercial Mediation Rules of the American Arbitration Association.
Thereafter, any remaining unresolved controversy or claim arising out of
or relating to this Agreement, or the performance or breach thereof, shall
be decided by binding arbitration in accordance with the Commercial
Arbitration Rules of the American Arbitration Association and Title 9 of
California Code of Civil Procedure Sections 1280 et seq. The sole
arbitrator shall be a retired or former Judge associated with the American
Arbitration Association. Judgement upon any award rendered by the
arbitrator shall be final and may be entered in any court having
jurisdiction. Each party shall bear its own costs, attorney's fees and its
share of arbitration fees. The Alternate Dispute Resolution Agreement in
this Agreement does not constitute a waiver of the parties' rights to a
judicial forum in instances where arbitration would be void under
applicable law, and does not preclude Bank from exercising it's rights to
interplead the funds of the Account at the cost of the Account.
20
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10.8 PARTIAL INVALIDITY. Any provision of this Trust Agreement
prohibited by law shall be ineffective to the extent of any such
prohibition, without invalidating the remaining provisions hereof. In the
event of any such holding, the Employer and Trustee and, if applicable,
Participants, will immediately amend this Trust Agreement as necessary to
remedy any such defect.
10.9 CONSTRUCTION. This Trust Agreement shall be governed by and
construed in accordance with the laws of California.
10.10 NOTICES. Any notice, report, demand or waiver required or permitted
hereunder shall be in writing, shall be deemed received upon the date of
delivery if given personally or, if given by mail, upon the receipt
thereof, and shall be given personally or by prepaid registered or
certified mail, return receipt requested, addressed to Employer and
Trustee as listed below in Article XII; if to a Participant, to the last
mailing address provided to the Trustee with respect to such individual,
provided, however, that if any party or his or its successor shall have
designated a different address by written notice to the other parties,
then to the last address so designated.
ARTICLE XI
DISTRIBUTIONS IN THE EVENT OF INSOLVENCY OF EMPLOYER
11.1 TRUSTEE AND EMPLOYER RESPONSIBILITY UPON NOTICE OF EMPLOYER'S INSOLVENCY:
(a) Insolvency. Trustee shall cease payment of benefits to
Participants if the Employer is Insolvent. Employer shall be
considered "Insolvent" for purposes of this Trust Agreement if (i)
Employer is unable to pay its debts as they become due, or (ii)
Employer is subject to a pending proceeding as a debtor under the
United States Bankruptcy Code.
(b) At all times during the continuance of this Trust, as
provided in Section 1.4 hereof, the principal and income of the
Trust shall be subject to claims of general creditors of Employer
under federal and state law as set forth below.
(1) The Board of Directors and Chief Operating Officer of
Employer shall have the duty to inform Trustee in writing of
Employer's Insolvency. If a person claiming to be a creditor of
Employer alleges in writing to Trustee that Employer has become
Insolvent, Trustee shall determine whether Employer is Insolvent
and, pending such determination, Trustee shall discontinue
payment of benefits to Participants. If Trustee is unable to
obtain information sufficient to ascertain Insolvency, Trustee
may seek instructions of a court of law or submit the matter for
arbitration before the American Arbitration Association or
interplead the Trust Assets at the expense of the Trust.
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(2) Unless Trustee has actual knowledge of Employer's
Insolvency, or has received written notice from Employer or a
person claiming to be a creditor alleging that Employer is
Insolvent, Trustee shall have no duty to inquire whether Employer
is Insolvent. Trustee may in all events rely on such evidence
concerning Employer's solvency as may be furnished to Trustee and
that provides Trustee with a reasonable basis for making a
determination concerning Employer's solvency.
(3) If at any time Trustee has determined that Employer is Insolvent,
Trustee shall discontinue payments to Participants and shall
hold the assets of the Trust for the benefit of Employer's
general creditors. Nothing in this Trust Agreement shall in
any way diminish any rights of Participants to pursue their
rights as general creditors of Employer with respect to
benefits due under the Plan(s) or otherwise.
(4) Trustee shall resume the payment of benefits to Participants
in accordance with Section 4.2 of this Trust Agreement only
after Trustee has determined that Employer is not Insolvent
(or is no longer Insolvent).
(c) Determination of Insolvency. Upon receipt of the
aforesaid written notice of the Employer's Insolvency from a person
claiming to be a creditor of the Employer, the Trustee shall notify
the Employer, and the Employer, within thirty (30) days of receipt
of such notice, shall engage an arbitrator (the "Arbitrator")
acceptable to Trustee, from the American Arbitration Association to
determine the Employer's solvency or Insolvency. The Employer shall
cooperate fully and assist the Arbitrator, as may be requested by
the Arbitrator, in such determination and Employer or Trust shall
pay all costs relating to such determination. The Arbitrator shall
notify the Employer and Trustee separately by registered mail of its
findings. If the Arbitrator determines that the Employer is solvent
or if once found Insolvent the Employer is no longer Insolvent, the
Trustee shall resume holding the Trust assets for the benefit of the
Participants and may make any distributions called for under this
Trust Agreement, including any amounts which should have been
distributed during the period when the Trustee suspended
distributions in response to a notice of the Employer's Insolvency,
including earnings (or losses) on such suspended distributions. If
the Arbitrator determines that the Employer is Insolvent or is
unable to make a conclusive determination of the Employer's
Insolvency, the Trustee shall continue to retain the assets of the
Trust until the Employer's status of solvency or Insolvency is
decided by a court of competent jurisdiction or it distributes all
or a portion of the Trust assets to any duly appointed receiver,
trustee in bankruptcy, custodian or to the Employer's general
creditors, but only as such distribution is ordered by a court of
competent jurisdiction.
The Trustee shall have no liability for relying upon the
determination of the Arbitrator as to the Employer's solvency or
Insolvency.
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(d) If a court of competent jurisdiction orders distribution of only
part of the Trust assets and does not specify the manner in which Trust
assets are to be liquidated, the Trustee shall liquidate Trust assets as
follows:
(i) If such liquidation is ordered prior to a Change in Control,
as directed by the Employer; or
(ii) If such liquidation is ordered after a Change in Control or
upon Insolvency of Employer, as determined by the Trustee in its sole and
absolute discretion.
If the Employer fails to provide instructions under subparagraph (i)
above, as to the manner of liquidation within five (5) business days
prior to the date the Trustee is required to comply with the court's
order, the Trustee shall liquidate and shall have the authority to order
any Investment Manager to liquidate the Trust assets in such manner as
the Trustee shall determine in its sole and absolute discretion. The
Trustee shall not be liable for any damages resulting from the Trustee's
exercise in good faith of its power to liquidate assets as provided in
this paragraph.
(e) Provided that there are sufficient assets, if Trustee
discontinues the payment of benefits from the Trust pursuant to subsection
(b)(3) hereof and subsequently resumes such payments, the first payment
following such discontinuance shall include the aggregate amount of all
payments due to Participants under the terms of the Plan(s) for the period
of such discontinuance, less the aggregate amount of any payments made to
Participants by Employer in lieu of the payments provided for hereunder
during any such period of discontinuance of which Trustee has actual
knowledge.
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Nothing in this Trust Agreement shall in any manner diminish any right of a
Participant to pursue his or her rights as a general creditor of the Employer
with regard to payments under the Trust or otherwise.
ARTICLE XII
EFFECTIVE DATE
The effective date of this Trust Agreement shall be September 1, 1998.
Executed at Rancho Cordova, CA.
Foundation Health Systems, Inc.
UNION BANK OF CALIFORNIA, N.A. "Employer", Sponsor of the
Trustee
475 Sansome St., 12th Floor Foundation Health Systems, Inc.
- -------------------------------- Deferred Compensation Plan
(Address) ---------------------------------
(PLAN)
San Francisco, CA 94111
- --------------------------------
21600 Oxnard Street
Woodland Hills, Ca 91367
--------------------------------
(Address)
By: /s/ Tim Shortt By: /s/ Danny O. Smithson
-------------------------- ------------------------
Tim Shortt Danny O. Smithson
-------------------------- ------------------------
(typed or printed name) (typed or printed name)
By: /s/ Thomas M. Thurston By: /s/ Jay Gellert
-------------------------- ------------------------
Thomas M. Thurston Jay Gellert
-------------------------- ------------------------
(typed or printed name) (typed or printed name)
Approved by Counsel to Employer:
- -------------------------------
Counsel
24
<PAGE>
Ex. 10.62
ASSET PURCHASE AGREEMENT
BY AND BETWEEN
FOUNDATION HEALTH SYSTEMS, INC.
AND
ACCESS HEALTH, INC.
<PAGE>
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (the "AGREEMENT"), dated as of the 31st
day of December, 1998, is entered into by and between Foundation Health Systems,
Inc. ("SELLER"), a corporation incorporated under the laws of the State of
California, and Access Health, Inc. ("BUYER"), a corporation incorporated under
the laws of the State of Delaware.
WHEREAS, Seller owns certain assets used in connection with the
provision of call center services through a telephone triage system (the
"BUSINESS"); and
WHEREAS, Seller desires to sell the assets associated with the
Business, as more fully described herein, and Buyer desires to purchase and
assume all such assets.
NOW, THEREFORE, in consideration of the premises and subject to the
representations, warranties, covenants and conditions contained herein, the
parties agree as follows:
ARTICLE 1.
SALE OF ASSETS
SECTION 1.01 SALE OF ASSETS.
(a) Seller agrees that, at the Closing, as defined in Section 1.06
herein, it shall sell, transfer, and deliver to Buyer, for the
consideration hereinafter provided, the clinical content used
by Seller in the Business, described in Schedule 1.01(a),
including all clinical assessment guidelines, algorithms and
protocols (the "TRIAGE CLINICAL CONTENT") and all Intellectual
Property Rights therein owned by Seller (collectively, "the
ASSETS"). "INTELLECTUAL PROPERTY RIGHTS" shall mean all
worldwide patents and other patent rights, utility models,
copyrights, trade secrets, know-how, trademarks, service
marks, confidential information and other intellectual
property and proprietary rights, including without limitation
all applications and registrations with respect thereto. The
Triage Clinical Content will be stored on a CD-ROM which will
be delivered to Buyer at a mutually agreed upon time prior to
the Closing for verification of completeness.
(b) For avoidance of doubt, Buyer shall not assume or be liable
for any liabilities of Seller in respect of: (i) any tax on
any profit derived from the sale under this Agreement; and
(ii) the preparation or filing of any tax
<PAGE>
returns and the payment of any taxes, license fees or other
charges levied, assessed or imposed upon the business and
Assets of the Seller prior to the Closing Date (as defined
herein).
SECTION 1.02 NON-ASSUMPTION OF LIABILITIES. Buyer shall not assume any
liabilities of Seller or be responsible for any obligations of Seller in
connection with the sale of Assets provided in Section 1.01 or otherwise arising
prior to the Closing.
SECTION 1.03 RIGHT TO EMPLOY CERTAIN OF SELLER'S EMPLOYEES. Buyer shall
have the right, but not the obligation, to offer employment to those employees
of Seller associated with the operation of the Business, that are set forth on
SCHEDULE 1.03.
SECTION 1.04 EXCLUDED ASSETS. For avoidance of doubt, Seller will retain
all other assets related to the Business or Seller's Fourth Generation Medical
Management System (the "4G SYSTEM"), including computer systems, network
equipment, certain clinical intellectual property, software applications and
related intellectual property (excluding all clinical assessment guidelines,
algorithms and protocols comprising the Assets), licenses to use certain
technology from other vendors (the "EXCLUDED LICENSES"), and the rights to sell
the 4G System and related technology (collectively the "4G SYSTEM ASSETS").
Seller's current 4G System products and the Excluded Licenses are generally set
forth on SCHEDULE 1.04 hereto.
(a) Excluded Licenses shall include all software licenses and
maintenance, support and related agreements with each of
Health Data Sciences Corporation, Systems Purkinje, Bolder
Heuristics and Medical Scientists.
(b) Seller shall retain the right to continue to employ all of
Seller's employees related to the development, delivery and
support of the 4G System, including technology support
professionals, clinical and technical developers and related
management and administrative personnel, except for those
employees set forth on SCHEDULE 1.03.
(c) Subject to Article 7, Seller shall retain all commercial
opportunities for the license or resale of all components of
the 4G System other than the Assets, including, but not
limited to, all CHAMPUS/Department of Defense opportunities.
SECTION 1.05 PURCHASE PRICE. The purchase price (the "PURCHASE PRICE") for
the Assets shall be thirty-eight million four hundred thousand dollars
($38,400,000), shall be payable by certified or cashiers check, wire transfer or
other same day funds, and shall be payable at the Closing, as set forth in
Section 1.06 below.
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SECTION 1.06 CLOSING. The closing of the transactions contemplated by
this Agreement shall take place at 4:00 p.m. PST on December 31st, 1998, at the
offices of the Seller, or such other place, time or date mutually agreed between
the parties in writing (such closing being called the "CLOSING" and such date
being called the "CLOSING DATE."
SECTION 1.07 POST-CLOSING OBLIGATIONS. From time to time, at either
party's request, whether at or after the Closing and without further
consideration, the other party, at its expense, will execute and deliver such
further instruments of conveyance and transfer and take such other action as the
requesting party reasonably may require to convey and transfer to Buyer any of
the Assets to be sold and otherwise to effectuate the terms of this Agreement.
ARTICLE 2.
REPRESENTATIONS AND WARRANTIES OF SELLER
As of the date hereof and the Closing Date, Seller represents and warrants
to Buyer, that:
SECTION 2.01 ORGANIZATION, QUALIFICATION AND CORPORATE POWER. Seller is,
and on the Closing Date will be, duly incorporated, validly existing, and in
good standing under the laws of the State of Delaware. Seller has the corporate
power and authority to own and hold its properties and to carry on its business
as now conducted.
SECTION 2.02 NO BREACH. the execution, delivery and performance by
Seller of this Agreement and related agreements contemplated herein do not and
will not on the Closing Date (i) contravene or conflict with the Certificate of
Incorporation or Bylaws of Seller; (ii) contravene, violate, or conflict with
any law, regulation, judgment, order or decree applicable to Seller; or (iii)
constitute a default under or give rise to any right to terminate any agreement,
contract or other instrument binding upon Seller, or any material license,
permit or other similar authorization held by Seller.
SECTION 2.03 OWNERSHIP. (i) Seller has good and marketable title to the
assets and owns all right, title and interest in and to the Assets, free and
clear of any and all mortgages, pledges, security interests, liens, charges,
claims, restrictions and other encumbrances; (ii) there are no outstanding
agreements or assignments inconsistent with the provisions of this Agreement or
which would impair the exercise by Buyer of its full ownership rights in the
Assets; (iii) no licenses or rights are required to be obtained from Seller or
any third party in order for Buyer to fully exploit the Assets; (iv) no third
party has been granted, and Seller shall not grant, any right in the Assets;
(v) no past or present employee or consultant of Seller has any interest in the
Assets and Seller has no knowledge of facts that could reasonably be expected to
give rise to such a claim; (vi) Seller owns all Intellectual Property Rights in
the Triage Clinical Content and has not acquired any Intellectual Property
Rights relating to the Triage Clinical Content from any third party;
(vii) Seller has no knowledge that any third party is infringing upon any of the
Intellectual Property Rights; (viii) the Triage Clinical Content does not
infringe the Intellectual Property Rights of any third party; (ix) the Triage
Clinical Content conforms to the description in Schedule 1.01(a); and (x) the
CD-ROM containing the Triage Clinical Content which was
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verified by Buyer has not been altered in any manner from the time of
verification to the Closing and has been stored under appropriate conditions.
SECTION 2.04 VALIDITY. Seller has the full legal power and authority to
execute and deliver this Agreement and all other agreements and documents
necessary to consummate the transactions contemplated hereunder and all
corporate action of Seller necessary for such execution and delivery and the
performance hereof and thereof will have been duly taken on or before the
Closing. No stockholder action by Seller is required to transfer the Assets to
Buyer or consummate the transactions contemplated by this Agreement. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of Seller. This Agreement and all agreements
related to the contemplated transaction when duly executed and delivered by
Seller and, when duly executed by the Buyer, will constitute the legal, valid,
and binding obligation of Seller enforceable in accordance with their terms,
subject as to enforcement of remedies to the discretion of courts in awarding
equitable relief and to applicable bankruptcy, reorganization, insolvency,
moratorium and similar laws affecting the rights of creditors generally. The
execution and delivery by Seller of this Agreement, and the performance of its
obligations hereunder, does not require any action of any party other than
Seller pursuant to or conflict with, or result in any violation of, or default
under, or breach of any material contract, agreement or other undertaking of
Seller, pursuant to any order or decree to which Seller is a party, or to which
the Assets are subject, and will not conflict with, or result in any violation
of, or default under (with or without notice or lapse of time, or both), or give
rise to a right of termination, cancellation or acceleration of any obligation
or loss of any benefit or creation of any security interest under (any such
event, a "CONFLICT"). No consent, waiver, approval, order or authorization of,
or registration, declaration or filing with, any court, administrative agency or
commission or other federal, state, county, local or foreign governmental
authority, instrumentality, agency or commission ("GOVERNMENT ENTITY") or any
third party (so as not to trigger any Conflict), is required by or with respect
to the company in connection with the execution and delivery of this Agreement,
the sale and transfer of the Assets or the consummation of the transactions
contemplated hereby.
SECTION 2.05 LITIGATION AND INVESTIGATIONS. Except in the case of a
claim Buyer may have against Seller, there is no (i) action, suit, claim,
proceeding, or investigation pending or, to its knowledge, threatened against or
affecting the Assets, or any of the employees providing services relating to the
Assets, by any private party or any federal, state, municipal, or other
governmental department, commission, board, bureau, agency or instrumentality,
domestic or foreign; (ii) arbitration proceeding relating to the Assets pending
under collective bargaining agreements or otherwise; or (iii) governmental or
professional inquiry pending or, to the knowledge of Seller, threatened against
or affecting the Assets. Seller is not in default with respect to any order,
writ, injunction, or decree known to or served upon them of any court or of any
federal, state, municipal, or other governmental department, commission, board,
bureau, agency, or instrumentality, domestic or foreign.
SECTION 2.06 TRADEMARKS, PATENTS AND OTHER RIGHTS. Set forth in
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SCHEDULE 2.06 is a list of all patents, patent rights, patent applications,
trademarks, trademark applications, service marks, service mark applications,
trade names and copyrights, and all applications for such which are in the
process of being prepared, owned by, or registered in the name of, Seller and
relating to the Assets.
SECTION 2.07 FEES AND COMMISSIONS. Seller has not agreed to pay or
become liable to pay any broker's, finder's, or originator's fees or commissions
by reason of services alleged to have been rendered for, or at the instance of,
Seller in connection with this Agreement and the transactions contemplated
hereby.
SECTION 2.08 YEAR 2000 COMPLIANCE. Seller makes no representation or
warranty with regard to information systems readiness for or that the Assets
will not otherwise be affected by the commencement of the year 2000.
SECTION 2.09 OTHER APPROVALS. SCHEDULE 2.09 sets forth a list of all
consents, approvals, qualifications, orders or authorizations of, or filings
with, any governmental authority, including any court or other governmental
third party, required in connection with Seller's valid execution, delivery, or
performance of this Agreement, or the consummation of any transaction
contemplated by this Agreement, with the exception of any clearance required
under the Hart-Scott-Rodino Antitrust Improvement Act of 1976 (the "HSR ACT"),
which clearance has been obtained.
ARTICLE 3.
REPRESENTATIONS AND WARRANTIES OF BUYER
As of the date hereof and the Closing Date, Buyer represents and
warrants to Seller:
SECTION 3.01 ORGANIZATION, QUALIFICATION AND CORPORATE POWER. Buyer is,
and on the Closing Date will be, duly incorporated, validly existing, and in
good standing under the laws of the State of Delaware. Buyer has the corporate
power and authority to own and hold its respective properties and to carry on
its respective business as now conducted.
SECTION 3.02 NO BREACH. The execution, delivery and performance by Buyer
of this Agreement and related agreements contemplated herein do not and will not
on the Closing Date (i) contravene or conflict with the respective Articles of
Incorporation or respective Bylaws of Buyer; (ii) contravene, violate, or
conflict with any material law, regulation, judgment, order or decree applicable
to Buyer; or (iii) constitute a default under or give rise to any right to
terminate any material agreement, contract or other instrument binding upon
Buyer, or any material license, permit or other similar authorization held by
Buyer.
SECTION 3.03 VALIDITY. Buyer has the full legal power and authority to
execute and deliver this Agreement and all other agreements and documents
necessary to consummate the transactions contemplated hereunder and all
corporate action of Buyer necessary for such execution and delivery and the
performance thereof will have been duly taken. This Agreement
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and all agreements related to the contemplated transaction when duly executed
and delivered by Buyer and, when duly executed by the other parties thereto,
will constitute the legal, valid, and binding obligation of Buyer enforceable
in accordance with their terms, subject as to enforcement of remedies to the
discretion of courts in awarding equitable relief and to applicable
bankruptcy, reorganization, insolvency, moratorium and similar laws affecting
the rights of creditors generally. The execution and delivery by Buyer of
this Agreement, and the performance of its obligations hereunder, does not
require any action of any party other than Buyer pursuant to any material
contract, agreement or other undertaking of Buyer, or pursuant to any order
or decree to which Buyer is a party or to which its properties or assets are
subject.
SECTION 3.04 FEES AND COMMISSIONS. Buyer has not agreed to pay or become
liable to pay any broker's, finder's, or originator's fees or commissions by
reason of services alleged to have been rendered for, or at the instance of,
Buyer in connection with this Agreement and the transactions contemplated
hereby.
SECTION 3.05 OTHER APPROVALS. SCHEDULE 3.05 sets forth a list of all
consents, approvals, qualifications, orders or authorizations of, or filings
with, any governmental authority, including any court or other governmental
third party, required in connection with Buyer's valid execution, delivery, or
performance of this Agreement, or the consummation of any transaction
contemplated by this Agreement, with the exception of any clearance required
under the HSR act, which clearance has been obtained.
ARTICLE 4.
JOINT COVENANTS OF THE PARTIES
SECTION 4.01 CONFIDENTIALITY OF BUSINESS INFORMATION. Each party shall
use Confidential Information and all notes, documents and materials prepared by
or for it which reflect, interpret, evaluate, include or are derived from
Confidential Information ("EVALUATION MATERIAL") solely to evaluate and consider
the proposed transactions. Upon the Closing, all Confidential Material and
Evaluation Material relating to the Assets shall be owned by Buyer. Neither
party shall use the Disclosing Party's Confidential Information or Evaluation
Material to compete with or adversely affect the business or operations of the
other or its Affiliates or for any other purpose except as permitted herein.
For the purposes of this paragraph "CONFIDENTIAL INFORMATION" means all
information in whatever form furnished to a party or its representatives by or
on behalf of the other party which is marked as confidential or which the
Receiving Party should have reason to know is treated as confidential by the
Disclosing Party; provided that it does not include information which (i) is
already in the Receiving Party's possession, and not previously provided by the
Disclosing Party, provided that such information is not known by the receiving
party to be subject to another confidentiality agreement with or other
obligation of secrecy to the Disclosing Party or any third party, or
(ii) becomes generally available to the public other than as a result of a
disclosure by the Receiving party or the Receiving party's representatives.
Upon request by a party at any time, the other party shall promptly return the
original and all copies of all non-oral Confidential Information of the
Disclosing Party and either
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deliver or destroy the original and all copies of all Evaluation Material.
Any party shall, upon request, certify as to its compliance with the
preceding sentence. Prior to disclosing any information to a Representative,
the party disclosing to such Representative shall obtain from such
Representative an agreement to keep such information confidential and make no
disclosure thereof, except as otherwise consistent with the terms of this
Section 6.01. In the event that any disclosure is required to be made, each
party shall cooperate with the other in order to limit the disclosure to the
extent permitted by law. This Section 6.01 shall survive the termination of
this Agreement. Notwithstanding the foregoing, in the event that the
Confidentiality Agreement between Buyer and Seller, dated as of June 17,
1998, which shall remain in effect after Closing, contains a more restrictive
term with regard to use and disclosure of Confidential Information than this
Section 6.01, such agreement shall control and supercede this Section 6.01
with respect to such Confidential Information, except with respect to the
Buyer's ownership upon Closing of Confidential Information and Evaluation
Material relating to the Assets.
SECTION 4.02 USE OF NAME. Buyer shall not use any and all trade names,
trademarks, logos and trade dress belonging to Seller or its Affiliates,
including, without limitation, those containing the words "FHS", "Foundation
Health Systems", "QualMed", "4th Generation Medical Management", or
"HealthLine", on its literature, inventory, products, labels, packaging,
supplies or other materials relating to the Business as soon as available
supplies thereof are exhausted and in any event within ninety (90) days after
the Closing Date. Buyer shall re-label (by sticker or other reasonable method)
its products, literature and other materials and supplies with its own trade
name.
SECTION 4.03 ANNOUNCEMENTS. The initial press releases with respect to the
execution of this Agreement shall be reasonably acceptable to Buyer and Seller.
Thereafter, so long as this Agreement is in effect, neither Buyer nor Seller nor
any of their respective Affiliates shall issue or cause the publication of any
press release with respect to the transactions contemplated hereby or this
Agreement without consulting with the other party, except as may be required by
law or by any listing agreement with a national securities exchange or market.
SECTION 4.04 RELEASE. In consideration for the sale of the Assets
hereunder, Buyer, for itself and its affiliates, hereby fully releases and
discharges Seller, its subsidiaries, divisions, successors, assigns,
representatives, shareholders, officers, directors, agents, employees,
representatives, and assigns (collectively for purposes of this section
"SELLER") from any and all actions, causes of action, claims, obligations,
costs, losses, liabilities, damages and demands of whatsoever character, whether
or not known, suspected or claimed ("CLAIMS"), which Buyer has or hereafter may
have against Seller, solely to the extent such Claims arise out of or in any way
relate to the Assets and Seller's ownership and use thereof prior to the
Closing. This release does not apply to any Claim based upon or asserted to be
based upon an act, omission or occurrence to the extent occurring subsequent to
Closing. It is further understood and agreed that all rights under Section 1542
of the Civil Code of California are hereby expressly waived by Buyer. Said
section reads as follows:
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A general release does not extend to claims which the
creditor does not know or suspect to exist in his favor at
the time of executing the release, which if known by him
must have materially affected his settlement with the
debtor.
Notwithstanding the provisions of Section 1542, and for the purpose of
implementing a full and complete release and discharge of Seller pursuant to
this Section 4.04 and under the terms hereof, Buyer expressly acknowledges that
this Agreement is intended to include in its effect, without limitation, all
Claims which Buyer does not know or suspect to exist in its favor at the time of
execution hereof, and this release contemplates the extinguishment of any such
claim or claims. This Section 4.04 shall be in, and remain in, effect as a full
and complete release according to its terms, notwithstanding the discovery or
existence of any additional or different facts. Notwithstanding anything herein
to the contrary, nothing in this Section 4.04 shall prevent Buyer from enforcing
its rights pursuant to this Agreement, that certain Master Services Agreement by
and among Seller and Buyer, of even date herewith (the "SERVICES AGREEMENT"),
and that certain License Agreement between Seller and Buyer, of even date
herewith.
ARTICLE 5.
NON-COMPETITION COVENANT
SECTION 5.01 NON-COMPETITION. Seller will not compete with Buyer during
the term of the Services Agreement, and for two years following its termination.
During the term of the Services Agreement and for two (2) years following its
termination, Seller shall not, directly or indirectly, own, operate, manage or
control, or participate in the ownership, operation, management or control of,
or be connected with or have any interest in or license or sublicense any
Intellectual Property Rights to any enterprise, person, firm, corporation or
business that is engaged in the commercial delivery of telephonically - based
triage services (including referral and health care assessment services
delivered as part of telephonically based triage services) or that licenses
clinical triage algorithms and guidelines for use by others in the provision of
telephonically - based triage services, provided that this covenant shall not
apply to the activities of Managed Health Network, Inc. as conducted on the date
hereof and shall not prohibit the Seller from (i) providing provider referral
services to Members (as defined in the Services Agreement), or (ii) undertaking
utilization review relating to Members. Notwithstanding the foregoing, if there
is a change of control of Seller such that more than fifty percent (50%) of the
ownership interest with respect to Seller prior to such change of control event
is held after such event by an unrelated person or entity (the "ACQUIROR"), and
such Acquiror operates telephonically-based triage services, such Acquiror and
Seller shall have the right, at its discretion, either to (i) extinguish the
noncompetition covenant set forth herein by making a liquidated damages payment
of Ten Million Dollars ($10,000,000) in immediately available funds to Buyer, or
(ii) extinguish the noncompetition covenant set forth herein by extending the
term of the Services Agreement until the date two (2) years from the later of
the previously-existing date of termination thereunder or the date of
consummation of such change of control of Seller and maintaining services
pursuant thereto during the extension period for at least as many Members (as
defined in the Services Agreement) as were receiving services
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pursuant thereto immediately prior to the earlier of Seller's execution of an
agreement in connection with such change of control or public announcement
that either an offer had been made to consummate, or Seller was in
discussions to consummate, a change in control.
SECTION 5.02 SEVERABILITY. If any particular prohibition or restriction
contained in Section 5.01 is judged by a court of competent jurisdiction to be
unenforceable, but would be judged enforceable by a court of competent
jurisdiction if that particular prohibition or restriction was deleted or
reduced, then the prohibitions or restrictions contained in Section 5.01 shall
apply with that particular prohibition or restriction deleted or reduced by the
minimum amount necessary.
SECTION 5.03 ACKNOWLEDGEMENTS. Seller acknowledges that:
(a) The prohibitions and restrictions contained in Section 5.01 are
reasonable and necessary; and
(b) Seller has received valuable consideration for agreeing to the
covenants in Section 5.01.
SECTION 5.04 DAMAGES. Seller and Buyer acknowledge that it will be
difficult to compute the amount of damage or loss to Buyer if Seller violates
any of its agreements under Section 5.01, that Buyer will be without an
adequate legal remedy if Seller violates the provisions of this Section 5.01
and that any such violation may cause substantial irreparable injury and
damage to Buyer not fully compensable by monetary damages. Therefore, Seller
and Buyer agree that in the event of any violation by Seller of this Section
5.01, Buyer shall be entitled (i) to recover from Seller monetary damages,
(ii) to obtain specific performance, injunctive or other equitable relief, of
either a preliminary or permanent type, and (iii) to seek any and all other
available rights or remedies at law or in equity which may be exercised
concurrently with the rights granted hereunder.
SECTION 5.05 TERMINATION OF COVENANT. At any time that Seller elects to
terminate the Services Agreement, as provided therein, Seller shall have the
right to terminate the provisions of this Article 5 upon payment to Buyer of the
amount of Ten Million Dollars ($10,000,000) in immediately available funds, in
addition to any payment due under the Services Agreement.
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ARTICLE 6.
INDEMNIFICATIONS
SECTION 6.01 SELLER'S INDEMNIFICATION. Seller agrees to indemnify and
hold Buyer harmless from and against any and all liabilities, losses, damages,
costs, and expenses (including reasonable attorneys' fees) incurred or
maintained by Buyer because of any inaccuracy in, or breach or violation of, the
representations, warranties, and covenants made by Seller in this Agreement.
Seller agrees to indemnify and hold Buyer harmless from any and all claims and
liabilities arising out of the activities of Seller relating to the Assets prior
to the Closing Date.
SECTION 1.02 BUYER'S INDEMNIFICATION. Buyer agrees to indemnify and hold
Seller harmless from and against any and all liabilities, losses, damages,
costs, and expenses (including reasonable attorneys' fees) incurred or sustained
by Seller because of any inaccuracy in, or breach or violation of, the
representations, warranties, and covenants made by it in this Agreement.
SECTION 6.03 LIMITATION ON AND EXPIRATION OF INDEMNIFICATION.
Notwithstanding anything in this Article 6 to the contrary, Seller's rights
to indemnification from Buyer, and Buyer's rights to indemnification from
Seller shall be limited as follows:
(a) All rights of the parties hereto to indemnification hereunder
for breaches of representations and warranties (other than
those set forth in Section 2.03 hereof) shall expire one (1)
year after the closing date; PROVIDED, HOWEVER, if, prior to
such expiration, a state of facts shall have become known
which threatens to give rise to a liability against which any
party hereto would be entitled to indemnification hereunder
and the indemnified party shall have given notice of such
facts to the indemnifying party, then the rights of the
indemnified party to indemnification with respect to such
liability shall continue until such liability shall have been
finally determined and disposed of; PROVIDED, FURTHER, that
Seller shall continue to indemnify and hold harmless Buyer for
any breach of the representations and warranties under Section
2.03 herein for the term of the services agreement.
(b) No party shall be shall be entitled to indemnification
pursuant to Section 6.01 or 6.02 unless and until the
aggregate amount of damages to which the foregoing indemnity
relates, sustained by such party with respect to any
individual claim, exceeds $100,000.
SECTION 6.04 NOTICE AND CONTROL OF LITIGATION. If any claim or
liability is asserted in writing against a party entitled to indemnification
under this Article 6 (the "INDEMNIFIED PARTY") which would give rise to a
claim under this Article 6, the Indemnified Party shall notify the person
providing the indemnity ("INDEMNIFYING PARTY") in writing of the same within
thirty (30) days of receipt of such written assertion of a claim or
liability. The Indemnifying Party shall have the right to defend a claim and
control the defense, settlement and
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prosecution of any litigation. If the Indemnifying Party, within ten (10) days
after notice of such claim, fails to defend such claim, the Indemnified Party
will (upon further notice to the Indemnifying Party) have the right to undertake
the defense, compromise or settlement of such claim on behalf of and for the
account and risk of the Indemnifying Party, subject to the right of the
Indemnifying Party to assume the defense of such claim at any time prior to
settlement, compromise or final determination thereof. Anything in this Section
6.04 notwithstanding, (i) if there is a reasonable probability that a claim
may adversely affect the Indemnified Party other than as a result of money
damages or other money payments, the Indemnified Party shall have the right, at
its own cost and expense, to defend, compromise and settle such claim, and
(ii) the Indemnifying Party shall not, without the written consent of the
Indemnified Party settle or compromise any claim or consent to the entry of any
judgment which does not include as an unconditional term thereof the giving by
the claimant to the Indemnified Party a release from all liability in respect to
such claim. All parties agree to cooperate fully as necessary in the defense of
such matters. Should the Indemnified Party fail to notify the Indemnifying
Party in the time required above, this indemnity shall terminate and be of no
further force and effect with respect to the subject matter of the required
notice in the event that the Indemnified Party's failure to notify in the time
required above adversely affects the Indemnifying Party's ability to defend such
matter.
SECTION 6.05 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 6 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 realized as a result of any Indemnifiable Loss.
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 (x) promptly notify
the Indemnifying Party of the amount and nature of such proceeds and benefits
and (y) pay to the Indemnifying Party the amount of such insurance proceeds or
tax benefit or, if lesser, the amount of the Indemnity Payment.
SECTION 6.06 MITIGATION OF LOSS. Each Indemnitee is obligated to use all
reasonable efforts to mitigate to the fullest extent practicable the amount of
any Indemnifiable 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 Indemnifiable Loss to the extent such
Indemnitee failed to comply with the foregoing obligation.
SECTION 6.07 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 Indemnifiable
Loss to which the payment relates; PROVIDED, HOWEVER, that until the Indemnitee
recovers full payment of its Indemnifiable Loss, any and all claims of the
Indemnifying Party against any such third party on account of
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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 6.08 EXCLUSIVE REMEDY. Following the Closing, and with the
exception of the provisions of Articles 4 and 5, the indemnities provided for in
this Article 6 shall be the sole and exclusive remedies of 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, nothing herein is intended to waive any
claims for fraud.
ARTICLE 7.
MISCELLANEOUS
SECTION 7.01 DEFINITIONS. For the purposes of this Agreement:
(a) The term "KNOWLEDGE" shall be defined as actual knowledge and
knowledge of such other facts as to show bad faith;
(b) The term "AFFILIATE" (or "AFFILIATES") shall mean an entity that
is controlled by, controls, or is under common control with a
party (directly or indirectly).
SECTION 7.02 AMENDMENTS. This Agreement may not be amended or modified
without the written consent of the parties hereto.
SECTION 7.03 WAIVER. Failure to insist upon strict compliance with
any of the terms, covenants, or conditions of this Agreement at any one time
shall not be deemed a waiver of such term, covenant, or condition at any
other time nor shall any waiver or relinquishment of any right or power
herein at any time be deemed a waiver or relinquishment of the same or any
other right or power at any other time.
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SECTION 7.04 NOTICES. All notices, payments, or other communications
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given if sent by registered or certified mail, postage prepaid, and
return receipt requested to the parties, addressed as follows (or at such other
addresses as designated by the parties from time to time):
IF TO SELLER: Foundation Health Systems, Inc.
21600 Oxnard Street
Woodland Hills, California 91367
Attn: President and Chief Executive,
Government Operations and Specialty
Services
IF TO BUYER: Access Health, Inc.
335 Interlocken Parkway
Broomfield, Colorado 80021
Attn: General Manager
SECTION 1.05 COUNTERPARTS. This Agreement may be executed in any number
of counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
SECTION 7.06 ENFORCEABILITY AND SEVERABILITY. In the event any provision
of this Agreement or portion thereof is found to be wholly or partially invalid,
illegal, or unenforceable in any proceeding, then such provision shall be deemed
to be modified or restricted to the extent and in the manner necessary to render
the same valid and enforceable, or shall be deemed excised from this Agreement,
as the case may require, and this Agreement shall be construed and enforced to
the maximum extent permitted by law as if such provision had been originally
incorporated herein as so modified or restricted or as if such provision had not
been originally incorporated herein, as the case may be.
SECTION 7.07 GOVERNING LAWS AND CONSENT TO JURISDICTION. The laws of the
State of California (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
courts of the State of California and the Federal courts of the United States of
America located in the State of California (and the California state and Federal
courts having jurisdiction over appeals therefrom) in respect of the
transactions contemplated by this Agreement, the other agreements and documents
referred to herein and the transactions contemplated by this Agreement and such
other documents and agreements.
13
<PAGE>
SECTION 7.08 SECTION TITLES. The titles of the sections have been
inserted as a matter of convenience and reference only and shall not control or
affect the meaning or construction of this Agreement.
SECTION 7.09 ASSIGNMENT. This Agreement shall not be assignable or
delegated by any party without the prior written consent of the other except
that Buyer may assign this Agreement to its parent company without prior written
consent.
SECTION 7.10 EXPENSES. Each party hereto will pay its own expenses in
connection with the transactions contemplated hereby, whether or not such
transactions shall be consummated.
SECTION 7.11 SURVIVAL OF AGREEMENTS. All representations and warranties
made in Sections 2 or 3 herein shall be effective as of the Closing Date and
shall survive the execution and delivery of this Agreement until one (1) year
from the date of Closing, except for Seller's representation and warrranty under
Section 2.03, which shall survive until the termination of the Services
Agreement. All statements contained in any certificate or other instrument
delivered by Buyer or Seller, hereunder or in connection herewith shall be
deemed to constitute representations and warranties made by that entity. Such
representations and warranties shall survive until the time specified herein in
full force and effect notwithstanding any investigation by the party relying
upon them.
SECTION 7.12 BROKERAGE. Each party hereto will indemnify and hold the
others harmless against and in respect of any claim for brokerage or other
commissions relative to this Agreement or to the transactions contemplated
hereby, based in any way on agreements, arrangements, or understandings made or
claimed to have been made by such party with any third party.
SECTION 7.13 PARTIES IN INTEREST. All representations, covenants, and
agreements contained in this Agreement by or on behalf of any of the parties
hereto shall bind and inure to the benefit of the respective successors and
assigns of the parties hereto whether so expressed or not. Seller acknowledges
that Buyer's corporate parent is in the process of being acquired by McKesson
Corporation.
SECTION 7.14 REMEDIES. All remedies for breach of this Agreement shall
be cumulative.
SECTION 7.15 THIRD PARTIES. Except as specifically provided herein, this
Agreement does not and is not intended to create any rights in any person or
entity which is not a party to this Agreement.
SECTION 7.16 SPECIFIC PERFORMANCE. Each party acknowledges and agrees
that in the event of any breach of this Agreement, each non-breaching party
would be irreparably and immediately harmed and could not be made whole by
monetary damages. It is accordingly
14
<PAGE>
agreed that 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 7.04.
SECTION 7.17 ENTIRE AGREEMENT. This Agreement, including the Schedules
and Exhibits hereto, constitutes the sole and entire agreement and understanding
of the parties with respect to the subject matter hereof. All Schedules and
Exhibits hereto are incorporated herein by reference.
15
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement to be effective as of the day and year first written above.
ACCESS HEALTH, INC. FOUNDATION HEALTH SYSTEMS, INC.
By: /s/ Joseph P. Tallman By: /s/ Gary S. Velasquez
-------------------------- -----------------------------------------
Joseph P. Tallman Gary S. Velasquez
-------------------------- -----------------------------------------
Print Name Print Name
President President/CEO Government & Specialty
-------------------------- -----------------------------------------
Title Services Division
-------------------------- -----------------------------------------
Title
16
<PAGE>
Ex. 10.63
PURCHASE AGREEMENT
among
FOUNDATION HEALTH SYSTEMS, INC.,
FOUNDATION HEALTH CORPORATION,
FOUNDATION HEALTH PHARMACEUTICAL SERVICES, INC.,
INTEGRATED PHARMACEUTICAL SERVICES, INC.
and
ADVANCE PARADIGM, INC.
Dated: February 26, 1999
<PAGE>
PURCHASE AGREEMENT
This PURCHASE AGREEMENT (this "AGREEMENT") is made as of the 26th day of
February 1999, by and among Advance Paradigm, Inc., a Delaware corporation
("BUYER"), Foundation Health Systems, Inc., a Delaware corporation (the
"COMPANY"), Foundation Health Corporation ("FHC"), a California corporation,
Foundation Health Pharmaceutical Services, Inc., a California corporation
("FHPS"), and Integrated Pharmaceutical Services, Inc., a California
corporation ("IPS", and together with FHC and FHPS, the "SUBSIDIARIES"). The
Company is the ultimate parent of the Subsidiaries.
RECITALS:
WHEREAS, the Company owns (directly or indirectly) all of the
outstanding capital stock of the Subsidiaries; and
WHEREAS, Buyer desires to purchase from the Company all of the
outstanding capital stock of FHPS, and the Company desires to sell to Buyer
all of the outstanding capital stock of FHPS, in accordance with the terms
and conditions of this Agreement; and
WHEREAS, Buyer desires to purchase from IPS certain assets of IPS, and
IPS desires to sell to Buyer certain assets of IPS, in accordance with the
terms and conditions of this Agreement.
AGREEMENT:
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, Buyer, the Company and the Subsidiaries
(collectively, the "PARTIES") agree as follows:
ARTICLE 1
DEFINITIONS
"ADVERSE CONSEQUENCES" means all actions, suits, proceedings, hearings,
investigations, charges, complaints, claims, demands, injunctions, judgments,
orders, decrees, rulings, damages, dues, penalties, fines, costs, amounts
paid in settlement, Liabilities, obligations, Taxes, liens, losses, expenses,
and fees, including, but not limited to, court costs and reasonable
attorneys' fees and expenses.
"AFFILIATE" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
"AFFILIATED BUSINESS" means the pharmacy benefit requirements of the
Company and its Affiliates, and employer groups, administrative services
organizations and other third party clients of the Company and its Affiliates.
"BUYER" has the meaning set forth in the preface to this Agreement.
<PAGE>
"BUYER PERMITS" shall have the meaning set forth in SECTION 3.6.
"CHANGE OF CONTROL" of a company shall occur when: (i) a third party
acquires fifty percent (50%) or more of the outstanding voting stock of such
company; (ii) the company sells all or substantially all of its assets to a
third party; or (iii) the company merges into or consolidates with another
party such that (a) the company is not the surviving company, (b) if the
surviving company, a majority of the Board of Directors of the company
comprising the board immediately prior to such transaction does not also
constitute a majority following such transaction, or (c) if the surviving
company, a majority of the outstanding shares of the company's stock is not
held by holders who held a majority of the shares of stock of the company
immediately prior to such transaction.
"CLAIM NOTICE" has the meaning set forth in SECTION 8.5.
"CLOSING" has the meaning set forth in SECTION 2.5.
"CLOSING DATE" has the meaning set forth in SECTION 2.5.
"CODE" means the Internal Revenue Code of 1986, as amended, and the
rules and regulations promulgated thereunder.
"COMPANY" has the meaning set forth in the preface to this Agreement.
"CONTRACT" means any agreement, contract, lease, note, mortgage,
indenture, loan agreement, franchise agreement, covenant, employment
agreement, license, instrument, purchase and sales order, commitment,
undertaking or obligation.
"CURRENT BALANCE SHEET" has the meaning set forth in SECTION 4.9.
"CURRENT FINANCIAL STATEMENTS" has the meaning set forth in SECTION 4.8.
"DEFAULT IN PHARMACY PAYMENT" has the meaning set forth in SECTION
5.12(d).
"EMPLOYEE BENEFIT PLAN" means any (a) nonqualified deferred compensation
or retirement plan or arrangement which is an Employee Pension Benefit Plan,
(b) qualified defined contribution retirement plan or arrangement which is an
Employee Pension Benefit Plan, (c) qualified defined benefit retirement plan
or arrangement which is an Employee Pension Benefit Plan (including any
Multiemployer Plan), or (d) Employee Welfare Benefit Plan or material fringe
benefit plan or program.
"EMPLOYEE PENSION BENEFIT PLAN" has the meaning set forth in ERISA
Section 3(2).
"EMPLOYEE WELFARE BENEFIT PLAN" has the meaning set forth in ERISA
Section 3(1).
"ENVIRONMENTAL, HEALTH, AND SAFETY REQUIREMENTS" shall mean all federal,
state, and local statutes, regulations, ordinances and other provisions
having the force or effect of law, all judicial and administrative orders and
determinations, all contractual obligations and all common law concerning
public health and safety, worker health and safety, and pollution or
protection of
<PAGE>
the environment, including without limitation all those relating to the
presence, use, production, generation, handling, transportation, treatment,
storage, disposal, distribution, labeling, testing, processing, discharge,
release, threatened release, control, or cleanup of any hazardous materials,
substances or wastes, chemical substances or mixtures, pesticides,
pollutants, contaminants, toxic chemicals, petroleum products or byproducts,
asbestos, polychlorinated biphenyls, noise or radiation, each as amended and
as now in effect.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and the rules and regulations promulgated thereunder.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder.
"FINANCIAL STATEMENTS" has the meaning set forth in SECTION 4.8.
"FHPS PERMITS" shall have the meaning set forth in SECTION 4.19.
"FHS SUCCESSOR" means any third party that acquires the Company or the
Affiliated Business in a Change of Control transaction.
"GAAP" means United States generally accepted accounting principles as
in effect from time to time.
"GOVERNMENTAL AUTHORITY" means any nation or government, any state,
regional, local or other political subdivision thereof, and any entity or
official exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government.
"HART-SCOTT-RODINO ACT" means the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, and the rules and regulations
promulgated thereunder.
"INDEMNIFIED PARTY" has the meaning set forth in SECTION 8.4.
"INDEMNIFYING PARTY" has the meaning set forth in SECTION 8.4.
"INTELLECTUAL PROPERTY" has the meaning set forth in SECTION 4.21.
"LIABILITY" means any liability (whether known or unknown, whether
asserted or unasserted, whether absolute or contingent, whether accrued or
unaccrued, whether liquidated or unliquidated, and whether due or to become
due), including any liability for Taxes.
"LIENS" means liens, claims, charges, options, pledges, security
interests or other encumbrances.
"MATERIAL ADVERSE CHANGE (OR EFFECT)" means a change (or effect) in the
condition (financial or otherwise), properties, assets (including intangible
assets), liabilities (including contingent liabilities), rights, obligations,
operations, or business, which change (or effect), individually or in the
aggregate, is materially adverse to the operations or business of FHPS, the
Purchased Assets or Buyer, each taken as a whole.
<PAGE>
"MATERIAL CONTRACT" means each Contract to which the respective Person
is a party, or by which it or its properties or assets are bound, and which
is material to any of its businesses, assets, properties or prospects.
"MULTIEMPLOYER PLAN" has the meaning set forth in ERISA Section 3(37).
"NON-AFFILIATED BUSINESS" means the pharmacy benefit services offered to
third party health plan customers by the Company, FHPS, IPS or their
Affiliates prior to the Closing.
"PARTIES" has the meaning set forth in the preface to this Agreement.
"PBGC" means the Pension Benefit Guaranty Corporation.
"PERSON" means an individual, a partnership, a corporation, an
association, a joint stock company, a trust, a joint venture, an
unincorporated organization, or a governmental entity (or any department,
agency, or political subdivision thereof).
"PRIOR FINANCIAL STATEMENTS" has the meaning set forth in SECTION 4.8.
"PURCHASED ASSETS" means all of the assets of IPS identified on EXHIBIT
A hereto.
"PURCHASE PRICE" has the meaning set forth in SECTION 2.2.
"PURCHASED MATERIAL CONTRACTS" has the meaning set forth in SECTION 4.22.
"Section 338 ELECTION" has the meaning set forth in SECTION 5.5.
"SECTION 338 FORMS" has the meaning set forth in SECTION 5.5.
"SECURITIES ACT" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
"SERVICE AGREEMENT" has the meaning set forth in SECTION 5.11.
"SHARES" means all of the outstanding shares of the Common Stock, no par
value, of FHPS.
"STRADDLE PERIOD" means any taxable period which includes but does not
end on the Closing Date.
"TAX" means any federal, state, local, or foreign income, gross
receipts, license, payroll, employment, excise, severance, stamp, occupation,
premium, windfall profits, environmental (including taxes under Code Section
59A), customs duties, capital stock, franchise, profits, withholding, social
security (or similar), unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added, alternative or
add-on minimum, estimated, or other tax of any kind whatsoever, including any
interest, penalty, or addition thereto, whether disputed or not.
"THIRD PARTY CLAIM" has the meaning set forth in SECTION 8.4.
<PAGE>
ARTICLE 2
PURCHASE AND SALE
2.1 BASIC TRANSACTION.
(a) On and subject to the terms and conditions of this Agreement,
Buyer agrees to purchase from FHC, and FHC agrees to sell to Buyer, all of
the Shares and IPS agrees to sell to Buyer and Buyer agrees to purchase all
of the Purchased Assets, for the consideration specified in SECTION 2.2.
(b) Prior to the Closing, the Company shall, and shall cause each
of the Subsidiaries to, take any and all action necessary to contribute the
Purchased Assets from IPS to FHPS as mutually agreed upon by the parties, so
that the agreed upon Purchase Assets shall be assets of FHPS at the Closing.
(c) Prior to the Closing, all of the outstanding shares of stock
of IPS held by FHPS shall have been transferred to FHS or an Affiliate of FHS.
2.2 PURCHASE PRICE. Buyer agrees to pay to the Company, at the Closing,
Seventy Million Dollars ($70,000,000.00) (the "PURCHASE PRICE") by wire
transfer of federal or other immediately available funds to an account
designated by Buyer. The allocation of the purchase price among the Purchased
Assets and the Shares shall be as set forth in SCHEDULE 2.2.
2.3 ASSUMPTION OF LIABILITIES. On or subject to the terms and
conditions of this Agreement, at the Closing, Buyer shall assume and agree to
pay, perform and discharge all of the liabilities and obligations of FHPS
identified on EXHIBIT B hereto, and the liabilities of the Company and IPS
set forth in SCHEDULE 2.3 hereto related to the Purchased Assets purchased at
the Closing. No other obligations of the Company or IPS shall be assumed by
Buyer.
2.4 WARRANT FOR SHARES. Upon execution of this Agreement, Buyer shall
issue to FHS a warrant to purchase 200,000 shares of the common stock of
Buyer, subject to and in form and substance as set forth in the warrant
agreement attached hereto as EXHIBIT E.
2.5 THE CLOSING. The closing of the transactions contemplated by this
Agreement (the "CLOSING") shall take place at the offices of Epstein Becker &
Green, P.C., 2 Embarcadero, San Francisco, California, commencing at 9:00
a.m., local time, on the later of March 31, 1999 or the second business day
following the satisfaction or waiver of all conditions to the obligations of
the Parties to consummate the transactions contemplated hereby (other than
conditions with respect to actions the respective Parties will take at the
Closing itself) or such other date as Buyer and the Company may mutually
determine (the "CLOSING DATE").
2.6 DELIVERIES AT THE CLOSING. At the Closing, (a) the Company shall
deliver to Buyer the various certificates, instruments, and documents
referred to in ARTICLE 6, (b) Buyer shall deliver to the Company the various
certificates, instruments, and documents referred to in ARTICLE 7, (c) the
Company shall deliver to Buyer the various certificates and transfer
documents set forth on EXHIBIT C hereto, and (d) Buyer shall deliver to the
Company the consideration specified in SECTION 2.2.
<PAGE>
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer makes the following representations and warranties to the Company:
3.1 CORPORATE STATUS. Buyer is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware, and
has the requisite power and authority to own or lease its properties and to
carry on its business as presently conducted. There is no pending or
threatened proceeding for the dissolution, liquidation, insolvency or
rehabilitation of Buyer.
3.2 CORPORATE POWER AND AUTHORITY. Buyer has the corporate power and
authority to execute and deliver this Agreement and the Service Agreement, to
perform its obligations hereunder and under the Service Agreement and to
consummate the transactions contemplated hereby and by the Service Agreement.
Buyer has taken all corporate action necessary to authorize its execution and
delivery of this Agreement, the performance of its obligations hereunder and
the consummation of the transactions contemplated hereby.
3.3 ENFORCEABILITY. This Agreement has been duly executed and
delivered by Buyer and constitutes its legal, valid and binding obligation
enforceable against Buyer in accordance with its terms, except as the same
may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting the enforcement of creditors' rights
generally and general equitable principles regardless of whether such
enforceability is considered in a proceeding at law or in equity.
3.4 NO VIOLATION. The execution and delivery of this Agreement and the
Service Agreement by Buyer, the performance by Buyer of its obligations
hereunder and under the Service Agreement and the consummation by Buyer of
the transactions contemplated by this Agreement and the Service Agreement
will not (a) contravene any provision of the Certificate of Incorporation or
Bylaws of Buyer, (b) violate or conflict with any law, statute, ordinance,
rule, regulation, decree, writ, injunction, judgment, ruling or order of any
Governmental Authority or of any arbitration award which is either applicable
to, binding upon, or enforceable against Buyer, the occurrence of any of
which would have a Material Adverse Effect on Buyer, (c) conflict with,
result in any breach of, or constitute a default (or an event which would,
with the passage of time or the giving of notice or both, constitute a
default) under, or give rise to a right to terminate, amend, modify, abandon
or accelerate, any Material Contract which is applicable to, binding upon or
enforceable against Buyer, the occurrence of which would have a Material
Adverse Effect on Buyer, (d) result in or require the creation or imposition
of any Lien upon or with respect to any of the property or assets of Buyer,
(e) give to any individual or entity a right or claim against the Buyer,
which would have a Material Adverse Effect on Buyer or (f) require the
consent, approval, authorization or permit of, or filing with or notification
to, any Governmental Authority, any court or tribunal or any other Person,
except (i) pursuant to the Hart-Scott-Rodino Act, the Exchange Act and the
Securities Act and applicable inclusion requirements of Nasdaq, (ii) filings
required under the securities or blue sky laws of the various states, (iii)
any filings required to be made by the Subsidiaries, or (iv) any governmental
permits or licenses required to operate the businesses of the Subsidiaries.
<PAGE>
3.5 NO COMMISSIONS. Other than Morgan Stanley, no broker, finder,
investment banker or other Person is or will be, in connection with the
transactions contemplated by this Agreement, entitled to any brokerage,
finder's or other fee or compensation based on any arrangement or agreement
made by or on behalf of Buyer and for which Buyer or the Company will have
any obligation or liability.
3.6 COMPLIANCE WITH LAW. Buyer has substantially complied with and is
substantially complying with all applicable laws, rules, regulations and
ordinances, and has the lawful authority and has obtained and now holds all
material state, federal, special or local governmental authorizations,
licenses, certificates (including Certificates of Need) and permits
(collectively "BUYER PERMITS") needed or required to conduct its businesses,
as such businesses are presently being conducted, the absence of which would
have a Material Adverse Effect on Buyer, and has made all material filings
required by applicable law and regulations.
3.7 OTHER APPROVALS. SCHEDULE 3.7 sets forth a list of all consents,
approvals, qualifications, orders or authorizations of, or filings with, any
governmental authority, including any court or other governmental third
party, required in connection with Buyer's valid execution, delivery or
performance of this Agreement and the Service Agreement, or the consummation
of any transaction contemplated by this Agreement and the Service Agreement.
3.8 INVESTIGATION BY BUYER. In entering into this Agreement:
(a) Buyer acknowledges that, except for the specific
representations and warranties of the Company and the Subsidiaries contained
in ARTICLE 4 hereof, none of the Company, the Subsidiaries, any Affiliate of
the Company, 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 financial
projections, forecasts or budgets provided or otherwise made available to
Buyer or any of its directors, officers, employees, Affiliates, controlling
persons, agents, advisors or representatives (including, without limitation,
in any management presentations, supplemental information or other materials
or information with respect to any of the above). With respect to any such
projection or forecast delivered by or on behalf of the Company or the
Subsidiaries to Buyer, Buyer acknowledges that: (i) there are uncertainties
inherent in attempting to make such projections and forecasts; (ii) it is
familiar with such uncertainties; (iii) it is taking full responsibility for
making its own evaluation of the adequacy and accuracy of all such
projections and forecasts so furnished to it; (iv) it is not acting in
reliance on any such projection or forecast so furnished to it; and (v) it
shall have no claim against any such person with respect to any such
projection or forecast; and
(b) Buyer agrees, to the fullest extent permitted by law, that the
Company and the Subsidiaries and their respective directors, officers,
employees, Affiliates, controlling persons, agents, advisors or
representatives shall not have any liability or responsibility whatsoever to
Buyer or any of its directors, officers, employees, Affiliates, controlling
persons, agents, advisors or representatives on any basis (including, without
limitation, in contract or tort, under Federal or state securities laws or
otherwise) based upon any financial projections provided or otherwise made
available, or statements made regarding such projections, (or
<PAGE>
omissions to so provide, make available or state), to Buyer or any of its
directors, officers, employees, Affiliates, controlling persons, agents,
advisors or representatives.
3.9 ACQUISITION FOR INVESTMENT. Buyer 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.
3.10 ABILITY TO PERFORM UNDER SERVICES AGREEMENT. Buyer represents and
warrants that it has or will have, the financial, personnel, and systems
capabilities to perform its obligations under the Service Agreement, in
accordance with the transition schedule set forth therein.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
AND THE SUBSIDIARIES
The Company and the Subsidiaries, jointly and severally, make the
following representations and warranties to Buyer:
4.1 CORPORATE STATUS. Each of the Company and the Subsidiaries is a
corporation, duly organized and validly existing and, except where the
failure would not have a Material Adverse Effect on FHPS or the Purchased
Assets, has the requisite power and authority to own or lease its properties
and to carry on its business as presently conducted, except where any such
failure would not have a Material Adverse Effect on FHPS or the Purchased
Assets. Each of the Company and the Subsidiaries is duly qualified to do
business as a foreign corporation in each of the jurisdictions where the
nature of its properties and the conduct of its business require such
qualification, except for such jurisdictions where the failure to be so
qualified would not have a Material Adverse Effect on the Company or a
Subsidiary. Each of the Company and the Subsidiaries is in good standing in
each of the jurisdictions in which it is so qualified. There is no pending or
threatened proceeding for the dissolution, liquidation, insolvency or
rehabilitation of the Company or a Subsidiary.
4.2 POWER AND AUTHORITY. Each of the Company and the Subsidiaries has
the corporate power and authority to execute and deliver this Agreement and
the Service Agreement, to perform its obligations hereunder and under the
Service Agreement, and to consummate the transactions contemplated hereby and
by the Service Agreement. Each of the Company and the Subsidiaries has taken
all corporate action necessary to authorize the execution and delivery of
this Agreement and the Service Agreement, the performance of its obligations
hereunder and under the Service Agreement, and the consummation of the
transactions contemplated hereby and by the Service Agreement.
4.3 ENFORCEABILITY. Each of this Agreement and the Service Agreement
has been duly executed and delivered by the Company and each of the
Subsidiaries (hereinafter sometimes referred to individually as a "COMPANY
PARTY" and collectively as the "COMPANY PARTIES") and constitutes the legal,
valid and binding obligation of each of them, enforceable against each of
them in accordance with its terms, except as the same may be limited by
<PAGE>
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting the enforcement of creditors' rights generally and general
equitable principles regardless of whether such enforceability is considered
in a proceeding at law or in equity.
4.4 CAPITALIZATION. Schedule 4.4 sets forth, as of the date hereof,
with respect to FHPS, (a) the number of authorized shares of each class of
its capital stock, (b) the number of issued and outstanding shares of each
class of its capital stock and (c) the number of shares of each class of its
capital stock which are held in treasury. FHC owns 100% of the capital stock
of FHPS. All of the issued and outstanding shares of capital stock of FHPS
(a) have been duly authorized and validly issued and are fully paid and
non-assessable, (b) were issued in compliance with all applicable state and
federal securities laws and (c) were not issued in violation of any
preemptive rights or rights of first refusal. Except as set forth on SCHEDULE
4.4, no preemptive rights, rights of first refusal or similar rights exist
with respect to the shares of capital stock of FHPS, and no such rights arise
or become exercisable by virtue of or in connection with the transactions
contemplated hereby. Except as set forth on SCHEDULE 4.4, there are no
outstanding or authorized rights, options, warrants, convertible securities,
subscription rights, conversion rights, exchange rights or other agreements
or commitments of any kind that could require FHPS to issue or sell any
shares of its capital stock (or securities convertible into or exchangeable
for shares of its capital stock). Except as set forth on SCHEDULE 4.4, there
are no outstanding stock appreciation, phantom stock, profit participation or
other similar rights with respect to FHPS. There are no proxies, voting
rights or other agreements or understandings with respect to the voting or
transfer of the capital stock of FHPS. The shares of capital stock of FHPS
are free and clear of all Liens. FHPS is not obligated to redeem or otherwise
acquire any of its outstanding shares of capital stock.
4.5 NO LIENS ON ASSETS. The Purchased Assets are free and clear of all
Liens.
4.6 NO VIOLATION, CONSENTS. The execution and delivery of this
Agreement and the Service Agreement by the Company Parties, the performance
by each of the Company Parties of their obligations hereunder and under the
Service Agreement and the consummation by them of the transactions
contemplated by this Agreement and the Service Agreement will not (a)
contravene any provision of the certificates of incorporation, bylaws or
other organizational or governing document of the Company or a Subsidiary,
(b) violate or conflict with any law, statute, ordinance, rule, regulation,
decree, writ, injunction, judgment, ruling or order of any Governmental
Authority or of any arbitration award which is either applicable to, binding
upon or enforceable against the Company or a Subsidiary, the occurrence of
any of which would have a Material Adverse Effect on FHPS or the Purchased
Assets, (c) conflict with, result in any breach of, or constitute a default
(or an event which would, with the passage of time or the giving of notice or
both, constitute a default) under, or give rise to a right of payment under
or the right to terminate, amend, modify, abandon or accelerate, any Material
Contract which is applicable to, binding upon or enforceable against FHPS,
the occurrence of any of which would have a Material Adverse Effect on FHPS
or the Purchased Assets, subject to SECTION 5.12 below, (d) result in or
require the creation or imposition of any Lien upon or with respect to any of
the properties or assets of FHPS or the Purchased Assets, (e) except as set
forth on SCHEDULE 4.6, give to any individual or entity a right or claim
against FHPS which would have a Material Adverse Effect on FHPS or the
Purchased Assets or (f) except as set forth on SCHEDULE 4.6, require the
consent, approval, authorization or permit of, or filing with or notification
to, any
<PAGE>
Governmental Authority, any court or tribunal or any other Person, except (i)
pursuant to the Hart-Scott-Rodino Act and applicable reporting requirements
of the Exchange Act, the Securities Act or the New York Stock Exchange, Inc.,
(ii) filings required under the securities or blue sky laws of the various
states, or (iii) except where the failure to obtain such consent or approval
would not have a Material Adverse Effect on FHPS or the Purchased Assets, or
the ability of the Company to consummate the transactions set forth in this
Agreement.
4.7 RECORDS OF FHPS. The copies of the certificates of incorporation
and bylaws of FHPS and the agreements of FHPS and IPS which were provided to
Buyer are true, accurate, and complete and reflect all amendments made
through the date of this Agreement. The minute books and other records of
corporate actions for FHPS made available to Buyer for review were correct
and complete as of the date of such review, no further entries have been made
through the date of this Agreement, such minute books and records contain the
true signatures of the persons purporting to have signed them, and such
minute books and records contain an accurate record of all corporate actions
of the stockholders and directors (and any committees thereof) of FHPS taken
by written consent or at a meeting since formation. All corporate actions
taken by FHPS have been duly authorized or ratified. All accounts, books,
ledgers and official and other records of FHPS have been fully, properly and
accurately kept and are complete, and there are no material inaccuracies or
discrepancies contained therein. The stock ledgers of FHPS, as previously
made available to Buyer, contain accurate and complete records of all
issuances, transfers and cancellations of shares of the capital stock of
FHPS. To the Company Parties' knowledge, the books and all corporate
(including minute books and stock record books) and financial records of FHPS
are substantially complete and correct in all material respects and have been
maintained in accordance with applicable sound business practices, laws and
other requirements.
4.8 FINANCIAL STATEMENTS. The Company has delivered to Buyer the
unaudited financial statements of FHPS, consisting of balance sheets at
December 31, 1995, 1996 and 1997 and the related statements of operations for
the respective periods then ended (collectively, the "FINANCIAL STATEMENTS").
The 1995, 1996 and 1997 financial statements of FHPS are referred to herein
as its "PRIOR FINANCIAL STATEMENTS." The financial statements for the twelve
(12) months ended December 31, 1998 are referred to herein as the "CURRENT
FINANCIAL STATEMENTS." The Financial Statements (i) were prepared from the
books and records of FHPS, (ii) were prepared in accordance with GAAP applied
on a consistent basis (except as may be expressly indicated therein or in any
notes thereto, or except for the absence of notes, statement of cash flows,
and statement of shareholders equity which may otherwise be required under
GAAP) and (iii) present fairly the financial position of FHPS as at the dates
thereof and the results of its operations for the periods then ended (subject
to normal year-end adjustments which would not in the aggregate have a
Material Adverse Effect on the FHPS and any other adjustments expressly
described therein or in the notes thereto). The balance sheets included in
the Current Financial Statements do not reflect any writeup or revaluation
increasing the book value of any assets, except as specifically disclosed in
the notes thereto or as otherwise disclosed in writing to Buyer. All
financial projections, forecasts, or budgets that the Company and the
Subsidiaries have made available to Buyer have been or will be prepared in
good faith based upon assumptions that the Company and the Subsidiaries
believe to be reasonable.
<PAGE>
4.9 CHANGES SINCE THE CURRENT BALANCE SHEET DATE. Except as set forth on
SCHEDULE 4.9, since the date of the balance sheet dated as of December 31,
1998 included in the Current Financial Statements (the "CURRENT BALANCE
SHEET"), FHPS has not (a) issued, sold, pledged, disposed of, encumbered, or
authorized the issuance, sale, pledge, disposition, grant or encumbrance of
any shares of its capital stock, or any options, warrants, convertible
securities or other rights of any kind to acquire any shares of such capital
stock or any other ownership interest of FHPS, (b) declared, set aside, made,
or paid any dividend or other distribution payable in cash, stock, property
or otherwise of or with respect to its capital stock or other securities, or
reclassified, combined, split, subdivided or redeemed, purchased or otherwise
acquired, directly or indirectly, any of its capital stock or other
securities; (c) except for raises in the ordinary course and consistent with
past practice, paid any bonus to or increased the rate of compensation of any
of its officers or salaried employees or amended any other terms of
employment of such persons; (d) sold, leased or transferred any of its
properties or assets or acquired any properties or assets other than in the
ordinary course of business consistent with past practice; (e) made or
obligated itself to make capital expenditures other than in the ordinary
course of business consistent with past practice; (f) made any payment in
respect of its liabilities other than in the ordinary course of business
consistent with past practice; (g) incurred any obligations or liabilities
(including, without limitation, any indebtedness for borrowed money, issuance
of any debt securities, or the assumption, guarantee, or endorsement of the
obligations of any person) or entered into any transaction or series of
transactions involving in excess of $15,000 individually or $50,000 in the
aggregate out of the ordinary course of business, except for this Agreement
and the transactions contemplated hereby; (h) suffered any theft, damage,
destruction or casualty loss, whether or not covered by insurance, in excess
of $15,000 individually or $50,000 in the aggregate; (i) suffered any
extraordinary losses (whether or not covered by insurance); (j) waived,
canceled, compromised or released any rights having a value in excess of
$15,000 individually or $50,000 in the aggregate other than in the ordinary
course of business consistent with past practice; (k) made or adopted any
material change in its accounting practice or policies; (l) made any material
adjustment to its books and records other than in respect of the conduct of
its business activities in the ordinary course consistent with past practice;
(m) entered into any material transaction with any other Company Party or any
Affiliate of any of the Company Parties, except in the ordinary course of
business; (n) entered into any employment agreement not terminable at will;
(o) terminated, amended or modified any agreement involving an amount in
excess of $15,000 individually or $50,000 in the aggregate other than in the
ordinary course of business consistent with past practice; (p) imposed any
material security interest or other Lien on any of its assets other than in
the ordinary course of business consistent with past practice; (q) delayed
paying any account payable beyond forty-five (45) days following the date on
which it is due and payable except to the extent being contested in good
faith; (r) made or pledged any charitable contributions in excess of $1,000
individually or $5,000 in the aggregate; (s) acquired (including, without
limitation, for cash or shares of stock, by merger, consolidation, or
acquisition of stock or assets) any interest in any corporation, partnership
or other business organization or division thereof or any assets, or made any
investment in another Person either by purchase of stock or securities,
contributions or property transfer of capital other than as permitted or
provided in this Agreement; (t) increased or decreased prices charged to
customers, except in the ordinary course of business consistent with past
practice, materially increased or decreased the average monthly inventory,
other than in the ordinary course of business consistent with past practice,
ordered any inventory which would be inconsistent with the prior practices of
<PAGE>
such Company, or taken any actions which might reasonably result in any
material increase in the loss of customers; (u) entered into any other
transaction or been subject to any event which has or may reasonably be
expected to have a Material Adverse Effect on FHPS; or (v) agreed to do or
authorized any of the foregoing.
4.10 LIABILITIES OF FHPS. Except as set forth on Schedule 4.10(a), FHPS
has no liabilities or obligations, whether accrued, absolute, contingent or
otherwise, except (a) to the extent reflected on the Current Balance Sheet
and not heretofore paid or discharged; (b) liabilities incurred in the
ordinary course of business consistent with past practice since the date of
the Current Balance Sheet (none of which relates to breach of contract,
breach of warranty, tort, infringement or violation of law, or which arose
out of any action, suit, claim, governmental investigation or arbitration
proceeding) and which, in the aggregate would not have a Material Adverse
Effect on FHPS; (c) liabilities incurred prior to the date of the Current
Balance Sheet which, in accordance with GAAP consistently applied, were not
required to be recorded thereon and which, in the aggregate, would not have a
Material Adverse Effect on FHPS; or (d) inter-company liabilities that on a
consolidated basis are not reflected on the Current Balance Sheet. SCHEDULE
4.10(b) lists all indebtedness in excess of $10,000 owed by FHPS to a bank or
any other Person, including without limitation, indebtedness for borrowed
money (including principal and accrued but unpaid interest) and capitalized
equipment leases of FHPS. SCHEDULE 4.10(c) lists each deposit account
maintained by or for the benefit of FHPS with any bank, broker or other
depository institution, and the names of all persons authorized to withdraw
funds from each such account.
4.11 LITIGATION. Except as set forth on SCHEDULE 4.11, there is no
action, suit or other legal or administrative proceeding or governmental
investigation pending, or, to the Company Parties' knowledge, threatened
against or anticipated or contemplated to be initiated by, FHPS, or FHPS'
properties or assets, or the Purchased Assets, or which question the validity
or enforceability of this Agreement or the transactions contemplated hereby,
and, to the Company Parties' knowledge, there is no reasonable basis for any
of the foregoing. The Company shall retain all actions, suits and other
legal and administrative proceedings and governmental investigations set
forth on SCHEDULE 4.11. There are no outstanding orders, decrees or
stipulations issued by any Governmental Authority in any proceeding to which
FHPS is or was a party which have not been substantially complied with or
which continue to impose any material obligations on FHPS.
4.12 ENVIRONMENTAL MATTERS. Except as set forth on SCHEDULE 4.12:
(a) During the period commencing from the date in 1991 on which
FHPS became a wholly owned subsidiary of the Company to the date of this
Agreement, the business of FHPS has been and is operated in compliance with
all Federal, state and local environmental protection, health and safety or
similar laws, statutes, ordinances, restrictions, licenses, rules,
regulations, permit conditions and legal requirements, including without
limitation the Federal Clean Water Act ("CWA") 42 U.S.C. Section 7401 ET
SEQ., Safe Drinking Water Act, ("SDWA") 42 U.S.C. Section 300f ET SEQ.,
Resource Conservation & Recovery Act ("RCRA") 42 U.S.C. Section 6901 ET SEQ.,
Clean Air Act ("CAA") 42 U.S.C. Section 7401 ET SEQ., Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") 42 U.S.C.
Section 9601 ET SEQ., Emergency Planning and Community Right to Know Act
("EPCRA") 42 U.S.C. Section 11001 ET SEQ., Toxic Substances
<PAGE>
Control Act ("TSCA") 15 U.S.C. Section 2601 ET SEQ., and the Occupational
Safety and Health Act ("OSHA") 29 U.S.C. Section 655 ET SEQ., each as amended
and currently in effect (collectively, "ENVIRONMENTAL LAWS"), except where
the failure to be so in compliance would not result in a Material Adverse
Effect on FHPS.
(b) During the period commencing from the date in 1991 on which
FHPS became a wholly owned subsidiary of the Company to the date of this
Agreement, FHPS has not received any written notice from any Governmental
Authority or other third party or, to the knowledge of the Company Parties,
any other communication alleging or concerning any violation by FHPS, or
responsibility for or liability of FHPS under any Environmental Law, which,
if decided unfavorably to FHPS would have a Material Adverse Effect on FHPS
or the Purchased Assets. There are no pending, or to the knowledge of the
Company Parties, threatened, claims, suits, actions, proceedings or
investigations with respect to the businesses or operations of FHPS alleging
or concerning any violation of or responsibility for or liability under any
Environmental Law, nor does any Company Party have any knowledge of any fact
or condition that could give rise to such a claim, suit, action, proceeding
or investigation which, if decided unfavorably to FHPS would have a Material
Adverse Effect on FHPS or the Purchased Assets.
4.13 REAL ESTATE. FHPS does not currently own any real property.
SCHEDULE 4.13 sets forth a list of all leases, licenses or similar use or
occupancy agreements to which FHPS is a party, which are for the use or
occupancy of real estate owned by a third party ("LEASES") (true and complete
copies of which have previously been furnished to Buyer), in each case,
setting forth: (i) the lessor and lessee thereof and the commencement date,
term and renewal rights under each of the Leases; and (ii) the street address
or legal description of each property covered thereby (the "LEASED
PREMISES"). The Leases are in full force and effect and have not been amended
except as disclosed in SCHEDULE 4.13, and there have been no notices of
default by either party to the Leases. With respect to each such Leased
Premises: (i) FHPS' interests in the Leased Premises are free and clear of
any Liens, covenants and easements or title defects created or suffered to be
created by FHPS, except for Liens for taxes which are not yet due or are
otherwise being contested; and (ii) none of the Company Parties has received
notice of (A) any condemnation proceeding with respect to any portion of the
Leased Premises or any access thereto and, to the knowledge of the Company
Parties, no such proceeding is contemplated by any Governmental Authority; or
(B) any special assessment which may affect any of the Leased Premises and,
to the knowledge of the Company Parties, no such special assessment is
contemplated by any Governmental Authority, any of which would have a
Material Adverse Effect on FHPS.
4.14 COMPLIANCE WITH LAWS. Except as set forth on SCHEDULE 4.14, FHPS
is in substantial compliance with all laws, regulations and orders applicable
to it, its business, operations, properties and assets, except where the
failure to comply would not have a Material Adverse Effect on FHPS or the
Purchased Assets. During the period commencing from when FHPS became a wholly
owned subsidiary of the Company in 1991 to the date of this Agreement, FHPS
has not been cited, fined or otherwise notified of any asserted past or
present failure to comply with any laws, regulations or orders, where there
remains any remedial action to be undertaken by FHPS as a result thereof, and
no proceeding with respect to any such violation is pending or to the Company
Parties' knowledge threatened. Except as set forth on SCHEDULE 4.14,
<PAGE>
FHPS is not subject to any decree or injunction to which it is a party which
restricts the continued operation of its business or the expansion thereof to
other geographical areas, customers and suppliers or lines of business, which
decree or injunction has a Material Adverse Effect on FHPS.
4.15 LABOR AND EMPLOYMENT MATTERS. FHPS is not a party to or bound by
any collective bargaining agreement or any other agreement with a labor
union. There is not now any actual or threatened labor dispute, strike or
work stoppage which affects or which may affect the business of FHPS or which
may interfere with its continued operations. Except as set forth on SCHEDULE
4.15, none of the Company Parties is aware that any executive or key employee
or group of employees of FHPS or IPS has any plans to terminate his, her or
their employment with FHPS or IPS as a result of the transactions
contemplated hereby or otherwise.
4.16 EMPLOYEE BENEFIT PLANS.
(a) EMPLOYEE BENEFIT PLANS. SCHEDULE 4.16(a) contains a list
setting forth each employee benefit plan or arrangement of FHPS, including
but not limited to employee pension benefit plans, as defined in Section 3(2)
of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
Multiemployer Plans, if any, as defined in Section 3(37) of ERISA, employee
welfare benefit plans, as defined in Section 3(1) of ERISA, deferred
compensation plans, stock option plans, bonus plans, stock purchase plans,
hospitalization, disability and other insurance plans, severance or
termination pay plans and policies, whether or not described in Section 3(3)
of ERISA, in which employees, their spouses or dependents, of the Company
participate ("EMPLOYEE BENEFIT PLANS") (true and accurate copies of which,
together with the most recent annual reports on Form 5500 and summary plan
descriptions with respect thereto, were furnished to Buyer).
(b) COMPLIANCE WITH LAW. With respect to each Employee Benefit
Plan to the best knowledge of the Company Parties: (i) each has been
administered in all respects in compliance with its terms and with all
applicable laws, including, but not limited to, ERISA and the Code; (ii) no
actions, suits, claims or disputes, other than routine benefit claims, are
pending, or threatened; (iii) no audits, inquiries, reviews, proceedings,
claims, or demands are pending with any governmental or regulatory agency;
(iv) there are no facts which could give rise to any material liability in
the event of any such investigation, claim, action, suit, audit, review, or
other proceeding; (v) except as set forth on SCHEDULE 4.16(b), all reports,
returns and similar documents required to be filed with any Governmental
Authority or distributed to any plan participant have been duly or timely
filed or distributed; and (vi) no "prohibited transaction" has occurred under
Section 406 of ERISA or Section 4975 of the Code, except where the failure of
any of the matters in subparagraphs (i)-(vi) would not have a Material
Adverse Effect on FHPS.
(c) TITLE IV PLANS. FHPS does not contribute to a Multiemployer
Plan as described in Section 4001(a)(3) of ERISA or a defined benefit plan.
(d) WELFARE PLANS. (i) Except as otherwise provided by applicable
state or federal law, FHPS is not obligated under any employee welfare
benefit plan as described in Section 3(1) of ERISA ("WELFARE PLAN") to
provide medical or death benefits with respect to any employee or former
employee of FHPS or its predecessors after termination of employment;
<PAGE>
(ii) no violations of the notice and continuation coverage requirements of
Section 4980B of the Code or Sections 601 through 608 of ERISA have occurred
with respect to any Welfare Plan that is a group health plan within the
meaning of Section 5000(b)(1) of the Code which would have a Material Adverse
Effect on FHPS; and (iii) there are no reserves, assets, surplus or prepaid
premiums under any Welfare Plan which is an Employee Benefit Plan.
(e) PBGC LIABILITY. FHPS (i) has never terminated or withdrawn
from an employee benefit plan under circumstances resulting (or expected to
result) in liability to the Pension Benefit Guaranty Corporation ("PBGC")
(other than routine claims for benefits); (ii) has no assets subject to (or
expected to be subject to) a lien for unpaid contributions to any employee
benefit plan; (iii) has not failed to pay premiums to the PBGC when due (iv)
is not subject to (or expected to be subject) an excise tax under Code
Section 4971; (v) has not engaged in any transaction which would give rise to
liability under Section 4069 or Section 4212(c) of ERISA; or (vi) has not
violated Code Section 4980B or Section 601 through 608 of ERISA, any of which
matters described in clauses (i)-(vi) would have a Material Adverse Effect on
FHPS.
(f) OTHER LIABILITIES. Except as set forth on SCHEDULE 4.16(f),
(i) FHPS is not obligated to pay separation, severance, termination or
similar benefits or to vest any person, in whole or in part, solely as a
result of any transaction contemplated by this Agreement or solely as a
result of a "change of control" (as such term is defined in Section 280G of
the Code); and (ii) none of the Employee Benefit Plans has any unfunded
liabilities which are not reflected on the Current Balance Sheet or the books
and records of FHPS.
4.17 INSURANCE. FHPS and the Purchased Assets are covered by policies
of insurance for its properties, assets and businesses (the "INSURANCE
POLICIES"), which policies are in full force and effect, and which coverage
amounts are adequate for the business conducted by FHPS and the Purchased
Assets, and all premiums due thereon have been paid. Prior to the Closing
Date, each of the Insurance Policies will be in full force and effect. FHPS
has complied with the provisions of such Insurance Policies, except where the
failure to comply would not have a Material Adverse Effect on FHPS. There is
no pending claim under any of the Insurance Policies for an amount in excess
of $10,000 individually or $50,000 in the aggregate that relates to loss or
damage to the properties, assets or business of FHPS.
4.18 RECEIVABLES. All of the Receivables of FHPS, net of any allowance
for doubtful accounts reflected in the Current Balance Sheet, are valid and
legally binding, represent bona fide transactions and arose in the ordinary
course of business of FHPS. To the best of the Company Parties' knowledge,
all of the Receivables of FHPS reflected in each Current Balance Sheet are
collectible in accordance with the terms of such receivables, without set off
or counterclaims, subject to the allowance for doubtful accounts, if any, set
forth on such Current Balance Sheet. For purposes of this Agreement, the term
"RECEIVABLES" means all receivables of FHPS, including without limitation,
trade account receivables arising from the provision of services, sale of
inventory, notes receivable, and insurance proceeds receivable, whether or
not billed.
4.19 LICENSES AND PERMITS. There are no licenses and governmental or
official approvals, permits or authorizations required for the conduct of
FHPS' business and operations, the absence of which would have a Material
Adverse Effect on FHPS (collectively, the "FHPS
<PAGE>
PERMITS"). All FHPS Permits are valid and in full force and effect, FHPS is
in compliance with the respective requirements thereof, no proceeding is
pending or, to the Company Parties' knowledge, threatened to revoke or amend
any of them, and none of the FHPS Permits is or will be impaired or affected,
which impairment or affect would have a Material Adverse Effect on FHPS, by
the execution and delivery of this Agreement or the consummation of the
transactions contemplated hereby, except for such of the preceding which,
individually or in the aggregate, would not have a Material Adverse Effect on
FHPS or on the ability of the parties to consummate the transactions
contemplated herein.
4.20 ADEQUACY OF THE ASSETS; RELATIONSHIPS WITH CUSTOMERS AND SUPPLIERS;
AFFILIATED TRANSACTIONS. Except as set forth on SCHEDULE 4.20, the Purchased
Assets, including Purchased Assets held by IPS, and assets and properties
currently owned and operated by FHPS constitute, in the aggregate, all of the
assets and properties used in the conduct of the business of FHPS and IPS,
with respect to the Purchased Assets, in the manner in which and to the
extent to which such business is currently being conducted. Neither FHPS,
nor, with respect to the Purchase Assets, IPS, has received any notice from
any current supplier of items essential to the conduct of its business that
such supplier intends to terminate or materially alter a business
relationship with FHPS or, with respect to the Purchased Assets, IPS, for any
reason, involving an amount in excess of $50,000, and to the Company Parties'
knowledge, no such supplier intends to terminate or materially alter any such
business relationship with FHPS, or IPS. Neither FHPS nor IPS has received
any notice from any customer that such customer intends to discontinue
purchases of products or services from FHPS, or, in connection with the
Purchased Assets, IPS, and to the Company Parties' knowledge no such customer
intends to discontinue or cancel purchases or orders, involving in each case
amounts in excess of $50,000. No Company Party has any direct or indirect
interest in any customer, supplier or competitor of FHPS or in any Person
from whom FHPS leases real or personal property, except to the extent that
any such customer, supplier or competitor is also an Affiliate of the
Company, or except for any passive investment interest held by any of the
Company Parties.
4.21 INTELLECTUAL PROPERTY. Except as set forth in SCHEDULE 4.21, FHPS
has full legal right, title and interest in and to all trademarks, service
marks, trade names, copyrights, know-how, patents, trade secrets, licenses
(including licenses for the use of computer software programs), and other
intellectual property used in the conduct of its business (the "INTELLECTUAL
PROPERTY"), the absence of which would have a Material Adverse Effect on FHPS
or the Purchased Assets. SCHEDULE 4.21 sets forth a true and correct list of
all Intellectual Property of FHPS. To the Company Parties' knowledge, FHPS
owns or possesses adequate rights to use all Intellectual Property reasonably
necessary to the conduct of the business of FHPS as presently conducted, and
the unrestricted conduct and the unrestricted use and exploitation of the
Intellectual Property does not infringe or misappropriate any rights held or
asserted by any Person, except where the failure to possess such rights or
the infringement would not have a Material Adverse Effect on FHPS or the
Purchased Assets. To the Company Parties' knowledge, no Person is infringing
on the Intellectual Property, and no payments are required for the continued
use of the Intellectual Property, except for software licenses entered into
in the ordinary course of business. None of the Intellectual Property has
ever been declared invalid or unenforceable, or is the subject of any pending
or, to the Company Parties' knowledge, threatened action for opposition,
cancellation, declaration, infringement, or invalidity, unenforceability or
misappropriation or like claim, action or proceeding, which declaration or
<PAGE>
unenforceability, or which pending or threatened action would have a Material
Adverse Effect on FHPS if decided adversely to FHPS.
4.22 MATERIAL CONTRACTS. SCHEDULE 4.22 sets forth a list of each
Material Contract of each Subsidiary, including all material contracts with
customers for the provision of products or services by each Subsidiary, other
than any Material Contract relating to any excluded assets or liabilities
(the "PURCHASED MATERIAL CONTRACTS"). The copy of each Material Contract
furnished to Buyer is a true and complete copy of the document it purports to
represent and reflects all amendments thereto made through the date of this
Agreement. Neither Subsidiary has violated any of the terms or conditions of
any Purchased Material Contract which would permit termination or material
modification of any Purchased Material Contract. All of the material
covenants to be performed by each Subsidiary and, to the knowledge of the
Company Parties, any other party thereto, have been fully performed in all
material respects, and neither Subsidiary has received notice for breach or
indemnification or notice of default or termination under any Purchased
Material Contract by or against FHPS or IPS or to the knowledge of the
Company Parties, any other party thereto. To the knowledge of the Company
Parties, no event has occurred which constitutes, or after notice or the
passage of time, or both, would constitute, a default by either Subsidiary
under any Purchased Material Contract, and to the knowledge of the Company
Parties no such event has occurred which constitutes or would constitute a
material default by any other party. Neither Subsidiary is subject to any
liability or payment resulting from re-negotiation of amounts paid under any
Purchased Material Contract. As used in this Section 4.22, Purchased
Material Contracts shall mean formal or informal, written or oral (a) loan
agreements, indentures, mortgages, pledges, hypothecations, deeds of trust,
conditional sale or title retention agreements, security agreements,
equipment financing obligations or guaranties, or other sources of contingent
liability in respect of any indebtedness or obligations to any other Person,
or letters of intent or commitment letters with respect to same, which exceed
$10,000 individually or $50,000 in the aggregate; (b) contracts obligating
FHPS or IPS to provide products or services for a period of one year or more;
(c) leases of real property extending for a period of one year or more; (d)
leases of personal property which individually provide for total payments in
excess of $10,000, or in the aggregate $25,000 and which are not cancelable
without penalty on notice of sixty (60) days or less; (e) agreements
providing for an independent contractor's services, or letters of intent with
respect to same, where the payment due thereunder exceeds $10,000; (f)
employment agreements, management service agreements, consulting agreements,
having a value in the form of revenue or expense in excess of $10,000; (g)
any contract relating to pending capital expenditures by FHPS in excess of
$10,000; (h) contracts obligating FHPS to purchase supplies, equipment, media
and related services of any kind, in an amount exceeding $10,000 and not
cancelable without penalty on notice of thirty (30) days or less; (i) any
non-competition agreements restricting FHPS in any manner; and (j)
confidentiality agreements, non-competition agreements, employee handbooks,
policy statements and any other agreements relating to any employee of FHPS,
which is not terminable as of the Closing.
4.23 ACCURACY OF INFORMATION FURNISHED. Subject to Buyer's
representation and warranty under SECTION 3.10, no representation, statement
or information contained in this Agreement (including, without limitation,
the various Schedules attached hereto) or any agreement executed in
connection herewith or in any certificate delivered pursuant hereto or
thereto contains any untrue statement of a material fact or omits any
material fact necessary to
<PAGE>
make the information contained therein not misleading. The Company Parties
have provided Buyer with true, accurate and complete copies of all documents
listed or described in the various Schedules attached hereto.
4.24 NO COMMISSIONS. Other than S G Cowen Securities Corporation,
neither the Company nor any Subsidiary has incurred any obligation for any
finder's or broker's or agent's fees or commissions or similar compensation
in connection with the transactions contemplated hereby.
4.25 ABSENCE OF SENSITIVE PAYMENTS. FHPS has not made or maintained (a)
any contributions, payments or gifts of its funds or property to any
governmental official, employee or agent where either the payment or the
purpose of such contribution, payment or gift was or is illegal under the
laws of the United States or any state thereof, or any other jurisdiction
(foreign or domestic); or (b) any contribution, or reimbursement of any
political gift or contribution made by any other Person, to candidates for
public office, whether federal, state, local or foreign, where such
contributions by FHPS were or would be a violation of applicable law.
4.26 TAX MATTERS. Within the times (including extensions) and in the
manner prescribed by law, FHPS (or the Company, on behalf of FHPS) has filed
all federal, state, local and foreign returns for Taxes ("RETURNS") required
to be filed in any jurisdiction (including, without limitation, informational
returns) and such Returns are complete, true and correct in all material
respects. All Returns complied in all material respects with the tax laws,
rules and regulations, as presently interpreted, applicable to such Returns.
FHPS (or the Company on behalf of FHPS) has not waived or extended any
statute of limitations relating to the assessment of any Taxes. No audit or
examination of any of the Returns of FHPS is currently in progress or, to the
Company Parties' knowledge, threatened or has occurred in the past. All Taxes
required to be paid pursuant to such Returns have been paid on or before
their respective due dates, including any extensions thereof.
ARTICLE 5
ADDITIONAL AGREEMENTS
5.1 FURTHER ASSURANCES. Each party shall execute and deliver such
additional instruments and other documents and shall take such further
actions as may be necessary or appropriate to effectuate, carry out and
comply with all of the terms of this Agreement and the transactions
contemplated hereby.
5.2 COMPLIANCE WITH COVENANTS. The Company shall, and shall cause the
Subsidiaries to, comply with all of the covenants of the Company Parties
under this Agreement.
5.3 COOPERATION. Each of the parties agrees to cooperate with the other
in the preparation and filing of all forms, notifications, reports and
information, if any, required or reasonably deemed advisable pursuant to any
law, rule or regulation in connection with the transactions contemplated by
this Agreement and to use its respective reasonable best efforts to agree
jointly on a method to overcome any objections by any Governmental Authority
to any such transactions. In addition, the Company agrees to cooperate with
Buyer, with third party
<PAGE>
costs paid by Buyer, in connection with any audit of historical financial
information that may be required under the rules and regulations of the
Securities and Exchange Commission.
5.4 APPLICATIONS AND OTHER ACTIONS. Each of the parties hereto shall
use its reasonable best efforts to take, or cause to be taken, all
appropriate actions, 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 herein, including, without
limitation, using its reasonable best efforts to obtain all licenses,
permits, consents, approvals, authorizations, qualifications and orders of
any Governmental Authority and parties to Material Contracts with the Company
and the Subsidiaries as are necessary for the consummation of the
transactions contemplated hereby. Each of the parties shall make on a prompt
and timely basis all governmental or regulatory notifications and filings
required to be made by it for the consummation of the transactions
contemplated hereby.
5.5 PURCHASE PRICE ALLOCATION AND SECTION 338 ELECTIONS. If requested
by Buyer, Buyer, the Company and the Subsidiaries shall join in an election
to have the provisions of Section 338(h)(10) of the Code and similar
provisions of state law ("SECTION 338 ELECTION") apply to the acquisition of
FHPS. Buyer shall be responsible for, and control, the preparation and
filing of such election. Each of the Company and the Subsidiaries shall
allocate the Purchase Price in accordance with SECTION 2.2 and shall report,
act and file in all respects and for all purposes consistent with such
SCHEDULE 2.2, unless to do so would cause undue hardship on the Company.
Each of the Company and the Subsidiaries shall execute and deliver to Buyer
such documents or forms (including Section 338 Forms, as defined below) as
Buyer shall request or as are required by applicable law for an effective
338(h)(10) Election. "SECTION 338 FORMS" shall mean all returns, documents,
statements, and other forms that are required to be submitted to any federal,
state, county or other local taxing authority in connection with a 338(h)(10)
Election, including, without limitation, any "statement of Section 338
election" and IRS Form 8023 (together with any schedules or attachments
thereto) that are required pursuant to Treasury Regulations.
5.6 ACCESS TO INFORMATION. From the date hereof to the Closing Date,
the Company shall, and shall cause each of the Subsidiaries and their
respective directors, officers, employees, auditors, counsel and agents to,
afford Buyer and Buyer's officers, employees, auditors, counsel and agents
reasonable access, during regular business hours and upon reasonable advance
notice, to its properties, offices and other facilities, to its officers and
employees and to all books and records, and shall furnish such persons with
all financial, operating and other data and information as may be requested.
No information provided to or obtained by Buyer shall affect any
representation or warranty in this Agreement.
5.7 NOTIFICATION OF CERTAIN MATTERS. From the date hereof to the
Closing Date, each of the parties to this Agreement shall give prompt notice
to the other parties of the occurrence or non-occurrence of any event which
would likely cause any representation or warranty made by such party herein
to be untrue or inaccurate or any covenant, condition or agreement contained
herein not to be complied with or satisfied (provided, however, that, any
such disclosure shall not in any way be deemed to amend, modify or in any way
affect the representations, warranties and covenants made by any party in or
pursuant to this Agreement).
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5.8 CONFIDENTIALITY; PUBLICITY. Except as may be required by law or as
otherwise permitted or expressly contemplated herein, no party hereto or
their respective Affiliates, employees, agents and representatives shall
disclose to any third party this Agreement, the subject matter or terms
hereof or any confidential information or other proprietary knowledge
concerning the business or affairs of the other party which it may have
acquired from such party in the course of pursuing the transactions
contemplated by this Agreement, including all notes, documents and materials
prepared by or for the respective party which reflect, interpret, evaluate,
include or are derived from such confidential information or proprietary
knowledge of the other party, without the prior consent of the other party
hereto; provided, that any information that is otherwise publicly available,
without breach of this provision, or has been obtained from a third party,
or has been requested pursuant to the order of a court of competent
jurisdiction or governmental agency having the authority to obtain such
information, or pursuant to the rules of any applicable stock exchange to
which any of the parties is subject shall not be deemed confidential
information; provided, however, that the party from whom disclosure is
sought, regarding information concerning the other party shall promptly
notify such party and allow such party to obtain any order blocking or
otherwise controlling the disclosure of such information. Any press releases
or any other public announcements concerning this Agreement or the
transactions contemplated hereby shall be approved by both Buyer and the
Company; PROVIDED, HOWEVER, that if any party reasonably believes that it has
a legal obligation to make a press release and the consent of the other party
cannot be obtained, then the release may be made without such approval. Prior
to such time, the parties shall not make any public disclosure regarding the
Agreement or the transactions contemplated hereby.
5.9 NO OTHER DISCUSSIONS. The Company Parties and their Affiliates
shall not directly or indirectly, through any officer, director, employee,
affiliate or agent or otherwise, take any action to solicit, initiate, seek,
entertain, encourage, support or respond to any inquiry, proposal or offer
from, furnish any information to, or participate in any negotiations with,
any third party regarding any acquisition of FHPS or the Purchased Assets,
any merger or consolidation with or involving FHPS or the Purchased Assets,
or any acquisition of any material portion of the Shares of FHPS or Purchased
Assets, including the grant of any license to any Intellectual Property of
FHPS other than licenses in the ordinary course of business related to the
sale of FHPS' products. The Company agrees that any such negotiations (other
than negotiations with Buyer) in progress as of the date hereof will be
suspended and that the Company will not accept or enter into any agreement,
arrangement or understanding regarding any such third party acquisition
transaction prior to the termination hereof. In the event a Company Party or
any of their respective officers, directors, employees, affiliates or agents
receives any proposal for, any third party acquisition transaction involving
FHPS or the Purchased Assets, or any request for nonpublic information in
connection with any such proposal, the Company will immediately notify Buyer,
describing in detail the identity of the Person making such proposal and the
terms and conditions of such proposal. Nothing contained in this Section
shall be construed as limiting the ability of the Company as to any matter
described in this section, with regard to any other assets of the Company
other than the Purchased Assets and the Shares.
<PAGE>
5.10 FHPS TAX MATTERS.
(a) COMPANY RETURNS. The Company and/or FHPS shall duly prepare,
or cause to be prepared, and the Company shall file, or cause to be filed, on
a timely basis all Returns of FHPS for any period ending on or before the
Closing Date. The Company shall file amended Tax Returns with respect to
periods ending on or before the Closing Date only as agreed by Buyer and the
Company.
(b) BUYER RETURNS. Buyer shall duly prepare, or cause to be
prepared, and file, or cause to be filed, on a timely basis all Returns of
FHPS for any tax period which ends after the Closing Date, including but not
limited to any Straddle Periods. Any such Returns with respect to the
Straddle Periods shall, insofar as they relate to FHPS, be on a basis
consistent with previous Returns filed in respect of FHPS, unless Buyer and
the Company conclude that there is no reasonable basis for such position.
(c) TAX COOPERATION. The Company and Buyer shall provide the other
party with such forms, information and records and make such of its officers,
directors, employees and agents available as may be reasonably requested by
such other party in connection with the preparation of any Return or any
audit or other proceeding, including any ruling request, that relates to FHPS.
(d) COMPANY INDEMNIFICATION. The Company shall be liable for and
shall indemnify and hold Buyer harmless against all Taxes of FHPS or
attributable to the Purchased Assets payable for any taxable year or taxable
period ending on or before the Closing Date. To appropriately apportion any
income taxes relating to any taxable year, beginning before and ending after
the Closing Date, the parties shall apportion such income taxes to the
taxable period ending on or before the Closing Date by a closing of the books
consistent with their past practice for reporting items, except that (i)
exemptions, allowances or deductions that are calculated on a time basis,
such as the deduction for depreciation shall be apportioned on a time basis,
and (ii) all Taxes relating to actions outside the ordinary course of
business, occurring after the Closing, on the Closing Date shall be
apportioned to the period ending after the Closing Date. To appropriately
apportion any non-income taxes relating to any taxable year beginning before
and ending after the Closing Date, the parties shall apportion such
non-income taxes to the taxable period ending on or before the Closing Date,
as follows: (x) ad valorem taxes (including without limitations real and
personal property taxes), shall be accrued on a daily basis over the period
for which such taxes are levied, or, if it cannot be determined over the
period such taxes are being levied, over the fiscal period of the relevant
taxing authority in each case irrespective of the lien or assessment date of
such taxes, (y) all taxes relating to actions outside the ordinary course of
business occurring after the Closing on the Closing Date shall be apportioned
to the period ending after the Closing Date, and (z) franchise and other
privilege taxes not measured by income shall be accrued on a daily basis over
the period to the which the privilege relates.
(e) BUYER AND FHPS INDEMNIFICATION. Buyer and FHPS shall be
liable for, and shall indemnify and hold the Company and any of its
Affiliates harmless against any and all Taxes imposed on FHPS relating or
apportioned to any taxable year or portion thereof ending after the Closing
Date, including without limitation all Taxes relating to actions outside the
ordinary course of business occurring after the Closing, on the Closing Date.
<PAGE>
(f) REFUNDS OR CREDITS. Buyer and FHPS shall promptly pay to the
Company any refunds or credits (including interest paid to Buyer thereon)
relating to Taxes for which the Company may be liable under SECTION 5.10
hereof. For purposes of this SECTION 5.10(f), 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 Tax Return or an adjustment therein, using such reduction,
overpayment or offset, or upon the receipt of cash. Upon the reasonable
request and cost of the Company, Buyer shall prepare and file or cause to be
prepared and filed, all claims for refunds relating to such Taxes; provided,
however, that Buyer shall not be required to file such claims for refund to
the extent such claim for refund would have a Material Adverse Effect on
Buyer or FHPS in the future, or to the extent such claims for refund relate
to a carryback of an item. Buyer shall be entitled to all other refunds and
credits of Taxes; provided, however, Buyer will not allow the amendment of
any Tax Return relating to any Taxes for a period (or portion thereof)
ending on or prior to the Closing Date or the carryback of an item to a
period ending on or prior to Closing without the Company's consent.
(g) CONSENT. Whenever any taxing authority asserts a claim, makes
an assessment or otherwise disputes the amount of taxes for which the Company
is or may be liable under this Agreement, Buyer shall, if informed of such
assertion, promptly inform the Company within fifteen business days, and the
Company shall have the right to control the 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 the Company may be liable under this Agreement. Whenever any taxing
authority asserts a claim, makes an assessment, or otherwise disputes the
amount of taxes for which the Buyer is liable under this Agreement, the Buyer
shall have the right to control any resulting proceedings and to determine
whether and when to settle any such claim, assessment or dispute, except to
the extent such proceeding affect the amount of taxes for which the Company
may be liable under this Agreement.
(h) SURVIVAL. The obligations of the parties set forth in this
SECTION 5.10 shall be unconditional and absolute and shall remain in effect
until thirty days after the expiration of the applicable statute of
limitations.
5.11 SERVICE AGREEMENT. Buyer, the Company and IPS shall enter into a
service agreement (the "SERVICE AGREEMENT") in the form of EXHIBIT D hereto
under which Buyer or any of its subsidiaries or Affiliates shall be the
provider of certain mail order, network claims processing and other pharmacy
benefit management services set forth in the Service Agreement.
5.12 TRANSITION OF SERVICES.
(a) IMPLEMENTATION SCHEDULE. On or before the Closing, the parties
will complete a schedule and attach it to this Agreement as SCHEDULE 5.12,
which schedule will include the name, address, contact person and number of
lives eligible for pharmacy benefits for each plan covered by the Affiliated
Business and the Non-affiliated Business and the targeted date that such
business will be transitioned to Buyer's pharmacy claims processing system
(the "IMPLEMENTATION SCHEDULE"). The parties shall use their respective
reasonable best efforts to ensure that all of such business is transitioned
to and implemented by Buyer.
<PAGE>
(b) TRANSITION OF THE COMPANY AFFILIATED BUSINESS. Upon Closing,
Buyer shall provide claims processing services, retail pharmacy network
management services, rebate contracting and formulary management services,
mail service pharmacy and other pharmacy benefit management services for the
Company Affiliated Business in accordance with the terms and provisions set
forth in the Service Agreement, including subject to the transition schedule
set forth therein.
(c) TRANSITION OF THE NON-AFFILIATED BUSINESS.
(i) The Company agrees that, following the Closing and until
such time as the claims processing services are implemented by Buyer for
each plan, the Company shall continue to perform the same scope of claims
processing services that it provided for each such plan prior to the
Closing. The Company shall use its reasonable best efforts to ensure that
during this transition period such services are performed in such a manner
that is consistent with the ordinary course of business immediately prior
to Closing in order to preserve and keep intact the business relationships
with such plans.
(ii) The Company and IPS agree that following the Closing and
until such time as the FHS Affiliated Business has been transitioned to the
jointly negotiated drug manufacturer agreements (as contemplated by the
Service Agreement), upon the request of Buyer, the Company and IPS shall
cause the Non-affiliated Business to be eligible for rebates under any or
all of the existing IPS rebate agreements should Buyer determine in its
sole discretion that it desires to continue to use such agreements for the
Non-affiliated Business. The Company and IPS agree that such rebates will
be serviced in accordance with Buyer's instructions. IPS agrees that all
rebates collected by IPS based on the utilization of the Non-affiliated
Business prior to Closing shall be paid by IPS following Closing pursuant
to the terms and conditions of the respective agreements for the
Non-affiliated Business, and that Advance Paradigm's obligation to pay such
rebates on such business shall begin with the rebates collected for the
quarter ending June 30, 1999.
(iii) Upon Closing, subject to the respective agreements
between Buyer and each plan covered by the Non-affiliated Business, mail
pharmacy services shall be provided for the Non-Affiliated Business as
determined by Buyer in its sole discretion.
(d) PHARMACY NETWORK AGREEMENTS. Pursuant to the transactions
contemplated by this Agreement, IPS will assign to FHPS prior to Closing or
directly to Buyer as of the Closing, and Buyer will acquire, all of the
retail pharmacy network contracts held by IPS, including, but not limited to
those set forth on SCHEDULE 4.22, and Buyer will assume all of the rights and
obligations thereunder upon Closing, or as soon thereafter as is practical;
provided, however, that the parties may agree to substitute new agreements
between Buyer and any such pharmacies in lieu of assignment of any such
agreements. In addition, the parties will use their reasonable best efforts
to obtain assignments of all other retail pharmacy network agreements,
subject to any limitations imposed under applicable law or regulation
affecting any of the Company's Affiliates. Subject to the respective
agreements between Buyer and each plan covered by the Non-affiliated
Business, the pharmacy eligible participants covered by such plans will
continue to receive their prescription services from such retail pharmacies.
The parties will
<PAGE>
use their reasonable best efforts to obtain a release of IPS and/or FHS from
any liability arising from any such pharmacy network agreements from and
after the Closing. In the event Buyer has failed or is otherwise unable to
pay any such pharmacies in accordance with such agreements (a "DEFAULT IN
PHARMACY PAYMENT"), upon written notice to Buyer and confirmation from
Buyer's chief financial officer that such amounts have not been paid to the
pharmacies or to the pharmacies' Affiliates or designees, FHS, or an FHS
Affiliated Plan may make payment in order to remedy any such Default in
Pharmacy Payment, and FHS shall have the right to offset any amounts that
would have been due to Buyer for such claims under the Service Agreement for
such claims.
5.13 CONDUCT OF COMPANY PENDING TRANSITION. From and after the date
hereof and prior to the complete transition of the Affiliated Business and
the Non-affiliated Business, unless Buyer shall otherwise agree in writing,
and except as otherwise expressly contemplated by this Agreement, each of the
Company and the Subsidiaries consents and agrees that the businesses of FHPS
and the business relating to the Purchased Assets shall be conducted only in,
and each of the Company and the Subsidiaries shall not take any action
affecting FHPS or the Purchased Assets except in, the ordinary course of
business and consistent with past practices, and each of the Company and the
Subsidiaries shall use its best efforts to maintain and preserve the business
organization, assets, employees and advantageous business relationships of
FHPS and the Purchased Assets.
5.14 RESTRICTIVE COVENANTS.
(a) In order to assure that Buyer will realize the benefits of the
transactions contemplated hereby, subject to the Company's right to terminate
the Service Agreement after five (5) years, during the term of the Service
Agreement, but in any event not less than the five-year period following the
Closing Date, the Company and its Affiliates shall not engage in pharmacy
claims processing, retail pharmacy network management, mail service pharmacy,
rebate management or (subject to Section 3 of the Service Agreement) the
negotiation and performance of drug manufacturer agreements. Notwithstanding
the foregoing, (i) if the parties' obligations regarding formulary management
and drug manufacturer agreements are terminated in accordance with Section
11(c)(i) of the Service Agreement, then, so long as the Company complies with
Section 11(c)(i) of the Service Agreement, the Company may thereafter provide
such services for the FHS Affiliated Members; and (ii) if the Company
releases Buyer from its obligations to perform the retail pharmacy network
management services in accordance with Section 11(c)(ii) of the Service
Agreement, then, so long as the Company is in compliance with Section
11(c)(ii) of the Service Agreement, the Company may thereafter provide such
services for the FHS Affiliated Members; both (i) and (ii) including
participation (which may include minority ownership interests representing
not more than twenty percent (20%) of the equity or voting control) in
cooperative groups or alliances, provided the Company shall not market such
services to third parties. This section shall not be deemed to be a
limitation on providing clinical services (including pharmacy formulary and
rebate management services in accordance with Section 3 of the Service
Agreement) to the FHS Affiliated Members and the Company's contracting
medical groups, or the disease management services offered by the Company, or
otherwise limit the Company or any Affiliate from undertaking activities
relating to the processing and payment of medical claims generally as a payor
of such claims.
<PAGE>
(b) SECTION 5.14(a) shall not be deemed to be a limitation on
providing clinical services (including pharmacy formulary and rebate
management services in accordance with Section 3 of the Services Agreement)
to the Affiliated Business and the Company's contracting medical groups, or
the disease management services offered by the Company, or otherwise limit
the Company or any Affiliate from undertaking activities relating to the
processing and payment of medical claims generally as a payor of such claims.
(c) Nothing contained in this SECTION 5.14 shall limit any FHS
Successor from owning and operating any business (or line of business), for
the benefit of the enrollees of the FHS Successor or other third parties with
whom the FHS Successor contracts, which would otherwise be construed as
violating the provisions of this SECTION 5.14; provided that the FHS
Successor shall be bound to this SECTION 5.14 with respect to the business of
the Company and the Affiliated Business, including business that would have
been attributable to the Company but for the Change of Control of the
Company; and provided further that except as expressly otherwise stated
herein, all terms, conditions and obligations of this Agreement shall become
the obligations of any FHS Successor. The Buyer and the FHS Successor shall
use their respective best efforts to agree on the allocation of enrollees
between FHS and the FHS Successor that are subject to this provision. To the
extent that the Company acquires any managed care company that has an
ownership in or otherwise provides services that would conflict with this
provision, this provision shall not apply to the enrollees of such managed
care organization as of the effective date of such acquisition; provided that
the provisions of this SECTION 5.14 shall continue to apply to any and all
current and additional Affiliated Business. In addition, prior to
consummating any acquisition of a managed care company that has an ownership
interest on or otherwise provide services that would conflict with this
SECTION 5.14, the Company shall notify Buyer of such acquisition, and Buyer
shall engage in good faith negotiations regarding cooperative efforts with
such entity, including Buyer's opportunity to acquire such business.
(d) Notwithstanding anything contained herein to the contrary, in
the event of a breach or threatened breach of the covenants contained in
SECTION 5.14(a) hereof, Buyer may, in addition to any other available
remedies, be entitled to an injunction enjoining the Company and its
Affiliates or any person or persons acting for or with the Company in any
capacity whatsoever from violating any of the terms herein, in accordance
with applicable law regarding the award of an equitable remedy.
5.15 RETENTION OF LITIGATION BY THE COMPANY. The Parties agree that the
Company shall retain all actions, suits and other legal and administrative
proceedings and governmental investigations pending or threatened against
FHPS, or FHPS' properties or assets, or the Purchased Assets. The Parties
agree that the Buyer has not agreed to assume, and shall not be required to
assume, any such pending or threatened action, suit or other legal or
administrative proceeding or governmental investigation, and the Company
agrees that it will take all actions and do all things necessary to ensure
that Buyer is not liable for any of the foregoing.
5.16 FHPS FUNDS. The Company shall cause FHPS to have not less than
Five Million Dollars ($5,000,000.00) in cash immediately prior to and at the
Closing.
<PAGE>
ARTICLE 6
CONDITIONS TO THE OBLIGATIONS OF THE BUYER
The obligations of Buyer to effect the transactions contemplated hereby
shall be subject to the fulfillment at or prior to the Closing Date of the
following conditions, any or all of which may be waived in whole or in part
by Buyer:
6.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES AND COMPLIANCE WITH
OBLIGATIONS. The representations and warranties of the Company Parties
contained in this Agreement shall be true and correct in all material
respects at and as of the Closing Date with the same force and effect as
though made at and as of that time except (a) for changes specifically
permitted by this Agreement and (b) that those representations and warranties
which address matters only as of a particular date shall remain true and
correct as of such date. Each of the Company Parties shall have performed or
complied with in all material respects all of their obligations required by
this Agreement to be performed or complied with at or prior to the Closing
Date. Each of the Company Parties shall have delivered to Buyer a
certificate, dated as of the Closing, duly signed by the Chief Executive
Officer and principal accounting officer, certifying that such
representations and warranties are true and correct in all material respects
and that all such obligations have been performed and complied with in all
material respects.
6.2 NO MATERIAL ADVERSE CHANGE OR DESTRUCTION OF PROPERTY. Between
September 30, 1998 and the Closing Date, (a) there shall have been no
Material Adverse Change to FHPS or the Purchased Assets, (b) there shall have
been no adverse federal, state or local legislative or regulatory change
affecting in any material respect the services, products, business or
prospects of FHPS or the Purchased Assets, and (c) none of the Purchased
Assets or the assets of FHPS shall have been damaged by fire, flood,
casualty, act of God or the public enemy or other cause (regardless of
insurance coverage for such damage), which damages may have a Material
Adverse Effect on the Purchased Assets or FHPS, or have become the subject of
a condemnation proceeding, and the Company Parties shall have delivered to
Buyer a certificate, dated as of the Closing Date, to that effect.
6.3 CORPORATE CERTIFICATES. The Company shall have delivered to Buyer
(i) copies of the organizational documents of FHPS as in effect immediately
prior to the Closing Date, (ii) copies of resolutions adopted by the Board of
Directors and stockholders of the Company and the Subsidiaries authorizing
the transactions contemplated by this Agreement, and (iii) a certificate of
good standing of each of the Company and the Subsidiaries issued by the
Secretary of State of its respective state of incorporation and each other
state in which each is qualified to do business as of a recent date,
certified in each case as of the Closing Date by the Secretary of the
respective Company Party as being true, correct and complete.
6.4 OPINION OF COUNSEL. Buyer shall have received an opinion dated as
of the Closing Date from counsel for the Company Parties in form and
substance reasonably acceptable to Buyer.
6.5 CERTIFICATES AND TRANSACTION DOCUMENTS. Buyer shall have received
from the Company all of the certificates and transfer documents set forth on
EXHIBIT C.
<PAGE>
6.6 CONSENTS AND APPROVALS. The Company Parties shall have received
and furnished to Buyer all consents to the transaction contemplated hereby
and waivers of rights to terminate or modify any material rights or
obligations of the Company Parties from any Person from whom such consent or
waiver is required under any Material Contract on or prior to the Closing and
effective through and including the Closing Date, or who as a result of the
transactions contemplated hereby, would have such rights to terminate or
modify such Contracts or instruments, either by the terms thereof or as a
matter of law. The requirements of the Hart-Scott-Rodino Act, if applicable,
shall have been satisfied.
6.7 NO ADVERSE LITIGATION. There shall not be pending or threatened
any action or proceeding by or before any court or other governmental body
which shall seek to restrain, prohibit, invalidate or collect damages arising
out of the transactions contemplated hereby, and which, in the reasonable
judgment of Buyer, makes it inadvisable to proceed with the transactions
contemplated hereby.
6.8 LIABILITIES. Prior to the Closing, the Company shall have obtained
full satisfactions or releases of all obligations and liabilities due to or
on behalf of any Affiliate of a Subsidiary.
6.9 LIENS. The shares of capital stock of each Subsidiary held by the
Company shall be free and clear of any Liens. The Purchased Assets shall be
free and clear of any Liens.
6.10 SERVICE AGREEMENT. The Service Agreement shall be executed and
become effective immediately following the Closing.
6.11 IMPLEMENTATION SCHEDULE. Buyer and the Company shall have agreed
upon the Implementation Schedule set forth on SCHEDULE 5.12.
6.12 FINANCIAL STATEMENTS. The Company shall have delivered, or shall
have caused to be delivered, to Buyer the Prior Financial Statements and the
Current Financial Statements. The Company shall have agreed to deliver the
balance sheet of FHPS at March 31, 1999 within thirty (30) days of the
Closing.
ARTICLE 7
CONDITIONS TO THE OBLIGATIONS OF
THE COMPANY PARTIES
The obligations of the Company Parties to effect the transactions
contemplated hereby shall be subject to the fulfillment at or prior to the
Closing Date of the following conditions, any or all of which may be waived
in whole or in part by the Company Parties:
7.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES AND COMPLIANCE WITH
OBLIGATIONS. The representations and warranties of Buyer contained in this
Agreement shall be true and correct in all material respects at and as of the
Closing Date with the same force and effect as though made at and as of that
time except (a) for changes specifically permitted by or disclosed pursuant
to this Agreement and (b) that those representations and warranties which
address matters only as of a particular date shall remain true and correct as
of such date. Buyer
<PAGE>
shall have performed and complied with in all material respects all of its
obligations required by this Agreement to be performed or complied with at or
prior to the Closing Date. Buyer shall have delivered to the Company a
certificate, dated as of the Closing Date, and signed by an executive
officer, certifying that such representations and warranties are true and
correct in all material respects and that all such obligations have been
performed and complied with in all material respects.
7.2 NO ADVERSE LITIGATION OR LEGISLATION. There shall not be pending
or threatened any action or proceeding by or before any court or other
governmental body which shall seek to restrain, prohibit, invalidate or
collect damages arising out of the transactions contemplated hereby, and
which, in the reasonable judgment of the Company Parties, makes it
inadvisable to proceed with the transactions contemplated hereby.
7.3 NO MATERIAL ADVERSE CHANGE. Between September 30, 1998 and the
Closing Date, there shall have been no Material Adverse Change to Buyer.
7.4 OPINION OF BUYER COUNSEL. The Company shall have received an
opinion dated as of the Closing Date from counsel to Buyer in form and
substance reasonably acceptable to the Company.
7.5 HART - SCOTT - RODINO ACT. The requirements of the
Hart-Scott-Rodino Act, if applicable, shall have been satisfied.
ARTICLE 8
REMEDIES FOR BREACHES OF THIS AGREEMENT
8.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All of the
representations and warranties of the Parties contained in this Agreement
shall survive the Closing (except if the Party suffering Adverse Consequences
knew or had reason to know of any misrepresentation or breach of warranty or
covenant at the time of Closing) and continue in full force and effect
thereafter until the earlier of: (i) the completion of the Buyer's
consolidated audit for the fiscal year ending March 31, 2000, or (ii) ninety
(90) days following the end of the fiscal year ending March 31, 2000.
8.2 INDEMNIFICATION PROVISIONS FOR BENEFIT OF BUYER. In the event any
Company Party breaches (or in the event any third party alleges facts that,
if true, would mean any Company Party has breached) any representations,
warranties, and covenants of the Company Parties contained herein, then the
Company agrees to indemnify Buyer from and against any Adverse Consequences
Buyer may suffer through and after the date of the claim for indemnification
(including any Adverse Consequences suffered after the end of any applicable
survival period) resulting from, arising out of, relating to, in the nature
of, or caused by the breach (or the alleged breach), subject to the
limitations set forth below.
8.3 INDEMNIFICATION PROVISIONS FOR BENEFIT OF THE COMPANY. In the
event Buyer breaches (or in the event any third party alleges facts that, if
true, would mean Buyer has breached) any representations, warranties, and
covenants of Buyer contained herein, then Buyer agrees to indemnify the
Company from and against any Adverse Consequences the Company may suffer
through and after the date of the claim for indemnification (including any
Adverse
<PAGE>
Consequences suffered after the end of any applicable survival period)
resulting from, arising out of, relating to, in the nature of or caused by
the breach (or the alleged breach), subject to the limitations set forth
below.
8.4 PROCEDURE FOR MATTERS INVOLVING THIRD PARTIES.
(a) If any third party shall notify any Party (the "INDEMNIFIED
PARTY") with respect to any matter (a "THIRD PARTY CLAIM") which may give
rise to a claim for indemnification against any other Party (the
"INDEMNIFYING PARTY") under this ARTICLE 8, then the Indemnified Party shall
promptly issue a Claim Notice to the Indemnifying Party with respect thereto.
(b) Any Indemnifying Party will have the right to defend the
Indemnified Party against the Third Party Claim with counsel of its choice
reasonably satisfactory to the Indemnified Party so long as (i) the
Indemnifying Party notifies the Indemnified Party in writing within fifteen
(15) days following the receipt of the Claim Notice that the Indemnifying
Party will indemnify the Indemnified Party from and against the entirety of
any Adverse Consequences the Indemnified Party may suffer resulting from,
arising out of, relating to, in the nature of, or caused by the Third Party
Claim, (ii) upon request of the Indemnified Party, the Indemnifying Party
provides the Indemnified Party with evidence reasonably acceptable to the
Indemnified Party that the Indemnifying Party will have the financial
resources to defend against the Third Party Claim and fulfill its
indemnification obligations hereunder, and (iii) the Indemnifying Party
conducts the defense of the Third Party Claim actively and diligently.
(c) The Indemnified Party: (i) may retain separate co-counsel at
its sole cost and expense and participate in the defense of the Third Party
Claim and (ii) will not consent to the entry of any judgment or enter into
any settlement with respect to the Third Party Claim without the prior
written consent of the Indemnifying Party (not to be withheld unreasonably);
and the Indemnifying Party will not consent to the entry of any judgment or
enter into any settlement with respect to the Third Party Claim without the
prior written consent of the Indemnified Party (not to be withheld
unreasonably).
(d) In the event any of the conditions in SECTION 8.4(b) is or
becomes unsatisfied, (i) the Indemnified Party may defend against the Third
Party Claim in any manner it reasonably may deem appropriate, (ii) the
Indemnifying Parties will reimburse the Indemnified Party promptly and
periodically for the costs of defending against the Third Party Claim
(including reasonable attorneys' fees and expenses), and (iii) the
Indemnifying Parties will remain responsible for any Adverse Consequences the
Indemnified Party may suffer resulting from, arising out of, relating to, in
the nature of, or caused by the Third Party Claim to the fullest extent
provided in this ARTICLE 8.
8.5 NOTICE OF CLAIM. A Party suffering Adverse Consequences that gives
or could give rise to a claim for indemnification under this ARTICLE 8 shall
promptly notify each other Party thereof in writing (a "CLAIM NOTICE") in
accordance with SECTION 10.1. The Claim Notice shall contain a brief
description of the nature of the Adverse Consequences suffered and, if
practicable, an aggregate dollar value estimate of the Adverse Consequence
suffered. No delay in
<PAGE>
the issuance of a Claim Notice shall relieve any Party from any obligation
under this ARTICLE 8, unless and solely to the extent such Party is thereby
prejudiced.
8.6 LIMITATION ON AND EXPIRATION OF INDEMNIFICATION. Notwithstanding
anything in this ARTICLE 8 to the contrary, the Company's rights to
indemnification from Buyer, and Buyer's rights to indemnification from the
Company, shall be limited as follows:
(a) all rights of the parties hereto to indemnification hereunder
for breaches of representations and warranties shall expire following the
completion of the Buyer's consolidated audit for the fiscal year ending March
31, 2000; provided, however, if, prior to such expiration, a state of facts
shall have become known which threatens to give rise to a liability against
which any party hereto would be entitled to indemnification hereunder and the
indemnified party shall have given notice of such facts to the indemnifying
party, then the rights of the indemnified party to indemnification with
respect to such liability shall continue until such liability shall have been
finally determined and disposed of; and provided, further, that any
obligation for indemnification by the Company arising out of Taxes shall
continue for the period of the applicable statute of limitations for such
Taxes.
(b) No party shall be entitled to indemnification pursuant to
SECTION 8.1 or 8.2 unless and until the aggregate amount of damages resulting
from any and all indemnification sustained by such party exceeds $500,000.
Further, the aggregate amount to which an Indemnified Party shall be entitled
to recover for all obligations of indemnification under this Section 8 shall
not exceed the amount of $20 million.
(c) whenever the word "material" or phrase "Material Adverse
Effect" is used in this Agreement, it shall be construed as referring to
damages with respect to any individual claim which exceeds $75,000.
8.7 ADJUSTMENT FOR INSURANCE. The amount which an Indemnifying Party is
required to pay to, for or on behalf of the Indemnified Party pursuant to
this Article 8 shall be adjusted (including, without limitation,
retroactively) by any insurance proceeds actually recovered by or on behalf
of such Indemnified Party in reduction of the related indemnifiable loss (the
"INDEMNIFIABLE LOSS"). Amounts required to be paid, as so reduced, are
hereinafter sometimes called an "INDEMNITY PAYMENT". If an Indemnified Party
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, then the Indemnified Party shall (x) promptly notify the
Indemnifying Party of the amount and nature of such proceeds, and (y) pay to
the Indemnifying Party the amount of such insurance proceeds or, if lesser,
the amount of the Indemnity Payment.
8.8 MITIGATION OF LOSS. Each Indemnified Party is obligated to use all
reasonable efforts to mitigate to the fullest extent practicable the amount
of any Indemnifiable 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 Indemnifiable Loss to the extent
such Indemnified Party failed to comply with the foregoing obligation.
8.9 SUBROGATION. Upon making any Indemnity Payment, the Indemnifying
Party will, to the extent of such payment, be subrogated to all rights of the
Indemnified Party against
<PAGE>
any third party in respect of the Indemnifiable Loss to which the payment
relates; PROVIDED, HOWEVER, that until the Indemnified Party recovers full
payment of its Indemnifiable 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 Indemnified
Party's rights against such third party. Without limiting the generality of
any other provision hereof, each such Indemnified Party and Indemnifying
Party will duly execute, upon request, all instruments reasonably necessary
to evidence and perfect the above-described subrogation and subordination
rights.
8.10 OTHER INDEMNIFICATION PROVISIONS. The foregoing indemnification
provisions are in addition to, and not in derogation of, any statutory,
equitable, or common law remedy (including without limitation any such remedy
arising under Environmental, Health, and Safety Requirements) any Party may
have with respect to the transactions contemplated by this Agreement;
provided, however, that the limitations contained in SECTION 8.6 shall apply
to such remedies, except with respect to any equitable remedy, or any rights
of any of the parties arising under the Service Agreement.
ARTICLE 9
TERMINATION, AMENDMENT AND WAIVER
9.1 TERMINATION. This Agreement may be terminated at any time prior to
the Closing Date:
(a) by mutual written consent of all of the parties hereto at any
time prior to the Closing; or
(b) by Buyer upon delivery of written notice to the Company in
accordance with SECTION 10.1 of this Agreement in the event of a material
breach by a Company Party of any provision of this Agreement; or
(c) by the Company upon delivery of written notice to Buyer in
accordance with SECTION 10.1 of this Agreement in the event of a material
breach by Buyer of any provision of this Agreement; or
(d) by Buyer or the Company upon delivery of written notice to the
other in accordance with SECTION 10.1 of this Agreement, if the Closing shall
not have occurred by March 31, 1999, unless the failure of the Closing to
occur is the result of a breach by the terminating party that caused the
Closing to be delayed.
9.2 EFFECT OF TERMINATION. Except for the provisions of ARTICLE 8 and
SECTION 10.3 hereof, which shall survive any termination of this Agreement,
in the event of termination of this Agreement pursuant to SECTION 9.1, this
Agreement shall forthwith become void and of no further force and effect, and
the parties shall be released from any and all obligations hereunder;
provided, however, that nothing herein shall relieve any party from liability
for the willful breach of any of its representations, warranties, covenants
or agreements set forth in this Agreement.
<PAGE>
ARTICLE 10
GENERAL PROVISIONS
10.1 NOTICES. All notices, requests, demands, claims, and other
communications hereunder shall be in writing and shall be deemed given if
delivered by certified or registered mail (first class postage pre-paid),
guaranteed overnight delivery or facsimile transmission, if such transmission
is confirmed by delivery by certified or registered mail (first class postage
pre-paid) or guaranteed overnight delivery, to the following addresses and
telecopy numbers (or to such other addresses or telecopy numbers which such
party shall designate by like notice to the other party):
(a) if to Buyer to:
Advance Paradigm, Inc.
545 E. John Carpenter Freeway, Suite 1570
Irving, Texas 75062
Attn: David D. Halbert
Chief Executive Officer, President and Chairman
Telecopy: (972) 830-6196
with a copy to:
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
1700 Pacific Avenue, Suite 4100
Dallas, Texas 75201
Attn: J. Kenneth Menges, Jr., P.C.
Telecopy: (214) 969-4343
(b) if to the Company Parties to:
Foundation Health Systems, Inc.
21650 Oxnard Street
Woodland Hills, California 91367
Attention: Gary Velasquez
President - Specialty Services
Telecopy: 1-818-676-6616
with a copy to:
Foundation Health Systems, Inc.
21650 Oxnard Street
Woodland Hills, California 91367
Attention: B. Curtis Westen, Esquire
Senior Vice President, General Counsel and
Secretary
Telecopy: 1-818-676-7503
and
<PAGE>
Epstein Becker & Green, P.C.
1227 25th Street, N.W.
Washington, D.C. 20037
Attention: Robert D. Reif, Esquire
Telecopy: 202-296-2882
10.2 ENTIRE AGREEMENT. This Agreement (including the Exhibits and
Schedules attached hereto, and other documents delivered at the Closing
pursuant hereto), contains the entire understanding of the parties in respect
of its subject matter and supersedes all prior agreements and understanding
(oral or written) between or among the parties with respect to such subject
matter. The Exhibits and Schedules constitute a part of this Agreement as
though set forth in full herein.
10.3 EXPENSES; SALES TAX. Except as otherwise provided herein, each
party shall bear its own transaction fees. The Company shall bear, be
responsible for and pay any state sales tax arising as a result of sale of
the Shares.
10.4 AMENDMENT; WAIVER. This Agreement may not be modified, amended,
supplemented, canceled, or discharged, except by written instrument executed
by all parties. No failure to exercise and no delay in exercising, any right,
power or privilege under this Agreement shall operate as a waiver, nor shall
any single or partial exercise of any right, power or privilege hereunder
preclude the exercise of such or any other right, power or privilege. No
waiver of any breach of any provision shall be deemed to be a waiver of any
preceding or succeeding breach of the same or any other provision, nor shall
any waiver be implied from any course of dealing between the parties. No
extension of time for performance of any obligations or other acts hereunder
or under any other agreement shall be deemed to be an extension of the time
for performance of any other obligations or any other acts.
10.5 BINDING EFFECT; ASSIGNMENT. The rights and obligations of this
Agreement shall bind and inure to the benefit of the parties and their
respective successors and permitted assigns. Nothing expressed or implied
herein shall be construed to give any other Person any legal or equitable
rights hereunder. Except as expressly provided herein, the rights and
obligations of this Agreement may not be assigned by the Company Parties
without the prior written consent of Buyer. Buyer may assign all or any
portion of its rights hereunder to one or more of its wholly owned
subsidiaries.
10.6 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be an original but all of which together
shall constitute one and the same instrument.
10.7 INTERPRETATION. When a reference is made in this Agreement to an
article, section, paragraph, clause, schedule or exhibit, such reference
shall be deemed to be to this Agreement unless otherwise indicated. The
headings contained herein and on the schedules are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement or the schedules. Whenever the words "include," "includes" or
"including" are used in this Agreement, they shall be deemed to be followed
by the words "without limitation." Time shall be of the essence in this
Agreement.
<PAGE>
10.8 GOVERNING LAW; INTERPRETATION. This Agreement shall be construed
in accordance with and governed for all purposes by the laws of the State of
Delaware without giving effect to the principles of conflicts of laws.
10.9 JURISDICTION; SERVICE OF PROCESS. Any action or proceeding seeking
to enforce any provision of, or based on any right arising out of, this
Agreement may be brought against any of the parties in the United States
District Court for the District of Delaware and each of the parties consents
to the jurisdiction of such court (and of the appropriate appellate courts)
in any such action or proceeding and waives any objection to venue laid
therein. Process in any action or proceeding referred to in the preceding
sentence may be served on any party anywhere in the world. To the extent not
prohibited by applicable law, each of the parties hereby waives any right to
trial by jury in any action or proceeding based on or arising out of this
Agreement.
10.10 ARM'S LENGTH NEGOTIATIONS. Each party hereto expressly
represents and warrants to all other parties hereto that (a) before executing
this Agreement, said party has fully informed himself or itself of the terms,
contents, conditions, and effects of this Agreement; (b) said party has
relied solely and completely upon his or its own judgment in executing this
Agreement; (c) said party has had the opportunity to seek and has obtained
the advice of counsel before executing this Agreement; (d) said party has
acted voluntarily and of his or its own free will in executing this
Agreement; (e) said party is not acting under duress, whether economic or
physical, in executing this Agreement; and (f) this Agreement is the result
of arm's length negotiations conducted by and among the parties and their
respective counsel.
[SIGNATURE PAGE FOLLOWS]
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as
of the date first above written.
ADVANCE PARADIGM, INC.
By: /s/ David D. Halbert
----------------------------------------
Name: David D. Halbert
--------------------------------------
Title: Chairman, CEO
-------------------------------------
FOUNDATION HEALTH SYSTEMS, INC.
By: /s/ Gary S. Velasquez
----------------------------------------
Name: Gary S. Velasquez
--------------------------------------
Title: President Specialty Services
-------------------------------------
FOUNDATION HEALTH PHARMACEUTICAL SYSTEMS, INC.
By: /s/ Gary S. Velasquez
----------------------------------------
Name: Gary S. Velasquez
--------------------------------------
Title: CEO
-------------------------------------
INTEGRATED PHARMACEUTICAL SYSTEMS, INC.
By: /s/ Gary S. Velasquez
----------------------------------------
Name: Gary S. Velasquez
--------------------------------------
Title: CEO
-------------------------------------
FOUNDATION HEALTH CORPORATION
By: /s/ Gary S. Velasquez
----------------------------------------
Name: Gary S. Velasquez
--------------------------------------
Title:
-------------------------------------
<PAGE>
FOURTH AMENDMENT TO
CREDIT AGREEMENT
THIS FOURTH AMENDMENT TO CREDIT AGREEMENT is made and dated as of March
26, 1999 (the "FOURTH 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 by that certain First
Amendment and Waiver to Credit Agreement (the "FIRST AMENDMENT") dated as of
April 6, 1998, that certain Second Amendment to Credit Agreement (the "SECOND
AMENDMENT") dated as of July 31, 1998 and that certain Third Amendment (the
"THIRD AMENDMENT") dated as of November 6, 1998 (as further 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) The definition of the term "Adjusted EBITDA" in Section
1.01 of the Credit Agreement is hereby amended by inserting ", any Specified
Credits (calculated on a pre-tax basis)" after the words "any Specified Charges"
in the fourth line thereof.
(b) The definition of the term "Net Cash Flow" in Section 1.01
of the Credit Agreement is hereby amended by inserting ", any Specified Credits
(calculated on a net of tax basis)" prior to the words "extraordinary gains" in
the third line thereof.
(c) The definition of the term "Net Worth" in Section 1.01 of
the Credit Agreement is hereby amended and restated in its entirety to read as
follows:
1
<PAGE>
"NET WORTH" of the Company on any day of determination means
an amount equal to the excess of Total Assets over Total Liabilities.
(d) There shall be added to Section 1.01 of the Credit
Agreement, in appropriate alphabetical sequence, a new definition of the term
"Specified Credits" reading in its entirety as follows:
"SPECIFIED CREDITS" means the gains (net of costs and expenses
of sale) realized from the sale of those assets set forth on Part 3 of
Schedule 1.01 hereof.
2.2 AMENDMENT TO SCHEDULE 1.01.
(a) Schedule 1.01 of the Credit Agreement is hereby amended
and restated to read in its entirety as set forth on Schedule 1.01 hereto.
2.3 AMENDMENTS TO SECTION 2.09.
(a) The first sentence of Clause (e) of Section 2.09 of the
Credit Agreement is hereby amended and restated to read in its entirety as
follows:
"Subject to Section 3.04, until the aggregate
Commitments shall have permanently been reduced to an amount not in
excess of $750,000,000, the Company shall ratably prepay Committed
Loans by an amount equal to (A) 100% of the net cash proceeds from the
sale of its assets described on Schedule 2.09 (without giving effect to
clause (ii) below) and (B) 50% of net cash proceeds from all other
asset sales except for (i) the Workers Compensation Disposition and
(ii) asset sales generating aggregate net proceeds up to $10,000,000 in
any fiscal year."
(b) Section 2.09 of the Credit Agreement is hereby amended by
adding the following subsection (f) thereto:
"(f) Subject to Section 3.04, until the aggregate
Commitments shall have permanently been reduced to an amount not in
excess of $750,000,000, at any time that the Company's Senior Unsecured
Debt Rating shall not be at or above BBB - by S&P or at or above Baa3
by Moody's, the Company shall ratably prepay Committed Loans by an
amount equal to 100% of the net proceeds from any issuance by the
Company of equity securities after December 31, 1998 (other than any
equity securities issued in connection with an Acquisition). Such
prepayment shall be made on the next Interest Payment Date for Offshore
Rate Committed Loans (or, if there shall be no Offshore Rate Committed
Loans outstanding, on the next Interest Payment Date for Base Rate
Committed Loans) occurring after completion of such issuance. 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
2
<PAGE>
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 the amount of the required prepayment."
2.4 ADDITION OF SCHEDULE 2.09.
(a) There shall be added to the Credit Agreement a new
Schedule 2.09 reading in its entirety as set forth on Schedule 2.09 hereto.
2.5 AMENDMENTS TO SECTION 7.12.
(a) Clause (c) of Section 7.12 of the Credit Agreement is
hereby amended and restated in its entirety to read as follows:
"(c) its Net Worth to be less than the sum of (w) 85%
of Net Worth as of December 31, 1998 PLUS (x) 50% of the net income of
the Company and its Subsidiaries (without giving effect to losses) for
each fiscal quarter ending on or after March 31, 1999 ."
3. 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 Fourth Amendment:
3.1 AUTHORIZATION. The execution, delivery and performance by
the Company of this Fourth Amendment has been duly authorized by all necessary
corporate action, and this Fourth Amendment has been duly executed and delivered
by the Company.
3.2 BINDING OBLIGATION. This Fourth Amendment constitutes the
legal, valid and binding obligation of the Company, enforceable against it in
accordance with its terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, or similar laws affecting the enforcement of creditors'
rights generally or by equitable principles relating to enforceability.
3.3 NO LEGAL OBSTACLE TO AMENDMENT. The execution, delivery
and performance of this Fourth 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
3
<PAGE>
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 Fourth Amendment,
or the transactions contemplated hereby.
3.4 INCORPORATION OF CERTAIN REPRESENTATIONS. After giving
effect to the terms of this Fourth 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.
3.5 DEFAULT. No Default or Event of Default under the Credit
Agreement has occurred and is continuing.
4. CONDITIONS, EFFECTIVENESS. The effectiveness of this Fourth
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 of the following on or before March 31, 1999:
4.1 AUTHORIZED SIGNATORIES. A certificate, signed by the
Secretary or an Assistant Secretary of the Company and dated the date of this
Fourth Amendment, as to the incumbency of the person or persons authorized to
execute and deliver this Fourth Amendment and any instrument or agreement
required hereunder on behalf of the Company.
4.2 FEES. Payment to the Administrative Agent, for the pro
rata benefit of each Bank that executed and returned the approval letter dated
March 16, 1999 from the Agent to the Banks (the "Approval Letter") on or before
3:00 p.m., Pacific time, on March 26, 1999 and that thereafter executed this
Fourth Amendment prior to March 31, 1999, of an amendment fee in an amount equal
to .25% of the aggregate amount of the Commitments held by the Banks that have
so executed the Approval Letter and this Fourth Amendment; and payment of all
other fees and expenses of the Arrangers in connection with this Fourth
Amendment (including, without limitation, the reasonable fees and expenses of
the counsel to the Arrangers).
4.3 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 Fourth Amendment and the Credit
Agreement and the compliance with the conditions set forth herein.
5. CONDITION SUBSEQUENT. On or before May 30, 1999, the Company
shall deliver to the Agent a certificate, signed by the Secretary or an
Assistant Secretary of the Company as to the resolutions of the Company's board
of directors authorizing or ratifying the transactions contemplated by the
Fourth Amendment, which certificate shall be in form and substance
4
<PAGE>
satisfactory to the Agent. If the Company shall fail to deliver such a
certificate by May 30, 1999, then this Fourth Amendment shall cease to be
effective as of such date.
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 Fourth 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 Fourth 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 Fourth Amendment shall
become effective when 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 Fourth Amendment shall be governed by
and construed in accordance with the laws of the State of California.
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Fourth
Amendment to be duly executed and delivered as of the date first written above.
FOUNDATION HEALTH SYSTEMS, INC.
By: /s/ signature
--------------------------------------
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION, as Administrative Agent
By: /s/ signature
--------------------------------------
[Balance of signatures not included with this copy]
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Exhibit 10.65
FOUNDATION HEALTH SYSTEMS, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
Effective as of January 1, 1996
(As amended as of April 1, 1997 to reflect the change in name
of Health Systems International, Inc. to Foundation Health Systems, Inc.)
<PAGE>
FOUNDATION HEALTH SYSTEMS, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
ARTICLE I - INTRODUCTION
1.01 Purpose. . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.02 Effective Date and Term. . . . . . . . . . . . . . . . . . 1
1.03 Participation. . . . . . . . . . . . . . . . . . . . . . . 1
1.04 Applicability of ERISA . . . . . . . . . . . . . . . . . . 1
ARTICLE II - DEFINITIONS
2.01 Affiliated Company . . . . . . . . . . . . . . . . . . . . 1
2.02 Average Monthly Compensation . . . . . . . . . . . . . . . 2
2.03 Benefit Accrual Percentage . . . . . . . . . . . . . . . . 2
2.04 Board; Board of Directors. . . . . . . . . . . . . . . . . 2
2.05 Change in Control. . . . . . . . . . . . . . . . . . . . . 2
2.06 Code . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.07 Committee. . . . . . . . . . . . . . . . . . . . . . . . . 3
2.08 Common Stock . . . . . . . . . . . . . . . . . . . . . . . 3
2.09 Compensation . . . . . . . . . . . . . . . . . . . . . . . 4
2.10 Covered Employer . . . . . . . . . . . . . . . . . . . . . 4
2.11 Defined Benefit Plan . . . . . . . . . . . . . . . . . . . 4
2.12 Effective Date . . . . . . . . . . . . . . . . . . . . . . 4
2.13 ERISA. . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.14 Exchange Act . . . . . . . . . . . . . . . . . . . . . . . 4
2.15 100% Joint and Survivor Annuity. . . . . . . . . . . . . . 4
2.16 50% Joint and Survivor Annuity . . . . . . . . . . . . . . 5
2.17 401(k) Plan. . . . . . . . . . . . . . . . . . . . . . . . 5
2.18 Full-Time Employment . . . . . . . . . . . . . . . . . . . 5
2.19 Merger . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.20 Nonqualified Defined Benefit Plan. . . . . . . . . . . . . 5
2.21 Nonqualified Defined Contribution Plan . . . . . . . . . . 5
2.22 Normal Benefit Date. . . . . . . . . . . . . . . . . . . . 6
2.23 Normal Benefit Form. . . . . . . . . . . . . . . . . . . . 6
2.24 Normal Retirement. . . . . . . . . . . . . . . . . . . . . 6
2.25 Participant. . . . . . . . . . . . . . . . . . . . . . . . 6
2.26 Payment Commencement Date. . . . . . . . . . . . . . . . . 6
2.27 Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.28 Retirement; Retirement Date. . . . . . . . . . . . . . . . 6
2.29 Service Years. . . . . . . . . . . . . . . . . . . . . . . 7
2.30 Single Life Annuity. . . . . . . . . . . . . . . . . . . . 7
2.31 Specified Rate . . . . . . . . . . . . . . . . . . . . . . 7
2.32 Sponsor. . . . . . . . . . . . . . . . . . . . . . . . . . 8
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PAGE NO.
2.33 Spouse . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.34 Termination; Termination Date. . . . . . . . . . . . . . . 8
2.35 Termination for Cause. . . . . . . . . . . . . . . . . . . 8
ARTICLE III - ADMINISTRATION OF THE PLAN
3.01 Administration . . . . . . . . . . . . . . . . . . . . . . 9
3.02 Committee Authority; Rules and Regulations . . . . . . . . 9
3.03 Appointment of Agents. . . . . . . . . . . . . . . . . . . 9
3.04 Leave of Absence . . . . . . . . . . . . . . . . . . . . . 9
3.05 Actuarial Assumptions. . . . . . . . . . . . . . . . . . . 9
ARTICLE IV - BENEFITS
4.01 Eligibility and Vesting. . . . . . . . . . . . . . . . . . 10
4.02 Form of Supplemental Benefit . . . . . . . . . . . . . . . 10
4.03 Payment of Supplemental Benefit. . . . . . . . . . . . . . 11
4.04 Monthly Annuity Amount . . . . . . . . . . . . . . . . . . 11
4.05 Target Monthly Benefit . . . . . . . . . . . . . . . . . . 11
4.06 Monthly Offset Amount. . . . . . . . . . . . . . . . . . . 12
4.07 Special Rules for Early Retirement . . . . . . . . . . . . 17
4.08 Termination of Plan Participation. . . . . . . . . . . . . 17
4.09 Disability . . . . . . . . . . . . . . . . . . . . . . . . 18
4.10 Change in Control. . . . . . . . . . . . . . . . . . . . . 18
4.11 Termination for Cause. . . . . . . . . . . . . . . . . . . 18
ARTICLE V - DEATH OF A PARTICIPANT
5.01 Termination by Reason of Death . . . . . . . . . . . . . . 18
5.02 Form and Payment of Death Benefit. . . . . . . . . . . . . 19
5.03 Monthly Death Benefit Amount . . . . . . . . . . . . . . . 19
ARTICLE VI - MISCELLANEOUS PROVISIONS
6.01 Payments During Incapacity . . . . . . . . . . . . . . . . 20
6.02 Prohibition Against Assignment . . . . . . . . . . . . . . 20
6.03 Binding Effect . . . . . . . . . . . . . . . . . . . . . . 20
6.04 No Transfer of Interest. . . . . . . . . . . . . . . . . . 20
6.05 Amendment or Termination of the Plan . . . . . . . . . . . 21
6.06 No Right to Employment . . . . . . . . . . . . . . . . . . 21
6.07 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . 22
6.08 Governing Law. . . . . . . . . . . . . . . . . . . . . . . 22
6.09 Titles and Headings; Gender of Terms . . . . . . . . . . . 22
6.10 Severability . . . . . . . . . . . . . . . . . . . . . . . 22
6.11 Tax Effect of Plan . . . . . . . . . . . . . . . . . . . . 23
</TABLE>
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<PAGE>
FOUNDATION HEALTH SYSTEMS, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
ARTICLE I
INTRODUCTION
1.01 PURPOSE. This Foundation Health Systems, Inc. Supplemental
Executive Retirement Plan is hereby established by the Board of Directors of
the Sponsor to enable the Sponsor and the Affiliated Companies to attract,
retain and motivate selected executives of the Sponsor and such Affiliated
Companies by providing to such executives certain additional retirement
income as more fully set forth herein.
1.02 EFFECTIVE DATE AND TERM. This Plan is adopted effective as of
January 1, 1996, and shall continue in effect until terminated by the Board
of Directors.
1.03 PARTICIPATION. Participation in this Plan is open only to those
executives of the Sponsor or any Affiliated Company who are selected for
participation in the Plan by the President of the Sponsor and approved by the
Committee. The participation in this Plan by any such executive, and the
payment of any benefits under this Plan to any such executive, shall be
governed by the terms of this Plan and by the election form submitted by such
executive pursuant to this Plan.
1.04 APPLICABILITY OF ERISA. This Plan is intended to be an unfunded
plan maintained primarily for the purpose of providing deferred compensation
to a select group of management or highly compensated employees within the
meaning of ERISA.
ARTICLE II
DEFINITIONS
2.01 AFFILIATED COMPANY. "Affiliated Company" means any corporation
other than the Sponsor in an unbroken chain of corporations beginning with
the Sponsor if, at the time of reference, each of the corporations other than
the last corporation in the unbroken chain owns stock possessing 50 percent or
more of the total combined voting power of all classes of stock in one of the
other corporations in such chain.
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2.02 AVERAGE MONTHLY COMPENSATION. "Average Monthly Compensation"
means, with respect to any Participant and as of any date of reference (the
"Determination Date"), the quotient obtained by dividing (a) the aggregate
amount of Compensation earned by such Participant during the consecutive
60-month period ending on such Determination Date by (b) a factor of 60,
provided that any bonuses included in Compensation shall be deemed to have
been earned pro-rata each month during the applicable period in which such
bonuses were earned. Notwithstanding the preceding sentence, in the case of
a Participant who, as of any applicable Determination Date, has not been
employed by one or more Covered Employers during the consecutive 60-month
period ending on such Determination Date, such Participant's Average Monthly
Compensation as of such Determination Date shall be the quotient obtained by
dividing (i) the total amount of Compensation earned by such Participant
prior to, and including, such Determination Date by (ii) a factor equal to
the number of months prior to, and including, such Determination Date during
which such Participant was employed by a Covered Employer.
2.03 BENEFIT ACCRUAL PERCENTAGE. "Benefit Accrual Percentage" means,
with respect to any Participant and as of any date of reference, the
percentage obtained by multiplying (a) 50% by (b) a fraction (not to exceed
1) having a numerator equal to such Participant's Service Years (determined
as of such reference date) and having a denominator equal to the greater of
fifteen years or the total number of Service Years such Participant would
have if such Participant continued in the employ of the Sponsor or an
Affiliated Company uninterrupted through his Normal Benefit Date.
2.04 BOARD; BOARD OF DIRECTORS. "Board" and "Board of Directors" each
mean the board of directors of the Sponsor.
2.05 CHANGE IN CONTROL. "Change in Control" means the occurrence of
any of the following events:
(i) an action of the Board (or, if approval of the Board is not
required as a matter of law, the stockholders of the Sponsor) approving
(a) any consolidation or merger of the Sponsor in which the Sponsor is not
the continuing or surviving corporation or pursuant to which shares of Common
Stock would be converted into cash, securities or other property, other than
a Merger, (b) any sale, lease, exchange or other transfer (in one transaction
or a series of related transactions) of all, or substantially all, of the
assets of the Sponsor or (c) the adoption of any plan or proposal for the
liquidation or dissolution of the Sponsor;
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(ii) the purchase by any person (as such term is defined in
Sections 13(d)(3) and 14(d)(2) of the Exchange Act), corporation or other
entity (other than the Sponsor or any employee benefit plan sponsored by the
Sponsor or an Affiliated Company) of any Common Stock of the Sponsor (or
securities convertible into the Sponsor's Common Stock) for cash, securities
or any other consideration pursuant to a tender offer or exchange offer,
without the prior consent of the Board and, after such purchase, such person
shall be the "beneficial owner" (as such term is defined in Rule 13d-3 under
the Exchange Act), directly or indirectly, of securities of the Sponsor
representing 20 percent or more of the combined voting power of the then
outstanding securities of the Sponsor ordinarily (and apart from rights
accruing under special circumstances) having the right to vote in the
election of directors (calculated as provided in Section (d) of such
Rule 13d-3 in the case of rights to acquire the Sponsor's securities);
(iii) a change in the composition of the Board during any period
of two consecutive years, such that individuals who at the beginning of such
period constitute the entire Board shall cease for any reason to constitute a
majority thereof unless the election, or the nomination for election by the
Sponsor's stockholders, of each new director was approved by a vote of at
least two-thirds of the directors then still in office who were directors at
the beginning of the period; or
(iv) the occurrence of such other transactions involving a
significant issuance of voting stock or change in the composition of the
Board that the Board determines to be a Change in Control for purposes of
this Plan;
provided that, notwithstanding the foregoing, none of the events relating to
or resulting from the merger transaction involving the Sponsor and Foundation
Health Corporation, consummated on April 1, 1997, shall constitute a Change
in Control for purposes of this Plan.
2.06 CODE. "Code" means the Internal Revenue Code of 1986, as amended.
2.07 COMMITTEE. "Committee" means the Compensation and Stock Option
Committee of the Board.
2.08 COMMON STOCK. "Common Stock" means the Class A Common Stock,
$.001 par value per share, of the Sponsor.
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2.09 COMPENSATION. "Compensation" means, with respect to any
Participant, the base salary paid to such Participant by any Covered Employer,
including any amounts not currently includible in such Participant's gross
income by reason of any amount deferred for the period pursuant to any
nonqualified deferred compensation arrangement between the Participant and
any Covered Employer or pursuant to Code Section 402(e)(3) or Code Section 125.
Except as provided in the following sentence, Compensation shall also include
any annual bonus earned by any Participant and accrued by the applicable
Covered Employer for the benefit of such Participant. Notwithstanding the
foregoing, the Committee shall have the sole and absolute discretion to
determine, at the time of any award under a bonus plan, or the payment of any
bonus, that such bonus does not constitute Compensation for purposes of this
Plan.
2.10 COVERED EMPLOYER. "Covered Employer" means and includes both
(a) the Sponsor and (b) any Affiliated Company.
2.11 DEFINED BENEFIT PLAN. "Defined Benefit Plan" means the Health
Net Defined Benefit Pension Plan, which was terminated effective as of
December 31, 1994, and any other existing, frozen or previously terminated
qualified defined benefit plan currently or previously maintained by the
Sponsor, an Affiliated Company or any other entity acquired by the Sponsor or
an Affiliated Company prior to or following the Effective Date hereof.
2.12 EFFECTIVE DATE. "Effective Date" means January 1, 1996.
2.13 ERISA. "ERISA" means the Employee Retirement Income Security Act
of 1974, as amended.
2.14 EXCHANGE ACT. "Exchange Act" means the Securities Exchange Act
of 1934, as amended.
2.15 100% JOINT AND SURVIVOR ANNUITY. "100% Joint and Survivor Annuity"
means an annuity which (a) provides a specified level monthly benefit during
the life of the Participant and (b) following the death of the Participant
provides a level monthly benefit to, and during the remaining life of, such
Participant's surviving spouse (if any) equal to 100% of the monthly benefit
provided to such Participant.
2.16 50% JOINT AND SURVIVOR ANNUITY. "50% Joint and Survivor Annuity"
means an annuity which (a) provides a specified level monthly benefit during
the life of the Participant and (b) following the
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death of the Participant provides a level monthly benefit to, and during the
remaining life of, such Participant's surviving spouse (if any) equal to 50%
of the monthly benefit provided to such Participant.
2.17 401(k) PLAN. "401(k) Plan" means the Sponsor's 401(k) Associate
Savings Plan, as such Plan is in effect as of the Effective Date and as it
may be amended from time to time thereafter and any other existing, frozen or
previously terminated 401(k) and/or profit sharing plan or any other qualified
defined contribution plan currently or previously maintained by the Sponsor,
an Affiliated Company or any other entity acquired by the Sponsor or an
Affiliated Company prior to or following the Effective Date.
2.18 FULL-TIME EMPLOYMENT. "Full-Time Employment" means, with respect
to any Participant, any employment or independent contractor relationship
with any organization or person, whether or not the Sponsor or an Affiliated
Company, pursuant to which such Participant performs services on a regular
and continuous basis, provided, however, that any such relationship shall not
constitute Full-Time Employment unless the Participant devotes at least an
average of 35 hours per week to the performance of services pursuant to such
relationship. For purposes of determining as of any given date whether the
Participant meets the 35 hour requirement set forth in the preceding
sentence, no more than the three-month period immediately preceding such
given date shall be taken into account.
2.19 MERGER. "Merger" means any merger of the Sponsor in which the
holders of Common Stock immediately prior to the merger have the same
proportionate ownership of common stock of the surviving or resulting parent
corporation immediately after the merger.
2.20 NONQUALIFIED DEFINED BENEFIT PLAN. "Nonqualified Defined Benefit
Plan" means any existing, frozen or terminated nonqualified deferred
compensation plan or supplemental executive retirement plan providing for a
defined benefit currently or previously maintained by the Sponsor, an
Affiliated Company or any other entity acquired by the Sponsor or an
Affiliated Company prior to or following the Effective Date.
2.21 NONQUALIFIED DEFINED CONTRIBUTION PLAN. "Nonqualified Defined
Contribution Plan" means any existing, frozen or terminated nonqualified
deferred compensation plan or supplemental executive retirement plan which
provides for contributions by the Participant and/or the Sponsor or an
Affiliated Company currently or previously maintained by the Sponsor, an
Affiliated Company or any other entity acquired by the Sponsor or an
Affiliated Company prior to or following the Effective Date.
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Nonqualified Defined Contribution Plan includes, but is not limited to, the
Health Net Executive Deferral Plan and the Health Net Supplemental Credit
Plan.
2.22 NORMAL BENEFIT DATE. "Normal Benefit Date" means, with respect
to any Participant, the ninetieth (90th) day immediately following the day
upon which such Participant attains (or is expected to attain) age 62.
2.23 NORMAL BENEFIT FORM. "Normal Benefit Form" means a Single Life
Annuity.
2.24 NORMAL RETIREMENT. "Normal Retirement" means, with respect to
any Participant, any Retirement of such participant having a Retirement Date
which falls on or after the date such Participant attains age 62.
2.25 PARTICIPANT. "Participant" means any executive of the Sponsor or
any Affiliated Company who is selected and approved for participation in this
Plan as provided in Section 1.03 hereof.
2.26 PAYMENT COMMENCEMENT DATE. "Payment Commencement Date" means,
with respect to any Participant, the ninetieth (90th) day after the earlier
of (a) such Participant's Normal Benefit Date and (b) the later of (i) such
Participant's Retirement Date and (ii) the date such Participant attains age 55.
2.27 PLAN. "Plan" means this Foundation Health Systems, Inc.
Supplemental Executive Retirement Plan adopted as of the Effective Date and as
it may be amended from time to time.
2.28 RETIREMENT; RETIREMENT DATE. "Retirement" occurs with respect to
any Participant only if and when such Participant permanently ceases all
Full-Time Employment for whatever reason (whether voluntary or involuntary
and including death or Disability). The temporary cessation of a Participant's
Full-Time Employment shall not constitute Retirement. The cessation of a
Participant's Full-Time Employment shall be deemed to be temporary if,
following such cessation, such Participant commences (or intends to commence)
actively seeking Full-Time Employment; provided, however, that if such
Participant subsequently abandons his search (or intended search) for
Full-Time Employment prior to obtaining such Full-Time Employment, such
Participant shall be deemed to incur Retirement at the time of such
abandonment. The determination as to whether (and when) a Participant incurs
Retirement shall be made solely by the Committee based on such evidence as
the Committee, in its discretion, deems appropriate.
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Such evidence may, but is not required to include, a representation of
Retirement presented to the Committee by the Participant. If, following a
determination by the Committee that a Participant has incurred Retirement,
such participant recommences Full-Time Employment, such Participant shall
nevertheless be deemed for all purposes of this Plan to have incurred
Retirement in accordance with the Committee's original determination. A
Participant's "Retirement Date" shall be the first day, as determined by the
Committee, on which such Participant meets the requirements of Retirement as
set forth in this Section 2.28.
2.29 SERVICE YEARS. "Service Years" means with respect to any
Participant, the quotient obtained by dividing (a) the whole number of
complete months (disregarding any incomplete month) elapsing during the period
commencing on the date such Participant initially commenced employment with
any Covered Employer and ending on such Participant's final Termination Date
by (b) a factor of 12. In the case of any Participant who (a) commenced
employment with a Covered Employer, (b) terminated such employment and
(c) prior to the Effective Date re-commenced employment with any Covered
Employer, such Participant shall be credited with Service Years for those
periods prior to the Effective Date during which he was actually employed by
any Covered Employer notwithstanding the fact that such pre-Effective Date
employment with such Covered Employer was not continuous. Except as otherwise
provided in Section 3.04 hereof (concerning leaves of absence), it is intended
that a Participant shall cease earning Service Years upon his incurring any
Termination after the Effective Date, regardless of whether such Participant
is thereafter employed by the Sponsor any Affiliated Company. Notwithstanding
the foregoing, in the case of a Participant whose Termination is due to a
Disability, such Participant shall continue to be credited with Service Years
as provided in Section 4.09.
2.30 SINGLE LIFE ANNUITY. "Single Life Annuity" means an annuity
which provides a specified level monthly benefit until the death of the
beneficiary.
2.31 SPECIFIED RATE. "Specified Rate" means an interest rate equal to
8% per annum, or such other annual interest rate as the Committee may from
time to time designate as the Specified Rate, with any such designation to be
given effect only on a prospective basis.
2.32 SPONSOR. "Sponsor" means Foundation Health Systems, Inc., a
Delaware corporation.
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2.33 SPOUSE. "Spouse" means, with respect to any Participant, only
that person to whom such Participant is married as of such Participant's
Termination Date, provided, however, that a person who has been married to a
Participant for less than one year as of such Participant's Termination Date
shall not be deemed to be the "Spouse" of such Participant.
2.34 TERMINATION; TERMINATION DATE. "Termination" means the voluntary
or involuntary termination of a Participant's employment with the Sponsor and
all Affiliated Companies for any reason (including death or Disability ).
The determination as to whether a Participant's Termination constitutes
Retirement shall be made by the Committee in accordance with the provisions
of Section 2.28 hereof. "Termination Date" means, with respect to any
Participant, the effective date of such Participant's Termination.
2.35 TERMINATION FOR CAUSE. "Termination for Cause" means, with
respect to any Participant, a Termination incurred by such Participant as a
result of any one or more of the following causes:
(a) The Participant's substantial neglect of his duties and
responsibilities as an employee of the Covered Employer;
(b) The Participant's theft or other misappropriation of, or any
malfeasance with respect to, any property of the Covered Employer;
(c) A conviction of the Participant for any criminal offense, whether
or not involving property of the Covered Employer, but only if the
Committee reasonably believes such conviction may adversely affect
either (i) the reputation of the Covered Employer or (ii) the
Participant's ability to effectively perform his duties and
responsibilities as an employee of the Covered Employer;
(d) The Participant's use of illegal drugs or alcohol to an extent that
such use interferes with his ability to perform, in an acceptable
manner, his duties and responsibilities as an employee of the
Covered Employer;
(e) The Participant's solicitation of business on behalf of, or
diversion of business to, any competitor of the Covered Employer
with whom the Participant expects to become employed or otherwise
associated following such Participant's Termination.
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ARTICLE III
ADMINISTRATION OF THE PLAN
3.01 ADMINISTRATION. This Plan shall be administered by the Committee.
3.02 COMMITTEE AUTHORITY; RULES AND REGULATIONS. The Committee shall
have discretionary authority to (a) make, amend, interpret and enforce all
appropriate rules and regulations for the administration of this Plan and
(b) decide or resolve, in its discretion, any and all questions, including
interpretations of this Plan, as may arise in connection with this Plan. Any
decision or action of the Committee in respect of any question arising out of
or in connection with the administration, interpretation and application of
this Plan and the rules and regulations promulgated hereunder shall be final,
conclusive and binding upon all persons having any interest in this Plan.
3.03 APPOINTMENT OF AGENTS. In the administration of this Plan, the
Committee may from time to time employ agents (which may include officers
and/or employees of the Sponsor) and delegate to them such administrative
duties as the Committee deems appropriate.
3.04 LEAVE OF ABSENCE. In the event a Participant takes a leave of
absence from active employment with the Sponsor or any Affiliated Company,
the Committee shall determine, in its discretion, (a) whether such leave of
absence shall be deemed to constitute a Termination for purposes of this Plan
and (b) if such leave of absence is not deemed to constitute a Termination
under this Plan, whether such Participant shall continue to earn Service
Years during such leave of absence notwithstanding the provisions of
Section 2.29 hereof. The Committee shall establish such standards and
procedures as may be necessary so that, with respect to any determinations
made by the Committee pursuant to either clause (a) or clause (b) of the
preceding sentence, Participants in substantially similar circumstances shall
be treated substantially alike.
3.05 ACTUARIAL ASSUMPTIONS. In any case in which it is necessary to
make actuarial adjustments in order to carry out the provisions of this Plan
(including, without limitation, the provisions requiring the determination of
an actuarially equivalent benefit under Sections 4.02 and 4.06 hereof), the
following rules shall apply:
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(a) The interest/discount rate assumed in making such actuarial
adjustments shall be a fixed rate equal to the Specified Rate then
in effect at the time such actuarial adjustments are calculated;
and
(b) The mortality table used in making such actuarial adjustments shall
be the 1983 Unisex Group Annuity Mortality Table (GAM83) or such
other table approved by the Committee from time to time.
ARTICLE IV
BENEFITS
4.01 ELIGIBILITY AND VESTING. Except as otherwise provided in
Section 4.11 and Article V hereof, upon incurring a Termination, a Participant
shall receive a supplemental benefit under this Plan (a "Supplemental
Benefit"), which Supplemental Benefit shall be paid to the extent vested, in
such form and amounts, and at such times, as provided under this Plan.
Notwithstanding the foregoing, and except as otherwise provided in Sections
4.09 and 4.10 hereof, a Participant who incurs a Termination shall be
entitled to receive a Supplemental Benefit under this Plan only to the extent
such Participant is vested in such Benefit. A Supplemental Benefit shall
vest and become nonforfeitable up to a maximum of 100% as follows:
<TABLE>
<CAPTION>
SERVICE YEARS VESTED PERCENTAGE
------------- -----------------
<S> <C>
Less than 5 years 0%
5 years but less than 6 years 10%
6 years but less than 7 years 20%
7 years but less than 8 years 40%
8 years but less than 9 years 60%
9 years but less than 10 years 80%
10 or more years 100%
</TABLE>
A Supplemental Benefit shall also be 100% vested upon the death of a
Participant.
4.02 FORM OF SUPPLEMENTAL BENEFIT. Any Participant who is entitled to
a Supplemental Benefit pursuant to Section 4.01 hereof shall receive such
Supplemental Benefit in the form of an annuity, which annuity shall provide a
series of level monthly payments for a period determined in accordance with
the rules set forth herein below. With respect to any Participant, the
amount of the level monthly payment
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provided by such annuity (the "Monthly Annuity Amount") shall be determined in
accordance with Section 4.04 hereof, subject to such modifications as may be
applicable under this Section 4.02:
(a) Except as provided in subsection (b) below, a Participant shall
receive his Supplemental Benefit in the Normal Benefit Form.
(b) A Participant who is entitled to receive a Supplemental Benefit
may, with the consent of the Committee, elect in writing, on such
form designated by the Committee and received by the Committee at
least 15 months prior to the Payment Commencement Date (or, to the
extent permitted by the Committee in its sole discretion, at such
later time following any change in the Specified Rate or mortality
table pursuant to Section 3.05), to receive his Supplemental
Benefit in the form of either a 100% Joint and Survivor Annuity or
a 50% Joint and Survivor Annuity. Notwithstanding such election,
such Participant shall be entitled to receive his Supplemental
Benefit in the form of a Joint and Survivor Annuity only if such
Participant has a spouse as of such Participant's Payment
Commencement Date and also has been married continuously for at
least one year preceding such Participant's Payment Commencement
Date. The amount of the Supplemental Benefit so designated by the
Participant shall be the actuarial equivalent of the amount
otherwise payable to the Participant in the Normal Benefit Form.
If such election is not made or is invalid or void, the
Participant's Supplemental Benefit shall be paid in the Normal
Benefit Form.
4.03 PAYMENT OF SUPPLEMENTAL BENEFIT. Notwithstanding any other
provisions of this Plan, payment of a Participant's Supplemental Benefit (or
any portion thereof) shall commence on such Participant's Payment
Commencement Date.
4.04 MONTHLY ANNUITY AMOUNT. Except to the extent modified pursuant
to Sections 4.01 or 4.02 hereof, a Participant's "Monthly Annuity Amount"
shall be the amount of such Participant's Target Monthly Benefit (as defined
in Section 4.05 hereof) reduced, but not below zero, by such Participant's
Monthly Offset Amount (as defined in Section 4.06 hereof).
4.05 TARGET MONTHLY BENEFIT. A Participant's "Target Monthly Benefit"
shall be determined as of his Termination Date and shall be the amount
calculated by multiplying (a) the Participant's Average Monthly Compensation
determined as of his Termination Date by (b) his Benefit Accrual Percentage
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determined as of his Termination Date (or later date in the case of Disability)
by (c) his vesting percentage as of his Termination Date (or later date in
the case of Disability) under Section 4.01.
4.06 MONTHLY OFFSET AMOUNT. A Participant's "Monthly Offset Amount"
shall be the amount equal to the sum of such Participant's Social Security
Offset Amount, plus such Participant's Qualified Plan Offset Amount, plus
such Participant's Nonqualified Plan Offset Amount, plus such Participant's
Employment Agreement Offset Amount (all as defined herein below).
(a) A Participant's "Social Security Offset Amount" shall be determined
in accordance with the following rules:
(i) In the case of any Participant whose Termination constitutes
Normal Retirement, such Participant's Social Security Offset
Amount shall be 50% of the amount of the monthly Primary
Social Security Benefit (as calculated by the Committee under
paragraph (iii) below) to which such Participant is entitled
following such Termination.
(ii) In the case of any Participant whose Termination does not
constitute Normal Retirement, such Participant's Social
Security Offset Amount shall be 50% of the amount of the
monthly Primary Social Security Benefit (as calculated by
the Committee under paragraph (iii) below) to which such
Participant would be entitled commencing on his Normal
Benefit Date paid to such Participant in the Normal Benefit
Form if, with respect to the period (if any) between such
Participant's Termination Date and his Normal Benefit Date,
(A) such Participant is assumed to have no earnings
subsequent to his or her Termination and (B) the Social
Security wage base and other provisions of the Social
Security law relevant to the determination of benefits
thereunder (including any applicable regulations and/or
other pronouncements, such as wage base and other
provisions) in effect as of such Participant's Termination
Date had remained unchanged.
(iii) Each Participant shall submit to the Board, for use in
calculating such Participant's Primary Social Security
Benefit and the corresponding Social Security Offset Amount
under paragraphs (i) or (ii) above, as applicable, either
(A) a written earnings history obtained from the Social
Security Administration or (B) written evidence satisfactory
to the Committee showing that such Participant has never
earned wages subject to the jurisdiction of the U.S. Social
Security Administration (e.g., a foreign Participant with no
U.S. wages). In the event a
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Participant fails to comply with the requirements of the
preceding sentence within 90 days following such
Participant's Payment Commencement Date, the Participant's
Primary Social Security Benefit (for purposes of
calculating his Social Security Offset Amount under
paragraphs (i) or (ii) above, as applicable) shall be
determined by the Committee using an estimated wage
history, applying a salary scale projected backwards from
the Participant's Payment Commencement Date to the age of
18, and based on (I) for the two years prior to the
Participant's Payment Commencement Date, an increase of six
percent (6%) per annum, and (II) for the period prior to
such two year period, the actual change in average wages
from year to year as determined by the Social Security
Administration. Such estimated wage history shall be
deemed correct for all purposes of this Plan.
(b) A Participant's "Qualified Plan Offset Amount" shall be the sum of
the Defined Benefit Plan Offset Amount and the 401(k) Plan Offset
Amount determined with respect to such Participant under the
following provisions, as applicable:
(i) With respect to any Participant who was a Participant in
any Defined Benefit Plan, such Participant's "Defined
Benefit Plan Offset Amount" shall be the employer-provided
portion (i.e., the portion attributable to employer
contributions) of the amount of the monthly annuity payment
to which such Participant would be entitled under any
Defined Benefit Plan if all previous distributions
representing the interests of the Participant thereunder
and all other amounts the Participant would be entitled to
under such Plan were paid in the Normal Benefit Form
commencing on his Normal Benefit Date. The "Defined
Benefit Plan Offset Amount" shall be zero with respect to
any Participant who was not a participant in any Defined
Benefit Plan.
(ii) With respect to any Participant, such Participant's "401(k)
Plan Offset Amount" shall be the amount of the monthly
annuity payment to which such Participant would be entitled
if the balance (determined as of such Participant's Payment
Commencement Date) in such Participant's 401(k) Offset
Account (as defined herein below) were paid to such
Participant in the Normal Benefit Form commencing on his
Normal Benefit Date. For purposes of this paragraph (ii),
a Participant's "401(k) Offset Account" shall be a
hypothetical account established and maintained with
respect to such Participant as follows: A Participant's
401(k) Offset Account shall be established as of December 31,
1995, and such 401(k)
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Offset Account shall have an initial balance equal to the
actual balance (if any) as of December 31, 1995, in the
account maintained under the 401(k) Plan for employer
contributions made with respect to such Participant
(excluding any employer contributions not currently
includible in gross income by reason of Code Section
402(e)(3)). Thereafter, (A) commencing with the 1996
calendar year and ending with the calendar year in which
such Participant incurs a Termination (the "Termination
Year"), the balance in such Participant's 401(k) Offset
Account shall be increased as of the end of each such
calendar year (or, in the case of the Termination Year, as
of such Participant's Termination Date) by the amount of
such Participant's Hypothetical Employer Contribution (as
defined in paragraph (iii) below) for such calendar year
and the actual employer profit sharing contribution made
for such calendar year with respect to such Participant
under the terms of the 401(k) Plan; and (B) commencing
January 1, 1996, and ending on such Participant's Payment
Commencement Date, such Participant's 401(k) Offset Account
shall also be increased as if the balance in such account
(as increased from time to time by the Hypothetical
Employer Contributions Described in Clause (A) above) were
earning interest, compounded annually, from January 1, 1996
until such Participant's Payment Commencement Date at the
Specified Rate applicable from time to time.
(iii) As used in paragraph (ii) above, "Hypothetical Employer
Contribution" means, with respect to any Participant,
(A) for any calendar year prior to such Participant's
Termination Year the maximum employer matching contribution
that would have been made for such calendar year with
respect to such Participant under the terms of the 401(k)
Plan (disregarding the limits imposed by reason of Code
Section 401(m)) assuming such Participant's before-tax
deferral to the 401(k) Plan for such calendar year is equal
to his Hypothetical Participant Deferral (as defined in
paragraph (iv) below) with respect to such calendar year;
and (B) for such Participant's Termination Year, an amount
equal to the product obtained by multiplying (I) the
Hypothetical Employer Contribution determined with respect
to such Participant for the immediately preceding calendar
year by (II) a fraction having a numerator equal to the
number of days in such Termination Year prior to and
including such Participant's Termination Date and having a
denominator equal to 365.
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(iv) For purposes of paragraph (iii) above, the "Hypothetical
Participant Deferral" applicable to any Participant for any
calendar year shall be the amount determined under the
following provisions, whichever is applicable:
(A) If, with respect to any calendar year, the 401(k) Plan
administrative committee does not take any action,
either during or after the close of such year, to
reduce the level of Participant deferrals permitted to
be made by any 401(k) Plan Participant for such year,
then the Hypothetical Participant Deferral with
respect to any Participant for such calendar year
shall be the lesser of (I) the maximum amount such
Participant would be permitted to contribute to the
401(k) Plan for such year under Code Section 402(g) or
(II) the maximum amount the Participant would be
permitted to contribute under the terms of the 401(k)
Plan.
(B) If, with respect to any calendar year, the 401(k) Plan
administrative committee takes action during and/or
after such year to reduce the level of Participant
deferrals permitted to be made by any 401(k) Plan
Participant for such year, then the Hypothetical
Participant Deferral with respect to any Participant
for such year shall be the lesser of (I) the maximum
amount such Participant would be permitted to
contribute to the 401(k) Plan for such year under Code
Section 402(g) or (II) the product determined by
multiplying such Participant's compensation for such
year (as determined under the 401(k) Plan for
anti-discrimination testing purposes) by the maximum
"actual deferral percentage" for any highly
compensated employee for such year (as determined
under Code Section 401(k)(3)(B) after giving effect to
any corrections made following the close of such year)
applicable to "highly-compensated employees" (as
defined in Code Section 414(q)).
(c) A Participant's "Nonqualified Plan Offset Amount" shall be the sum
of the Nonqualified Defined Benefit Plan Offset Amount and the
Nonqualified Defined Contribution Plan Offset Amount determined with
respect to such Participant under the following provisions as
applicable:
(i) With respect to any Participant who was a Participant in
any Nonqualified Defined Benefit Plan (as defined in
Section 2.20), such Participant's "Nonqualified Defined
Benefit Plan Offset Amount" shall be the employer-provided
portion (i.e., the
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portion attributable to employer contributions including,
but not limited to, any additional payment provided by the
employer under such plan to enable the Participant to
satisfy his or her tax liability) of the amount of the
monthly annuity payment to which such Participant would be
entitled under the Nonqualified Defined Benefit Plan if
his benefits thereunder were paid in the Normal Benefit
Form commencing on his Normal Benefit Date. The
"Nonqualified Defined Benefit Plan Offset Amount" shall be
zero with respect to any Participant who was not a
participant in any Nonqualified Defined Benefit Plan.
(ii) With respect to any Participant who was a Participant in
any Nonqualified Defined Contribution Plan (as defined in
Section 2.21), such Participant's "Nonqualified Defined
Contribution Plan Offset Amount" shall be the amount of the
monthly annuity payment to which such Participant would be
entitled if the balance (determined as of such
Participant's Payment Commencement Date) in such
Participant's Nonqualified Defined Contribution Plan Offset
Account (as defined herein below) were paid to such
Participant in the Normal Benefit Form commencing on his
Normal Benefit Date. For purposes of this paragraph (ii),
a Participant's "Nonqualified Defined Contribution Plan
Offset Account" shall be a hypothetical account established
and maintained with respect to such Participant as follows:
A Participant's Nonqualified Defined Contribution Plan
Offset Account shall be established as of December 31, 1995
and shall have an initial balance equal to the actual
balance (if any) as of December 31, 1995 in the account
maintained under all Nonqualified Defined Contribution
Plans for employer (I.E., nonelective) contributions made
with respect to such Participant (including, but not
limited to, any additional payment provided by the employer
under such plan to enable the Participant to satisfy his
tax liability). Thereafter (A) commencing with the 1996
calendar year and ending with the calendar year in which
such Participant incurs a Termination (the "Termination
Year"), the balance in such Participant's Nonqualified
Defined Contribution Plan Offset Account shall be increased
as of the end of each such calendar year (or, in the case
of the Termination Year, as of such Participant's
Termination Date) by the actual employer contributions made
for such calendar year with respect to such Participant
under the terms of the applicable Nonqualified Defined
Contribution Plan; and (B) commencing January 1, 1996, and
ending on such Participant's Payment Commencement Date,
such Participant's
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Nonqualified Defined Contribution Plan Offset Account shall
also be increased as if the balance in such account (as
increased from time to time by clause (A) above) were earning
interest, compounded annually, from January 1, 1996 until
such Participant's Payment Commencement Date at the Specified
Rate applicable from time to time.
(d) A Participant's "Employment Agreement Offset Amount" shall mean
the employer-provided portion (I.E., the portion attributable to
employer contributions) of the monthly annuity payment to which
such Participant would be entitled from retirement benefits
including, but not limited to, life insurance arrangements and
any other amounts paid after Termination and not otherwise
described in paragraphs (a) through (c) above pursuant to the
Participant's individual employment agreement with the Sponsor or
an Affiliated Company if the benefits thereunder were paid in the
Normal Benefit Form commencing on his Normal Benefit Date. The
Committee shall, in its sole and absolute discretion, determine
whether any amounts payable under an employment agreement are
intended to constitute retirement benefits and an offset under
the Plan. The "Employment Agreement Offset Amount" shall be zero
with respect to any Participant who, pursuant to his individual
employment agreement, is not entitled to post-employment retirement
benefits in addition to those specified in paragraphs (a)
through (c) above.
4.07 SPECIAL RULES FOR EARLY RETIREMENT. In the case of any Participant
whose Supplemental Benefit commences prior to his Normal Benefit Date, such
Participant's Monthly Annuity Amount shall be determined as provided in
Section 4.04 hereof, and then shall be reduced to reflect the commencement of
benefits on a date earlier than the Normal Benefit Date by 0.5% for each full
month by which such commencement date precedes the first day of the month
next following the attainment of age 62.
4.08 TERMINATION OF PLAN PARTICIPATION. In the event that the Committee
determines that a Participant's employment performance is no longer at a
level which merits continued participation in the Plan, the Committee may
terminate such Participant's participation in the Plan (without necessarily
terminating such Participant's employment) as of the date specified by the
Committee (the "Participation Severance Date"). Accordingly, notwithstanding
any other provision of this Plan, the Supplemental Benefit payable to any
Participant whose Plan participation is terminated pursuant to this Section
4.08 shall be calculated by taking into account, in determining the amount of
such Participant's Target Monthly Benefit and whether such Participant has
met the vesting requirement of Section 4.01 hereof, only the
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Service Years and Compensation earned by such Participant as of his
Participation Severance Date. Such Supplemental Benefit shall be paid to the
Participant pursuant to the provisions of Section 4.03 herein.
4.09 DISABILITY. In the event that a Participant incurs a Termination
as a result of such Participant's becoming Disabled, the Supplemental Benefit
payable to such Participant under this Plan shall be determined with regard
to the vesting requirement of Section 4.01 hereof assuming Service Years
continue to accrue until the earliest of (a) age 62, (b) return to Full-Time
Employment or (c) the death of the Participant. For purposes of this Plan, a
Participant shall be deemed to be "Disabled" if and when, as a result of
injury or sickness, such Participant is permanently impaired to such an
extent that he cannot perform, and is not reasonably expected ever to be able
to perform, each of the material duties of his position of employment with
the Sponsor or any Affiliated Company. For the purpose of determining
whether a Participant is Disabled, the Committee may require the Participant
to submit to an examination by a competent physician or medical clinic
selected by the Committee.
4.10 CHANGE IN CONTROL. Notwithstanding any other provision of this
Plan, upon a Change in Control, all Participants in the Plan shall be fully
vested in their Supplemental Benefits. All Participants shall be entitled to
the Supplemental Benefit, reflecting actual Service Years, they would
otherwise receive pursuant to this Article IV hereof. Upon and following a
Change in Control, no Participant shall be removed from the Plan, nor shall
his benefit be terminated, modified, reduced or eliminated without his
express written consent.
4.11 TERMINATION FOR CAUSE. Notwithstanding any other provision of
this Plan except Section 4.10, a Participant who incurs a Termination for
Cause prior to a Change in Control shall not be entitled to a Supplemental
Benefit, regardless of Service Years, under this Plan.
ARTICLE V
DEATH OF A PARTICIPANT
5.01 TERMINATION BY REASON OF DEATH. In the event that a Participant
incurs a Termination by reason of his death, (a) such Participant shall not
be entitled to receive a Supplemental Benefit under this Plan and (b) if such
Participant has a Spouse at the time of his death, such Participant's Spouse
(the "Surviving Spouse") shall be entitled to receive a special benefit (a
"Death Benefit") at the times and in the
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amounts set forth in this Article V. No Death Benefit shall be paid in
respect of any Participant who does not have a Spouse at the time of his
death.
5.02 FORM AND PAYMENT OF DEATH BENEFIT. A Surviving Spouse who is
entitled to receive a Death Benefit pursuant to Section 5.01 hereof shall
receive such Death Benefit in the form of a Single Life Annuity which
provides a level monthly payment equal to the Monthly Death Benefit Amount
specified in Section 5.03 hereof. Except as otherwise provided herein below,
payment of a Surviving Spouse's Death Benefit shall commence on the ninetieth
(90th) day (the "Death Benefit Commencement Date") after the Participant's
death.
5.03 MONTHLY DEATH BENEFIT AMOUNT. The "Monthly Death Benefit Amount"
applicable to any Surviving Spouse shall be an amount equal to the Monthly
Annuity Amount of the Supplemental Benefit that would have been payable to
the deceased Participant under Article IV hereof if such Participant had
incurred a Retirement on the day prior to his death, provided, however, that
the determination of such Monthly Annuity Amount shall take into account the
following assumptions and special rules:
(a) Such Monthly Annuity Amount shall be determined assuming the
Participant would have received his Supplemental Benefit in the Normal
Benefit Form, modified, if applicable, by the provisions of
Section 4.07 hereof.
(b) Such Monthly Annuity Amount shall be determined as if the Participant
was 100% vested in the Supplemental Benefit.
(c) The Payment Commencement Date used in determining such Monthly Annuity
Amount shall be deemed to be the Surviving Spouse's Death Benefit
Commencement Date (disregarding any provision in Article IV to the
contrary), and if the deceased Participant's death occurred prior to
his Normal Benefit Date, the provisions of Section 4.07 hereof shall
be applied in determining the deceased Participant's Monthly Annuity
Amount after first determining the amount of the Defined Benefit Plan
Offset Amount pursuant to subsection (b) above.
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ARTICLE VI
MISCELLANEOUS PROVISIONS
6.01 PAYMENTS DURING INCAPACITY. In the event a Participant (or
Surviving Spouse) is under mental or physical incapacity at the time of any
payment to be made to such Participant (or Surviving Spouse) pursuant to
this Plan, any such payment may be made to the conservator or other legally
appointed personal representative having authority over and responsibility
for the person or estate of such Participant (or Surviving Spouse), as the
case may be, and for purposes of such payment references in this Plan to the
Participant (or Surviving Spouse) shall mean and refer to such conservator or
other personal representative, whichever is applicable. In the absence of
any lawfully appointed conservator or other personal representative of the
person or estate of the Participant (or Surviving Spouse) any such payment
may be made to any person or institution that has apparent responsibility for
the person and/or estate of the Participant (or Surviving Spouse) as
determined by the Committee. Any payment made in accordance with the
provisions of Section 6.01 to a person or institution other than the
Participant (or Surviving Spouse) shall be deemed for all purposes of this
Plan as the equivalent of a payment to such Participant (or Surviving
Spouse), and the Sponsor shall have no further obligation or responsibility
with respect to such payment.
6.02 PROHIBITION AGAINST ASSIGNMENT. Except as otherwise expressly
provided in Section 6.01 hereof, the rights, interests and benefits of a
Participant under this Plan (a) may not be sold, assigned, transferred,
pledged, hypothecated, gifted, bequeathed or otherwise disposed of to any
other party by such Participant or any Surviving Spouse, executor,
administrator, heir, distributee or other person claiming under such
Participant and (b) shall not be subject to execution, attachment or similar
process. Any attempted sale, assignment, transfer, pledge, hypothecation,
gift, bequest or other disposition of such rights, interests or benefits
contrary to the foregoing provisions of this Section 6.02 shall be null and
void and without effect.
6.03 BINDING EFFECT. The provisions of this Plan shall be binding upon
the Sponsor, the Participants, all Affiliated Companies employing any
Participants, and any successor-in-interest to the Sponsor.
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6.04 NO TRANSFER OF INTEREST. Benefits under this Plan shall be
payable solely from the general assets of the Sponsor (and, with respect to
any Participant who is an employee of an Affiliated Company, also from the
general assets of such Affiliated Company), and no person shall be entitled
to look to any other source for payment of such benefits. The Sponsor (and,
if applicable, any Affiliated Company) shall have and possess all title to,
and beneficial interest in, any and all funds or reserves maintained or held
by the Sponsor (or such Affiliated Company) on account of any obligation to
pay benefits as required under this Plan, whether or not earmarked as a fund
or reserve for such purpose; any such funds, other property or reserves shall
be subject to the claims of the creditors of the Sponsor (or such Affiliated
Company), and the provisions of this Plan are not intended to create, and
shall not be interpreted as vesting, in any Participant, Surviving Spouse or
other person, any right to or beneficial interest in any such funds, other
property or reserves. Nothing in this Section 6.04 shall be construed or
interpreted as prohibiting or restricting the establishment of a grantor
trust within the meaning of Code Section 671 which is unfunded for purposes
of Sections 201(2), 301(a)(3) and 401(a)(l) of ERISA, from which benefits
under this Plan may be payable.
6.05 AMENDMENT OR TERMINATION OF THE PLAN. The Board of Directors may
amend this Plan from time to time in any respect that it deems appropriate or
desirable, and the Board may terminate this Plan at any time; provided,
however, that any such amendment or termination may not, without the written
consent of a Participant, eliminate or reduce the Supplemental Benefit that
has accrued with respect to such Participant as of the effective date of such
amendment or termination. For purposes of this Section 6.05, the
Supplemental Benefit that has accrued with respect to any Participant as of
the date of any amendment of termination of the Plan shall be deemed to be
the Supplemental Benefit to which such Participant would be entitled pursuant
to Article IV hereof if such Participant incurred Retirement immediately
prior to such Plan amendment or Plan termination.
6.06 NO RIGHT TO EMPLOYMENT. This Plan is voluntary on the part of the
Sponsor and its Affiliated Companies, and the Plan shall not be deemed to
constitute an employment contract between any Participant and the Sponsor or
any Affiliated Company, nor shall the adoption or existence of the Plan or
any provision contained in the Plan be deemed to be a required condition of
the employment of any Participant. Nothing contained in this Plan shall be
deemed to give any Participant the right to continued employment with the
Sponsor or any Affiliated Company, and the Sponsor and its Affiliated
Companies may terminate any Participant at any time, in which case the
Participant's rights arising under this Plan shall be only those expressly
provided under the terms of this Plan.
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6.07 NOTICES. All notices, requests or other communications
(hereinafter collectively referred to as "Notices") required or permitted to
be given hereunder or which are given with respect to this Plan shall be in
writing and may be personally delivered, or may be deposited in the United
States mail, postage prepaid and addressed as follows:
To the Sponsor, any Affiliated Foundation Health Systems, Inc.
Company or the Committee at: Attention: Senior Vice President,
General Counsel and Secretary
21600 Oxnard Street
Woodland Hills, California 91367
To a Participant at: The Participant's residential mailing
address as reflected in the Sponsor's or
Affiliated Company's employment
records.
A Notice which is delivered personally shall be deemed given as of the
date of personal delivery, and a Notice mailed as provided herein shall be
deemed given on the second business day following the date so mailed. Any
Participant may change his address for purposes of Notices hereunder pursuant
to a Notice to the Committee, given as provided herein, advising the
Committee of such change. The Sponsor, any Affiliated Company and/or the
Committee may at any time change its address for purposes of Notices
hereunder.
6.08 GOVERNING LAW. This Plan shall be governed by, interpreted under
and construed and enforced in accordance with the internal laws, and not the
laws pertaining to conflicts or choice of laws, of the State of Delaware
applicable to agreements made and to be performed wholly within the State of
Delaware, except to the extent governed by the laws of the United States.
6.09 TITLES AND HEADINGS; GENDER OF TERMS. Article and Section
headings herein are for reference purposes only and shall not be deemed to be
part of the substance of this Plan or in any way to enlarge or limit the
meaning or interpretation of any provision in this Plan. Use in this Plan of
the masculine, feminine or neuter gender shall be deemed to include each of
the omitted genders wherever the context so requires.
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6.10 SEVERABILITY. In the event that any provision of this Plan is
found to be invalid or otherwise unenforceable by a court or other tribunal
of competent jurisdiction, such invalidity or unenforceability shall not be
construed as rendering any other provision contained herein invalid or
unenforceable, and all such other provisions shall be given full force and
effect to the same extent as though the invalid and unenforceable provision
was not contained herein.
6.11 TAX EFFECT OF PLAN. Neither the Sponsor nor any Affiliated
Company warrants any tax benefit nor any financial benefit under this Plan.
Without limiting the foregoing, the Sponsor and each Affiliated Company and
their directors, officers, employees and agents shall be held harmless by the
Participant from, and shall not be subject to any liability on account of,
any Federal or State tax consequences or any consequences under ERISA of any
determination as to the amount of Plan benefits to be paid, the method by
which Plan benefits are paid, the persons to whom Plan benefits are paid, or
the commencement or termination of the payment of Plan benefits.
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FOUNDATION HEALTH SYSTEMS, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
ELECTION OF FORM OF SUPPLEMENTAL BENEFIT
The Executive hereby designates the Form of Supplemental Benefit under the
Foundation Health Systems, Inc. Supplemental Executive Retirement Plan from
the choices below as the desired form of payment of the Supplemental Benefit
thereunder:
[ ] Single Life Annuity
[ ] 100% Joint and Survivor Annuity (only if Executive is married)
[ ] 50% Joint and Survivor Annuity (only if Executive is married)
If no election is made or the election is invalid or void, the Supplemental
Benefit shall be paid in the form of a Single Life Annuity.
IN WITNESS WHEREOF, the Executive has executed this election form as of the
date set forth below.
Dated: _______________________________
<PAGE>
Exhibit 10.66
FOUNDATION HEALTH SYSTEMS, INC.
DEFERRED COMPENSATION PLAN
I. INTRODUCTION
The purposes of the Foundation Health Systems, Inc. Deferred Compensation
Plan (the "Plan") are (i) to permit certain key employees of Foundation
Health Systems, Inc., a Delaware corporation (the "Company"), and certain of
its subsidiaries to defer receipt of the compensation payable to such
employees and (ii) to permit directors of the Company to defer the receipt of
certain meeting fees and other cash remuneration payable by the Company,
until such times as set forth herein.
II. DEFINITIONS
For purposes of the Plan, the following capitalized terms shall have the
meanings set forth in this Article.
2.1 "Account" shall mean all of the accounts kept on the books and records
of the Company established on behalf of a Participant in the Plan to which
amounts deferred by such Participant and earnings and losses thereon (as
described in Section 3.3(b)) are credited.
2.2 "Beneficiary" shall mean the beneficiary or beneficiaries (including any
contingent beneficiary) designated pursuant to Section 4.5.
2.3 "Board" shall mean the Board of Directors of the Company.
2.4 "Code" shall mean the Internal Revenue Code of 1986, as amended.
2.5 "Committee" shall mean the Compensation and Stock Option Committee of
the Board.
2.6 "Common Stock" shall mean the Class A Common Stock, $.001 par value, of
the Company.
2.7 "Company" shall mean Foundation Health Systems, Inc., a Delaware
corporation, or any successor thereto.
2.8 "Compensation" shall mean, with respect to an Eligible Employee, the
total earnings paid by an Employer to such Eligible Employee and properly
reportable on Form W-2 for a Deferral Year (including bonuses and overtime),
and all amounts not includible
-1-
<PAGE>
in such Eligible Employee's gross income for federal income tax purposes
solely on account of his or her election to have compensation reduced
pursuant to the Plan, a qualified cash or deferred arrangement described in
Section 401(k) of the Code or a cafeteria plan as defined in Section 125 of
the Code, but excluding any reimbursements or other allowances for
automobile, relocation, travel or education expenses (even if includible in
the Eligible Employee's gross income for federal income tax purposes).
"Compensation" shall mean, with respect to a Director, the fees and other
cash remuneration payable to such Director during a Deferral Year.
2.9 "Deferral Year" shall mean the twelve-month period beginning each
January 1, except that the first Deferral Year shall be the eight month
period beginning on May 1, 1998.
2.10 "Director" shall mean a member of the Board.
2.11 "Disability" shall mean, with respect to an Eligible Employee, a
disability within the meaning of the long-term disability plan maintained by
the Employer of such Eligible Employee, on account of which such Eligible
Employee is eligible for and receiving long-term disability benefits and,
with respect to a Director, a disability within the meaning of the long-term
disability plan maintained by the Company for its employees.
2.12 "Eligible Employee" shall mean an employee of an Employer whose annual
base salary for a Deferral Year is scheduled to be at least $100,000 as of
the first day of such Deferral Year (or such other amount determined by the
Committee from time to time). An employee whose base salary is increased to
$100,000 during a Deferral Year shall be an Eligible Employee as of the first
day of the following Deferral Year.
2.13 "ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended.
2.14 "Effective Date" shall mean May 1, 1998.
2.15 "Employer" shall mean the Company or a Subsidiary, other than a Subsidiary
that the Committee excludes from participation in the Plan.
2.16 "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
2.17 "Investment Fund" shall mean an "open-end," "closed-end" or other
collective investment fund selected by the Company from time to time as a
measure for allocating deemed investment gains and losses to Participants'
Accounts.
2.18 "Merger" shall mean any merger of the Company in which the holders of
the Class A common stock, $.001 par value, of the Company immediately prior
to the merger have the same proportionate ownership of common stock of the
surviving or resulting parent corporation immediately after the merger.
<PAGE>
2.19 "Participant" shall mean an Eligible Employee or Director who has
elected to defer Compensation pursuant to the terms of the Plan.
2.20 "Regular Compensation" shall mean an Eligible Employee's Compensation
for a Deferral Year, excluding any bonuses payable to such Eligible Employee
during, or with respect to, such Deferral Year.
2.21 "Subsidiary" shall mean any corporation other than the Company in an
unbroken chain of corporations beginning with the Company if, at the time of
reference, each of the corporations other than the last corporation in the
unbroken chain owns stock possessing 50 percent or more of the total combined
voting power of all classes of stock in one of the other corporations in such
chain.
III. PARTICIPATION AND DEFERRALS
3.1 PARTICIPATION. (a) IN GENERAL. Each Eligible Employee and Director may
participate in the Plan in a Deferral Year by specifying on an election form
filed with the Company prior to the beginning of such Deferral Year the
percentage(s) of the Compensation otherwise payable to him or her by an
Employer during the Deferral Year to be deducted from such Compensation and
deferred for payment at a later date pursuant to the Plan. The Company shall
establish rules prescribing the time and manner in which election forms shall
be filed with the Company.
(b) INITIAL PARTICIPATION. An individual may participate in the Plan
during the Deferral Year in which he or she becomes an Eligible Employee or
Director by filing an election form with the Company within 30 days of
becoming an Eligible Employee or a Director, as the case may be.
3.2 DEFERRAL ELECTIONS. An Eligible Employee may elect on the election form
in the time and manner designated by the Company to defer the receipt of
(i) between 5% and 50% of the Eligible Employee's Regular Compensation for a
Deferral Year (or such greater percentage specified for such Eligible
Employee on Exhibit A hereto, or determined from time to time by the
Committee), (ii) between 5% and 100% of any bonus payable to such Eligible
Employee during, or with respect to, the Deferral Year or (iii) both Regular
Compensation and bonuses as described and subject to the limitations set
forth in clauses (i) and (ii). A Director may elect on the election form
designated by the Company to defer the receipt of any or all of the
Compensation payable to such Director during the Deferral Year. Except as
provided in Section 3.1, an election form must be filed prior to the Deferral
Year for which the election is to be effective in accordance with rules
prescribed by the Company. A Participant may not revoke or change an
election to defer Compensation for a Deferral Year after the beginning of
such year. In order to participate in the Plan for any subsequent Deferral
Year, an Eligible Employee or Director must file a new election form with the
Company prior to the
<PAGE>
Deferral Year for which the election is to be effective. In no event shall an
election under the Plan apply to Compensation earned prior to the date on
which the election to participate in the Plan for a Deferral Year is received
by the Company.
3.3 DEFERRED COMPENSATION ACCOUNT. (a) CREDITING DEFERRED COMPENSATION. Any
Compensation deferred by a Participant shall be credited to the Participant's
Account as of the date on which, absent such election, such Compensation
would have been payable to the Participant.
(b) EARNINGS. Each Participant's Account shall be credited with deemed
earnings, or reduced by deemed losses, equal to the earnings or losses that
would have been realized or paid if assets in an amount equal to the balance
of such Account were actually invested among the Investment Funds selected by
the Participant in accordance with paragraphs (c) and (d) of this Section.
Although the Company or an Employer might actually invest assets of the
Company or such Employer according to the Participant's election, it is not
required to do so nor to even set aside any assets to provide for payments
hereunder. The Company may promulgate separate accounting and administrative
rules to facilitate the deemed investment in an Investment Fund.
(c) DEEMED INVESTMENT ELECTION. Upon the commencement of participation
in the Plan, each Participant shall specify on his or her election form the
whole percentage of the Participant's Account balance to be deemed invested
in any one or more of the Investment Funds.
(d) CHANGE OF DEEMED INVESTMENT ELECTION. A Participant may elect to
change his or her deemed investment election as frequently as may be designated
by the Company, and in any event at least quarterly. Any such change shall
specify the whole percentages (or amounts if so permitted by the Company) to
be deemed invested in one or more of the then available Investment Funds. A
Participant may change his or her election (i) with respect to the balance of
his or her Account as of the effective date of the Participant's new investment
election, (ii) with respect to future amounts credited to the Participant's
Account under Section 3.3(a) and (b) or (iii) both. A Participant's change
of a deemed investment election must be made in accordance with the written
rules and conditions provided by the Company to the Participants.
(e) NOTICES. Each Participant shall receive written notice of his or
her Account balance as soon as practicable following the last day of each
calendar quarter.
<PAGE>
IV. PAYMENTS OF DEFERRED COMPENSATION
4.1 TIMING. (a) INITIAL ELECTION. Except as otherwise provided herein, the
balance of a Participant's Account shall be paid or shall commence to be paid
within 90 days after the last day of the calendar year (the "payment date")
elected by the Participant on a form filed with the Company upon the
commencement of his or her participation in the Plan. The payment date
elected by the Participant may be (i) the last day of the year in which the
Participant's employment with an Employer or service as a Director terminates
(the "termination year") or (ii) the last day of any calendar year elected by
the Participant, whether earlier or later than his or her termination year,
provided that such payment date is no earlier than three years after the date
the Participant files his or her payment election form. If a Participant
continues to participate in the Plan following a payment date, then any of
the Participant's Compensation deferrals occurring after the payment date
shall be credited to a separate Account. The Participant must have on file
with the Company an election form described in Section 3.2 which specifies a
deferral amount, payment date, and deemed investment election for all amounts
credited to such separate Account.
(b) SUBSEQUENT ELECTION. A Participant may elect to change a
previously elected payment date to a later date by filing a new election form
with the Company at least one year prior to such previously elected payment
date. The new payment date must be at least three years later than the
previously elected payment date.
(c) PRE-RETIREMENT TERMINATION OF EMPLOYMENT. Notwithstanding any
payment date elected by a Participant, if the employment of such Participant
with an Employer terminates for any reason prior to the date such Participant
attains age 55, then the balance of such Participant's Account shall be paid
to such Participant within 90 days after the last day of the year in which
such termination of employment occurs.
(d) DEATH. Notwithstanding any payment date elected by a
Participant, if the employment of such Participant with an Employer or the
service of such Participant as a Director terminates by reason of death, then
the balance of such Participant's Account shall be paid to the Beneficiary of
such Participant within 90 days after the last day of the year in which the
Participant's death occurs.
(e) DELAYED PAYMENT DATE. Notwithstanding any payment date
elected by a Participant, the Committee may, in its sole discretion, defer
the payment of all or any portion of a Participant's Account to the extent
the Committee determines that the payment of such amount at the time elected
by the Participant would cause the Participant's Employer to be unable to
deduct any portion of the Participant's Compensation as a result of the
limitations prescribed by Section 162(m) of the Code.
4.2 MANNER OF PAYMENT. Each Participant shall receive payment of the amount
credited to the Participant's Account either in a single lump sum or in
annual installments at least equal to $1,000 over a period of not less than
two and not more than ten years, as elected by the
<PAGE>
Participant upon his or her commencement of participation in the Plan.
Notwithstanding the foregoing, a Participant's Account shall be paid to such
Participant or his or her Beneficiary in the form of a single lump sum if
(i) the amount credited to such Account as of the payment date is less than
$50,000, (ii) the Participant has not attained age 55 as of his or her payment
date or (iii) the Participant's employment with an Employer or service as a
Director terminates by reason of death.
4.3 EMERGENCY PAYMENTS. In the event of an Unforeseeable Financial Emergency,
as hereinafter defined, the Participant may file a written request with the
Company to receive all or any portion of the balance of such Participant's
Account in an immediate lump sum payment. A Participant's written request
for such a payment shall describe the circumstances which the Participant
believes justify the payment and an estimate of the amount necessary to
eliminate the Unforeseeable Financial Emergency. An "Unforeseeable Financial
Emergency" shall mean unforeseeable severe financial hardship resulting from
(i) the Participant's Disability, (ii) a sudden and unexpected illness or
accident of the Participant or a dependent of the Participant, (iii) loss of
the Participant's property due to casualty or (iv) such other extraordinary
and unforeseeable circumstances arising as a result of events beyond the
control of the Participant, all as determined in the sole discretion of the
Company. Unforeseeable Financial Emergency payments shall be made only to the
extent necessary to satisfy the emergency need and shall not be made to the
extent the need is or may be relieved through reimbursement or compensation,
by insurance or otherwise, by cessation of deferrals under the Plan or by
liquidation of the Participant's assets (to the extent such liquidation
itself would not cause severe financial hardship). Any Unforeseeable
Financial Emergency payment from a Participant's Account shall be deemed to
cancel any deferral election of the Participant then in effect and, unless
otherwise determined by the Company, the Participant shall be suspended from
making further deferral elections under the Plan during the remainder of the
Deferral Year in which such payment is made and the Deferral Year immediately
thereafter.
4.4 DISTRIBUTIONS TO MINOR AND INCOMPETENT PERSONS. If a payment is to be
made to a minor or to an individual who, in the opinion of the Company, is
unable to manage his or her financial affairs by reason of illness or mental
incompetency, such distribution may be made to or for the benefit of any such
individual in such of the following ways as the Company shall direct:
(a) directly to any such minor individual if, in the opinion of the Company,
he or she is able to manage his or her financial affairs, (b) to the legal
representative of any such individual, (c) to a custodian under a Uniform
Gifts to Minors Act for any such minor individual, or (d) to some near
relative of any such individual to be used for the latter's benefit. Neither
the Company nor any Employer shall be required to see to the application by
any third party of any payment made to or for the benefit of a Participant or
Beneficiary pursuant to this Section.
4.5 BENEFICIARIES. A Participant shall have the right to designate a
Beneficiary, and amend or revoke such designation at any time, in writing.
Such designation, amendment or revocation shall be effective upon receipt of
the Participant's written designation by the Company. If a Participant is
married at the time a beneficiary designation is submitted to the Company,
the designation of a Beneficiary other than the Participant's spouse shall
not be effective unless the Participant's spouse consents to such designation
in writing, or it is established to the
<PAGE>
satisfaction of the Company that such consent could not be obtained because
the Participant's spouse cannot be located or such other circumstances as may
be considered by the Company. Subject to the preceding sentence, a Participant
may from time to time, without the consent of any Beneficiary, change or
cancel any such designation. Such designation and each change therein shall
be made in the form prescribed by the Company and shall be filed with the
Company. If no Beneficiary survives the Participant, the Company shall direct
that payment of any balance to the Participant's Account be made in the
following order of priority:
(a) to the beneficiaries designated in the Participant's last will,
if specific reference is made therein to the payment of such Account; or if
none,
(b) to the Participant's spouse; or if none,
(c) to the Participant's descendants, per stirpes; or if none,
(d) to the Participant's estate.
V. ADMINISTRATION
5.1 COMMITTEE ADMINISTRATION. The Plan shall be administered by the
Committee, which shall have full power and authority to interpret, construe
and administer the Plan in accordance with the provisions herein set forth,
except to the extent the Plan specifically provides that the Company shall
carry out certain administrative duties. The Committee's interpretation and
construction hereof, and actions hereunder, or the amount or recipient of the
payments to be made herefrom, shall be binding and conclusive on all persons
for all purposes. In this connection, the Committee and the Company may
delegate to any Employer, committee, individual (whether or not an employee
of an Employer) or entity any of their respective powers or duties hereunder.
5.2 INDEMNIFICATION. No officer or employee of the Company or any Employer
shall be liable to any person for any action taken or omitted in connection
with the interpretation and administration of the Plan unless attributable to
his or her own willful misconduct or lack of good faith, and the Company
shall indemnify and hold harmless such officers and employees from and
against all claims, losses, damages, causes of action and expenses, including
reasonable attorney fees and court costs, incurred in connection with such
interpretation and administration of the Plan. The expenses of administering
the Plan shall be paid by the Employers and shall not be charged against any
Participant's Account.
5.3 CLAIMS PROCEDURE. In accordance with the regulations of the
U.S. Secretary of Labor, the Company shall (i) provide adequate notice in
writing to any Participant or Beneficiary whose claim for benefits under the
Plan has been denied, setting forth the specific reasons for such denial and
written in a manner calculated to be understood by such Participant or
Beneficiary and (ii) afford a reasonable opportunity to any Participant or
Beneficiary whose claim for benefits has been denied for a full and fair
review by the Committee of the decision denying the claim.
<PAGE>
VI. MISCELLANEOUS
6.1 UNFUNDED STATUS AND APPLICATION OF ERISA. The Plan is intended to be an
unfunded plan maintained primarily for the purpose of providing deferred
compensation to a select group of management or highly compensated employees
within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA and
Department of Labor Regulation Section 2520.104-23. In order to meet the
deferred obligations hereunder, the Company and the Employers may, but shall
not be required to, establish a grantor trust and transfer thereto an amount
necessary to provide payments equal to the aggregate balances of the
Participants' Accounts. In the event that the Company or an Employer transfers
any amounts to a grantor trust to provide payments hereunder, such amounts,
and all income attributable to such amounts, shall be subject to the claims
of the Company's or the Employer's general creditors. The Company's and each
Employer's obligations hereunder shall constitute general, unsecured
obligations, payable solely out of its general assets, and no Participant or
Beneficiary shall have any right to any specific assets. The Plan constitutes
a mere promise by the Company and each Employer to make benefit payments in the
future.
6.2 LIMITATION ON RIGHTS. Neither the establishment of the Plan nor the
payment of any Account hereunder shall be construed as giving or granting any
person any legal or equitable rights against the Company, any Employer, the
Board, the Committee, or any of their officers, trustees, associates, or
agents, other than such as are specifically conferred by the express terms of
the Plan.
6.3 SATISFACTION OF CLAIMS. The payment to a Participant, Beneficiary or
other person of an Account balance hereunder pursuant to the terms of the
Plan shall be in full satisfaction of all claims with respect to such Account
that such person may have against the Company or any Employer. Prior to a
Change in Control, the Committee may require any Participant, Beneficiary or
other person, as a condition to payment, to execute a waiver and release in
such form as shall be designated by the Committee.
6.4 NONASSIGNABILITY. No compensation deferred under the Plan or any amount
credited to an Account shall be subject in any manner to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance, attachment or
garnishment, and any attempt to transfer or encumber the same shall be void,
other than pursuant to a qualified domestic relations order as defined in
Title I of ERISA.
6.5 AMENDMENT OF THE PLAN. The Committee may, in its sole discretion and
without the consent of any Participant or Beneficiary, amend the Plan at any
time and in any manner by duly adopted resolutions, including, without
limitation, the acceleration of the payment of any Accounts hereunder;
PROVIDED, HOWEVER, that no amendment shall reduce the amount credited to the
Account of any Participant immediately prior to such amendment.
6.6 WITHDRAWAL BY AN EMPLOYER; TERMINATION OF THE PLAN. Each Employer may,
in its sole discretion without the consent of any Participant or Beneficiary,
terminate its participation in the
<PAGE>
Plan at any time by giving written notice thereof to the Committee and each
Participant employed by such Employer. Notwithstanding any Participant's
deferral election submitted to the Company pursuant to Sections 3.1 or 3.2,
the amount credited to each Account shall be paid to the person entitled
thereto at such time and in such manner as the Committee shall determine, but
not later than payments would have been made had such Employer's participation
in the Plan not been terminated. The Company may, in its sole discretion,
terminate the Plan without the consent of, or notification to, any person.
Upon the termination of the Plan, all Account balances shall be paid to
Participants and Beneficiaries.
6.7 CHANGE IN CONTROL. If, following a Change in Control, as hereinafter
defined, a Participant determines in good faith that the Company or an
Employer has failed to comply with any of its obligations under the Plan or,
if the Company or any other person takes any action to declare the Plan void
or unenforceable or institutes any litigation or other legal action designed
to deny or diminish or to recover from any Participant the benefits intended
to be provided hereunder, then the Company irrevocably authorizes such
Participant to retain counsel of his or her choice at the expense of the
Company to represent such Participant in connection with the initiation or
defense of any litigation or other legal action, whether by or against the
Company or an Employer, or any director, officer, stockholder or other person
affiliated with the Company or such Employer, or any successor thereto in any
jurisdiction. For purposes of this Section, a "Change in Control" shall mean:
(i) APPROVED TRANSACTION. An action of the Board (or, if approval of
the Board is not required as a matter of law, the stockholders of the
Company) approving (a) any consolidation or merger of the Company in which
the Company is not the continuing or surviving corporation or pursuant to
which shares of Common Stock would be converted into cash, securities or
other property, other than a Merger, or (b) any sale, lease, exchange, or
other transfer (in one transaction or a series of related transactions) of
all, or substantially all, of the assets of the Company, or (c) the
adoption of any plan or proposal for the liquidation or dissolution of the
Company;
(ii) CONTROL PURCHASE. The purchase by any person (as such term is
defined in Sections 13(d)(3) and 14(d)(2) of the Exchange Act), corporation
or other entity (other than the Company or any employee benefit plan
sponsored by an Employer) of any Common Stock of the Company (or securities
convertible into the Company's Common Stock) for cash, securities or any
other consideration pursuant to a tender offer or exchange offer, without
the prior consent of the Board and, after such purchase, such person shall
be the "beneficial owner" (as such term is defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Company
representing 20 percent or more of the combined voting power of the then
outstanding securities of the Company ordinarily (and apart from rights
accruing under special circumstances) having the right to vote in the
election of directors (calculated as provided in Section (d) of such
Rule 13d-3 in the case of rights to acquire the Company's securities);
(iii) BOARD CHANGE. A change in the composition of the Board during
any period of two consecutive years, such that individuals who at the
beginning of such period
<PAGE>
constitute the entire Board shall cease for any reason to constitute a
majority thereof unless the election, or the nomination for election by
the Company's stockholders, of each new director was approved by a vote
of at least two-thirds of the directors then still in office who were
directors at the beginning of the period; or
(iv) OTHER TRANSACTIONS. The occurrence of such other transactions
involving a significant issuance of voting stock or change in Board
composition that the Board determines to be a Change in Control for
purposes of the Plan.
6.8 NO CONTRACTUAL RIGHTS TO SERVE. Nothing in the Plan shall be
interpreted as conferring any right on any employee to remain employed by an
Employer for any stated period of time or otherwise change the employee's
employment relationship with his or her Employer from an employment at will
relationship or any right on any Director to continue as a Director.
6.9 SEVERABILITY. If a provision of the Plan shall be held illegal or
invalid, the illegality or invalidity shall not affect the remaining parts of
the Plan and the Plan shall be construed and enforced as if the illegal or
invalid provision had not been included in the Plan.
6.10 TAX WITHHOLDING, ETC. Any payment required under the Plan shall be
subject to all requirements of the law with regard to income and employment
withholding taxes, filings, and making of reports, and each Employer and
Participant shall use its or his or her best efforts to satisfy promptly all
such requirements, as applicable.
6.11 APPLICABLE LAW. The Plan and all rights hereunder and all determinations
made and actions taken pursuant thereto, to the extent not otherwise governed
by the Code or the laws of the United States, shall be governed by the laws
of the State of Delaware and construed in accordance therewith without giving
effect to the principles of conflicts of laws.
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
Foundation Health Systems, Inc.
Year Ended December 31,
(Amounts in thousands, except per share data) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
REVENUES
Health plan premiums $7,440,981 $5,829,444 $5,395,125 $4,557,214 $3,863,965
Government contracts 989,409 949,168 908,730 279,380 209,980
Specialty services 366,645 342,107 316,993 210,533 139,853
Investment and other income 99,041 114,300 88,392 66,510 51,698
- ------------------------------------------------------------------------------------------------------------------------
Total revenues 8,896,076 7,235,019 6,709,240 5,113,637 4,265,496
- ------------------------------------------------------------------------------------------------------------------------
EXPENSES
Health plan services 6,547,747 4,912,532 4,598,074 3,643,463 3,091,890
Government contracts health care services 757,047 711,757 706,076 174,040 147,629
Specialty services 307,675 290,319 289,744 182,380 121,299
Selling, general and administrative 1,042,556 851,826 859,996 657,275 536,209
Amortization and depreciation 128,093 98,353 112,916 89,356 66,741
Interest 92,159 63,555 45,372 33,463 23,081
Asset impairment, merger, restructuring
and other charges 274,953 395,925 44,108 20,164 125,379
- ------------------------------------------------------------------------------------------------------------------------
Total expenses 9,150,230 7,324,267 6,656,286 4,800,141 4,112,228
- ------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing
operations before income tax (254,154) (89,248) 52,954 313,496 153,268
Income tax provision (benefit) (88,996) (21,418) 14,124 124,345 70,169
Income (loss) from continuing operations (165,158) (67,830) 38,830 189,151 83,099
Discontinued operations:
Income (loss) from operations, net of tax - (30,409) 25,084 3,028 18,434
Gain (loss) on disposition, net of tax - (88,845) 20,317
- ------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (165,158) $ (187,084) $ 84,231 $ 192,179 $ 101,533
- ------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS (LOSS) PER SHARE:
Continuing operations $ (1.35) $ (0.55) $ 0.31 $ 1.54 $ 0.73
Income (loss) from discontinued
operations, net of tax (0.25) 0.20 0.02 0.16
Gain (loss) on disposition of discontinued
operations, net of tax (0.72) 0.16
- ------------------------------------------------------------------------------------------------------------------------
Net $ (1.35) $ (1.52) $ 0.67 $ 1.56 $ 0.89
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS (LOSS) PER SHARE:
Continuing operations $ (1.35) $ (0.55) $ 0.31 $ 1.53 $ 0.72
Income (loss) from discontinued
operations, net of tax (0.25) 0.20 0.02 0.16
Gain (loss) on disposition of discontinued
operations, net of tax (0.72) 0.16
- ------------------------------------------------------------------------------------------------------------------------
Net $ (1.35) $ (1.52) $ 0.67 $ 1.55 $ 0.88
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Operating cash flow $ 100,867 $ (125,872) $ (6,666) $ 51,417 -(ii)
Weighted average shares outstanding:
Basic 121,974 123,333 124,453 122,741 113,723
Diluted 121,974 123,333 124,966 123,674 115,658
BALANCE SHEET DATA:
Cash & cash equivalents and investments
available for sale $1,288,947 $1,112,361 $1,122,916 $ 871,818 $ 840,332
Total assets 3,929,541 4,076,350 3,423,776 2,733,765 2,218,506
Notes payable and capital leases-noncurrent 1,254,278 1,308,979 791,618 547,522 301,356
Stockholders' equity(i) 744,042 895,974 1,183,411 1,068,255 877,466
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(i) No cash dividends were declared in each of the years presented.
(ii) Information not available.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Foundation Health Systems, Inc. (together with its subsidiaries, the
"Company") is an integrated managed care organization which administers
the delivery of managed health care services. The Company's operations
consist of two operating segments: Health Plan Services and Government
Contracts/Specialty 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
administration and cost containment, behavioral health, dental, vision and
pharmaceutical products and other services.
The Health Plan Services segment consists of HMOs organized into
four operational divisions located in the following geographic regions:
the California Division, the Northeast Division, the Central Division and
the Arizona Division. These health plans are located in Arizona,
California, Colorado, Connecticut, Florida, Idaho, Louisiana, New Jersey,
New Mexico, New York, Ohio, Oklahoma, Oregon, Pennsylvania, Texas, Utah,
Washington and West Virginia. The Company's health plans provide a wide
range of managed health care services throughout the United States with
approximately 4.2 million at risk and administrative services only
members. The Company's HMO subsidiaries contract to provide medical care
services to a defined, enrolled population for a predetermined, prepaid
monthly fee for group, Medicaid, individual and Medicare plans throughout
their respective service areas. All of the HMOs are state licensed and
some are also federally qualified. The Company also operates PPO networks
which provide access to health care services and owns six health and life
insurance companies licensed to sell insurance throughout the United
States.
The Government Contracts/Specialty Services segment administers
large, multi-year managed health care government contracts. This segment
subcontracts to affiliated and unrelated third parties the administration
and health care risk of parts of these contracts and currently administers
health care programs covering approximately 1.6 million eligible
individuals under the Civilian Health and Medical Program of the Uniformed
Services ("CHAMPUS") through the TRICARE program. Currently, the Company
provides these services under three TRICARE contracts that cover Alaska,
Arkansas, California, Hawaii, Oklahoma, Oregon, Texas, Washington and
parts of Arizona, Idaho and Louisiana. This segment also offers behavioral
health, dental, and vision services as well as managed care products
related to bill review, administration and cost containment for hospitals,
health plans and other entities.
This discussion and analysis contains "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of
1995. Forward-looking statements involve risks and uncertainties [detailed
from time to time in the Company's filings with the Securities and
Exchange Commission (the "Commission")] which may cause actual results to
differ materially from those projected or implied in these statements. The
risks and uncertainties faced by the Company include, but are not limited
to, those set forth under "Additional Information Concerning the Company's
Business," "Cautionary Statements" and other sections within the Company's
filings with the Commission.
CONSOLIDATED OPERATING RESULTS
The Company's net loss from continuing operations for the year ended
December 31, 1998 was $165.2 million, or $1.35 per diluted share, compared
to a net loss from continuing operations for the same period in 1997 of
$67.8 million, or $.55 per diluted share.
During the year ended December 31, 1998, the Company recorded asset
impairment, restructuring and other charges totaling $410.9 million on a
pre-tax basis (the "1998 Charges"), or $2.13 per diluted share, net of
taxes. The Company recorded $395.9 million and $44.1 million related to
asset impairment, merger, restructuring and other charges during 1997 and
1996, respectively. These charges are further described in "Asset
Impairment, Merger, Restructuring and Other Charges" below. Excluding
these charges and the results of discontinued operations, the basic and
diluted earnings per share for the years ended December 31, 1998, 1997 and
1996 were $.78, $1.89 and $.57, respectively.
<PAGE>
The table below and the discussion that follows summarize the
Company's performance in the last three fiscal years.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
(Amounts in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total revenues $8,896,076 $7,235,019 $6,709,240
- --------------------------------------------------------------------------------------------------------------
Expenses:
Health plan services expenses(i) 6,547,747 4,912,532 4,598,074
Government contracts and specialty services expenses 1,064,722 1,002,076 995,820
Selling, general and administrative 1,042,556 851,826 859,996
Amortization and depreciation 128,093 98,353 112,916
Interest 92,159 63,555 45,372
Asset impairment, restructuring, merger, and other charges(i) 274,953 395,925 44,108
- --------------------------------------------------------------------------------------------------------------
Total expenses 9,150,230 7,324,267 6,656,286
- --------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before income taxes $ (254,154) $ (89,248) $ 52,954
- --------------------------------------------------------------------------------------------------------------
Overall medical care ratio 86.5% 83.1% 84.5%
Administrative expense ratio 12.4% 12.6% 13.6%
HEALTH PLAN SERVICES SEGMENT:
Health plan premiums $7,440,981 $5,829,444 $5,395,125
Health plan medical care ratio 88.0% 84.3% 85.2%
Health plan premiums per member per month $ 143.43 $ 137.96 $ 135.17
Health plan services per member per month $ 126.24 $ 116.26 $ 115.20
GOVERNMENT CONTRACTS/SPECIALTY SERVICES SEGMENT:
Government contracts and specialty services revenues $1,356,054 $1,291,275 $1,225,723
Government contracts and specialty services
expenses medical care ratio 78.5% 77.6% 81.2%
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(i) 1998 Charges of $275.0 million are included in asset impairment,
restructuring, merger and other charges and $135.9 million are included
primarily in health plan services expenses.
ENROLLMENT INFORMATION
<TABLE>
<CAPTION>
Year Ended December 31, Percent Percent
(Amounts in thousands) 1998 1997 Change 1996 Change
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Health Plan Services:
Commercial 3,287 3,522 (6.7)% 2,774 27.0%
Medicare Risk 326 308 5.8% 237 30.0%
Medicaid 586 442 32.6% 315 40.3%
- -------------------------------------------------------------------------------------------------------------
4,199 4,272 (1.7)% 3,326 28.4%
- -------------------------------------------------------------------------------------------------------------
Government Contracts:
CHAMPUS PPO and Indemnity 784 1,090 (28.1)% 1,035 5.3%
CHAMPUS HMO 783 801 (2.2)% 543 47.5%
- -------------------------------------------------------------------------------------------------------------
1,567 1,891 (17.1)% 1,578 19.8%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
REVENUES AND HEALTH CARE COSTS
The Company's revenues grew by $1.7 billion or 23% for the year ended
December 31, 1998 as compared to 1997. Growth in health plan revenues of
$1.6 billion for the year was due primarily to the acquisitions that
occurred in the fourth quarter of 1997, including Physicians Health
Services, Inc. ("PHS"), FOHP, Inc. ("FOHP") and PACC HMO, Inc. and PACC
Health Plans, Inc. (collectively "PACC"). Excluding these acquisitions,
revenues grew by $1 billion for the year ended December 31, 1998. The
growth from existing health plan businesses was due to increases in
premium rates in virtually all markets and significant increases in
Medicaid enrollment in California. Growth in government contracts revenues
totaled $40.3 million and growth in specialty services revenues totaled
$24.5 million. See "Segment Reporting" for discussion of Government
Contracts/Specialty Services.
The Company's revenues grew by $525.8 million or 7.8% for the year
ended December 31, 1997 as compared to 1996. Growth in revenues for the
year was due to slightly higher health plan premiums for the Company's
commercial membership and membership growth in Medicaid contracts in
California, commercial membership growth in the Northeast, and the partial
year impact of acquisitions that occurred in the second and fourth
quarters of 1997. Investment and other income was $99.0 million, $114.3
million and $88.4 million in 1998, 1997 and 1996, respectively. The
increase in 1997 was primarily related to non-recurring gains from the
sale of certain holdings and Medicaid contracts.
The overall medical care ratio ("MCR") (medical costs as a
percentage of revenue) for the year ended December 31, 1998 was 86.5% as
compared to 83.1% for the year ended December 31, 1997. The increase was
primarily due to higher pharmacy costs in all divisions, benefit cost
increases which exceeded premium rate increases, increased utilization and
continued pricing pressures throughout the Company's health plans.
Excluding the 1998 Charges, the MCR was 85.0%.
The overall MCR for the year ended December 31, 1997 was 83.1%
compared to 84.5% for the year ended December 31, 1996. The decline is due
primarily to higher medical costs and loss contracts that negatively
impacted the MCR in 1996 as well as favorable reserve development in 1997
in certain of the Company's health plans as well as improved health care
and subcontractor performance on certain government contracts. The 1997
reduction in MCR was offset slightly by escalating health care costs
including higher pharmacy costs coupled with a relatively flat premium
environment, particularly in the California market and throughout the
Company's health plans.
SELLING, GENERAL AND ADMINISTRATIVE COSTS
The Company's selling, general and administrative ("SG&A") expenses
increased by $190.7 million or 22.4% for the year ended December 31, 1998
as compared to 1997. The increase in SG&A expenses during 1998 is
primarily due to the SG&A expenses associated with the businesses acquired
during 1997. The administrative expense ratio (SG&A as a percentage of
health plan and government contracts revenue) decreased to 12.4% for the
year ended December 31, 1998 from 12.6% for the year ended December 31,
1997. This decrease is primarily attributable to the Company's ongoing
efforts to aggressively control its SG&A expenses and synergy savings
associated with the integration of its 1997 acquisitions which were
partially offset by increased expenditures related to consolidation and
integration of the Company's administrative facilities. Excluding the 1998
Charges, the administrative expense ratio was 12.2%.
The Company's SG&A expenses decreased by $8.2 million or 1.0% for
the year ended December 31, 1997 as compared to 1996. The administrative
expense ratio decreased to 12.6% for the year ended December 31, 1997 as
compared to 13.6% for the year ended December 31, 1996. This decrease
reflects the Company's ongoing efforts to aggressively control its SG&A
expenses and synergy savings associated with the integration of Health
Systems International, Inc. and Foundation Health Corporation after the
merger transaction (the "FHS Combination") involving such entities. This
decrease was offset partially by additional SG&A expenses associated with
the new acquisitions during 1997.
AMORTIZATION AND DEPRECIATION
Amortization and depreciation expense increased by $29.7 million in 1998
due to increases in intangible assets and fixed assets as a result of the
acquisitions that occurred in the fourth quarter of 1997 and increased
expenditures primarily related to the consolidation and integration of the
Company's administrative facilities.
Amortization and depreciation expense declined by $14.6 million for
the year ended December 31, 1997 as compared to 1996 due to
<PAGE>
certain intangible assets becoming fully amortized by the end of 1996,
fixed assets becoming fully depreciated in early 1997 and fixed asset
write-offs primarily associated with the Company's restructuring plans
discussed below.
INTEREST EXPENSE
Interest expense increased by $28.6 million due to increased borrowings
under the revolving credit facility coupled with a higher borrowing rate
in 1998 as compared to 1997. Interest expense increased by $18.2 million
in 1997 as compared to 1996 due to higher debt levels associated with the
Company's revolving lines of credit partially offset by lower interest
rates.
ASSET IMPAIRMENT, MERGER, RESTRUCTURING AND OTHER CHARGES
On July 19, 1998, FPA Medical Management, Inc. ("FPA") filed for
bankruptcy protection under Chapter 11 of the Federal Bankruptcy Code.
FPA, through its affiliated medical groups, provided services to
approximately 190,000 of the Company's affiliated members in Arizona and
California. FPA has discontinued its medical group operations in these
markets. As a result, the Company is seeking new tenants for, or will
sell, the 13 healthcare facilities it leased to FPA in these markets and
has made other arrangements for provider services to the Company's
affiliated members. To date, the Company has sold three of these
healthcare facilities.
Management's analysis of this situation indicated that the likely
replacement lease terms from these properties will be inadequate to enable
the Company to sell the facilities and recover their carrying value. Based
on management's best estimate of recovery for the real estate and the
impairment of notes receivable and other Company assets due to the FPA
bankruptcy filing, the Company recorded a charge of $50.0 million during
the second quarter ended June 30, 1998. The Company recorded an additional
$28.1 million during the third quarter ended September 30, 1998 which was
primarily related to additional impairment of the value of real estate
assets leased to FPA and an additional $6.0 million during the fourth
quarter ended December 31, 1998 which was related to the FPA bankruptcy.
Elements of the second, third and fourth quarter charges included
approximately $63.0 million for real estate asset impairments,
approximately $10.0 million for a note receivable impairment and $11.1
million for other items related to FPA.
During the third quarter ended September 30, 1998, excluding the
charges totaling $28.1 million related to the FPA bankruptcy, the Company
recorded $146.9 million of restructuring and other charges. These charges
included (i) $87.0 million related primarily to premium deficiency
reserves for the Company's Medicare operations in the Northeast division,
payment disputes with various provider groups, and costs associated with
contract terminations and exiting rural markets which were recorded as
health care costs; (ii) $21.2 million related to severance and benefits
related to staff reductions in selected health plans and the
centralization and consolidation of Corporate functions; (iii) $18.6
million related to the bankruptcy of a large hospital system; and (iv)
$20.1 million of other costs primarily related to premium deficiency
reserves established for certain of the Company's non-core health plan
operations. As of December 31, 1998, $40.9 million of the total $175.0
million of the third quarter charges described above has resulted in cash
outlays and $27.5 million is expected to require future outlays of cash.
During the fourth quarter ended December 31, 1998, the Company
initiated a formal plan to dispose of certain Central Division health
plans included in the Company's Health Plan Services segment. It is
anticipated that the divestiture of these plans will be completed during
the first half of 1999. The Company evaluated the carrying values of the
assets of these health plans and determined that the carrying value
exceeded estimated fair value by $112.4 million. As a result, the Company
recorded an impairment charge which is attributable to the following
assets: Goodwill totaling $30.0 million, furniture and equipment totaling
$40.3 million, building improvements totaling $20.9 million and other
impairments totaling $21.2 million. In addition, the Company recorded
$48.9 million primarily as health care costs. These costs were primarily
related to anticipated bad debts totaling $17.4 million, premium
deficiency reserves of $22.1 million for certain health plans whose health
care costs exceed contractual premium revenues and additional claims
reserves and other costs totaling $9.4 million. The Company also recorded
an additional $18.6 million of other charges. As of December 31, 1998,
$6.0 million of the total $185.9 million of the fourth quarter charges
resulted in cash outlays and $50.1 million is expected to require future
outlays of cash.
<PAGE>
As set forth above, the total 1998 Charges recorded by the Company
were $410.9 million.
Restructuring, merger and other charges of $395.9 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. The principal elements of these charges included (i) restructuring
costs of $146.8 million for a workforce reduction, the consolidation of
employee benefit plans, the consolidation of facilities in geographic
locations where office space is duplicated, the consolidation of
overlapping provider networks, and the consolidation of information
systems to standardized systems; (ii) $69.6 million in merger related
costs primarily for investment banking, legal, accounting and other costs;
(iii) premium deficiency reserves of $57.5 million related to the
Company's Gem Insurance Company ("Gem") and (iv) other charges of $122.0
million primarily related to other costs for certain of the Company's
non-core operations. As of December 31, 1998, $86.9 million of the net
1997 restructuring charge has resulted in cash outlays and $13.8 million
is expected to require future outlays of cash.
During 1996, the Company recorded $44.1 million of restructuring
and other charges. These charges were primarily comprised of restructuring
costs of $27.4 million and $16.7 million of other costs including loss
contract accruals related to governmental employer groups in the Company's
non-California markets, consulting and other costs.
INCOME TAX PROVISION AND BENEFIT
The effective tax benefit rate of 35.0% on losses from continuing
operations for the year ended December 31, 1998 increased compared to the
effective tax benefit rate on continuing operations of 24.0% for the year
ended 1997. The increased tax benefit rate was due primarily to
nondeductible merger and restructuring costs during 1997. The 1996
effective tax provision rate on income of 26.7% differs from the statutory
tax rate primarily due to various items including tax exempt interest
income and a settlement of an Internal Revenue Service examination.
SEGMENT REPORTING
HEALTH PLAN SERVICES
Health plan revenues increased by $1.6 billion or 27.6% primarily due to
enrollment increases in the commercial, Medicare and Medicaid lines of
business in the Northeast Division that was acquired in the fourth quarter
of 1997. These acquisitions contributed approximately $977.8 million in
revenues during the year ended December 31, 1998. In addition, Medicaid
enrollment growth in the California division and premium rate increases
for all divisions contributed to the overall increase in revenues for the
health plans.
Revenues generated by the Company's health plan operations
increased $434.3 million or 8.1% for the period ended December 31, 1997
compared to the same period in 1996. The increase in revenues for the year
ended December 31, 1997 as compared to the same period in 1996 is
primarily due to enrollment increases in the Medicaid lines of business
and enrollment and premium increases in the Medicare lines of business in
California, commercial enrollment increases in Connecticut and Arizona,
and the partial year impact of the acquisitions of Advantage Health in
Pennsylvania, FOHP in New Jersey, and PACC in Oregon.
Health plan health care costs increased by 33.3% for the year ended
December 31, 1998 as compared to 1997 primarily as a result of enrollment
increases in the Northeast Division, Medicaid enrollment growth in the
California Division, pharmacy cost increases in all divisions and
additional health care costs from the 1998 Charges totaling $104.3
million. The health plans MCR increased from 84.3% in 1997 to 88.0% in
1998 due to higher medical costs particularly in physician and hospital
fee for service costs, increase in pharmacy costs and increased
utilization. Excluding the 1998 Charges, the health plans MCR was 86.6%.
Health plan health care costs increased by 6.8% for the year ended
December 31, 1997 as compared to 1996. In the California market, health
care costs increased as a result of higher pharmacy costs for both the
commercial and Medicare lines of business, increased provider contracting
arrangements, increased hospital utilization in the Medicare line of
business, and increased enrollment in the Medicaid line of business. While
health care costs increased during 1997, the health plans MCR declined to
84.3% for the year ended December 31, 1997 from 85.2% for the comparable
period in 1996
<PAGE>
primarily due to higher medical costs in 1996 and favorable loss reserve
development in certain health plan operations during 1997.
The Company's commercial product lines are profitable. Premium rate
increases in the commercial line of products contributed to revenue
increases for the year ended December 31, 1998 as compared to the same
period in the prior year in all divisions of the Company, but were
partially offset by enrollment decreases in commercial HMO markets in
California and the health plans in the western and central states.
Commercial health care costs on a per member per month basis have
increased 8.1% during the year ended December 31, 1998 as compared to the
year ended December 31, 1997.
The Company's Medicare product lines in the California market are
profitable, but are experiencing lower margins than in the prior year. The
Medicare products in the Company's Northeast health plans have shown an
underwriting loss of approximately $32.9 million for the year ended
December 31, 1998. Medicare premium rates and enrollment have increased in
the Northeast markets, but enrollment rates are expected to slow. Medicare
health care costs in the California and Northeast markets continue to
increase faster than premium rates.
Medicaid enrollment in the California division has increased
significantly resulting in a 53.9% increase in member months during the
year ended December 31, 1998, compared to 1997. However, Medicaid premium
rates have decreased in all markets. Medicaid health care costs have
remained steady or decreased on a per member per month basis in all of the
Company's markets except for several of its Western health plans, which
have experienced higher costs due to several high cost claims.
GOVERNMENT CONTRACTS/SPECIALTY SERVICES
Government contracts revenue increased by $40.2 million or 4.2% during the
year ended December 31, 1998 as compared to 1997 primarily due to the full
year effect of the retroactive pricing adjustment in the third quarter of
1997 which reduced 1997 contract prices, as well as from growth in 1998
due to actuarial adjustments in risk share revenue and favorable equitable
adjustments resulting from governmental audits. Government contracts
revenue increased by $40.4 million or 4.4% for the year ended December 31,
1997, compared to 1996 as a result of the California/Hawaii CHAMPUS
contract being active for only 9 months in 1996 compared to a full year in
1997.
Specialty services revenues increased by $24.5 million or 7.2%
during the year ended December 31, 1998 as compared to 1997. These
increases are primarily the result of higher drug manufacturer rebates,
new business as a result of the FHS Combination, and continued growth in
the Company's managed behavioral health network and bill review cost
containment businesses. Specialty services revenues increased by $25.1
million or 7.9% for the year ended December 31, 1997 as compared to the
same period in 1996 primarily due to the impact of a full year's revenue
from Managed Health Network, Inc. which was acquired in March 1996. The
increase in revenue was offset somewhat by the sale of certain ancillary
health care service operations in 1996 and reduced revenue from various
ASO operations. The Company expects continued market pressure to maintain
modest increases in premiums for behavioral health, dental and vision
products.
The government contracts/specialty services MCR increased to 78.5%
for 1998 compared to 77.6% for 1997. Excluding the 1998 Charges, this
ratio was 77.4%. This increase for 1998 is primarily due to (i) the effect
of the 1998 Charges (ii) increased pharmacy costs and higher health care
claim costs on CHAMPUS contracts and (iii) the elimination of the Medicaid
contract administration business which was sold in 1997 which contributed
to revenues with no offsetting health care costs. The government
contracts/specialty services MCR decreased to 77.6% for 1997 compared to
81.2% in 1996. This decrease for 1997 is primarily due to improved health
care and subcontractor performance on the CHAMPUS contracts and due to
adverse reserve development recognized in the fourth quarter of 1996 which
resulted in a higher than usual MCR during 1996.
<PAGE>
DISCONTINUED OPERATIONS
WORKERS' COMPENSATION INSURANCE BUSINESS
In December 1997, the Company adopted a formal plan to sell its workers'
compensation segment. In December 1997, the Company estimated the loss on
the disposal of the workers' compensation segment would approximate $99.0
million (net of an income tax benefit of $21.0 million) which included the
anticipated results of operations during the phase-out period from
December 1997 through the date of disposal. On December 10, 1998, the
Company completed the sale of the workers' compensation segment. The
assets sold consisted primarily of investments, premiums and reinsurance
receivables. The selling price was $257 million in cash.
PHYSICIAN PRACTICE MANAGEMENT BUSINESS
On June 28, 1996 the Company executed a Stock and Note Purchase
Agreement with FPA for the purchase by FPA of the Company's medical
practices (the "Medical Practices"). The transaction was consummated in
November 1996 and the Company recognized a net of tax gain on sale of
$20.3 million, net of $17.6 million of taxes, in 1996. In 1997, the
Company recognized an additional $10.1 million gain on the sale, net of
$2.8 million of taxes, as a result of the final settlement of certain
contractual provisions. The income and loss on discontinued operations,
net of taxes, for the Medical Practices was $2.9 million during 1996.
The results were primarily due to insufficient patient volume being
served by the Medical Practices. The 1996 loss was reduced by a gain of
$10.8 million related to the sale of various independent practice
associations.
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 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.
<PAGE>
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. In addition, the Year 2000 problems of the Company's
providers and customers, including governmental entities, can affect the
Company's operations, which are highly dependent upon information
technology for processing claims, determining eligibility and exchanging
information.
PROJECT STATUS-The Year 2000 effort for the Company has the
highest priority of technology projects and has the full support of the
Company's management. The project has dedicated resources with multiple
teams to address its unique systems environment. Uniform project
management techniques have been adopted with overall oversight
responsibility residing with the Company's Chief Technology Officer,
assisted by a special project manager hired by the Company. An
executive management committee is also actively and directly involved
in an oversight capacity in the Company's Year 2000 project and
receives monthly reports from the project manager. In addition, the
project manager regularly meets with the Company's audit committee to
further discuss the Company's Year 2000 issues.
The Company is addressing its Year 2000 issues in several ways.
Selected systems are being 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 engaged IBM Global Services to assist in
the program management of the project. In addition, the Company is in the
process of assessing its third party relationships with respect to
non-information technology assets and services. The Company has also
retained legal consultants to assist in the review of insurance and the
Company's obligations and rights, and IBM's The Wilkerson Group, technical
consultants specializing in health care, to help develop contingency
plans.
The Company has divided its Year 2000 effort into five phases: (1)
Assessment and Strategy, (2) Detailed Analysis and Planning, (3)
Remediation, (4) Testing and Implementation, and (5) Certification. The
Company's geographical and specialty service divisions are conducting a
detailed self-assessment as to their compliance, needs, risks, and
contingency planning, which will then be reviewed and prioritized at the
corporate level. During the fourth quarter of 1998, the Company continued
moving forward in its efforts to address Year 2000 issues, though its
overall progress was less significant due to organizational changes and
restructuring. The Year 2000 project is experiencing increased progress at
the start of 1999. The Company has established the third quarter of 1999
to complete all phases and is endeavoring to accelerate completion ahead
of that time. The following table sets forth the estimated percentage
completion of each of the Company's Year 2000 phases as of February 1999
with respect to its core applications and information technology
infrastructure, and its Year 2000 project overall.
<TABLE>
<CAPTION>
Phase 1 Phase 2 Phase 3 Phase 4 Phase 5
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Core applications
and IT
infrastructure 100% 94% 56% 15% 0%
Overall 100% 83% 54% 11% 0%
-------------------------------------------------------------------------
</TABLE>
<PAGE>
THIRD PARTIES-The Company has commenced an inventory of third party
relationships, identifying them and analyzing their strategic importance
to the Company and their Year 2000 readiness. The strategically important
third party relationships identified by the Company are general purpose
utility vendors, care delivery organizations (such as providers), and
customer service vendors. The Company now anticipates completing its risk
assessment for third parties in the second quarter of 1999. There can be
no assurance that the systems of other companies on which the Company
relies will be compliant on a timely basis, or that the failure by a third
party to be compliant would not have a material adverse effect on the
Company.
COSTS-The Company is evaluating on an on-going basis the related
costs to resolve its potential Year 2000 problems. The Company currently
estimates that the total cost for the project will be approximately $42.7
million, excluding the costs to accelerate the replacement of hardware or
software otherwise required to be purchased by the Company. Through 1998,
the Company expended approximately $13.6 million relating to, among other
things, the cost to repair or replace software and related hardware
problems, cost of assessment, analysis and planning and internal and
external communications. The Company estimates that the percentages of its
total expenditures for Year 2000 issues will be approximately as follows:
35% for internal costs, 37% for outside consultants and contractors, 6.5%
for software-related costs, and 21.5% for hardware-related costs. The
Company has established a line-item in its overall operating budget
specifically for Year 2000 costs. The operating subsidiaries for each line
of business of the Company, however, are paying for the costs of
assessment, planning, remediation and testing of Year 2000 issues for
their respective operations.
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 from utilizing numerous
assumptions of future events including the continued availability of
certain resources, third party modification plans and other factors. There
can be no assurances that these estimates will be achieved and actual
results and costs could differ materially from these estimates.
Certain insurance coverages for defense costs associated with Year
2000 litigation have already been secured under the Company's Directors
and Officers Liability Insurance policy and will be re-evaluated upon
renewal of that policy. 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 costs and liabilities under its other insurance
policies. The Company is currently analyzing the availability of such
coverage under other existing and future insurance policies and products.
CONTINGENCY PLANNING. An important part of the Company's Year 2000
project involves identifying worst case scenarios and seeking to develop
contingency plans. Each geographical and specialty services division of
the Company is prioritizing its mission critical business functions in
order to address the most critical issues first in remediation efforts and
to develop alternatives to these critical processes as part of contingency
planning. A mission critical business activity or system is one that
cannot be without an automated or functional system for a period of 21
days without causing significant business impact to the particular line of
business. Among other things, the Company's divisions are assessing
potential negative impacts on a valid member's ability to receive
services, the ability to generate revenue, the need for additional
expenditures, compliance with legal, regulatory or accreditation
requirements, meeting contractual obligations and reimbursing providers,
vendors and agents. The Company is currently projecting to complete the
assessment of its most critical business functions by the end of the first
quarter of 1999 and the documentation and validation of its contingency
plans by the end of the second quarter of 1999. The Company currently
anticipates that its contingency plans will include the use of manual as
well as on-line files of its members to avoid disruption in the
verification of membership and eligibility for the provision of health
care services to its members.
RISKS-The Company is highly dependent upon its own information
technology systems and that of its providers and customers. Failure by the
Company or a third party to correct a material Year 2000 problem could
result in a failure of or an interruption in the Company's business
activities and operations. Such interruptions and failures could
materially and adversely affect the Company's results of operations,
liquidity and financial condition. Due to the general uncertainty inherent
in the Year 2000
<PAGE>
problem, resulting in part from the uncertainty of the readiness of third
party providers and customers, the Company is not able at this time to
determine whether the Year 2000 problems will have a material adverse
effect on the Company's results of operations, liquidity or financial
condition. The Company's Year 2000 project is expected to reduce
significantly the Company's level of uncertainty and the possibility of
significant or long-lasting interruptions of the Company's business
operations; however, the Company believes that it is impossible to predict
all of the areas in which material problems may arise.
The Company has initiated formal communications with others with
whom it does significant business to determine their Year 2000 issues. The
Company is currently projecting to complete its assessment of third party
risks by the end of the second quarter of 1999. 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.
Forward-looking statements contained in this Year 2000 section
should be read in connection with the Company's cautionary statements
identifying important risk factors that could cause the Company's actual
results to differ materially from those projected in these forward-looking
statements, which cautionary statements are contained in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998.
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 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. Additionally, the timely collection of
such receivables is also impacted by government audit and negotiation.
For the year ended December 31, 1998, cash provided by operating
activities was $100.9 million compared to cash used in operating
activities of $125.9 million in the prior year. This change was due
primarily to the timing of payments of accounts payable and other
liabilities, including payments for merger, restructuring and other costs
associated with the 1998 Charges. Net cash provided by investing
activities was $147.0 million during 1998 as compared to cash used in
investing activities of $134.8 million during 1997. This increase during
1998 was primarily due to cash received from the sale of the workers'
compensation segment. Net cash used in financing activities was $43.3
million in 1998 as compared to cash provided by financing activities of
$332.1 million during the same period in 1997. The decrease in 1998 was
due to the repayment of funds drawn under the Company's Credit Facility
(as defined below), which were partially offset by additional drawings
under the Credit Facility.
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 Amendments in April, July, November 1998
and March 1999 with the Lenders (the "Amendments"). 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. As of December 31,
1998, the Company was in compliance with the financial covenants of the
Credit Facility, as amended by the Amendments. The Credit
<PAGE>
Facility is available for five years, until July 2002, but it may be
extended under certain circumstances for two additional years. The
outstanding balance under the Credit Facility has decreased from $1.265
billion at December 31, 1997 to $1.225 billion at December 31, 1998. As of
March 18, 1999, the amount outstanding under the Credit Facility totaled
$1.175 billion with interest at LIBOR plus 1.50%.
In February 1999, the Company entered into an agreement to sell its
pharmacy benefits management business to an unrelated third party for $70
million in cash. The Company intends to use the net proceeds from the sale
to reduce corporate debt. The Company has initiated a formal plan to
dispose of certain non-core health plans included in the Company's Health
Plan Services segment. It is anticipated that the sales of these health
plans will be completed during the first half of 1999.
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 promissory notes
issued to the California Wellness Foundation in connection with the Health
Net conversion to for-profit status is subordinated to Health Net meeting
tangible equity requirements under applicable California statutes and
regulations. During 1998, the Company contributed $132.1 million to its
subsidiaries to meet risk-based or other capital requirements of the
regulated entities. As of December 31, 1998, the Company's subsidiaries
were in compliance with minimum capital requirements.
Legislation has been or may be enacted in certain states in which
the Company's subsidiaries operate imposing substantially increased
minimum capital and/or statutory deposit requirements for HMOs in such
states. Such statutory deposits may only be drawn upon under limited
circumstances relating to the protection of policyholders. The Company's
HMO subsidiary operating in New Jersey was required to increase its
statutory deposits by approximately $51 million in 1998 pursuant to such
legislation.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 $3.4 million at December 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
<PAGE>
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 total $1,256 million and the related average interest rate is
6.30% (which interest rate is subject to change pursuant to the terms of
the credit agreement). 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 December 31, 1998.
These cash flows include both expected principal and interest payments
consistent with the terms of the outstanding debt as of December 31, 1998.
<TABLE>
<CAPTION>
(Dollars in thousands) Year 1 Year 2 Year 3 Year 4 Year 5 Beyond Total
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Long-term Borrowings
Fixed Rate $ 4,005 $13,049 $ 2,148 $ 2,167 $2,186 $16,196 $ 39,751
Floating Rate 75,830 75,830 75,830 1,262,915 -- -- 1,490,405
- -------------------------------------------------------------------------------------------------------------
Total $79,835 $88,879 $77,978 $1,265,082 $2,186 $16,196 $1,530,156
- -------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS OF
FOUNDATION HEALTH SYSTEMS, INC.
The Board of Directors of the Company addresses its oversight
responsibility for the consolidated financial statements through its Audit
Committee (the "Committee"). The Committee currently consists of
Gov. George Deukmejian, Thomas T. Farley, Earl B. Fowler (Chairman) and
Richard J. Stegemeier, each of whom is an independent outside director.
In fulfilling its responsibilities in 1998, the Committee reviewed
the overall scope of the independent auditors' audit plan and reviewed the
independent auditors' non-audit services to the Company. The Committee
also exercised oversight responsibilities over various financial and
regulatory matters.
The Committee's meetings are designed to facilitate open
communication between the independent auditors and Committee members. To
ensure auditor independence, the Committee meets privately with the
independent auditors providing for full and free access to the Committee.
/s/ Earl B. Fowler
Earl B. Fowler, Chairman
Audit Committee
March 31, 1999
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Foundation Health Systems, Inc.
Woodland Hills, California
We have audited the accompanying consolidated balance sheets of Foundation
Health Systems, Inc. and subsidiaries (the "Company") as of December 31,
1998 and 1997, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the
period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of Foundation
Health Systems, Inc. and subsidiaries at December 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
/s/ Deloitte & Touche LLP
Los Angeles, California
March 31, 1999
<PAGE>
CONSOLIDATED BALANCE SHEETS
Foundation Health Systems, Inc.
<TABLE>
<CAPTION>
(Amounts in thousands)
December 31, 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Current Assets:
Cash and cash equivalents $ 763,865 $ 559,360
Investments - available for sale 525,082 553,001
Premium receivables, net of allowance for
doubtful accounts (1998 - $28,522; 1997 - $22,900) 230,157 224,383
Amounts receivable under government contracts 321,411 272,060
Deferred taxes 160,446 213,695
Reinsurance and other receivables 147,827 130,875
Other assets 91,096 188,606
Net assets of discontinued operations -- 267,713
- ----------------------------------------------------------------------------------------------------------------------
Total current assets 2,239,884 2,409,693
Property and equipment, net 345,269 427,149
Goodwill and other intangible assets, net 977,910 1,044,727
Other assets 366,478 194,781
- ----------------------------------------------------------------------------------------------------------------------
Total assets $3,929,541 $4,076,350
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Reserves for claims and other settlements $ 961,399 $ 967,815
Unearned premiums 288,683 244,340
Notes payable and capital leases 1,760 3,593
Amounts payable under government contracts 69,792 78,441
Accounts payable and other liabilities 503,797 470,483
- ----------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,825,431 1,764,672
Notes payable and capital leases 1,254,278 1,308,979
Other liabilities 105,790 106,725
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities 3,185,499 3,180,376
- ----------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 12)
Stockholders' equity
Preferred stock ($0.001 par value, 10,000 shares
authorized, none issued and outstanding) -- --
Class A common stock ($0.001 par value, 350,000
shares authorized; issued 1998 - 120,362; 1997 - 114,449) 120 114
Class B non-voting convertible common stock
($0.001 par value, 30,000 shares authorized;
issued and outstanding 1998 - 5,048; 1997 - 10,298) 5 10
Additional paid-in capital 641,820 628,611
Treasury Class A common stock, at cost
(1998 - 3,194 shares; 1997 - 3,194 shares) (95,831) (95,831)
Accumulated other comprehensive loss (7,308) (7,324)
Retained earnings 205,236 370,394
- ----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 744,042 895,974
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $3,929,541 $4,076,350
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
Foundation Health Systems, Inc.
<TABLE>
<CAPTION>
(Amounts in thousands, except per share data)
Years Ended December 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Health plan premiums $7,440,981 $5,829,444 $5,395,125
Government contracts 989,409 949,168 908,730
Specialty services 366,645 342,107 316,993
Investment and other income 99,041 114,300 88,392
- ----------------------------------------------------------------------------------------------------------------------
Total revenues 8,896,076 7,235,019 6,709,240
- ----------------------------------------------------------------------------------------------------------------------
EXPENSES
Health plan services 6,547,747 4,912,532 4,598,074
Government contracts health care services 757,047 711,757 706,076
Specialty services 307,675 290,319 289,744
Selling, general and administrative 1,042,556 851,826 859,996
Amortization and depreciation 128,093 98,353 112,916
Interest 92,159 63,555 45,372
Asset impairment, merger, restructuring and other charges 274,953 395,925 44,108
- ----------------------------------------------------------------------------------------------------------------------
Total expenses 9,150,230 7,324,267 6,656,286
- ----------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before income taxes (254,154) (89,248) 52,954
Income tax provision (benefit) (88,996) (21,418) 14,124
- ----------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations (165,158) (67,830) 38,830
Discontinued operations:
Income (loss) from operations, net of tax -- (30,409) 25,084
Gain (loss) on disposition, net of tax -- (88,845) 20,317
- ----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (165,158) $ (187,084) $ 84,231
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Basic and diluted earnings (loss) per share:
Continuing operations $ (1.35) $ (0.55) $ 0.31
Income (loss) from discontinued operations, net of tax -- (0.25) 0.20
Gain (loss) on disposition of discontinued operations, net of tax -- (0.72) 0.16
- ----------------------------------------------------------------------------------------------------------------------
Net $ (1.35) $ (1.52) $ 0.67
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding:
Basic 121,974 123,333 124,453
Diluted 121,974 123,333 124,966
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Foundation Health Systems, Inc.
<TABLE>
<CAPTION>
(Amounts in thousands)
Years Ended December 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(165,158) $(187,084) $ 84,231
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Amortization and depreciation 128,093 98,353 112,916
Loss on disposal of United Kingdom operations -- 12,676 --
Loss on early redemption of Senior Notes -- 9,586 --
Impairment of assets 193,966 8,456 14,963
Other changes in net assets of discontinued operations -- (5,395) (78,589)
(Gain) loss on disposition of discontinued operations -- 88,845 (20,317)
(Income) loss from discontinued operations -- 30,409 (25,084)
Other changes 15,041 (7,061) (1,049)
Changes in assets and liabilities, net of effects of acquisitions:
Premium receivable and unearned subscriber premiums 38,569 3,105 35,941
Other assets (75,271) (112,302) (239,013)
Amounts receivable/payable under government contracts (58,000) (16,155) (101,711)
Reserves for claims and other settlements (6,416) (55,450) 165,695
Accounts payable and accrued liabilities 30,043 6,145 45,351
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 100,867 (125,872) (6,666)
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale or maturity of investments 718,446 597,691 441,550
Purchase of investments (692,305) (406,818) (513,734)
Purchases of property and equipment (147,782) (131,669) (95,751)
Proceeds from notes receivables -- 93,011 825
Other 11,504 6,633 (17,784)
Sale of net assets of discontinued operations 257,100 -- --
Acquisition of businesses, net of cash acquired -- (293,625) 108
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 146,963 (134,777) (184,786)
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and employee stock purchases 13,209 21,506 31,756
Proceeds from sale of stock -- -- 95,828
Proceeds from issuance of notes payable and other financing arrangements 155,575 566,240 331,576
Repayment of debt and other non-current liabilities (212,109) (144,341) (4,939)
Stock repurchase -- (111,334) (105,418)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (43,325) 332,071 348,803
- ----------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 204,505 71,422 157,351
Cash and cash equivalents, beginning of year 559,360 487,938 330,587
- ----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 763,865 $ 559,360 $ 487,938
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Foundation Health Systems, Inc.
<TABLE>
<CAPTION>
(Amounts in thousands)
Years Ended December 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SUPPLEMENTAL CASH FLOWS DISCLOSURE:
Interest paid $ 85,981 $ 56,056 $ 43,337
Income taxes paid (refunded) (87,799) (3,534) 65,698
- ----------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations $ 2,530 $ 3,993 $ 401
Notes and stocks received on sale of Medical Practices -- -- 201,118
Transfer of investment as consideration for PACC acquisition -- 14,310 --
Conversion of FOHP convertible debentures to equity 1,197 70,654 --
Profit sharing plan shares issued -- -- 4,558
ACQUISITION OF BUSINESSES:
Fair value of assets acquired -- $849,487 $ 23,650
Liabilities assumed -- 438,448 12,903
Issuance of common stock -- -- 6,631
- ----------------------------------------------------------------------------------------------------------------------
Cash paid for acquisitions -- 411,039 4,116
Less cash acquired in acquisitions -- 117,414 4,224
- ----------------------------------------------------------------------------------------------------------------------
Net cash paid for acquisitions -- $293,625 $ (108)
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOUNDATION HEALTH SYSTEMS, INC.
<TABLE>
<CAPTION>
Common Stock
- ------------------------------------------------------------------------------------------------------- Additional
Class A Class B Paid-in
(Amounts in thousands) Shares Amount Shares Amount Capital
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 97,505 $ 97 25,684 $ 26 $585,292
Comprehensive income:
Net income
Change in unrealized depreciation on
investments, net
- ----------------------------------------------------------------------------------------------------------------------
Total comprehensive income
- ----------------------------------------------------------------------------------------------------------------------
Issuance of common stock 1,468 3 4,386
Retirement of treasury stock, net (878) (2) (704)
Exercise of stock options including
related tax benefit 1,216 1 29,546
Employee stock purchase plan 121 2,576
Employee profit sharing plan 166 4,558
Sale of common stock 9,581 10 (6,386) (7) 95,828
Purchase of treasury stock
- ----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 109,179 109 19,298 19 721,482
Comprehensive income:
Net income
Change in unrealized depreciation on
investments, net
- ----------------------------------------------------------------------------------------------------------------------
Total comprehensive income
- ----------------------------------------------------------------------------------------------------------------------
Redemption of common stock (4,550) (4) (111,330)
Retirement of treasury stock, net (130) (3,047)
Exercise of stock options including
related tax benefit 842 19,310
Conversion of Class B to Class A 4,450 5 (4,450) (5)
Employee stock purchase plan 108 2,196
- ----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 114,449 114 10,298 10 628,611
Comprehensive income:
Net income
Change in unrealized depreciation on
investments, net
- ----------------------------------------------------------------------------------------------------------------------
Total comprehensive income
- ----------------------------------------------------------------------------------------------------------------------
Exercise of stock options including
related tax benefit 497 1 9,584
Conversion of Class B to Class A 5,250 5 (5,250) (5)
Employee stock purchase plan 166 3,625
- ----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 120,362 $120 5,048 $ 5 $ 641,820
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOUNDATION HEALTH SYSTEMS, INC.
<TABLE>
<CAPTION>
Common Stock Accumulated
Held in Treasury Other
----------------------- Retained Comprehensive
(Amounts in thousands) Shares Amount Earnings Income (Loss) Total
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 (130) $ (3,047) $ 482,129 $ 3,757 $1,068,254
Comprehensive income:
Net income 84,231 84,231
Change in unrealized depreciation on
investments, net (556) (556)
- ------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 84,231 (556) 83,675
- ------------------------------------------------------------------------------------------------------------------------
Issuance of common stock 4,389
Retirement of treasury stock, net 878 9,588 (8,882) --
Exercise of stock options including
related tax benefit 29,547
Employee stock purchase plan 2,576
Employee profit sharing plan 4,558
Sale of common stock 95,831
Purchase of treasury stock (4,072) (105,419) (105,419)
- ------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 (3,324) (98,878) 557,478 3,201 1,183,411
Comprehensive income:
Net income (187,084) (187,084)
Change in unrealized depreciation on
investments, net (10,525) (10,525)
- ------------------------------------------------------------------------------------------------------------------------
Total comprehensive income (187,084) (10,525) (197,609)
- ------------------------------------------------------------------------------------------------------------------------
Redemption of common stock (111,334)
Retirement of treasury stock, net 130 3,047 --
Exercise of stock options including
related tax benefit 19,310
Conversion of Class B to Class A --
Employee stock purchase plan 2,196
- ------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 (3,194) (95,831) 370,394 (7,324) 895,974
Comprehensive income:
Net income (165,158) (165,158)
Change in unrealized depreciation on
investments, net 16 16
- ------------------------------------------------------------------------------------------------------------------------
Total comprehensive income (165,158) 16 (165,142)
- ------------------------------------------------------------------------------------------------------------------------
Exercise of stock options including
related tax benefit 9,585
Conversion of Class B to Class A --
Employee stock purchase plan 3,625
- ------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 (3,194) $ (95,831) $ 205,236 $ (7,308) $ 744,042
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 1 - DESCRIPTION OF BUSINESS
The current operations of Foundation Health Systems, Inc. (the "Company"
or "FHS") 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 shares of the Company's Class A Common Stock issued to FHC's
stockholders in the FHS Combination constituted approximately 61% of the
outstanding stock of the Company after the FHS Combination and the shares
held by the Company's stockholders prior to the FHS Combination (i.e., the
prior stockholders of HSI) constituted approximately 39% of the
outstanding stock of the Company after the FHS Combination.
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 consolidated financial statements have been
prepared and/or restated as though HSI and FHC always had been combined.
Although prior to the FHS Combination FHC reported on a fiscal year ended
June 30 basis, the consolidated financial statements have been restated to
reflect the Company's calendar year basis.
The consolidated financial statements give retroactive effect to
the FHS combination which was accounted for as a pooling of interests and
to the sale of the Company's workers' compensation business which was
accounted for as discontinued operations (see Note 3).
CONTINUING OPERATIONS
The Company is an integrated managed care organization which administers
the delivery of managed health care services. Continuing operations
consist of two segments: Health Plan Services and Government
Contracts/Specialty 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
administration and cost containment, behavioral health, dental, vision and
pharmaceutical products and other services.
The Health Plan Services segment consists of HMOs organized into
four operational divisions located in the following geographic regions:
the California Division, the Northeast Division, the Central Division, and
the Arizona Division. These health plans are located in Arizona,
California, Colorado, Connecticut, Florida, Idaho, Louisiana, New Jersey,
New Mexico, New York, Ohio, Oklahoma, Oregon, Pennsylvania, Texas, Utah,
Washington, and West Virginia. The Company's health plans provide a wide
range of managed health care services throughout the United States with
approximately 4.2 million at-risk and administrative services only
members. The Company's commercial HMO subsidiaries contract to provide
medical care services to a defined, enrolled population for a
predetermined, prepaid monthly fee for group, Medicaid, individual and
Medicare HMO plans throughout their respective service areas. All of the
HMOs are state licensed and some are also federally qualified. The Company
also operates PPO networks which provide access to health care services
and owns six health and life insurance companies licensed to sell
insurance throughout the United States.
The Government Contracts/Specialty Services segment administers
large, multi-year managed care government contracts. This segment
subcontracts to affiliated and unrelated third parties the administration
and health care risk of parts of these contracts and currently administers
health care programs covering 1.6 million eligible individuals under the
Civilian Health and Medical Program of the Uniformed Services ("CHAMPUS")
through the TRICARE program. Currently, there are three TRICARE contracts
that cover Alaska, Arkansas, California, Hawaii, Oklahoma, Oregon, Texas,
and Washington, and parts of Arizona, Idaho and Louisiana. This segment
also offers behavioral health, dental, vision, and pharmaceutical products
and
<PAGE>
services as well as managed care products related to bill review,
administration and cost containment for hospitals, health plans and other
entities.
DISCONTINUED OPERATIONS
The consolidated financial statements give retroactive effect to the
following (see Note 3):
WORKERS' COMPENSATION INSURANCE SEGMENT - In December 1997, the
Company revised its strategy of maintaining a presence in the workers'
compensation insurance business and adopted a formal plan to discontinue
and sell this segment through divestiture of its workers' compensation
insurance subsidiaries. The Company completed its sale of this segment on
December 10, 1998.
PHYSICIAN PRACTICE MANAGEMENT SEGMENT - On June 28, 1996 the
Company executed a Stock and Note Purchase Agreement with FPA Medical
Management, Inc. ("FPA"), a national health care management services
organization, for the purchase by FPA of the Company's physician practice
management subsidiary and affiliated physician-owned medical practices
(collectively, the "Medical Practices"). The transaction was consummated
in November 1996.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned and majority-owned subsidiaries. All significant
intercompany transactions have been eliminated in consolidation except for
transactions between the Company's continuing operations subsidiaries and
the discontinued operations segments discussed in Note 3. The accompanying
consolidated financial statements have been restated for the FHS
Combination accounted for as a pooling of interests and for the
discontinued operations as discussed in Note 1.
RECLASSIFICATIONS
Certain amounts in the 1997 and 1996 consolidated financial statements and
notes have been reclassified to conform to the 1998 presentation.
REVENUE RECOGNITION
Health plan services premium revenues include HMO and PPO premiums from
employer groups and individuals and from Medicare recipients who have
purchased supplemental benefit coverage, which premiums are based on a
predetermined prepaid fee, Medicaid revenues based on multi-year contracts
to provide care to Medicaid recipients, and revenue under Medicare risk
contracts to provide care to enrolled Medicare recipients. Revenue is
recognized in the month in which the related enrollees are entitled to
health care services. Premiums collected in advance are recorded as
unearned premiums.
Government contracts revenues are recognized in the month in which
the eligible beneficiaries are entitled to health care services.
Government contracts also contain cost and performance incentive
provisions which adjust the contract price based on actual performance,
and revenue under contracts is subject to price adjustments attributable
to inflation and other factors. The effects of these adjustments are
recognized on a monthly basis, although the final determination of these
amounts could extend significantly beyond the period during which the
services were provided. Amounts receivable under government contracts are
comprised primarily of estimated amounts receivable under these cost and
performance incentive provisions, price adjustments, and change orders for
services not originally specified in the contracts.
Specialty services revenues are recognized in the month in which
the administrative services are performed or the period that coverage for
services is provided.
HEALTH CARE EXPENSES
The cost of health care services is recognized in the period in which
services are provided and includes an estimate of the cost of services
which have been incurred but not yet reported. Such costs include payments
to primary care physicians, specialists, hospitals, outpatient care
facilities and the costs associated with managing the extent of such care.
The estimate for reserves for claims and other settlements is based on
actuarial projections of health care costs using historical studies of
claims paid. Estimates are continually monitored and reviewed and, as
settlements are made or estimates adjusted, differences are reflected in
current operations. Such estimates are subject to the impact of changes in
the regulatory environment and economic conditions. Given the inherent
variability of such estimates, the actual liability could differ
significantly from the amounts provided. While the ultimate amount of
claims and losses paid are dependent on future developments, management is
of the opinion that the reserves for claims and other settlements are
adequate to cover such claims and losses. These liabilities are reduced by
estimated amounts recoverable from third parties for subrogation.
The Company generally contracts with various medical groups to
provide professional care to certain of its members on a capitation, or
fixed per member per month fee basis. Capitation contracts generally
include a provision for stop-loss and non-capitated services for which the
Company is liable. Professional capitated contracts also generally contain
provisions for shared risk, whereby the
<PAGE>
Company and the medical groups share in the variance between actual
costs and predetermined goals. Additionally, the Company contracts
with certain hospitals to provide hospital care to enrolled members on a
capitation basis. The HMOs also contract with hospitals, physicians and
other providers of health care, pursuant to discounted fee-for-service
arrangements, hospital per diems, and case rates under which providers
bill the HMOs for each individual service provided to enrollees.
CASH AND CASH EQUIVALENTS
Cash equivalents include all liquid investments with a maturity of three
months or less when purchased.
The Company and its consolidated subsidiaries are required to set
aside certain funds for restricted purposes pursuant to regulatory
requirements. As of December 31, 1998 and 1997, cash and cash equivalent
balances of $65.5 million and $37.9 million, respectively, are restricted
and included in other noncurrent assets.
INVESTMENTS
Investments classified as available for sale are reported at fair value
based on quoted market prices, with unrealized gains and losses excluded
from earnings and reported as other comprehensive income, net of income
tax effects. The cost of investments sold is determined in accordance with
the specific identification method and realized gains and losses are
included in investment income.
Certain debt investments are held by trustees or agencies pursuant
to state regulatory requirements. Such investments which are classified as
held to maturity are carried at an amortized cost of $61.8 million in 1998
and $14.6 million in 1997 and are included in other noncurrent assets (see
Note 11). Market values approximate carrying value at December 31, 1998
and 1997.
REVENUES RELATED TO GOVERNMENT CONTRACTS
Amounts receivable or payable under government contracts are based on
three TRICARE contracts in five regions which include both amounts billed
(net receivables of $75.0 million and $108.8 million at December 31, 1998
and 1997, respectively) and estimates for amounts to be received under
cost and performance incentive provisions, price adjustments and change
orders for services not originally specified in the contracts. Such
estimates are determined based on information available as well as
historical performance. Differences, which may be material, between the
amounts estimated and final amounts collected are recorded in the period
when determined.
Additionally, the reserves for claims and other settlements
include approximately $162.4 million and $204.8 million relating to
health care services provided under these contracts as of December 31,
1998 and 1997, respectively.
PROPERTY AND EQUIPMENT
Property and equipment are stated at historical cost less accumulated
depreciation. Depreciation is computed using the straight-line method over
the lesser of estimated useful lives of the various classes of assets or
the lease term. The useful life for buildings and improvements is
estimated at 40 years, and the useful lives for furniture, equipment and
software range from three to eight years (see Note 5).
Expenditures for maintenance and repairs are expensed as incurred.
Major improvements which increase the estimated useful life of an asset
are capitalized. Upon the sale or retirement of assets, the recorded cost
and the related accumulated depreciation are removed from the accounts,
and any gain or loss on disposal is reflected in operations.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets arise primarily as a result of
various business acquisitions and consist of identifiable intangible
assets acquired and the excess of the cost of the acquisitions over the
tangible and intangible assets acquired (goodwill). Other intangible
assets consist of the value of employer group contracts and provider
networks. Goodwill and other intangible assets are amortized using the
straight-line method over the estimated lives of the related assets listed
below. Fully amortized goodwill and other intangible assets and the
related accumulated amortization are removed from the accounts. The
Company evaluates the carrying value of its goodwill and other intangible
assets periodically based on estimated fair value or undiscounted
operating cash flows whenever significant events or changes occur which
might impair recovery of recorded costs. In such circumstances, recorded
costs of the assets are written down to estimated fair value when recorded
costs, prior to impairment, are higher. Impairment charges for goodwill in
1998 amounted to $30.0 million (see Note 15).
<PAGE>
Goodwill and other intangible assets consisted of the following at
December 31, 1998 (dollars in thousands):
<TABLE>
<CAPTION>
Accumulated Amortization
Cost Amortization Net Balance Period
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Goodwill $1,029,301 $136,088 $ 893,213 27-40 years
Provider network 23,987 9,716 14,271 5-20 years
Employer group contracts 138,323 90,828 47,495 11-22 years
Other 50,540 27,609 22,931 4-15 years
- --------------------------------------------------------------------------------
Total $1,242,151 $264,241 $ 977,910
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
Goodwill and other intangible assets consisted of the following at
December 31, 1997 (dollars in thousands):
<TABLE>
<CAPTION>
Accumulated Amortization
Cost Amortization Net Balance Period
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Goodwill $1,026,992 $ 78,339 $ 948,653 27-40 years
Provider network 20,686 4,864 15,822 5-20 years
Employer group contracts 138,323 80,660 57,663 11-22 years
Other 50,836 28,247 22,589 4-15 years
- --------------------------------------------------------------------------------
Total $1,236,837 $192,110 $1,044,727
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
Amortization expense on goodwill and other intangible assets,
excluding the 1998 asset impairment charge of $30.0 million, was $42.3
million, $40.3 million and $45.2 million for the years ended December 31,
1998, 1997 and 1996, respectively.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash equivalents,
investments and premiums receivable. All cash equivalents and investments
are managed within established guidelines which limit the amounts which
may be invested with one issuer. Concentrations of credit risk with
respect to premium receivables are limited due to the large number of
payers comprising the Company's customer base. The Company's ten largest
employer groups accounted for 17% and 36% of receivables and 12% and 16%
of premium revenue as of December 31, 1998 and 1997, respectively, and for
the years then ended.
EARNINGS PER SHARE
The Company adopted in 1997, Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share." As required by SFAS No. 128, basic
EPS excludes dilution and reflects income divided by the weighted average
shares of common stock outstanding during the periods presented. Diluted
EPS 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 was required. Common stock equivalents
arising from dilutive stock options are computed using the treasury stock
method, and in 1996 amounted to 513,000 shares. Such shares amounting to
207,000 and 488,000 were anti-dilutive in 1998 and 1997, respectively.
Options to purchase an aggregate of 13.4 million, 9.6 million and
4.1 million shares of common stock during 1998, 1997 and 1996,
respectively, were not included in the computation of diluted EPS because
the options' exercise price was greater than the average market price of
the common stock. These options expire through December 2007.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles ("GAAP") requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates. Principal areas requiring the use of estimates include
the determination of allowances for doubtful accounts, reserves for claims
and other settlements, reserves for professional and general liabilities,
amounts receivable or payable under government contracts, remaining
reserves for restructuring and other charges, and net realizable values
for assets where impairment charges have been recorded.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts of cash equivalents, investments
available for sale and notes payable approximate their carrying amounts in
the financial
<PAGE>
statements and have been determined by the Company using available market
information and appropriate valuation methodologies. The carrying amounts
of cash equivalents approximate fair value due to the short maturity of
those instruments. The fair values of investments are estimated based on
quoted market prices and dealer quotes for similar investments. The fair
value of notes payable is estimated based on the quoted market prices for
the same or similar issues or on the current rates offered to the Company
for debt with the same remaining maturities. Considerable judgment is
required to develop estimates of fair value. Accordingly, the estimates
are not necessarily indicative of the amounts the Company could have
realized in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on
the estimated fair value amounts.
The fair value estimates are based on pertinent information
available to management as of December 31, 1998 and 1997. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since that date, and
therefore, current estimates of fair value may differ significantly.
STOCK-BASED COMPENSATION
The Financial Accounting Standards Board issued SFAS No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123"). As permitted under SFAS 123,
the Company has elected to continue accounting for stock-based
compensation under the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Under the intrinsic value method, compensation cost for stock
options is measured at the date of grant as the excess, if any, of the
quoted market price of the Company's stock over the exercise price of the
option (see Note 7).
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted SFAS No. 130 "Reporting
Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for
reporting and presenting comprehensive income and its components.
Comprehensive income includes all changes in stockholders' equity (except
those arising from transactions with stockholders) and includes net income
and net unrealized appreciation (depreciation), after tax, on investments
available for sale.
The adoption of SFAS 130 had no impact on total stockholders'
equity. Accumulated other comprehensive income at December 31, 1998, 1997
and 1996 consisted entirely of unrealized gains (losses), net of income
taxes. The changes in unrealized gains (losses) during each of the three
years ended December 31, 1998 include reclassification adjustments for
gains (losses) realized in net income relating to unrealized gains
(losses) previously recognized. Such reclassification adjustments net of
income tax, are not material to the financial statements.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"), which is required to be adopted in years beginning after June 15,
1999. Management does not anticipate that the adoption of SFAS 133 will
have a significant effect on the financial position of the Company or its
results of operations.
The American Institute of Certified Public Accountants issued
Statement of Position 97-3, "Accounting by Insurance and Other Enterprises
for Insurance-Related Assessments" ("SOP 97-3") in December 1997,
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1") in March 1998 and
Statement of Position 98-5 "Reporting on the Costs of Start-Up Activities"
("SOP 98-5") in April 1998, all of which are effective for the Company's
1999 financial statements. SOP 97-3 provides guidance for determining when
an insurance company or other enterprises should recognize a liability for
guaranty-fund assessments and guidance for measuring the liability. SOP
98-1 requires certain computer software and related costs for internal use
to be capitalized and amortized. SOP 98-5 requires costs of start-up
activities and organization costs to be expensed as incurred. The adoption
of SOP 97-3 and SOP 98-1 is not expected to have a significant effect on
the financial position of the Company or its results of operations. The
initial application of SOP 98-5 in the first quarter of 1999 will result
in a charge of approximately $10 million before income taxes representing
the write-off of existing start-up and organization costs which will be
reported as a cumulative effect of a change in accounting principle.
<PAGE>
NOTE 3 - ACQUISITIONS AND DISPOSITIONS
The following summarizes acquisitions, strategic investments, and
dispositions by the Company during the three years ended December 31,
1998.
1998 TRANSACTIONS
WORKERS' COMPENSATION - In December 1997, the Company adopted a formal
plan to sell its workers' compensation segment which was accounted for as
discontinued operations. On December 10, 1998, the Company completed the
sale of the workers' compensation segment. The net assets sold consisted
primarily of investments, premiums and reinsurance receivables, and
reserves for claims. The selling price was $257.1 million in cash.
Total revenues for the workers' compensation segment amounted to
$560.9 million and $518.7 million in 1997 and 1996, respectively. Net
income (loss) amounted to a $30.4 million loss in 1997 and income of $22.2
million in 1996 after applicable income tax benefits of $32.7 million and
expense of $1.2 million, respectively.
In December 1997, the Company estimated that the loss on the
disposal of the workers' compensation segment would approximate $99.0
million (net of income tax benefit of $21.0 million) which included an
anticipated loss from operations during the phase-out period from December
1997 through the date of disposal. The pre-tax loss in 1998 was an
additional $30.2 million. This was offset by an increase in the rate of
the tax benefit of the transaction to 35%. Accordingly, the accompanying
statement of operations for the year ended December 31, 1998 does not
reflect any additional net gain or loss from the disposition.
LOUISIANA, OKLAHOMA, AND TEXAS - In November 1998, the Company
entered into a definitive agreement to sell its health plan subsidiaries
in Louisiana, Oklahoma and Texas. The transaction is subject to various
closing conditions, including the receipt of all necessary regulatory
approvals and certain financial contingencies, and is expected to close in
the first half of 1999. Impairment charges recorded in 1998 include a
write down of the carrying value of these plans to their expected net
realizable value.
CALL CENTER OPERATIONS - In December 1998, the Company sold the
clinical algorithms used in its call center operations for $36.3 million
in cash, net of transaction costs, and recorded a gain of $1.2 million. In
addition, the Company entered into a long-term services agreement with the
buyer to provide such services to its members for a period of ten years.
1997 TRANSACTIONS
ADVANTAGE HEALTH - On April 1, 1997, the Company completed the acquisition
of Advantage Health, a group of managed health care companies based in
Pittsburgh, Pennsylvania, for $12.5 million in cash. The acquisition was
recorded using purchase accounting and the excess of the purchase price
over the fair value of the net liabilities assumed of $19.7 million was
recorded as goodwill. In December 1998, the Company adjusted the carrying
value of the goodwill to its estimated fair value (see Note 15). Advantage
Health remains a party to long-term provider agreements with the seller.
PACC - On October 22, 1997, effective October 1, 1997, the Company
completed the acquisitions of PACC HMO and PACC Health Plans
(collectively, "PACC"), which are managed health care companies based near
Portland, Oregon, for a purchase price of approximately $43.7 million in
cash. The acquisition was recorded using purchase accounting and the
excess of the purchase price over the fair value of the assets acquired
was recorded as goodwill. The goodwill, in the amount of $32.2 million, is
being amortized on a straight-line basis over 40 years.
FOHP - On April 30, 1997, the Company made a $51.7 million
investment in FOHP, Inc. ("FOHP"). FOHP was owned by physicians, hospitals
and other health care providers and was the sole shareholder of First
Option Health Plan of New Jersey, Inc. ("FOHP-NJ"), a managed health care
company. The Company's initial investment was in the form of FOHP
debentures convertible into up to 71 percent of FOHP's outstanding equity
at the Company's discretion. As of December 1, 1997, the Company converted
these initial FOHP debentures into 71 percent of FOHP's equity.
Additionally, effective December 8, 1997, FOHP issued an additional $29.0
million of convertible debentures to the Company which immediately
converted approximately $18.9 million of these debentures into an
additional 27 percent of FOHP's outstanding equity increasing FHS' equity
holding in FOHP to approximately 98 percent. Goodwill of $107.7 million
was recorded as a result of these transactions and is being amortized on a
straight-line basis over 40 years. On December 31, 1997, the Company
purchased nonconvertible debentures in the amount of $24 million from
FOHP. On December 31, 1998, the Company
<PAGE>
converted approximately $1.2 million of its remaining principal amount of
convertible debentures of FOHP into common stock of FOHP. As a result, the
Company now owns approximately 99.6% of the outstanding equity of FOHP.
The Company is currently in the process of consummating the purchase of
the remaining minority interest in FOHP.
PHYSICIANS HEALTH SERVICES - On December 31, 1997, the Company
completed the acquisition of Physicians Health Services, Inc. ("PHS"), a
group of managed health care companies based in Shelton, Connecticut. The
Company paid approximately $265 million for the approximately nine million
PHS shares then outstanding and caused PHS to cash-out approximately $6
million in PHS employee stock options as part of the acquisition. The
acquisition has been recorded using purchase accounting and the excess of
the purchase price over the fair value of the assets acquired was recorded
as goodwill. The goodwill, in the amount of $218.9 million, is being
amortized on a straightline basis over 40 years.
CHRISTIANIA GENERAL INSURANCE CORPORATION - On May 14, 1997, the
Business Insurance Group, Inc., a subsidiary of the Company, acquired the
Christiania General Insurance Corporation of New York ("CGIC") for $12.7
million in cash. The acquisition has been recorded using purchase
accounting and the excess of the purchase price over the fair value of the
assets acquired was recorded as goodwill. The goodwill, in the amount of
$5.2 million, was being amortized on a straightline basis over 20 years.
As previously discussed, the workers' compensation segment is reported as
discontinued operations and includes CGIC. The remaining goodwill was
reflected in the calculation of the net loss on the sale of this segment.
The following table reflects unaudited pro forma combined results
of operations of the Company and Advantage Health, PACC, FOHP, PHS, and
CGIC on the basis that the acquisitions had taken place at the beginning
of each year ended December 31 (in thousands, except per share data):
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------------------
<S> <C> <C>
Total revenues $ 8,373,830 $ 7,593,247
Loss from continuing operations (176,589) (1,890)
Net income (loss) (295,746) 45,570
Basic and diluted earnings (loss) per share:
Continuing operations (1.43) (0.02)
Net (2.39) 0.37
- -----------------------------------------------------------------------------------
</TABLE>
1996 TRANSACTIONS
MANAGED HEALTH NETWORK - In March 1996, the Company issued stock for
Managed Health Network, Inc. and its subsidiaries (collectively "MHN"), a
privately held company providing employee assistance and managed
behavioral health programs in a pooling of interests transaction valued at
approximately $45 million.
PHYSICIAN PRACTICE MANAGEMENT COMPANIES - On June 28, 1996, the
Company and the sole shareholder of the Medical Practices executed a Stock
and Note Purchase Agreement whereby the Company sold all the outstanding
stock of its management services organization and the sole shareholder
sold all of the outstanding stock of the holding company for the Medical
Practices to FPA. The aggregate consideration consisted of $2 million
cash, $75 million of FPA common stock, a $22 million bridge note
receivable and $104 million of Medical Practices' notes payable to the
Company which were assumed by FPA. During the year ended December 31,
1997, the FPA common stock was sold and the notes receivable were repaid
by FPA.
The transaction was consummated in November 1996 and the Company
recognized a gain on sale of $20.3 million, net of $17.6 million of taxes,
during the quarter ended December 31, 1996. During the year ended December
31, 1997, the Company recognized an additional $10.1 million gain on sale,
net of $2.8 million of taxes, based on the final settlement of certain
contractual provisions related to the disposition of the Medical
Practices.
During January and June of 1996, the Company completed the sale of
its affiliated independent practice associations ("IPAs") in California,
Florida and Arizona to FPA for total consideration of $30 million in cash
and notes. Gains of $10.8 million were recognized by the Company during
the year ended December 31, 1996 and are included in income from
discontinued operations.
This segment was accounted for as discontinued operations in 1996.
Total revenues (unaudited) for the eleven-month period ended November 30,
1996 were $153.5 million (before intercompany eliminations of $129.5
million) with corresponding net losses from operations of $44.7 million
after a tax benefit of $32.4 million. After considering the losses
previously accrued, the net income from discontinued operations was $2.9
million.
<PAGE>
NOTE 4 - INVESTMENTS
As of December 31, the amortized cost, gross unrealized holding gains and
losses and fair value of the Company's available-for-sale investments were
as follows (in thousands):
<TABLE>
<CAPTION>
1998
- ------------------------------------------------------------------------------------------------------------------------
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset-backed securities $135,819 $2,120 $ (39) $137,900
U.S. government and agencies 59,527 1,385 (48) 60,864
Obligations of states and other political subdivisions 181,464 2,964 (17) 184,411
Corporate debt securities 57,468 1,539 (36) 58,971
Equity securities 27,103 -- (18,762) 8,341
Other securities 74,409 209 (23) 74,595
- ------------------------------------------------------------------------------------------------------------------------
$535,790 $8,217 $(18,925) $525,082
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1997
- ------------------------------------------------------------------------------------------------------------------------
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset-backed securities $122,313 $ 901 $ (1,537) $121,677
U.S. government and agencies 88,468 808 (269) 89,007
Obligations of states and other political subdivisions 184,399 1,742 (144) 185,997
Corporate debt securities 73,521 704 (122) 74,103
Equity securities 27,943 -- (12,871) 15,072
Other securities 67,087 58 -- 67,145
- ------------------------------------------------------------------------------------------------------------------------
$563,731 $4,213 $(14,943) $553,001
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1998, the contractual maturities of the Company's
available-for-sale investments were as follows (in thousands):
<TABLE>
<CAPTION>
Estimated
Cost Fair Value
- ----------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $104,855 $105,144
Due after one year through five years 170,234 173,512
Due after five years through ten years 61,541 63,490
Due after ten years 36,238 36,695
- ----------------------------------------------------------------------
372,868 378,841
Asset-backed securities 135,819 137,900
Equity securities 27,103 8,341
- ----------------------------------------------------------------------
Total available for sale $535,790 $525,082
- ----------------------------------------------------------------------
</TABLE>
Proceeds from sales and maturities of investments available for
sale during 1998 were $718.4 million, resulting in realized gains and
losses of $3.6 million and $0.3 million, respectively. Proceeds from sales
and maturities of investments available for sale during 1997 were $597.7
million, resulting in realized gains and losses of $4.7 million and $0.1
million, respectively. Proceeds from sales and maturities of investments
available for sale during 1996 were $441.6 million, resulting in realized
gains and losses of $2.5 million and $0.3 million, respectively.
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment comprised the following at December 31 (amounts in
thousands):
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------
<S> <C> <C>
Land $ 25,195 $ 28,302
Construction in progress 17,824 19,472
Buildings and improvements 157,056 159,571
Furniture, equipment and software 533,897 526,781
- ---------------------------------------------------------
733,972 734,126
Less accumulated depreciation 388,703 306,977
- ---------------------------------------------------------
$345,269 $427,149
- ---------------------------------------------------------
</TABLE>
Depreciation expense on property and equipment was $85.8 million,
$58.1 million and $67.7 million for the years ended December 31, 1998,
1997 and 1996. Impairment charges in 1998 amounted to $61.2 million (see
Note 15).
<PAGE>
NOTE 6 - NOTES PAYABLE, CAPITAL LEASES AND OTHER FINANCING ARRANGEMENTS
Notes payable, capital leases and other financing arrangements comprised
the following at December 31 (amounts in thousands):
<TABLE>
<CAPTION>
1998 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revolving credit facility, variable interest at LIBOR plus 1.50% at
December 31, 1998, unsecured $1,225,000 $1,265,000
Note payable, due December 2000, interest at 7.95%, unsecured 10,500 22,500
Note payable to the California Wellness Foundation, due quarterly with a balloon
payment due 2006, variable interest of 2.5% above 3 year Treasury Note auction
rate, 8.16% and 10.27% at
December 31, 1998 and 1997, respectively, secured by a cash collateral pledge 17,646 18,754
Capital leases and other notes payable 2,892 6,318
- ------------------------------------------------------------------------------------------------------------------------
Total notes payable and capital leases 1,256,038 1,312,572
Less notes payable and capital leases - current portion 1,760 3,593
- ------------------------------------------------------------------------------------------------------------------------
Notes payable and capital leases - noncurrent portion $1,254,278 $1,308,979
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
REVOLVING CREDIT FACILITY
The Company established in July 1997, a $1.5 billion credit facility (the
"Credit Facility") with Bank of America [as Administrative Agent for the
Lenders thereto, as amended in April, July and November 1998 and March
1999 (the "Amendments")]. All previous revolving credit facilities were
terminated and rolled into the Credit Facility. 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 (6.19% and 5.98% at December 31, 1998 and 1997, respectively).
Under the Amendments, 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. The weighted average annual interest rate on the
Company's notes payable and capital leases was approximately 6.30%, 6.24%
and 6.39% for the years ended December 31, 1998, 1997 and 1996. The
maximum amount outstanding under the Credit Facility during 1998 was $1.39
billion.
As of December 31, 1998, the Company was in compliance with the
financial covenants of the Credit Facility, as amended in March 1999.
Scheduled principal repayments on notes payable, capital leases and
other financing arrangements for the next five years are as follows (in
thousands):
<TABLE>
<S> <C>
1999 $ 1,760
2000 11,282
2001 865
2002 1,225,958
2003 1,060
Thereafter 15,113
- ---------------------------------------------------------
Total notes payable and capital leases $1,256,038
- ---------------------------------------------------------
</TABLE>
NOTE 7 - STOCK OPTION AND EMPLOYEE STOCK PURCHASE PLANS
The Company has various Stock Option plans which cover certain employees,
officers and non-employee directors, and employee stock purchase plans
under which substantially all full-time employees of the Company are
eligible to participate. The stockholders have approved all of these
plans except for the 1998 Stock Option Plan which was adopted by the
Company's Board of Directors.
Under the 1989, 1990, 1991, 1992, 1993, 1997 and 1998 employee
stock option plans and the non-employee director stock option plan, the
Company grants options at prices at or above the fair market value of
the stock on the date of grant. The options carry a maximum term of up
to 10 years and in general vest ratably over three to five years. The
Company has reserved a total of 23.2 million shares of its Class A
Common Stock for issuance under the stock option plans.
Under the 1997 Employee Stock Purchase plans, the Company provides
employees with the opportunity to purchase stock through payroll
deductions. Eligible employees may purchase on a monthly basis the
Company's Class A Common Stock at 85% of the lower of the market price on
either the first or last day of each month.
<PAGE>
Stock option activity and weighted average exercise prices for the
years ended December 31 is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Options Price Options Price Options Price
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1 9,636,831 $29.94 7,051,940 $27.75 6,519,232 $24.44
Granted 8,021,018 14.05 3,912,040 32.18 2,338,031 32.50
Exercised (514,064) 18.64 (830,021) 22.66 (1,237,312) 19.52
Canceled (3,725,312) 30.28 (497,128) 28.61 (568,011) 27.32
- ---------------------------------------------------------------------------------------------------------------------------
Outstanding at December 31 13,418,473 $20.87 9,636,831 $29.94 7,051,940 $27.75
- ---------------------------------------------------------------------------------------------------------------------------
Exercisable at December 31 4,140,362 5,116,533 4,640,576
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes the weighted average exercise price
and weighted average remaining contractual life for significant option
groups outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------------------------------------------------
Weighted Average Weighted Weighted
Range of Number of Remaining Average Number of Average
Exercise Prices Options Contractual Life Exercise Price Options Exercise Price
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$9.88 - $12.25 507,338 9.69 years $11.88 10,338 $11.66
12.57 - 12.94 6,570,228 6.07 years 12.94 11,576 12.61
13.50 - 32.50 5,387,657 7.35 years 28.11 3,165,198 27.29
32.79 - 52.81 953,250 6.33 years 39.45 953,250 39.45
- ------------------------------------------------------------------------------------------------------------------------
$9.88 - $52.81 13,418,473 6.74 years $20.87 4,140,362 $30.01
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
The weighted average fair value for options granted during 1998,
1997 and 1996 was $6.00, $9.95 and $10.46, respectively. The fair
values were estimated using the Black-Scholes option-pricing model. The
following weighted average assumptions were used in the fair value
calculation for 1998, 1997 and 1996, respectively: (i) risk-free
interest rate of 4.57%, 5.71% and 6.23%; (ii) expected option lives of
1.9 years, 3.7 years and 2.7 years; (iii) expected volatility of 44.5%,
30.0% and 37.6%; and (iv) no expected dividend yield.
The Company applies APB Opinion 25 and related Interpretations in
accounting for its plans. Accordingly, no compensation cost has been
recognized for its stock option or employee stock purchase plans. Had
compensation cost for the Company's plans been determined based on the
fair value at the grant dates of options and employee purchase rights
consistent with the method of SFAS No. 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts
indicated below for the years ended December 31 (amounts in thousands,
except per share data):
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) As reported $(165,158) $(187,084) $84,231
Pro forma (171,022) (193,638) 69,226
Basic earnings (loss) per share As reported (1.35) (1.52) 0.67
Pro forma (1.40) (1.57) 0.56
Diluted earnings (loss) per share As reported (1.35) (1.52) 0.67
Pro forma (1.40) (1.56) 0.55
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
On December 4, 1998, options representing approximately 1.9
million shares of stock granted during 1990 through 1997 at exercise
prices ranging from $11.70 to $35.25 were exchanged for options
representing approximately 1.4 million shares of stock at an exercise
price of $12.94, which was the fair market value of the underlying
shares at the grant date.
As fair value criteria was not applied to option grants and
employee purchase rights prior to 1995, and additional awards in future
years are anticipated, the effects on net income and earnings per share in
this pro forma disclosure may not be indicative of future amounts.
NOTE 8 - CAPITAL STOCK
The Company has two classes of Common Stock. The Company's Class B Common
Stock has the same economic benefits as the Company's Class A Common Stock
but is non-voting. Upon the sale or transfer of shares of Class B Common
Stock by the California Wellness Foundation (the "CWF") to an unrelated
third party, such shares automatically convert into Class A Common Stock.
The CWF is the only holder of record of the Company's Class B Common
Stock.
PUBLIC OFFERING
On May 15, 1996, the Company completed a public offering in which the
Company sold 3,194,374 shares of Class A Common Stock and the CWF sold
6,386,510 shares of Class A Common Stock (constituting 6,386,510 shares
of Class B Common Stock which automatically converted into shares of
Class A Common Stock upon the sale) for a per share purchase price to
the public of $30.00 (the "Offering"). The net proceeds received by the
Company from the sale of the 3,194,374 shares of Class A Common Stock
were approximately $92.4 million after deducting underwriting discounts
and commissions and estimated expenses of the Offering payable by the
Company. The Company used its net proceeds from the Offering to
repurchase 3,194,374 shares of Class A Common Stock from certain Class
A Stockholders. The Company repurchased these shares of Class A Common
Stock from the Class A Stockholders at $30.00 per share less
transaction costs associated with the Offering, amounting to $1.08 per
share. All of these 3,194,374 shares of Class A Common Stock
repurchased are currently held in treasury. The Company did not receive
any of the proceeds from the sale of shares of Class A Common Stock in
the Offering by the CWF.
On June 27, 1997, the Company redeemed 4,550,000 shares of Class
B Common Stock from the CWF at a price of $24.47 per share. The Company
provided its consent to permit the CWF to sell 3,000,000 shares of
Class B Common Stock to an unrelated third party in June of 1997 and to
sell 450,000 shares of Class B Common Stock to unrelated third parties
throughout August of 1997. On November 6, 1997, the Company also
provided its consent to permit the CWF to sell 1,000,000 shares of
Class B Common Stock to an unrelated third party. In addition,
effective June 18, 1998, the Company gave its consent to permit the CWF
to sell (and the CWF sold) 5,250,000 shares of Class B Common Stock to
an unrelated third party. Pursuant to the Company's Certificate of
Incorporation, all of such shares of Class B Common Stock automatically
converted into shares of Class A Common Stock in the hands of such
third parties.
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. The Rights will separate
from the Common Stock in the event any person acquires 15% or more of the
outstanding Class A Common Stock, the Board of Directors of the Company
declares a holder of 10% or more of the outstanding Class A Common Stock
to be an "Adverse Person," or any person commences a tender offer for 15%
of the Class A Common Stock (each event causing a "Distribution Date").
Except as set forth below and subject to adjustment as provided in
the Rights Agreement, each Right entitles its registered holder, upon the
occurrence of a Distribution Date, to purchase from the Company one
one-thousandth of a share of Series A Junior Participating Preferred
Stock, at a price of $170.00 per one-thousandth share. However, in the
event any person acquires 15% or more of the outstanding Class A Common
Stock, or the Board of Directors of the Company declares a holder of 10%
or more of the outstanding Class A Common Stock to be an "Adverse Person,"
the Rights (subject to
<PAGE>
certain exceptions contained in the Rights Agreement) will instead become
exercisable for Class A Common Stock having a market value at such time
equal to $340.00. The Rights are redeemable under certain circumstances
at $.01 per Right and will expire, unless earlier redeemed, on
July 31, 2006.
In connection with the FHS Combination, the Company entered into
Amendment No. 1 to the Rights Agreement to exempt the FHS Combination and
related transactions from triggering the Rights. In addition, the
amendment modified certain terms of the Rights Agreement applicable to the
determination of certain "Adverse Persons," which modifications became
effective upon consummation of the FHS Combination.
NOTE 9 - EMPLOYEE BENEFIT PLANS
DEFINED CONTRIBUTION RETIREMENT PLANS
The Company and certain subsidiaries sponsor defined contribution
retirement plans intended to qualify under Sections 401(a) and 401(k) of
the Internal Revenue Code of 1986, as amended (the "Code"). Participation
in the plans is available to substantially all employees who meet certain
eligibility requirements and elect to participate. Employees may
contribute up to the maximum limits allowed by Sections 401(k) and 415 of
the Code, with Company contributions based on matching or other formulas.
The Company's expense under the plans totaled $7.4 million, $4.2 million
and $5.1 million for the years ended December 31, 1998, 1997 and 1996,
respectively.
DEFERRED COMPENSATION PLANS
Effective May 1, 1998, the Company adopted a deferred compensation plan
pursuant to which certain management and highly compensated employees
are eligible to defer between 5% and 50% of their regular compensation
and between 5% and 100% of their bonuses, and non-employee Board
members are eligible to defer up to 100% of their directors
compensation. The compensation deferred under such plan is credited
with earnings or losses measured by the rate of return on investments
elected by plan participants. Each plan participant is fully vested in
all deferred compensation and earnings credited to his or her account.
Prior to May 1997, certain members of management, highly
compensated employees and non-employee Board members were permitted to
defer payment of up to 90% of their compensation under a prior deferred
compensation plan (the "Prior Plan"). As part of the FHS Combination,
the Prior Plan was frozen in May 1997 at which time each participant's
account was credited with three times the 1996 Company match (or a
lesser amount for certain prior participants) and each participant
became 100% vested in all such contributions. The current provisions
with respect to the form and timing of payments under the Prior Plan
remain unchanged. At December 31, 1998 and 1997, the liability under
these Plans amounted to $27.9 million and $29.3 million, respectively.
The Company's expense under these Plans totaled $6.1 million, $7.8
million and $3.7 million for the years ended December 31, 1998, 1997
and 1996, respectively.
PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
RETIREMENT PLANS - In 1995, the Company adopted two unfunded non-qualified
defined benefit pension plans, a Supplemental Executive Retirement Plan
and a Directors' Retirement Plan (collectively, the "FHC SERPs"). In 1996,
the Company adopted two additional unfunded non-qualified defined benefit
pension plans, a Supplemental Executive Retirement Plan and a Directors'
Retirement Plan (collectively, the "HSI SERPs"). These plans cover key
executives, as selected by the Board of Directors, and non-employee
directors. Benefits under the plans are based on years of service and
level of compensation.
As part of the FHS Combination, the FHC SERPs were frozen in
April 1997 at which time each participant became 100% vested in his or
her benefits under the plans which are equal to 90% of the actuarial
equivalent of the participant's retirement benefit as of December 31,
1996. All benefits under the FHC SERPs were paid out either in cash, or
as a rollover to the deferred compensation plan.
POSTRETIREMENT HEALTH AND LIFE PLANS - Certain subsidiaries of
the Company sponsor postretirement defined benefit health care plans
that provide postretirement medical benefits to directors, key
executives, employees and dependents who meet certain eligibility
requirements. Under these plans, the Company pays a percentage of the
costs of medical, dental and vision benefits during retirement. The
plans include certain cost-sharing features such as deductibles,
coinsurance and maximum annual benefit amounts which vary based
principally on years of credited service.
On December 31, 1998, the Company adopted SFAS No. 132 "Employers'
Disclosures about Pensions and Other Postretirement Benefits" ("FAS 132"),
which revises employers' disclosures about pension and other
postretirement benefit plans. FAS 132 standardizes the disclosure
requirements. The Company has chosen to disclose the information required
by FAS 132 by aggregating retirement plans into one category and
postretirement plans into another category.
<PAGE>
The following table sets forth the plans' funded status and amounts
recognized in the Company's financial statements:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
------------------------- -------------------------
(in thousands) 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------- -------------------------
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation, beginning of year $ 7,018 $ 5,540 $1,084 $ 1,142
Service cost 1,463 1,122 -- --
Interest cost 674 417 73 86
Plan amendments 1,501 -- 23 --
Benefits paid (188) -- (138) (43)
Actuarial loss (gain) 3,479 (61) (46) (101)
- ---------------------------------------------------------------------------------------- -------------------------
Projected benefit obligation, end of year $ 13,947 $ 7,018 $ 996 $ 1,084
- ---------------------------------------------------------------------------------------- -------------------------
Change in fair value of plan assets:
Plan assets, beginning of year $ -- -- $-- $--
Actual return on plan assets -- -- -- --
Employer contribution 188 -- 138 43
Benefits paid (188) -- (138) (43)
- ---------------------------------------------------------------------------------------- -------------------------
Plan assets, end of year -- -- -- --
- ---------------------------------------------------------------------------------------- -------------------------
Funded status of plans $(13,947) $(7,018) $ (996) $(1,084)
Unrecognized transition obligation -- -- -- --
Unrecognized prior service cost 5,417 4,209 539 552
Unrecognized (gain)/loss 834 (713) (432) (421)
- ---------------------------------------------------------------------------------------- -------------------------
Net amount recognized $ (7,696) $(3,522) $ (889) $ (953)
- ---------------------------------------------------------------------------------------- -------------------------
Prepaid benefit cost:
Accrued benefit liability $ (9,391) $(4,572) $ (889) $ (953)
Intangible asset 1,695 1,050 -- --
- ---------------------------------------------------------------------------------------- -------------------------
Net amount recognized $ (7,696) $(3,522) $ (889) $ (953)
- ---------------------------------------------------------------------------------------- -------------------------
</TABLE>
The components of net periodic benefit costs for the years ended
December 31, 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
-------------------------------------- -------------------------------------
(in thousands) 1998 1997 1996 1998 1997 1996
- -------------------------------------------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost $1,463 $1,122 $1,066 $-- $-- $ 94
Interest cost 674 418 348 74 86 48
Amortization of unrecognized
transition obligation -- -- -- -- 10 14
Amortization of unrecognized
prior service cost 293 293 293 37 37 22
Amortization of unrecognized
(gain)/loss 37 (17) -- (24) (6) 3
- -------------------------------------------------------------------------- -------------------------------------
2,467 1,816 1,707 87 127 181
Cost of subsidiary plan
curtailment 1,896 -- -- (13) 531 --
- -------------------------------------------------------------------------- -------------------------------------
Net periodic benefit cost $4,363 $1,816 $1,707 $74 $658 $181
- -------------------------------------------------------------------------- -------------------------------------
</TABLE>
<PAGE>
The projected benefit obligation, accumulated benefit obligation
and plan assets for the pension plan were $13,947,000, $9,391,000, and $0
at December 31, 1998, respectively, and $7,018,000, $4,572,000, and $0 at
December 31, 1997, respectively.
The weighted average annual discount rate assumed was 6.75% and
7.25% for the years ended December 31, 1998 and 1997, respectively, for
both pension benefit plans and other postretirement benefit plans.
Weighted average compensation increases of 6% for the years ended December
31, 1998 and 1997 were assumed for the pension benefit plans.
For measurement purposes, a 6.25% annual rate of increase in the
per capita cost of covered health care benefits was assumed for 1998, and
6.5% was assumed for 1997. These rates were assumed to decrease gradually
to 4.5% in 2006 for 1998 and 2005 for 1997 and remain at that level
thereafter.
The Company has multiple postretirement benefit plans. The Company
acquired PACC effective September 30, 1997, including its frozen
post-retirement benefit plan. The PACC plan is non-contributory. The FHC
plan is contributory by certain participants. The account for the FHC plan
anticipates future cost-sharing changes to the plan consistent with the
Company's expressed intent to increase retiree contributions at the same
rate as the Company's premium increases.
A one-percentage-point change in assumed health care cost trend
rates would have the following effects (amounts in thousands):
<TABLE>
<CAPTION>
1-percentage 1-percentage
point increase point decrease
- --------------------------------------------------------------------
<S> <C> <C>
Effect on total of service and
interest cost, 1998 11 (9)
Effect on postretirement benefit
obligation, 12/31/98 102 (84)
- --------------------------------------------------------------------
</TABLE>
The Company has no minimum pension liability adjustment to be
included in comprehensive income.
PERFORMANCE BASED ANNUAL BONUS PLAN
In 1998, the Company adopted a Performance-Based Annual Bonus Plan that
qualified under Section 162(m) of the Code (the "162(m) Plan"). Under the
162(m) Plan, if the Company achieved greater than $250 million in
consolidated income from operations before taxes (as determined under GAAP
consistently applied, excluding any nonrecurring or extraordinary
charges), certain executives were potentially eligible to receive cash
bonuses from a pool of $7.5 million based on the executives' salaries in
relation to the pool. Amounts payable to such executives from such pool
were subject to downward adjustment by the Company's Compensation and
Stock Option Committee of the Board of Directors. The $250 million
performance goal for the 162(m) Plan was not met for 1998.
NOTE 10 - INCOME TAXES
Significant components of the provision (benefit) for income taxes
are as follows for the years ended December 31:
<TABLE>
<CAPTION>
(in thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 6,346 $(12,894) $13,687
State 3,897 3,183 2,593
- -----------------------------------------------------------------------------------
Total current 10,243 (9,711) 16,280
- -----------------------------------------------------------------------------------
Deferred:
Federal (121,800) (57,150) 7,420
State (7,630) (5,478) 1,123
- -----------------------------------------------------------------------------------
Total deferred (129,430) (62,628) 8,543
- -----------------------------------------------------------------------------------
Total provision (benefit) for income taxes $(119,187) $(72,339) $24,823
- -----------------------------------------------------------------------------------
</TABLE>
Income tax expense (benefit) is included in the consolidated
financial statements as follows for the years ended December 31:
<TABLE>
<CAPTION>
(in thousands) 1998 1997 1996
- --------------------------------------------------------------------
<S> <C> <C> <C>
Continuing operations $ (88,996) $(21,418) $14,124
Discontinued operations (30,191) (50,921) 10,699
- --------------------------------------------------------------------
Total provision (benefit)
for income taxes $(119,187) $(72,339) $24,823
- --------------------------------------------------------------------
</TABLE>
<PAGE>
A reconciliation of the statutory federal income tax rate and the
effective income tax rate on income from continuing operations is as
follows for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax rate (35)% (35)% 35%
State and local taxes, net
of federal income tax effect (1) (3) 3
Tax exempt interest income (1) (2) (3)
Goodwill amortization 6 6 6
Valuation allowance adjustment -- (2) (5)
Merger transaction costs (3) 8 --
Pooling transactions -- -- (4)
IRS settlement -- -- (4)
Other, net (1) 4 (1)
- --------------------------------------------------------------
Effective income tax rate (35)% (24)% 27%
- --------------------------------------------------------------
</TABLE>
Significant components of the Company's deferred tax assets and
liabilities as of December 31 are as follows:
<TABLE>
<CAPTION>
(in thousands) 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX ASSETS:
Accrued liabilities $ 91,993 $ 70,547
Accrued compensation and benefits 31,097 28,150
Restructuring reserves 30,462 30,057
Net operating loss carryforwards 190,913 140,862
Other, net 9,283 1,524
- -----------------------------------------------------------------------------
Deferred tax assets
before valuation allowance 353,748 271,140
Valuation allowance (48,452) (57,445)
- -----------------------------------------------------------------------------
Net deferred tax assets $305,296 $213,695
- -----------------------------------------------------------------------------
DEFERRED TAX LIABILITIES:
Depreciable and amortizable property $ 26,077 $ 66,608
Other, net 14 839
- -----------------------------------------------------------------------------
Deferred tax liabilities $ 26,091 $ 67,447
- -----------------------------------------------------------------------------
</TABLE>
As of December 31, 1998, the Company had federal net operating loss
carryforwards of approximately $469.0 million of which $111.0 million may
be subject to carryover limitations under Section 382 of the Internal
Revenue Code. A valuation allowance has been provided to account for the
potential limitations associated with utilization of net operating loss
carryforwards. The net operating loss carryforwards expire between 2006
and 2018.
Noncurrent deferred tax assets of $144.9 million at December 31,
1998 are included, net of noncurrent deferred tax liabilities of $26.1
million, in other noncurrent assets. Noncurrent deferred tax liabilities
at December 31, 1997 of $67.4 million are included in other noncurrent
liabilities.
The valuation allowance increase of $56.2 million in 1997
(decreased by $9.0 million in 1998) was due to the acquisition of a
subsidiary for which the future realizability of such subsidiary's
deferred tax assets, primarily related to net operating loss
carryforwards, is uncertain. In the event that the deferred tax assets
related to this subsidiary are realized, the future tax benefits will be
allocated to reduce the associated goodwill.
NOTE 11 - REGULATORY REQUIREMENTS
All of the Company's health plans as well as its insurance subsidiaries
are required to periodically file financial statements with regulatory
agencies in accordance with statutory accounting and reporting practices.
Under the California Knox Keene Health Care Service Plan Act of 1975, as
amended, California plans must comply with certain minimum capital or
tangible net equity requirements. The Company's non-California health
plans, as well as its health and life insurance companies, must comply
with their respective state's minimum regulatory net worth requirements
generally under the regulation of the respective state's department of
insurance and in certain cases, maintain minimum investment amounts for
the restricted use of the regulators which as of December 31, 1998 totaled
$127.3 million. Also, under certain government contracts, certain
subsidiaries are required to maintain a current ratio of 1:1.
As a result of the above requirements and certain other regulatory
requirements, certain subsidiaries are subject to restrictions on their
ability to make dividend payments, loans or other transfers of cash to the
Company. Such restrictions, unless amended or waived, limit the use of any
cash generated by these subsidiaries to pay obligations of the Company.
Management believes that as of December 31, 1998, substantially all of the
Company's health plans and insurance subsidiaries met their respective
regulatory requirements.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
Complaints have been filed in federal and state courts seeking an
unspecified amount of damages on behalf of an alleged class of persons who
purchased shares of common stock, convertible subordinated debentures and
options to purchase common stock of FPA at various times between February
3, 1997 and May 15, 1998. The complaints allege that
<PAGE>
the Company and certain former officers violated federal and state
securities laws by misrepresenting and failing to disclose certain
information about a 1996 agreement between the Company and FPA, about
FPA's business and about the Company's 1997 sale of FPA common stock
held by the Company. Management believes these suits are without merit
and intends to vigorously defend the actions.
The Company is involved in various other legal proceedings, which
are routine in its business. In the opinion of management, based upon
current facts and circumstances known by the Company, the resolution of
these matters should not have a material adverse effect on the financial
position or results of operations of the Company.
OPERATING LEASES
The Company leases administrative and medical office space under various
operating leases. Certain medical office space is subleased to
participating medical groups doing business with the Company. Certain
leases contain renewal options and rent escalation clauses.
In 1995, the Company entered into a $60 million tax retention
operating lease with NationsBank of Texas, N.A., as Administrative Agent
for the Lenders who are parties thereto, and First Security Bank of Utah,
N.A., as Owner Trustee, (the "TROL Agreement") for the construction of
health care centers and corporate facilities. Under the TROL Agreement,
rental payments commence upon completion of construction, with a guarantee
of 87% to the lessor of the residual value of properties leased at the end
of the lease term. After the initial five year noncancelable lease term,
the lease may be extended by agreement of the parties or the Company must
purchase or arrange for sale of the leased properties. The Company has
committed to a guaranteed residual value of $35.3 million under this
agreement at December 31, 1998.
Future minimum lease commitments for noncancelable operating leases
at December 31, 1998 are as follows (amounts in thousands):
<TABLE>
<S> <C>
1999 $ 47,933
2000 41,084
2001 36,161
2002 22,453
2003 12,203
Thereafter 9,582
- ------------------------------------------
Total minimum lease commitments $169,416
- ------------------------------------------
</TABLE>
Rent expense totaled $50.3 million, $48.7 million and $46.8 million
in 1998, 1997 and 1996, respectively.
NOTE 13 - RELATED PARTIES
Two current directors of the Company and one prior director are
partners in law firms which received legal fees totaling $1.0 million,
$1.1 million, and $1.0 million in 1998, 1997, and 1996, respectively.
One current director is an officer of IBM which the Company paid $8.0
million for services in 1998, and one current director is also a
director of a temporary staffing company which the Company paid $20.4
million for services in 1998. An officer of a contracted hospital was
also a member of the Company's Board of Directors until April 1, 1997.
Medical costs paid to the provider totaled $67.1 million and $58.7
million in 1997 and 1996, respectively. Such contracted hospital is
also an employer group of the Company from which the Company receives
premium revenues at standard rates.
NOTE 14 - ASSET IMPAIRMENT, MERGER, RESTRUCTURING AND OTHER CHARGES
The following sets forth the principal components of merger, restructuring
and other costs for the year ended December 31:
<TABLE>
<CAPTION>
(amounts in millions) 1998 1997 1996
- -----------------------------------------------------------
<S> <C> <C> <C>
Severance and benefit
related costs $ 21.2 $ 61.4 $ 5.4
Provider network
consolidation costs -- 36.2 --
Asset impairment costs -- 44.0 17.4
Real estate lease
termination costs -- 5.2 4.6
- -----------------------------------------------------------
Total restructuring costs 21.2 146.8 27.4
Asset impairments and other
charges related to FPA
Medical Management 84.1 -- --
Asset impairment charges
and other 112.4 -- --
Merger related costs -- 69.6 --
Gem costs -- 57.5 --
Other costs 57.3 122.0 16.7
- -----------------------------------------------------------
Total $275.0 $395.9 $44.1
- -----------------------------------------------------------
</TABLE>
1998 CHARGES
On July 19, 1998, FPA Medical Management, Inc. ("FPA") filed for
bankruptcy protection under Chapter 11 of the Federal Bankruptcy Code.
FPA, through its affiliated medical groups, provided services to
approximately 190,000 of the Company's affiliated members in Arizona and
California. FPA has discontinued its medical group operations in these
markets. As a result, the Company is seeking new tenants for, or will
sell, the 13 healthcare facilities it leased to FPA in these markets and
has made other arrangements for provider services to the Company's
affiliated members.
Based on these events and circumstances, management believes that
the likely replacement lease terms from these properties or the net
proceeds from a sale of the facilities will be inadequate
<PAGE>
to enable the Company to recover their carrying value. Based on
management's best estimate of recovery for the real estate and the
impairment of notes receivable and other Company assets due to the
FPA bankruptcy filing, the Company recorded charges totaling
approximately $84.1 million which was comprised of $63.0 million
for real estate asset impairments, $10.0 million for a note
receivable impairment and $11.1 million for other items.
During the third quarter ended September 30, 1998, excluding $28.1
million related to the FPA bankruptcy as discussed above, the Company
recorded $146.9 million of restructuring and other charges. These charges
were primarily related to severance costs of $21.2 million related to
staff reduction in selected health plans and the corporate centralization
and consolidation; other special charges totaling $38.7 million which
included the adjustment of amounts due from a hospital system that filed
bankruptcy totaling $18.6 million, premium deficiency reserves for certain
of the Company's non-core health plans totaling $12.0 million and $8.1
million related to other items. Other charges not included in the table
above totaling $87.0 million were mostly related to contractual
adjustments and were primarily included in health care costs within the
consolidated statement of operations. As of December 31, 1998, $40.9
million of the total $175 million has resulted in cash outlays and $27.5
million is expected to require future outlays of cash.
During the fourth quarter ended December 31, 1998, the Company
recorded impairment and other charges totaling $185.9 million. Of this
amount, $112.4 million related to impairment of certain long-lived assets
to be disposed of (see Note 15). The Company recorded $18.6 million of
other charges primarily related to litigation in the normal course of
business. The Company also recorded other charges not included in the
table above totaling $54.9 million primarily related to bad debts,
claims and premium deficiency reserves for certain health plans whose
health care costs exceeded the contractual premiums. These charges are
included as part of health plan services and selling, general and
administrative expenses within the consolidated statement of operations.
1997 CHARGES
RESTRUCTURING COSTS - In connection with the FHS Combination, the Company
adopted a restructuring plan effective June 30, 1997 (the "June 1997
Plan"), the principal elements of which include: a workforce reduction of
approximately 1,050 employees, the consolidation of employee benefit
plans, the consolidation of facilities in geographic locations where
office space is duplicated, the consolidation of overlapping provider
networks, and the consolidation of information systems at all locations to
standardized systems. The June 1997 Plan, which is substantially completed
as of December 31, 1998, resulted in a restructuring charge of $185.5
million for the quarter ended June 30, 1997.
Severance and benefit related costs include a termination benefits
plan and contractually required change of control payments to senior
executives. Also included are the costs of settlements of benefit plans
terminated as a result of the restructuring plan to conform benefits for
the merged companies. Provider network consolidation costs include costs
to consolidate overlapping provider networks, primarily in California, and
the costs of exiting existing provider contracts as legally, regulatory or
administratively required. Real estate lease termination costs include
facilities consolidation costs primarily in geographic regions where there
is overlapping office space usage. Asset impairment costs are primarily a
result of the Company's plan to be on common operating systems and
hardware platforms. These costs include impairment of hardware, software
and other systems related assets.
During December 1997, the Company adopted a restructuring plan
(the "December 1997 Plan") and recorded a $6.0 million restructuring
charge related to the Company's Eastern Division health plans before a
$2.7 million reduction for the December 1996 Plan (see "1996 Charges").
The plan relates to the integration of the Company's Eastern Division
operations in connection with its acquisition of PHS and FOHP in 1997.
The Company also recorded a credit of $44.7 million for previously
recorded restructuring charges during the fourth quarter of 1997. The
credit consists of $42.0 million for the June 1997 Plan and $2.7 million
for the December 1996 Plan (see "1996 Charges").
The restructuring credits to the June 1997 Plan resulted from the
following: $22.2 million from the Company's determination to continue to
operate certain facilities originally identified for lease termination,
$9.7 million from reductions to initially anticipated involuntary
severance costs, $8.1 million from reductions to certain anticipated
provider network consolidation and other contract termination costs and
$2.0 million in reductions to asset impairment costs primarily related to
the reclassification of workers' compensation insurance subsidiaries
related charges to discontinued operations.
Of the $146.8 million in net restructuring costs recorded as part
of the 1997 plans, $86.9 million represented cash payments and $42.2
million noncash
<PAGE>
activities through December 31, 1998. As of December 31, 1998, $13.8
million is expected to require future outlays of cash and $3.9 million
represents future noncash activities.
MERGER COSTS - In connection with the June 1997 Plan, $69.6 million
in merger costs were recorded. The significant components of the charge
include the following: $22.6 million of transaction costs, primarily
consisting of investment banking, legal, accounting, filing and printing
fees; $22.7 million of merger consulting costs; $5.9 million of former
senior executive consulting costs; $2.4 million of directors and officers
liability coverage required by the merger agreement; $9.6 million in costs
to consolidate debt facilities; and $6.4 million of other merger related
costs.
OTHER COSTS - During the quarters ended June 30, and December 31,
1997, $89.7 million and $32.3 million, respectively, in other costs were
recorded. The significant components of the charge included the following:
$30.5 million for receivables related to provider contracts that will not
be renewed; $17.2 for government receivables related to prior contracts
and adjustments on current contracts being negotiated with the Department
of Defense; $15.1 million for litigation settlement estimates primarily
related to former FHC subsidiaries; $12.6 million for the loss on sale of
the United Kingdom operations; $16.1 million for loss contract accruals,
including $10.1 million related to the Company's health plans in Texas,
Louisiana and Oklahoma; $7.7 million related to contract termination
costs; $8.2 million in other receivables; and $14.6 million of other
costs.
These costs are shown as other costs on the Company's consolidated
statement of operations because of their nature. If not for their nature,
approximately $53.8 million would have been recorded as health plan
services, $38.4 million as selling, general and administrative and $17.2
million as government health care services.
GEM COSTS - The Company established a premium deficiency of
$57.5 million related to the Company's Gem Insurance Company ("Gem")
during the year ended December 31, 1997. During the quarter ended June
30, 1997, the Company had reached a definitive agreement regarding a
reinsurance transaction with The Centennial Life Insurance Company
("Centennial"). Pursuant to this agreement, Centennial was to reinsure
and manage Gem's accident and health, life and annuity policies in
exchange for a reinsurance premium. The cost of the reinsurance along
with the write-down of certain Gem assets that were not recoverable
based on the terms of the agreement totaled $57.5 million. The
transaction was not ultimately consummated due to the unanticipated
failure to satisfy certain closing conditions, including the failure to
receive certain regulatory approvals. Gem established a reserve for the
estimated premium deficiency related to these policies for the
intervening period. As of December 31, 1998, this charge was
substantially completed.
1996 CHARGES
During 1996, the Company recorded restructuring costs of $27.4 million
which included $5.4 million of executive and other involuntary severance
costs, $17.4 million of software, hardware and other asset impairment
costs, and $4.6 million of facilities consolidation costs (the "December
1996 Plan"). As stated above under "1997 Costs," $2.7 million in
reductions to the December 1996 Plan were recorded during 1997 as a result
of the Company's decision to continue to operate certain facilities
originally identified for lease termination.
The Company also recorded $16.7 million of other costs in 1996
including loss contract accruals related to governmental employer groups
in the Company's non-California markets, consulting and other costs. If
not for their unusual nature, approximately $8.5 million of these costs
would have been recorded as health plan services and $8.2 million as
selling, general and administrative expenses. No further costs are
expected.
NOTE 15 - IMPAIRMENT OF LONG-LIVED ASSETS
During 1998, the Company initiated a formal plan to dispose of certain
Central Division health plans included in the Company's Health Plan
Services segment in accordance with previously disclosed anticipated
divestitures program. It is anticipated that the sales of these health
plans will be completed during the first half of 1999. Pursuant to SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of," the Company evaluated the carrying
values of the assets for these health plans and determined that they
exceeded their estimated fair values. Accordingly, in the fourth quarter
of 1998, the Company adjusted the carrying value of these long-lived
assets to their estimated fair value, resulting in a noncash asset
impairment charge of approximately $112.4 million (see Note 14). This
asset impairment charge of $112.4 million consists of $40.3 million for
write-down of furniture, equipment and software, $20.9 million write-down
of buildings and improvements, $30.0 million for write-down of goodwill
and $21.2 million for other impairments and other charges. The fair value
is based on expected net realizable value.
<PAGE>
NOTE 16 - SEGMENT INFORMATION
As of December 31, 1998, the Company adopted SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related Information" ("SFAS 131").
SFAS 131 establishes annual and interim reporting standards for an
enterprise's reportable segments and related disclosures about its
products, services, geographic areas and major customers. Under SFAS 131,
reportable segments are to be defined on a basis consistent with reports
used by management to assess performance and allocate resources. The
Company's reportable segments are business units that offer different
products to different classes of customers. The Company has two reportable
segments: Health Plan Services and Government Contracts/Specialty
Services. The Health Plan Services segment provides a comprehensive range
of health care services through HMO and PPO networks. The Government
Contracts/Specialty Services segment administers large, multi-year managed
care government contracts and also offers behavioral, dental, vision, and
pharmaceutical products and services.
The Company evaluates performance and allocates resources based on
profit or loss from operations before income taxes. The accounting
policies of the reportable segments are the same as those described in the
summary of significant accounting policies, except intersegment
transactions are not eliminated.
Presented below are segment data for the three years in the period
ended December 31, 1998 (amounts in thousands):
<TABLE>
<CAPTION>
Government
Contracts/
Health Plan Specialty
1998 Services Services Other Total
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues from external sources $7,440,981 $1,356,054 $ -- $8,797,035
Intersegment revenues 16,388 234,380 -- 250,768
Investment and other income 69,760 18,110 16,011 103,881
Interest expense 11,937 805 1,927 14,669
Depreciation and amortization 87,579 15,104 2,074 104,757
Asset impairment costs(i) 147,596 5,200 15,162 167,958
Restructuring, merger and other charges(i) 7,107 -- 19,871 26,978
Segment profit (loss)(i) (154,613) 113,832 (33,161) (73,942)
Segment assets 2,799,484 1,099,368 142,143 4,040,995
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(i) Asset impairment, restructuring, merger and other charges exclude $135.9
million of other charges which were primarily included in health plan services
expenses.
<TABLE>
<CAPTION>
Government
Contracts/
Health Plan Specialty
1997 Services Services Other Total
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues from external sources $5,829,444 $1,291,275 $ -- $7,120,719
Intersegment revenues 28,487 304,678 -- 333,165
Investment and other income 72,351 19,248 13,906 105,505
Interest expense 8,474 1,443 2,243 12,160
Depreciation and amortization 67,952 9,648 2,019 79,619
Restructuring, merger and other charges 181,165 40,399 315 221,879
Segment profit (loss) 14,864 58,332 655 73,851
Segment assets 3,457,663 527,859 87,052 4,072,574
- -----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Government
Contracts/
Health Plan Specialty
1996 Services Services Other Total
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues from external sources $5,395,125 $1,225,723 $ -- $6,620,848
Intersegment revenues 20,108 297,378 -- 317,486
Investment and other income 63,211 8,808 11,180 83,199
Interest expense 5,460 1,071 672 7,203
Depreciation and amortization 88,369 9,505 348 98,222
Restructuring, merger and other charges 19,708 4,500 -- 24,208
Segment profit (loss) 45,777 18,052 -- 63,829
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
The following are reconciliations of reportable segment revenues,
profit or loss, segment assets, and other significant items for the three
years in the period ended December 31, 1998 (amounts in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Total external revenues $ 8,797,035 $ 7,120,719 $6,620,848
Total intersegment revenues 250,768 333,165 317,486
Eliminations (250,768) (333,165) (317,486)
- ---------------------------------------------------------------------------------------------------------------------------
Consolidated $ 8,797,035 $ 7,120,719 $6,620,848
- ---------------------------------------------------------------------------------------------------------------------------
Profit or Loss:
Total for reportable segments $ (73,942) $ 73,851 $ 63,829
Other (180,212) (163,099) (10,875)
- ---------------------------------------------------------------------------------------------------------------------------
Total income before taxes $ (254,154) $ (89,248) $ 52,954
- ---------------------------------------------------------------------------------------------------------------------------
Assets:
Total for reportable segments $ 4,040,995 $ 4,072,574
Other 2,125,045 1,461,276
Eliminations (2,236,499) (1,457,500)
- ------------------------------------------------------------------------------------------------------
Consolidated $ 3,929,541 $ 4,076,350
- ------------------------------------------------------------------------------------------------------
Investment and other income:
Total for reportable segments $ 103,881 $ 105,505 $ 83,199
Other 28,698 38,815 19,904
Eliminations (33,538) (30,020) (14,711)
- ---------------------------------------------------------------------------------------------------------------------------
Consolidated $ 99,041 $ 114,300 $ 88,392
- ---------------------------------------------------------------------------------------------------------------------------
Interest expense:
Total for reportable segments $ 14,669 $ 12,160 $ 7,203
Other 95,396 62,998 45,407
Eliminations (17,906) (11,603) (7,238)
- ---------------------------------------------------------------------------------------------------------------------------
Consolidated $ 92,159 $ 63,555 $ 45,372
- ---------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization:
Total for reportable segments $ 104,757 $ 79,619 $ 98,222
Other 23,336 18,734 14,694
- ---------------------------------------------------------------------------------------------------------------------------
Consolidated $ 128,093 $ 98,353 $ 112,916
- ---------------------------------------------------------------------------------------------------------------------------
Asset impairment:
Total for reportable segments $ 167,958 $ -- $ --
Other 31,538 44,300 17,400
- ---------------------------------------------------------------------------------------------------------------------------
Consolidated $ 199,496 $ 44,300 $ 17,400
- ---------------------------------------------------------------------------------------------------------------------------
Merger, restructuring and other charges:
Total for reportable segments $ 26,978 $ 221,879 $ 24,208
Other 48,479 129,746 2,500
- ---------------------------------------------------------------------------------------------------------------------------
Consolidated $ 75,457 $ 351,625 $ 26,708
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
The reconciling amounts to adjust total reportable segment amounts
to consolidated amounts represent amounts from non-reportable operating
segments comprised primarily of corporate units.
NOTE 17 - QUARTERLY INFORMATION (UNAUDITED)
The following restated interim financial information presents the 1998 and
1997 results of operations on a quarterly basis (in thousands, except per
share data) (see Note 1):
<TABLE>
<CAPTION>
March 31 June 30 September 30 December 31
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998:
Total revenues $2,175,374 $2,236,971 $2,213,954 $2,269,777
Income (loss) from continuing operations
before income taxes 43,262 1,529 (127,572) (171,373)
Income (loss) from continuing operations 26,238 956 (88,619) (103,733)
Net income (loss) 26,238 956 (88,619) (103,733)
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE
Continuing operations 0.22 0.01 (0.73) (0.85)
Net 0.22 0.01 (0.73) (0.85)
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
March 31 June 30 September 30 December 31
- ---------------------------------------------------------------------------------------------------------------------------
1997:
Total revenues $1,770,019 $1,773,422 $1,793,379 $1,898,199
Income (loss) from continuing operations
before income taxes 78,683 (313,108) 97,081 48,096
Income (loss) from continuing operations 47,624 (205,792) 59,803 30,535
Net income (loss) 58,481 (200,128) 68,901 (114,338)
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE(I)
Continuing operations 0.38 (1.64) 0.49 0.25
Net 0.47 (1.60) 0.57 (0.94)
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(i) The sum of quarterly earnings (loss) per share amounts may not equal the
year-to-date earnings (loss) per share amounts due to transactions affecting the
weighted average number of shares outstanding in each quarter.
NOTE 18 - SUBSEQUENT EVENTS
In February 1999, the Company entered into a definitive agreement to sell
all of the outstanding shares of its pharmacy benefit management
subsidiary, Foundation Health Pharmaceutical Services, Inc., for $70
million in cash. Completion of the transaction is subject to certain
closing conditions, and is expected to close in the first half of 1999.
In March 1999, the Company signed a letter of intent to sell its
Colorado health plan subsidiary. The completion of the transaction will be
subject to reaching a definitive agreement and various conditions,
including the receipt of all necessary regulatory approvals and other
customary closing conditions.
In March 1999, the Company also entered into a definitive agreement
to sell all of the outstanding shares of its New Mexico health plan
subsidiary. Completion of the transaction is subject to various conditions
and certain regulatory approvals.
<PAGE>
Ex. 21.1
SUBSIDIARIES OF FOUNDATION HEALTH SYSTEMS, INC.
Foundation Health Systems, Inc. (DE)*
-QualMed, Inc. (DE)
-QualMed Plans for Health of Colorado, Inc. (CO)
-San Luis Valley Physicians Service Corp., Ltd. (CO Limited
Partnership)(1)
-Foundation Health Systems Life & Health Insurance Company (CO)
-QualMed Washington Health Plan, Inc. (WA)
-QualMed Plans for Health, Inc. (NM)
-QualMed Oregon Health Plan, Inc. (OR)
-Preferred Health Network, Inc. (CA)
-Health Net (CA) (2)
-Health Net Life Insurance Company (CA)
-PCA of California Insurance Agency (CA)
-HSI Advantage Health Holdings, Inc. (DE)
-QualMed Plans for Health of Ohio and West Virginia, Inc. (OH)
-QualMed Plans for Health of Western Pennsylvania, Inc. (PA)
-Pennsylvania Health Care Plan, Inc. (PA)
-National Pharmacy Services, Inc. (DE)
-Integrated Pharmacy Systems, Inc. (PA) (3)
-HSI Eastern Holdings, Inc. (PA)
-Greater Atlantic Health Service, Inc. (DE)
-QualMed Plans for Health, Inc. (PA)
-Greater Atlantic Preferred Plus, Inc. (PA)
-Employ Better Care, Inc. (PA)
-Foundation Health Corporation (DE)
-Foundation Health Preferred Administrators (CA)
-Foundation Health National Life Insurance Company (TX)
-FH-Arizona Surgery Centers, Inc. (AZ)
-FH Surgery Limited, Inc. (CA)
-FH Surgery Centers, Inc. (CA)
-Foundation Health Facilities, Inc. (CA)
-FH Assurance Company (Cayman Islands)
-Foundation Health Warehouse Company (CA)
-Memorial Hospital of Gardena, Inc. (CA)
-East Los Angeles Doctors Hospital, Inc. (CA)
-Foundation Health Vision Services (CA)
-Denticare of California, Inc. (CA)
-Managed Alternative Care, Inc. (CA)
-American VitalCare, Inc. (CA)
-Foundation Health Federal Services, Inc. (DE)
-Catalina Professional Recruiters, Inc. (AZ)
-Foundation Health Pharmaceutical Services, Inc. (CA)
-Integrated Pharmaceutical Services (CA)
-Foundation Health, A Florida Health Plan, Inc. (FL)
-Foundation Health, A Louisiana Health Plan, Inc. (LA)
-Foundation Health, An Oklahoma Health Plan, Inc. (OK)
-Foundation Health, A Texas Health Plan, Inc. (TX)
-Intercare, Inc. (AZ)
<PAGE>
-Intergroup Health Plan, Inc. (AZ)
-Intergroup Prepaid Health Services of Arizona, Inc. (AZ)
-Interlease of Arizona, Inc. (AZ)
-Intergroup of Utah, Inc. (UT)
-Managed Health Network, Inc. (DE)
-Health Management Center, Inc. (MA)
-Health Management Center, Inc. of Wisconsin (WI)
-HMC PPO, Inc. (MA)
-Managed Health Network (CA)
-MHN Reinsurance Company of Arizona (AZ)
-MHN Services (CA)
--MHN Services IPA, Inc. (NY)
-WC Division, Inc. (CA)
-Foundation Health Medical Resource Management (CA)
-Foundation Integrated Risk Management Solutions, Incorporated
(CA)
-AXIS Integrated Resources, Inc. (DE)
-Gem Holding Corporation (UT) (4)
-Gem Insurance Company (UT)
-QualMed Plans for Health of Pennsylvania, Inc. (PA)
-FOHP, Inc. (NJ) (5)
-Physicians Health Services of New Jersey, Inc. (NJ)
-First Option Health Plan of Pennsylvania, Inc. (PA)
-FOHP Agency, Inc. (NJ)
-Physicians Health Services, Inc. (DE)
-Physicians Health Services (Bermuda) Ltd. (Bermuda)
-Physicians Health Services of Connecticut, Inc. (CT)
-Physicians Health Services of New York, Inc. (NY)
-Physicians Health Services Insurance of New York, Inc. (NY)
-Physicians Health Insurance Services, Inc. (CT)
-PHS Insurance of Connecticut, Inc. (CT)
-PHS Real Estate, Inc. (DE)
-PHS Real Estate II, Inc. (DE)
-HN Reinsurance Limited (Cayman Islands)
*All subsidiaries wholly owned unless otherwise indicated.
(1) A limited partnership in which QualMed Plans for Health of Colorado, Inc.
is an 83.4% limited partner.
(2) Foundation Health Systems, Inc. owns approximately 86% of the outstanding
common stock; Foundation Health Corporation owns approximately 14% of the
outstanding common stock.
(3) National Pharmacy Services, Inc. owns approximately 90% of the outstanding
common stock.
(4) Foundation Health Corporation owns approximately 99.99% of the outstanding
common stock.
(5) Foundation Health Systems, Inc. owns approximately 99.6% of the outstanding
common stock.
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
To the Board of Directors and Stockholders of
Foundation Health Systems, Inc.
Woodland Hills, California
We consent to the incorporation by reference in Registration Statements on
Forms S-8 (i) filed on December 4, 1998 and on March 31, 1998, and (ii) No.
333-35193, No. 333-24621, No. 33-74780 and No. 33-90976 of our report dated
March 31, 1999, appearing in and incorporated by reference in this Annual
Report on Form 10-K of Foundation Health Systems, Inc. (the "Company") for
the year ended December 31, 1998.
Our audits of the financial statements referred to in our aforementioned report
also included the financial statement schedule of Foundation Health Systems,
Inc., listed in Item 14(a). The financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, such financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ DELOITTE & TOUCHE
Los Angeles, California
March 31, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1998 JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1998 DEC-31-1997 DEC-31-1996
<CASH> 763,865 559,360 487,938
<SECURITIES> 525,082 553,601 634,978
<RECEIVABLES> 580,090 519,343 390,769
<ALLOWANCES> 28,522 22,900 18,200
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 2,239,884 2,409,693 2,209,616
<PP&E> 733,972 734,126 542,641
<DEPRECIATION> 388,703 306,977 237,893
<TOTAL-ASSETS> 3,929,541 4,076,350 3,423,776
<CURRENT-LIABILITIES> 1,825,431 1,764,672 1,430,182
<BONDS> 1,254,278<F1> 1,308,979<F1> 791,618<F1>
0 0 0
0 0 0
<COMMON> 125<F2> 124<F2> 128<F2>
<OTHER-SE> 743,917 895,850 1,183,283
<TOTAL-LIABILITY-AND-EQUITY> 3,929,541 4,076,350 3,423,776
<SALES> 0 0 0
<TOTAL-REVENUES> 8,896,076 7,235,019 6,709,240
<CGS> 0 0 0
<TOTAL-COSTS> 7,612,469 5,914,608 5,593,894
<OTHER-EXPENSES> 1,445,602<F3> 1,346,104<F3> 1,017,020<F3>
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 92,159 63,555 45,372
<INCOME-PRETAX> (254,154) (89,248) 52,954
<INCOME-TAX> (88,996) (21,418) 14,124
<INCOME-CONTINUING> (165,158) (67,830) 38,830
<DISCONTINUED> 0<F4> (119,254)<F4> 45,401<F4>
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (165,158) (187,084) 84,231
<EPS-PRIMARY> (1.35) (1.52) 0.67
<EPS-DILUTED> (1.35) (1.52) 0.67
<FN>
<F1>Includes borrowings under revolving credit facility, miscellaneous notes payable
and capital leases.
<F2>Net of treasury stock.
<F3>Includes asset impairment, merger, restructuring and other charges.
<F4>Includes income (loss) from discontinued operations, net of tax and gain (loss)
on disposition of discontinued operations, net of tax.
</FN>
</TABLE>
