-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ClJd9ZBFvq9CegwwhzRlNhItX36PzTVF9rs72z/gTiFN+M9B/RLwFY4lBSeuJmm1 Thtd7yd9lXoJMFvKbxtrPg== 0000912057-95-008082.txt : 19951002 0000912057-95-008082.hdr.sgml : 19951002 ACCESSION NUMBER: 0000912057-95-008082 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 19 CONFORMED PERIOD OF REPORT: 19950630 FILED AS OF DATE: 19950927 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FOUNDATION HEALTH CORPORATION CENTRAL INDEX KEY: 0000859493 STANDARD INDUSTRIAL CLASSIFICATION: HOSPITAL & MEDICAL SERVICE PLANS [6324] IRS NUMBER: 680014772 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-10540 FILM NUMBER: 95576486 BUSINESS ADDRESS: STREET 1: 3400 DATA DR CITY: RANCHO CORDOVA STATE: CA ZIP: 95670 BUSINESS PHONE: 9166315000 MAIL ADDRESS: STREET 1: 3400 DATA DRIVE CITY: RANCHO CORDOVA STATE: CA ZIP: 95670 10-K 1 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 JUNE 30, 1995 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934. COMMISSION FILE NO. 1-10540 FOUNDATION HEALTH CORPORATION (Exact name of Registrant as specified in its charter) DELAWARE 68-0014772 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 3400 DATA DRIVE, RANCHO CORDOVA, CA 95670 (Address of principal executive (Zip Code) office)
Registrant's telephone number, including area code: (916) 631-5000 Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH NAME OF EACH EXCHANGE CLASS ON WHICH REGISTERED - ------------------ ------------------------------------- Common Stock New York Stock Exchange, Inc. $.01 par value
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. /X/ The aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon the closing sale price of the Common Stock on September 21, 1995 as reported on the New York Stock Exchange Composite Tape was approximately $2,109,240,948. As of September 22, 1995, the Registrant had 57,044,786 shares of Common Stock outstanding and entitled to vote in the election of directors. DOCUMENTS INCORPORATED BY REFERENCE Parts of the following document are incorporated by reference to Part III of this Form 10-K Report: Proxy Statement for Registrant's 1995 Annual Meeting of Stockholders. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS. Foundation Health Corporation (the "Company") is an integrated managed care organization which administers the delivery of managed health care services. Through its subsidiaries, the Company offers group, Medicaid, individual and Medicare health maintenance organization ("HMO") and preferred provider organization ("PPO") plans; government sponsored managed care plans; and managed care products related to workers' compensation insurance, administration and cost-containment, behavioral health, dental, vision and pharmaceutical products and services. The Company has implemented managed care cost-containment programs, cost-effective medical delivery systems and medical information management to enable it to meet its business strategies. Over the past several years, the Company has developed a diversified product line, has established a full range of medical delivery systems and has achieved geographic expansion throughout the west, southwest and southeast areas of the United States and in the United Kingdom. The Company was incorporated in Delaware in 1984. The Company's executive offices are located at 3400 Data Drive, Rancho Cordova, California 95670, and its telephone number is (916) 631-5000. Unless the context otherwise requires, the term "Company" as used in this Report refers to Foundation Health Corporation, a Delaware corporation, and its subsidiaries. BUSINESS STRATEGY The Company's business strategy is to develop, market and support the delivery of quality, cost-effective managed care products that address the health care needs of the Company's commercial, specialty services and government customers. The Company's business plan has the following primary objectives: (i) Achieve multi-state enrollment of covered medical risk lives (including Medicare, Medicaid and CHAMPUS lives); (ii) Achieve significant market share in commercial, government and specialty services managed care products in the markets the Company serves; (iii) Continue the Company's strategy to vertically integrate its health care delivery system; and (iv) Continue to improve administrative processes in order to provide quality services to its enrollees. Mergers and acquisitions have played an important role in the implementation of the Company's business strategy and are expected to continue to be important to the Company's growth and development. COMMERCIAL MANAGED CARE MEDICAL HMO AND PPO. The Company owns medical HMO subsidiaries which operate in Arizona, California, Colorado, Florida, Louisiana, Oklahoma, Texas and Utah and has commercial HMO license applications pending in Alabama and Nevada. The HMOs 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. The Company's insurance subsidiaries have established preferred provider organization ("PPO") products. PPOs are generally a network of health care providers which offer their services to health care purchasers, such as insurers and self-funded employers. 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 medical HMO and PPO products. The HMOs and PPOs have contractual arrangements with health care providers, some of which are closely 1 affiliated with the Company, for the delivery of health care to the Company's enrollees. Cost-effective delivery of health care services by such providers is achieved through appropriate use of health care services, emphasizing preventive health care services and encouraging the reduction of unnecessary hospitalization and other services. The following chart describes the Company's commercial HMO and insured PPO membership by state and product: JUNE 30, 1995 COMMERCIAL HMO AND INSURED PPO
GROUP AND MEDICARE COMMERCIAL STATE INDIVIDUAL RISK MEDICAID SUBTOTAL - ----------------------------------- ----------- ----------- --------- ----------- Arizona............................ 296,000 28,000 5,000 329,000 California......................... 522,000 18,000 80,000 620,000 Colorado........................... 19,000 -- -- 19,000 Florida............................ 43,000 26,000 23,000 92,000 Louisiana.......................... 6,000 -- -- 6,000 Texas.............................. 3,000 -- -- 3,000 Utah............................... 79,000 -- 4,000 83,000 Other.............................. 24,000 -- -- 24,000 ----------- ----------- --------- ----------- Total.......................... 992,000 72,000 112,000 1,176,000
PROVIDER ARRANGEMENTS. The Company's medical HMOs arrange for the delivery of health care services to their enrollees by contracting with physicians, either directly or through independent practice associations ("IPAs") and medical groups, hospitals and other health care providers for a defined range of health services, including primary and specialty care and outpatient diagnostic services. Some of the IPAs and medical groups are affiliated with the Company, including Foundation Health Medical Group, Inc. ("FHMG") and Thomas-Davis Medical Centers, P.C., ("TDMC"), which are professional medical corporations owned by a Company-affiliated physician. Each enrollee's primary care physician plays a significant role in cost-control by practicing preventive medicine and managing the use of specialty physicians, hospitals and ancillary providers. The Company pays for health care services provided by IPAs and medical groups on a capitated basis or pursuant to discounted fee-for-service arrangements. Under capitation arrangements, the Company pays the IPA, medical group or hospital a fixed amount per enrollee per month to cover the payment of all or most medical services regardless of utilization, which transfers the risk of certain health care costs to the provider organization. The Company also uses various risk sharing and incentive arrangements to manage further the cost of providing health care. The Company contracts for hospital services under a variety of arrangements including capitation, per diem, discounted fee-for-service and flat fee arrangements. As a result of the increasing competition for health care providers (especially primary care physicians) and rising health care costs, the Company has implemented a strategy to construct and manage health care centers. FHMG and TDMC employ the physicians at the centers to provide medical services to the Company's enrollees. The Company provides facilities and support functions to the health care centers and is reimbursed in the form of a management fee by the affiliated professional corporations. CONTROL OF HEALTH CARE COSTS. The profitability of the Company depends on its ability to effectively control health care costs. Advances in medical technologies, inflation, hospital costs, major epidemics and numerous other external factors, including the aging of the population and other demographic characteristics affecting the delivery of health care, may affect the ability of HMOs, including the Company's HMOs, to predict and control health care costs. 2 The Company manages health care costs by entering into payment arrangements with health care providers and by sharing the risk of certain health care costs with certain of the Company's contracting providers. The Company continues to seek capitation arrangements with its physician providers. In addition, several of the Company's hospital providers are paid pursuant to capitation arrangements. Under the Company's utilization review system, certain routine hospital admissions and lengths of stay require prior authorization and concurrent review. Post-discharge utilization review procedures are performed to evaluate the quality and utilization of care. Health professionals also monitor and become involved in case management of catastrophic cases in an effort to assist enrollees in obtaining medical care and treatment options that may be more appropriate and cost-effective than a long-term hospital stay. RISK MANAGEMENT. In addition to the Company's cost control systems, the use of medical underwriting criteria is an integral part of its risk management efforts. In addition, the Company mitigates part of the risk of catastrophic losses by maintaining reinsurance coverage for annual hospital costs incurred in the treatment of an enrollee's illness. The Company believes that its reinsurance policies significantly limit, at a reasonable premium cost, the risk of catastrophic costs incurred by its enrollees. The Company also maintains general liability, property, fidelity, and managed care professional liability and directors and officers insurance coverage in amounts the Company believes to be adequate. The Company requires contracting physicians, physician groups, dentists, hospitals and ancillary providers to maintain malpractice insurance coverage in amounts customary in the industry. QUALITY MANAGEMENT. The Company's HMOs have programs to evaluate the quality and appropriateness of care provided to its enrollees. The providers participate in quality management programs through peer review procedures conducted with the Company's medical directors. These procedures involve reviews of the tests, types of treatment and procedures performed for specific diagnoses as well as reviews of aggregate data. When considering whether to contract with a provider, the Company's HMOs conduct a credentialling evaluation of the applicant, including licensure, board certification, residency program completion, malpractice claims history and ability to accommodate enrollment demands. The Company's HMOs have customer service departments that work directly with enrollees to respond to their concerns and have enrollee grievance procedures to investigate and resolve complaints. The Company's HMOs also conduct periodic surveys to assess enrollee satisfaction with the health care delivery system, health care received and responsiveness to enrollees' needs. MANAGED CARE INDEMNITY PRODUCTS. Through the Company's indemnity insurance subsidiaries, the Company expands the managed care options for enrollees by making available PPO, point-of-service and other insured managed care products. These companies also offer group term and dependent life, accidental death and dismemberment and long-term disability coverage, as well as dual choice and out-of-area medical coverage. SPECIALTY SERVICES MANAGED CARE The Company is utilizing its experience in managing HMOs to apply managed care concepts to areas such as dental, vision, prescription drugs, behavioral health, workers' compensation insurance and administration and ancillary services, in order to assist employers and other payers in meeting cost-containment and integration of benefits goals both on an insured and self-funded basis. The Company believes that offering a continuum of integrated managed care products and selling them across broad product lines will result in new sources of revenue, will increase membership in existing employer groups and will enable the Company to sell its integrated products to new employer groups. The Company's specialty services managed care operations consist of the following groups: DENTAL. DentiCare of California, Inc. ("DentiCare"), the Company's dental HMO, offers prepaid commercial and Medicaid dental care services. DentiCare served approximately 486,000 enrollees as of June 30, 1995. 3 VISION. Foundation Health Vision Services dba AVP Vision Plans, the Company's vision HMO, offers prepaid vision services in the major metropolitan areas of California. AVP served approximately 124,000 enrollees as of June 30, 1995. BEHAVIORAL HEALTH. Foundation Health PsychCare Services, Inc. (formerly Occupational Health Services, Inc.), the Company's behavioral health HMO, provides managed care mental health, employee assistance and substance abuse programs on both an insured and self-funded basis to employers, governmental entities and other payers throughout the United States through a network of contracted providers. Foundation Health PsychCare Services, Inc. provided services to approximately 2.2 million eligible beneficiaries as of June 30, 1995. WORKERS' COMPENSATION SERVICES. The Company applies its managed care concepts, such as use of specialized preferred provider networks and utilization review, to the operations of its workers' compensation subsidiaries, California Compensation Insurance Company ("CalComp"), Business Insurance Company and Combined Benefits Life Insurance Company, which had estimated aggregate annual premiums in force at June 30, 1995 of approximately $390 million. These subsidiaries expand the Company's workers' compensation products to include insured risk products, permit the Company to apply its managed care expertise to reduce the medical costs associated with workers' compensation claims and enable the Company to develop and market "24 hour" risk or "Combined Care" products covering employees for medical care both on and off the job. The Company provides third party administration of workers' compensation claims primarily to self-insured employers, and operates a medical review and cost-containment business for the workers' compensation industry primarily within California at the current time. PHARMACEUTICAL MANAGED CARE SERVICES. Integrated Pharmaceutical Services, the Company's pharmaceutical subsidiary, provides pharmaceutical managed care services, including a national pharmacy network and formulary, pharmacy adjudication and claims processing services, to reduce costs. This subsidiary also operates retail pharmacies at the Company's health care centers to manage pharmacy-related costs. SELF-FUNDED PRODUCTS. The Company has developed self-funded products for employers who desire the cost containment aspects of an HMO product but who want to self-insure the health care cost risk. The Company has developed a provider network for these self-funded products. The Company's third party administration subsidiaries provide administrative only arrangements, including utilization review, managed care and claims administrative services to employer groups and to medical groups and IPAs that are paid on a capitated, at-risk basis. GOVERNMENT CONTRACTS The Company, through Foundation Health Federal Services, Inc. ("FHFS"), its government contracts subsidiary, administers large, multi-year managed care government programs. FHFS subcontracts to affiliated and unrelated third parties the administration and health care risk of parts of these contracts. These programs include a CHAMPUS managed care contract in Washington and Oregon to provide health care services to approximately 227,000 CHAMPUS-eligible beneficiaries which commenced health care services in March, 1995 and a similar contract in Texas, Louisiana, Arkansas and Oklahoma to provide health care services to approximately 590,000 CHAMPUS-eligible beneficiaries with health care services scheduled to commence in November 1995. On August 31, 1995, FHFS was notified of award by the Department of Defense of the multi-year TRICARE managed care contract to provide health care services to approximately 720,000 CHAMPUS-eligible beneficiaries in California and Hawaii with health care services scheduled to commence in April 1996. FHFS had previously been the prime contractor under the predecessor contract to the TRICARE program from 1988 through January 31, 1994. The Company intends to compete for other managed care contracts as they are announced by federal and state agencies. There can be no assurance that the 4 Company will be successful in managing the implementation and delivery of services under several large, multi-year government managed care contracts or whether any such contracts will provide the Company with an adequate level of profitability. FHFS also administers contracts in Massachusetts and New Jersey to enroll Medicaid eligible individuals in managed care programs in those states. FHFS is not at risk for the provision of any health care services under either of these contracts. PATIENT SERVICES 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. Both of these hospitals are accredited by the Joint Commission on the Accreditation of Healthcare Organizations. The Company's strategy in maintaining ownership of these hospitals depends on the continued cost-efficiency of the hospitals, integration of the hospitals into the Company's Southern California HMO networks, particularly with respect to the Medicaid population, and development of subacute or related units which offer less costly care than acute hospitalization and which contribute to the hospitals' revenues. Through its wholly owned subsidiaries, American VitalCare, Inc. and Managed Alternative Care, Inc., the Company is also engaged in the management of hospital subacute care units serving chronically ill patients. INFORMATION TECHNOLOGY The Company's information technology systems include several computer systems, each utilizing customized software and a network of on-line terminals. The Company's operations use its computer-based information technology systems for various purposes including claims processing, general accounting and health services reporting. These systems also include enrollment and billing functions, including membership verification capabilities, and analysis of transactions relating to providers and enrollees, such as claims status, hospital admissions and lengths of stay, outpatient care and utilization. The Company is heavily dependent on its information technology systems and is in the process of integrating the systems of its recently acquired operations. These systems will need to be further enhanced as the Company's business expands and it offers new products; there is no assurance the Company will not experience interruptions in service as a result of the enhancement and integration of its information technology systems. SALES AND MARKETING The Company's sales and marketing strategy and implementation for its managed care products is defined and coordinated by its corporate sales and marketing staff. Primary marketing responsibility for the Company's products resides with a marketing director and a direct sales force at both the corporate and subsidiary levels. In addition, these products are sold through independent insurance agents and brokers. The Company is emphasizing cross-marketing of its products to current and prospective customers through its corporate and subsidiary sales and marketing staff. Medicaid and Medicare risk products are primarily marketed by the HMOs' sales employees. Sales and marketing efforts are also supported by advertising programs that employ television, radio, newspapers, billboard and direct mail. COMPETITION The managed health care industry evolved primarily as a result of health care buyers' concerns regarding rising health care costs. The industry's goal is to infuse greater cost effectiveness and accountability into the health care system through the development of managed care products, including HMOs, PPOs, and specialized services such as mental health or pharmacy benefit programs, while increasing the accessibility and quality of health care services. The managed health care industry is highly competitive, both nationally and in the Company's various service areas. As HMO and PPO penetration of the health care market and the effects of health care reforms increase nationwide, the Company expects that competition for new contracts with large employer and government groups, small employer groups and individuals will intensify. In addition, employers 5 may choose to self-insure the health care risk while seeking benefit administration and utilization review services from third parties to assist them in controlling and reporting health care costs. In such an environment, the Company believes that having a broad line of health care programs and products available will be important in being selected by employers to manage the health care products or coverage offered to their employees. The Company's managed care products compete for group and individual membership with conventional health insurance plans, Blue Cross/Blue Shield plans, other HMOs, PPOs, third party administrators and health care companies, and employers or groups who elect to self-insure. The Company's ability to increase the number of persons covered by its products or services or to increase its premiums and fees can be affected by the Company's level of competition in any particular area. The Company believes that the principal competitive factors affecting the Company's business include price, the level and quality of service provided or arranged for, provider network capabilities, the offering of innovative products and marketplace reputation. The Company also faces competition from hospitals, health care facilities and other health care providers who have combined and formed their own networks to contract directly with employer groups and other prospective customers for the delivery of health care services. GOVERNMENT REGULATION Government regulation of the Company's business is a changing area of the law that varies from jurisdiction to jurisdiction and from product to product and generally gives responsible administrative agencies broad discretion. The Company believes that it is currently in compliance in all material respects with the various federal and state licensing regulations and contract requirements applicable to its current operations. To maintain such compliance, it may be necessary for the Company to make changes from time to time in its services, products, structure or marketing methods. Additional government regulation, or future interpretation of existing regulations, could increase the cost of the Company's compliance or otherwise affect the Company's operations, products, profitability or business prospects. Non-compliance with government regulations could also subject the Company to fines, penalties, cease and desist orders, investigations, audits, reimbursement of funds previously received, lower reimbursement levels and contract termination. The Company is unable to predict what additional regulation, if any, affecting its business may be enacted in the future or how existing or future regulations may be interpreted. Increasingly states are considering various health care reform measures and are adopting laws or regulations which may limit the Company's HMOs and insurance operations' ability to control which providers are part of their networks and may hinder their ability to effectively manage utilization and cost. The Company is unable to predict what reforms, if any, may be enacted or how those reforms would affect the Company's operations. HMOS. All of the states in which the Company's HMOs offer products have enacted statutes regulating the activities of those HMOs. Regulatory authorities exercise extensive supervisory, investigatory and audit powers over HMOs. Most states require periodic financial reports from HMOs licensed to operate in their states and impose minimum capital or reserve requirements. Certain of the Company's subsidiaries are required to retain for their own use cash generated from their operations. In addition, certain of the Company's subsidiaries are required by state regulatory agencies to maintain restricted cash reserves represented by interest-bearing instruments which are held by trustees or state regulatory agencies to ensure that adequate financial reserves are maintained. Some state regulations enable agencies to review all contracts entered into by HMOs for reasonableness of fees charged and other provisions. The Company's HMOs which have Medicare risk contracts are subject to regulation by the Health Care Financing Administration ("HCFA"), a branch of the United States Department of Health and Human Services. HCFA has the right to audit HMOs operating under Medicare risk contracts to determine each HMO's compliance with HCFA's contracts and regulations and the quality of care being rendered to the HMO's enrollees. 6 The Company's HMOs which have Medicaid contracts are subject to both federal and state regulation regarding services to be provided to Medicaid enrollees, payment for those services and other aspects of the Medicaid program. Both Medicare and Medicaid have in force and/or have proposed regulations relating to fraud and abuse, physician incentive plans and provider referrals which may affect the Company's operations. Several of the Company's HMOs have contracts with the Federal Employees Health Benefit Plan ("FEHBP"). These contracts are subject to extensive regulation, including complex rules relating to the premiums charged. FEHBP has the authority to retroactively audit the rates charged and frequently seeks premium refunds and other sanctions against health plans participating in the program. The Company's HMOs which have contracted with FEHBP are subject to such audits and may be requested to make such refunds. INSURANCE REGULATION. The Company's insurance subsidiaries are subject to regulation by the Department of Insurance (the "DOI") in each state in which the entity is licensed. Regulatory authorities exercise extensive supervisory power over insurance companies with regard to the licensing of insurance companies, including the nature of, and limitation on, an insurance company's investments, periodic examination of the operations of insurance companies, and the establishment of capital and surplus requirements for insurance companies. The Company's insurance company subsidiaries are required to file periodic statutory financial statements in each jurisdiction in which they are licensed, are subject to an annual audit by an independent public accounting firm, and are required to file on an annual basis an actuarial certification of the insurer's reserves for losses and loss adjustment expenses. Additionally, such companies are periodically examined by the insurance departments of the jurisdictions in which they are licensed to do business. INSURANCE HOLDING COMPANY REGULATIONS. Certain of the Company's HMOs and each of the Company's insurance subsidiaries are subject to regulation under state insurance holding company regulations. Such insurance holding company laws and regulations generally require registration with the state DOI and the filing of certain reports describing capital structure, ownership, financial condition, certain intercompany transactions and general business activities. Various notice and reporting requirements generally apply to transactions between companies within an insurance holding company system, depending on the size and nature of the transactions. Certain state insurance holding company laws and regulations require prior regulatory approval or, in certain circumstances, prior notice of, certain material intercompany transactions as well as certain transactions between the regulated companies and their affiliates. TPAS. Certain subsidiaries of the Company are also licensed as third party administrators ("TPAs") in states where such licensing is required for their activities. TPA regulations differ greatly from state to state and there are not uniform or consistent applications of regulations from state to state. UTILIZATION REVIEW REGULATIONS. A number of states have enacted laws and/or adopted regulations governing the provision of utilization review activities. Generally, these laws and regulations require compliance with specific standards for the delivery of services, confidentiality, staffing, and policies and procedures of private review entities, including the credentials required of personnel. Some of these laws and regulations may affect certain operations of the Company's businesses. ERISA. The provision of goods and services to or through certain types of employee health benefit plans is subject to the Employee Retirement Income Security Act of 1974 ("ERISA"). ERISA is a complex set of laws and regulations that are subject to periodic interpretation by the United States Department of Labor. ERISA places certain controls on how certain of the Company's subsidiaries may do business with employers covered by ERISA, particularly employers that maintain self-funded plans. The Department of Labor is engaged in an ongoing ERISA enforcement program which may result in additional constraints on how ERISA-governed benefit plans conduct their activities. There recently have been legislative attempts to limit ERISA's preemptive effect on state laws. If such 7 limitations were to be enacted, they might increase the Company's liability exposure under state law-based suits relating to employee health benefits offered by the Company's HMOs and specialty businesses and may permit greater state regulation of other aspects of those businesses' operations. GOVERNMENT PROGRAMS. FHFS is subject to extensive federal regulation and cost accounting standards as a result of its government contracts, including federal affirmative action and labor requirements, and in the future may be subject to additional state regulations with respect to such contracts. FHFS is also subject to federal and state regulations as a result of the administration of Medicaid programs in various states. HOSPITAL REGULATION. The operation of the Company's hospitals is also subject to federal, state and local government regulation. These facilities are subject to periodic inspection by state licensing agencies to determine that standards of medical care and the physical plant necessary for continued licensure are maintained. The hospitals are subject to environmental legislation by virtue of the real property owned by the hospitals and by their operations, including regulation of the disposal of medical waste. Under the federal reimbursement program for inpatients, Medicare pays a predetermined rate for each covered hospitalization. Each hospitalization is classified into one of several hundred diagnosis related groups, which classification determines the rate paid for the hospitalization. Outpatient services are reimbursed on the basis of reasonable cost and/or per procedure price. The East Los Angeles Doctors Hospital and Memorial Hospital of Gardena have Medicaid contracts which are subject to cancellation by the state or the hospital on 120 days' prior notice without cause. If either hospital's Medicare contract was terminated, the hospital would also cease to participate in Medicaid. For the fiscal year ended June 30, 1995, the hospitals received approximately 76.7% of their total revenues from the Medicare and Medicaid contracts. The termination of participation in these programs would threaten the hospitals' viability. GOVERNMENT AUDITS. The Company is subject to and currently is undergoing extensive governmental investigations and audits with respect to its government contracts and Medicaid and Medicare programs. The results of such audits, which may continue past the termination of the contracts, may result in reimbursement to the governmental agencies of amounts previously paid by such governmental agencies to the Company. The Company is also subject to regular and special medical and financial investigations and audits by various state and federal regulatory agencies with respect to the operations of its HMO and insurance subsidiaries. EMPLOYEES As of June 30, 1995, the Company and its subsidiaries employed approximately 8,896 people. None of the Company's employees is presently covered by a collective bargaining agreement, and the Company believes its employee relations are good. ITEM 2. PROPERTIES. As of June 30, 1995, the Company leased approximately 1.2 million aggregate square feet of space primarily for administrative offices, data processing facilities and claims processing in the states in which it is doing business. These leases expire at various dates through July 2002. The Company owns approximately 486,000 aggregate square feet of space for health care centers in California and Arizona and approximately 248,760 square feet of space for the two hospitals in Southern California. The Company also leases approximately 245,000 aggregate square feet of space for health care centers in Arizona, California and Florida, which leases expire at various dates through April 2003. ITEM 3. LEGAL PROCEEDINGS. The Company maintains general liability and managed care professional liability and directors and officers liability insurance and other insurance coverage it believes is typical in the industry. In the ordinary course of its business, the Company is subject to claims and legal actions by enrollees, 8 providers and others. See "Business -- Government Regulation." There can be no assurance that claims in excess of the Company's insurance coverage will not arise or that all claims would be covered by such insurance. The Company has been requested pursuant to two separate non-public Securities and Exchange Commission ("SEC") investigations, commencing in August 1992 in the case of Century MediCorp. Inc. ("CMC") and in August 1995 in the case of Intergroup Healthcare Corporation ("Intergroup"), to provide information regarding trading (i) in the common stock of CMC and the Company prior to the July 1992 announcement of the proposed merger between CMC and the Company and (ii) in the common stock of Intergroup prior to the July 1994 announcement of the proposed merger between Intergroup and the Company. The SEC has not brought charges in connection with either inquiry and has advised the Company that its inquiries are not to be construed as an adverse reflection on any person or as an indication that any violation of law has occurred. Two actions, as previously disclosed, filed in 1993 against the Company, its dental HMO subsidiary and certain present and former executive officers of the Company and such subsidiary, continue in discovery or pleading stages and as such, the Company cannot determine the liability, if any, that may be assessed or result in these matters. The Company is defending these matters vigorously. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company, who are elected by and serve at the discretion of the Board of Directors, subject to rights under employment agreements, are as follows: Daniel D. Crowley, age 47, has been a director and the President and Chief Executive Officer of the Company since May 1989. In May 1990, Mr. Crowley was appointed Chairman of the Board of Directors of the Company. Prior thereto, Mr. Crowley served Blue Cross and Blue Shield of Ohio in various senior management positions, including Executive Vice President of Statewide Operations, Chief Operating Officer of the Western Division and Vice President. Steven D. Tough, age 44, has been President and Chief Operating Officer -- Government Operations since October 1994. He has been employed by the Company and its subsidiaries in various capacities since 1978. Mr. Tough has been a director of the Company since 1988. Jeffrey L. Elder, age 47, was appointed Senior Vice President-Chief Financial Officer of the Company in July 1992. Mr. Elder joined the Company as Vice President-Financial Operations in July 1989 and was appointed Vice President-Chief Financial Officer in March 1990. Prior thereto, Mr. Elder served as Vice President-Administration of Medical Life Insurance Company. Mr. Elder has been a director of the Company since 1991. Kirk A. Benson, age 45, was appointed President and Chief Operating Officer -- Commercial Operations in October, 1994 and has served as Senior Vice President-Corporate Development of the Company since July 1991. Mr. Benson has been employed by the Company in various capacities since March 1989. Allen J. Marabito, age 49, joined the Company as Senior Vice President-General Counsel and Secretary in July 1991. Prior thereto, Mr. Marabito was a partner with the law firm of Climaco, Climaco, Seminatore, Lefkowitz & Garofoli, Cleveland, Ohio. There are no family relationships among directors or executive officers of the Company. 9 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS. The Company's common stock is listed on the New York Stock Exchange, Inc. (the "NYSE") under the symbol "FH." The following table sets forth, for the periods indicated, the high and low sales prices of the common stock on the NYSE Composite Tape.
PRICE RANGE OF COMMON STOCK ------------------ HIGH LOW ------- ------- Fiscal Year 1994 First Quarter.............................................. $35 $18 1/8 Second Quarter............................................. 32 21 3/4 Third Quarter.............................................. 41 1/2 29 3/4 Fourth Quarter............................................. 46 33 1/4 Fiscal Year 1995 First Quarter.............................................. 39 5/8 31 1/4 Second Quarter............................................. 37 1/2 29 3/4 Third Quarter.............................................. 34 7/8 26 3/8 Fourth Quarter............................................. 32 3/4 26 7/8 Fiscal Year 1996 First Quarter (through September 21, 1995).............................. 38 3/4 26 3/4
On September 21, 1995, the closing sale price of the common stock was $37.125 per share. As of September 22, 1995, there were approximately 712 holders of record of the common stock. The Company has never paid cash dividends on its common stock, except that CareFlorida Health Systems, Inc., which merged with the Company in October 1994, paid cash dividends to its shareholders prior to the merger. The Company presently intends to retain its earnings for the development of its business and does not anticipate paying cash dividends on its common stock in the foreseeable future. The Company's loan agreements restrict payment of cash dividends on the Company's common stock. 10 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA. FOUNDATION HEALTH CORPORATION (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED JUNE 30, -------------------------------------------------------------------- 1991 1992 1993 1994 1995 ------------ ------------ ------------ ------------ ------------ STATEMENT OF OPERATIONS DATA (1): Revenues: Commercial premiums....................... $ 759,052 $ 900,660 $ 1,102,392 $ 1,358,616 $ 1,664,509 Government contracts...................... 584,997 670,271 746,827 542,726 187,493 Specialty services revenue................ 31,099 50,627 89,135 380,726 509,807 Patient service revenue, net.............. 16,377 40,612 43,483 41,358 41,323 Investment and other income............... 17,465 21,449 24,874 39,511 56,792 ------------ ------------ ------------ ------------ ------------ 1,408,990 1,683,619 2,006,711 2,362,937 2,459,924 ------------ ------------ ------------ ------------ ------------ Expenses: Commercial health care services........... 617,527 711,735 862,602 1,067,027 1,290,367 Government contracts health care services................................. 149,659 171,983 188,139 152,185 67,508 Government contracts subcontractor costs.................................... 388,822 419,817 432,903 252,743 66,551 Specialty services costs.................. 30,683 47,950 79,366 355,208 438,124 Patient service costs..................... 17,130 40,973 38,156 37,599 33,561 Selling, general and administrative....... 135,179 175,135 230,506 291,130 307,802 Amortization and depreciation............. 15,162 18,390 21,388 28,463 41,102 Interest expense.......................... 11,031 6,035 4,239 12,709 11,555 Acquisition and restructuring costs (2)... -- -- 12,413 -- 124,822 ------------ ------------ ------------ ------------ ------------ 1,365,193 1,592,018 1,869,712 2,197,064 2,381,392 ------------ ------------ ------------ ------------ ------------ Income before income taxes and minority interest................................... 43,797 91,601 136,999 165,873 78,532 Provision for income taxes.................. 12,877 34,737 57,026 64,834 26,821 Minority interest........................... -- 4,042 6,636 7,398 2,262 ------------ ------------ ------------ ------------ ------------ Net income.................................. 30,920 52,822 73,337 93,641 49,449 Preferred stock dividends................... 1,721 -- -- -- -- ------------ ------------ ------------ ------------ ------------ Net income available to common stockholders............................... $ 29,199 $ 52,822 $ 73,337 $ 93,641 $ 49,449 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Earnings per share.......................... $ 0.78 $ 1.32 $ 1.53 $ 1.92 $ 0.90 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Weighted average common and common stock equivalent shares outstanding.............. 37,564,198 40,022,322 47,870,576 48,688,221 54,780,162 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ JUNE 30, -------------------------------------------------------------------- 1991 1992 1993 1994 1995 ------------ ------------ ------------ ------------ ------------ BALANCE SHEET DATA (1): Cash and investments...................... $ 170,290 $ 291,919 $ 485,370 $ 765,572 $ 795,278 Total assets.............................. 441,405 632,037 916,247 1,498,508 1,964,207 Notes payable and capital leases.......... 59,592 51,688 142,048 170,108 180,054 Stockholders' equity...................... 113,127 263,427 342,398 422,443 756,899 - -------------------------- (1) The Company's consolidated financial statements have been restated to reflect the results of acquisitions accounted for in accordance with the pooling of interests method of accounting. See Note 1 of Notes to the Consolidated Financial Statements. (2) In connection with certain acquisitions the Company recorded charges for acquisition and restructuring costs. See Note 1 of Notes to the Consolidated Financial Statements.
11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The Company's financial position and results of operations changed significantly during fiscal year 1995 as a result of the following mergers and acquisitions which enhanced the Company's geographic and product diversity:
DATE OF ACQUISITION NATURE OF BUSINESS CONSIDERATION - ------------------------------ ----------------------------------- ----------------------------------- PURCHASE TRANSACTIONS July 1994 Workers compensation bill review $37 million cash plus common stock and third party administration November 1994 Colorado HMO $8.9 million common stock November 1994 Florida Medicaid HMO $32.9 million cash plus note November 1994 39.5% minority interest in Arizona $249.1 million common stock and Utah managed care company ("Intergroup") February 1995 Property and casualty insurance $13.2 million cash company POOLING TRANSACTIONS October 1994 Florida managed care company $226.4 million exchange of common ("CareFlorida") stock November 1994 Arizona professional corporation $438.9 million exchange of common ("TDMC") and its 60.5% interest in stock Intergroup
In addition to these mergers and acquisitions, in fiscal year 1995 the Company's government contracts subsidiary was awarded a large government managed care contract in Washington and Oregon to provide services to approximately 227,000 CHAMPUS-eligible beneficiaries (the "Washington/Oregon Contract"), which commenced health care delivery in March 1995 and was awarded a similar contract in April 1995 in Oklahoma, Arkansas and parts of Louisiana and Texas to provide services to approximately 590,000 CHAMPUS-eligible beneficiaries (the "Region 6 Contract"), with health care delivery scheduled to commence in November 1995. The financial information, enrollment data and related comparisons presented in this discussion have been restated to include the results of CareFlorida, TDMC and its majority interest in Intergroup for all periods presented. The acquisitions accounted for under the purchase method of accounting have been included in the Company's consolidated financial statements from their respective dates of acquisition. This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the accompanying consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. CONSOLIDATED OPERATING RESULTS The Company achieved record revenues and earnings (before a $124.8 million acquisition and restructuring charge net of related tax effects recorded in the second quarter) for the fiscal year ended June 30, 1995. The growth in revenues during fiscal year 1995 was primarily driven by commercial enrollment gains, especially from the Company's individual and Medicare risk products, additional Medicaid enrollment as a result of the acquisition of the Florida Medicaid HMO, growth in net earned workers' compensation premium due to sales and recapture of ceded premium and commencement of health care delivery under the Washington/Oregon Contract during the third quarter. This growth was offset by the January 31, 1994 expiration of the CRI Contract. Fiscal year 1994 revenues included $431.3 million in revenues related to the CRI Contract. Revenues in fiscal year 1994 exceeded fiscal 12 year 1993 revenues of $2,006.7 million by 17.8%, primarily as a result of increased commercial enrollment and specialty services revenues, including revenues generated from CalComp which was acquired in August 1993. Investment and other income, included as a component of the Company's revenues, increased each year due primarily to the investment of excess surplus and reserves generated by operations, a significant part of which was generated by CalComp, acquired in August 1993, whose investments are primarily held in tax-exempt securities. Investment income also increased due to the general rise in interest rates during fiscal years 1993, 1994 and 1995. The Company's selling, general and administrative ("SG&A") expenses in fiscal year 1995 increased due primarily to the implementation costs of the Washington/Oregon and Region 6 Contracts and start-up of the New Jersey Medicaid administrative services only contract. The increase in SG&A expenses in fiscal year 1994 over 1993 was due primarily to expenses related to the establishment and operation of government claims processing as an internal function and the inclusion of SG&A expenses related to Gem Insurance Company ("Gem"), the Utah insurance subsidiary which was acquired by Intergroup effective January 1, 1994. The ratio of SG&A expenses to total revenues (the "SG&A ratio") increased from 11.5% in fiscal year 1993 to 12.3% in fiscal year 1994 to 12.5% in fiscal year 1995. This increase was due primarily to the expiration of the CRI Contract which resulted in the cessation of contract revenues effective January 31, 1994 while various administrative costs related to claims processing and other activities continued during the wind-down period. Amortization and depreciation expense increased each year primarily due to increased depreciation as a result of the Company's ownership and construction of health care centers and increased amortization of goodwill incurred in connection with the purchase of the Intergroup minority interest and other business acquisitions during fiscal years 1993, 1994 and 1995. Interest expense increased in fiscal year 1994 from fiscal year 1993 due primarily to the issuance of $125 million of Senior Notes in June 1993. Interest expense decreased in fiscal year 1995 as a result of the prepayment of $11.4 million in bank debt by TDMC in November 1994. In connection with the mergers of CareFlorida, TDMC and Intergroup, the Company recorded a charge for integration, restructuring and pooling costs of $124.8 million. The acquisition and restructuring charge represents the costs of acquiring and consolidating the companies' management information systems and administrative functions and positioning the Company to take advantage of best practices in healthcare delivery systems and managed care techniques after the mergers. The components of this charge include (in millions): Professional fees....................................................... $ 21.5 Cancellation of certain contractual obligations and other settlement costs.................................................................. 27.1 Write-off of certain redundant hardware, software and other settlement costs.................................................................. 17.9 Elimination of duplicate facilities..................................... 13.0 Transition and severance related payments to employees.................. 36.5 Other integration and restructuring..................................... 8.8 ------ Total............................................................... $124.8 ------ ------
These costs satisfy the definition of "exit costs" as set forth in Emerging Issues Task Force Issue 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an 13 Activity (including Certain Costs Incurred in a Restructuring)" that are directly related to the mergers. Management of the Company anticipates the integration and restructuring of the combined entities will be substantially complete by the end of the fourth quarter of fiscal year 1996. Full implementation of the restructuring plan will result in the termination of 638 employees (291 employees had been terminated as of June 30, 1995) by eliminating and consolidating duplicate administrative, information systems and sales functions. As of June 30, 1995, $62.8 million (primarily professional fees, transition and related severance payments and write-off of impaired assets) in merger, integration and restructuring costs have been paid or otherwise charged against the $124.8 million accrual. The remaining restructuring obligations are expected to be substantially paid as due through the fourth quarter of fiscal year 1996 utilizing existing cash resources of the Company. The amounts set forth above represent management's best estimate of the restructuring costs to be incurred and the timing of the restructuring and integration plan (the "Plan"). The progress of the Plan and the actual amounts incurred could vary from these estimates if future developments differ from the underlying assumptions used by management in developing the recorded accrual. The Company expects that this restructuring will result in operating cost savings in excess of the amount of the charge. As a result of the factors described above and despite expiration of the CRI Contract in January 1994, income before income taxes and minority interest grew from $149.4 million in fiscal year 1993 (before acquisition and restructuring costs) to $165.9 million in 1994. After acquisition and restructuring costs, income before income taxes and minority interest was $137.0 million in fiscal year 1993. In fiscal year 1995, income before income taxes and the minority interest grew to $203.3 million (before acquisition and restructuring costs). After acquisition and restructuring costs, income before income taxes and minority interest was $78.5 million in fiscal year 1995. The tax provision rate for fiscal year 1994 of 39.1% was 2.5% lower than for fiscal year 1993, because of acquisition expenditures in the earlier year which were not deductible for income tax purposes, and the acquisition in fiscal year 1994 of CalComp, which is not subject to state income or franchise taxes. The tax provision rate dropped further in fiscal year 1995 to 34.2% because of the combined effect of the acquisition and restructuring charge of $124.8 million and the resulting increased proportion of tax-exempt interest income as a percentage of pre-tax income. The rate was further reduced by the acquisition of Intergroup, which is not subject to state franchise or income taxes, and the elimination of a duplicate tax for undistributed income from Intergroup to its former parent company. These rate reductions were mitigated by the effects of non-deductible acquisition expenses. Minority interest represents the allocation of Intergroup's net income to the holders of the 39.5% shares of Intergroup common stock not held by TDMC (the "Intergroup Minority Interest"), for the periods prior to the Company's acquisition of the Intergroup Minority Interest. Through the combination of the factors described above, net income grew from $82.5 million or $1.72 per share in fiscal year 1993 (before the $12.4 million acquisition and restructuring costs net of related tax effects) to $93.6 million or $1.92 per share in fiscal year 1994. After the acquisition and restructuring costs net of related tax effects in fiscal year 1993, net income was $73.3 million or $1.53 per share. In fiscal year 1995, net income increased to $128.8 million or $2.35 per share (before the $124.8 million acquisition and restructuring costs net of related tax-effects). After such charge net of related tax effects, net income for fiscal year 1995 was $49.4 million or $.90 per share. 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 14 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. LINE OF BUSINESS REPORTING The Company operates in a single industry segment, managed health care. The following table presents financial information reflecting the Company's operations by the three primary lines of business: (i) commercial operations; (ii) government contracts; and (iii) specialty services. This information is provided to facilitate a more meaningful discussion of the Company's results of operations. As patient services (the operations of the Company's two hospitals) represents less than 2.5% of the Company's total revenues for all lines of business, a detailed discussion is not presented. Commercial operations includes the Company's HMOs and life and health insurance subsidiaries. This line of business is characterized by operations in which the Company assumes underwriting risk in return for premium revenue. Government contracts consists of contractual services to state and federal government programs such as CHAMPUS and administrative-only Medicaid contracts in which the Company receives revenues for administrative and management services and, under the CHAMPUS contracts, also accepts financial responsibility for health care costs. Specialty services includes operations in which the Company assumes underwriting risk in return for premium revenue, including managed care workers' compensation insurance and behavioral health, dental and vision HMO products, and operations in which the Company provides administrative services only, including certain of the behavioral health and pharmacy benefits management programs, workers' compensation third party administration and bill review services and administrative-only products and services. 15 LINE OF BUSINESS FINANCIAL INFORMATION FOUNDATION HEALTH CORPORATION
1993 1994 -------------------------------------- ------------------------------------- PERCENT OF PERCENT PERCENT OF PERCENT AMOUNT OR TOTAL INCREASE AMOUNT OR TOTAL INCREASE PERCENT REVENUE (DECREASE) PERCENT REVENUE (DECREASE) ---------- ----------- ------------- ---------- ----------- ------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenues: Commercial premiums......... $1,102,392 54.9% 22.4% $1,358,616 57.5% 23.2% Government contracts........ 746,827 37.2 11.4 542,726 23.0 (27.3) Specialty services revenue.................... 89,135 4.4 76.1 380,726 16.1 327.1 Patient service revenue, net........................ 43,483 2.2 7.1 41,358 1.8 (4.9) Investment and other income..................... 24,874 1.2 16.0 39,511 1.7 58.8 ---------- ----- ---------- ----- 2,006,711 100.0 19.2 2,362,937 100.0 17.8 ---------- ----- ---------- ----- Expenses: Commercial health care services................... 862,602 43.0 21.2 1,067,027 45.2 23.7 Government contracts health care services.............. 188,139 9.4 9.4 152,185 6.4 (19.1) Government contracts subcontractor costs........ 432,903 21.6 3.1 252,743 10.7 (41.6) Specialty services costs.... 79,366 4.0 65.5 355,208 15.0 347.6 Patient service costs....... 38,156 1.9 (6.9) 37,599 1.6 (1.5) Selling, general and administrative ("SG&A").... 230,506 11.5 31.6 291,130 12.3 26.3 Amortization and depreciation............... 21,388 1.1 16.3 28,463 1.2 33.1 Interest expense............ 4,239 0.2 (29.8) 12,709 0.5 199.8 Acquisition and restructuring costs........ 12,413 0.6 N/A -- -- N/A ---------- ----- ---------- ----- 1,869,712 93.2 17.4 2,197,064 93.0 17.5 ---------- ----- ---------- ----- Income before income taxes.... 136,999 6.8 49.6 165,873 7.0 21.1 Provision for income taxes...................... 57,026 2.8 64.2 64,834 2.7 13.7 Minority interest........... 6,636 0.3 64.2 7,398 0.3 11.5 ---------- ----- ---------- ----- Net income.................... $ 73,337 3.7% 38.8 $ 93,641 4.0% 27.7 ---------- ----- ---------- ----- ---------- ----- ---------- ----- Earnings per share............ $ 1.53 27.5 $ 1.92 25.5 ---------- ---------- ---------- ---------- Weighted average common and common stock equivalent shares outstanding........... 47,840,576 8.7 48,688,221 1.8 ---------- ---------- ---------- ---------- Operating Ratios: Commercial loss ratio....... 78.2% 78.5% Government contracts ratio.. 83.2 74.6 Specialty services ratio.... 89.0 93.3 Patient service ratio....... 87.7 90.9 S G & A to total revenues... 11.5 12.3 Effective tax rate.......... 41.6 39.1 Enrollment: Commercial: Group and individual...... 661 5.8 828 25.3 Medicare risk............. 28 55.6 46 64.3 Medicaid.................. 83 76.6 111 33.7 ---------- ----- ---------- ------ 772 11.9 985 27.6 ---------- ----- ---------- ------ Government: CHAMPUS PPO and indemnity................ 713 0.3 86 (87.9) CHAMPUS HMO............... 258 33.0 24 (90.7) ---------- ----- ---------- ------ 971 7.3 110 (88.7) ---------- ----- ---------- ------ Combined................ 1,743 9.3% 1,095 (37.2)% ---------- ----- ---------- ------ ---------- ----- ---------- ------ 1995 -------------------------------------- PERCENT OF PERCENT AMOUNT OR TOTAL INCREASE PERCENT REVENUE (DECREASE) ---------- ----------- ------------- Revenues: Commercial premiums......... $1,664,509 67.7% 22.5% Government contracts........ 187,493 7.6 (65.5) Specialty services revenue.................... 509,807 20.7 33.9 Patient service revenue, net........................ 41,323 1.7 (0.1) Investment and other income..................... 56,792 2.3 43.7 ---------- ----- 2,459,924 100.0 4.1 ---------- ----- Expenses: Commercial health care services................... 1,290,367 52.5 20.9 Government contracts health care services.............. 67,508 2.7 (55.6) Government contracts subcontractor costs........ 66,551 2.7 (73.7) Specialty services costs.... 438,124 17.8 23.3 Patient service costs....... 33,561 1.4 (10.7) Selling, general and administrative ("SG&A").... 307,802 12.5 5.7 Amortization and depreciation............... 41,102 1.7 44.4 Interest expense............ 11,555 0.5 (9.1) Acquisition and restructuring costs........ 124,822 5.1 N/A ---------- ----- 2,381,392 96.8 8.4 ---------- ----- Income before income taxes.... 78,532 3.2 (52.7) Provision for income taxes...................... 26,821 1.1 (58.6) Minority interest........... 2,262 0.1 (69.4) ---------- ----- Net income.................... $ 49,449 2.0% (47.2) ---------- ----- ---------- ----- Earnings per share............ $ 0.90 (53.1) ---------- ---------- Weighted average common and common stock equivalent shares outstanding........... 54,780,162 12.5 ---------- ---------- Operating Ratios: Commercial loss ratio....... 77.5% Government contracts ratio.. 71.5 Specialty services ratio.... 85.9 Patient service ratio....... 81.2 S G & A to total revenues... 12.5 Effective tax rate.......... 34.2 Enrollment: Commercial: Group and individual...... 992 19.8 Medicare risk............. 72 56.5 Medicaid.................. 112 0.9 ---------- ----- 1,176 19.4 ---------- ----- Government: CHAMPUS PPO and indemnity................ 251 191.9 CHAMPUS HMO............... 86 258.3 ---------- ----- 337 206.4 ---------- ----- Combined................ 1,513 38.2% ---------- ----- ---------- -----
16 COMMERCIAL OPERATIONS Revenues generated by the Company's commercial operations increased in fiscal year 1995 over fiscal year 1994 due in part to inclusion of revenues from the January 1994 purchase of Gem and the November 1994 purchases of the Colorado HMO and the Florida Medicaid HMO as well as increased enrollment in existing lines of business. Revenues in fiscal year 1994 increased over fiscal year 1993, reflecting increased enrollment growth and as well as the inclusion of revenue from Gem for the last six months of fiscal year 1994. The Company anticipates revenues to increase during fiscal year 1996 primarily as a result of enrollment growth; however, the rate of increase is not expected to be at the same level as in prior years since, to some extent, prior year increases have resulted from businesses acquired and the Company anticipates continued pressure on its ability to increase premium rates. The Company expects continued pressure from employer groups and government agencies to reduce premiums. Effective July 1, 1995, Medicaid HMO rates in Florida were reduced by approximately 18%, which will affect commercial premium revenues. Employer groups continue to demand lower premium increases and in some cases, premium decreases. The Company has managed health care costs and decreased the rate at which its health care costs have grown, by a number of strategies, including greater controls on hospital utilization, the generation of cost savings through national health care purchasing contracts (including mental health, home health and pharmacy) and long-term hospital provider contracts, reduction in specialist reimbursement rates and utilization and development and management of health care centers. The Company is starting to realize the impact of implementing these strategies on its recent acquisitions. The Company's continued medical cost management efforts are reflected in the commercial loss ratio, which improved in fiscal year 1995 from fiscal year 1994. The slight increase in the ratio in fiscal year 1994 over that in fiscal year 1993 was due to the competitive pressures in California offset in part by the greater profitability of the Company's Florida and Arizona HMOs. The Company believes that the pressures on margins will continue, which may adversely affect the commercial loss ratio; however, the Company will seek to mitigate any increase in the loss ratio by the cost management efforts described above. In addition, as the Company's Medicare risk business increases, the loss ratio may increase as historically this product has a higher loss ratio than the Company's other HMO and indemnity insurance business. GOVERNMENT CONTRACTS Government contracts revenue decreased in each of the last two fiscal years primarily due to the expiration of the CRI Contract in January 1994. The CRI Contract contributed $682.1 million to revenues in fiscal year 1993 and $431.3 million in fiscal year 1994. The Company commenced health care delivery under its managed care contract in Louisiana and Texas in May 1993 and under the Washington/Oregon Contract in March 1995. Government contracts revenue is impacted by semi-annual bid price adjustments, annual price increases or decreases, risk sharing provisions and various other price adjustments attributable to change orders for additional services, inflation and other factors. On August 31, 1995, FHFS was notified of award by the Department of Defense of the multi-year TRICARE managed care contract to provide services to approximately 720,000 CHAMPUS-eligible beneficiaries in California and Hawaii. Health care services are scheduled to commence in April 1996. The contract is valued at approximately $2.5 billion in revenue over the projected five year term. The government contracts ratio improved in each of the last two fiscal years. The improvement from fiscal year 1993 to fiscal year 1994 was due primarily to lower health care costs under the CRI Contract attributable to effective managed care techniques, shifting of claims processing from an outside vendor to an internal function and increased change order revenue. The continued improvement in fiscal year 1995 was due to the continued phase-out of the CRI Contract. The government contracts ratio is expected to increase in fiscal year 1996 as a result of a full year of delivery of health care services under the Washington/Oregon Contract and delivery of health care services under the Region 6 Contract which are scheduled to commence in November 1995 and the TRICARE contract which are scheduled to comence in April 1996. 17 SPECIALTY SERVICES Specialty services revenues increased from $89.1 million in fiscal year 1993 to $380.7 million in fiscal year 1994 to $509.8 million in fiscal year 1995. A significant part of the increases was due to revenues related to CalComp which was acquired in August 1993 and to the Company's workers' compensation bill review and third party administration subsidiaries which were acquired in July 1994. In addition, during fiscal year 1995, several of the Company's specialty services subsidiaries recorded increased revenues related to start-up Medicaid contracts. The increase in the specialty services ratio in fiscal year 1994 over that of fiscal year 1993 was primarily a result of the purchase of CalComp, which generally has a higher operating ratio than the other specialty services businesses. The improvement in the ratio in fiscal year 1995 was primarily due to improvement in the workers' compensation operating ratios, discussed below, through the successful implementation of managed care programs, which has lowered workers' compensation medical costs and the addition of the workers' compensation bill review company, which was acquired in July 1994, which has a lower administrative component than most of the other specialty services companies. Commencing in 1993, several significant reforms to the California workers' compensation laws affected CalComp. The reforms address various aspects of the workers' compensation system, including limitations on certain types of claims, restrictions on vocational rehabilitation benefits, additional penalties for fraud and abuse, and reductions in state-mandated minimum premium rates which culminated in open rating in California effective January 1, 1995. Since the acquisition of CalComp, the Company has taken various actions to mitigate the effects of the reforms and the sharp premium declines as a result of the more competitive pricing environment under open rating. These actions include development and implementation of its managed care approach to workers' compensation, continued use of loss prevention and return to work programs, shifting of the risk profile of CalComp's business, increased use of the Company's PPO and blended case management systems (which have reduced the average severity per claim), and payment of lower average commissions to agents and brokers in California on new and renewal policies written in 1995. The Company believes this strategy should contribute to the continued growth of this part of the specialty services operations and may offset the impact from the changes in the California workers' compensation marketplace. Four ratios are traditionally used to measure underwriting performance of workers' compensation companies: the loss and loss adjustment expense ratio, the underwriting expense ratio and the policyholder dividend ratio, which when added together constitute the combined ratio. A combined ratio of greater than 100% reflects an underwriting loss, while a combined ratio of less than 100% indicates an underwriting profit. The following table sets forth CalComp's underwriting experience as measured by its combined ratio and its components (computed on a generally accepted accounting principles basis) for the fiscal year ended June 30, 1995 and the eleven months from August 1, 1993 (the date of acquisition) to June 30, 1994:
JUNE 30, ------------------------ 1995 1994 ----------- ----------- Loss and loss adjustment expense ratio............................................... 62.8% 62.8% Underwriting expense ratio........................................................... 22.7 24.0 Policyholder dividend ratio.......................................................... 1.4 7.4 --- --- Combined ratio....................................................................... 86.9% 94.2%
CalComp was able to maintain a consistent loss and loss adjustment expense ratio in fiscal year 1995 through the successful implementation of managed care programs, as described above, and the increased use of internal staff to support fair hearing representatives in the settlement of claims, despite the 16% decrease in the minimum rates in California effective October 1, 1994, and the abolishment of minimum rates and the commencement of open rating effective January 1, 1995. The 18 decrease in the combined ratio from fiscal year 1994 to fiscal year 1995 was primarily due to the 6.0% decrease in the policyholder dividend ratio and the 1.3% reduction in the underwriting expense ratio. The underwriting expense ratio decrease is primarily due to the decrease in employee salaries and benefits to 9.7% of premiums in fiscal year 1995 from 11.0% in fiscal year 1994. CalComp was able to achieve this decrease during a period when net premiums earned increased by 20%; however, approximately one-half of such increase was the result of cancellation of CalComp's quota share reinsurance arrangement effective July 1, 1994. Workers' compensation reforms and increased price competition have also resulted in lower policyholder dividends incurred as policyholders now receive the benefit of lower workers' compensation costs in the form of reduced premiums at the inception of the policy versus policyholder dividends paid after the policy expires. QUARTERLY RESULTS The following table presents unaudited consolidated operating results for the last eight fiscal quarters. The Company believes that all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts stated below to present fairly the following quarterly results when read in conjunction with the Company's consolidated financial statements included elsewhere herein. Results of operations for any particular quarter are not necessarily indicative of results of operations for a full fiscal year.
1ST 2ND 3RD 4TH QUARTER QUARTER QUARTER QUARTER --------- --------- --------- --------- (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) FISCAL 1994 Total revenues.......................................................... $ 621.3 $ 637.5 $ 578.9 $ 525.2 Income before income taxes and minority interest........................ $ 39.9 $ 47.7 $ 40.0 $ 38.3 Net income.............................................................. $ 22.3 $ 27.3 $ 22.4 $ 21.7 Earnings per share...................................................... $ 0.47 $ 0.56 $ 0.46 $ 0.44 FISCAL 1995 Total revenues.......................................................... $ 594.4 $ 598.5 $ 615.6 $ 651.4 Income (loss) before income taxes and minority interest................. $ 39.3 $ (76.8) $ 57.8 $ 58.2 Net income (loss)....................................................... $ 23.7 $ (49.3) $ 36.3 $ 38.8 Earnings (loss) per share............................................... $ 0.48 $ (0.90) $ 0.63 $ 0.68
LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities was $201.9 million for the year ended June 30, 1995 as compared to $144.1 million for the prior year. The increase was due primarily to the Company's profitable operations, especially those of CalComp. The Company's cash and investments increased from $765.6 million at June 30, 1994 to $795.3 million at June 30, 1995. The Company invests its cash in investment grade securities. The total cash portion of the purchase price for acquisitions completed in fiscal year 1995 described in Note 1 of the Notes to the Consolidated Financial Statements is $61.1 million, $53.2 million of which has been paid to date with the remainder to be paid in November 1995. During fiscal year 1996, the Company expects capital expenditures to approximate $67.8 million, primarily consisting of $47.7 million for the purchase of computer hardware and software systems; $15.3 million for the purchase of furniture and equipment primarily for the health care centers and the hospitals; and $4.8 million for other requirements. The Company anticipates the net costs of operating and managing the health care centers for fiscal year 1996 will approximate $20 million, offset in part by health care cost savings anticipated to be realized by the Company's HMOs. Effective September 1, 1995, the Company purchased a medical practice and related facilities in Arizona for approximately $6.2 million, which was paid in cash. The anticipated level of capital expenditures in fiscal year 1996 for construction of health care centers and corporate facilities has been impacted as a result of the Company's $60 million tax-retention operating lease financing with NationsBank of Texas, N.A., as Administrative Agent for the 19 Lenders parties thereto and First Security Bank of Utah, N.A., as Owner Trustee (the "TROL" financing). The Company expects that up to $32 million of the TROL financing will be used during fiscal year 1996 for the construction of health care centers and corporate facilities. The Company's regulated subsidiaries are required to maintain minimum tangible net equity or capital and surplus. As of June 30, 1995, restricted net assets of the subsidiaries totaled approximately $34.3 million. Certain subsidiaries must also maintain current ratios of 1:1. During fiscal year 1995, the Company contributed $35 million to CalComp to meet rating agency requirements to maintain an A- rating and to support future premium growth. The Company also contributed $14 million to its United Kingdom subsidiary for required capital and surplus to support its operations. As the Company's businesses continue to grow, the Company expects to contribute additional cash to certain subsidiaries to support premium and revenue growth. In addition, the Company's regulated subsidiaries are required to keep securities on deposit in various states where they are licensed. At June 30, 1995, approximately $364.9 million in securities were restricted to satisfy various state regulatory and licensing requirements. In December 1994, the Company established a $300 million unsecured revolving credit agreement with Citicorp USA, Inc. as Administrative Agent (the "Credit Agreement") for the lenders parties thereto. As of August 31, 1995, the Company has drawn $60 million under the Credit Agreement. In June 1993, the Company issued $125 million of Senior Notes due June 1, 2003, which bear interest at 7 3/4% due semi-annually. See Notes 7 and 12 to the Consolidated Financial Statements for a more detailed description of the TROL financing, the Credit Agreement and the Senior Notes. In April 1993, the Company established a stock repurchase program (as amended) to acquire from time to time up to 5.7 million shares of the Company's common stock in the open market at prices deemed appropriate by management and subject to market conditions and other relevant factors. As of June 30, 1995, the Company had repurchased 1,545,500 shares under the program, 100,000 of which were repurchased in fiscal year 1995. Management of the Company continually evaluates opportunities to expand the Company's commercial, government contracts and specialty services operations. The Company's expansion options may include additional acquisitions and internal development of new products and programs. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The financial statements and related financial information required to be filed hereunder are set forth at the pages indicated at Item 14(a) of this Report. ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. ------------------------ The Company's 1995 Annual Report to Stockholders is not to be deemed filed as a part of this Report. PART III Certain information required by Part III is omitted from this Report in that the registrant will file a definitive proxy statement pursuant to Regulation 14A (the "Proxy Statement") not later than 120 days after the end of the fiscal year covered by this Report, and certain information included therein is incorporated herein by reference. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information concerning the Company's directors required by this Item is incorporated by reference from the Company's Proxy Statement. No biographical information is provided for Robert Anderson who is not a nominee for director. 20 The information concerning the Company's executive officers required by this Item is incorporated by reference to the section in Part I hereof entitled "Executive Officers of the Registrant." ITEM 11. EXECUTIVE COMPENSATION. The information required by this item is incorporated by reference from the Company's Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this Item is incorporated by reference from the Company's Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this Item is incorporated by reference from the Company's Proxy Statement. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) The following documents are filed as a part of this Report: 1. FINANCIAL STATEMENTS. The following Consolidated Financial Statements of Foundation Health Corporation and its subsidiaries and the Independent Auditors' Report therein are filed as part of this Report:
PAGE ----- Independent Auditors' Report..................................................................... 26 Consolidated Balance Sheets as of June 30, 1994 and 1995......................................... 27 Consolidated Statements of Operations for the years ended June 30, 1993, 1994 and 1995........... 28 Consolidated Statements of Stockholders' Equity for the years ended June 30, 1993, 1994 and 1995............................................................................................ 29 Consolidated Statements of Cash Flows for the years ended June 30, 1993, 1994 and 1995........... 30 Notes to Consolidated Financial Statements....................................................... 31 The independent auditors' reports for predecessor companies for the years ended December 31, 1993 and 1992 are included in Exhibits 13.1, 13.2 and 13.3
2. FINANCIAL STATEMENT SCHEDULES. The following consolidated financial statement schedules of Foundation Health Corporation and its subsidiaries are filed as part of this Report and should be read in conjunction with the Consolidated Financial Statements of Foundation Health Corporation:
SCHEDULE PAGE - ------------------------------------------------------------------------------------------------- ----- Article 5, Schedule I -- Condensed Financial Information of Registrant........................... S-1 Article 5, Schedule V -- Supplemental Information Concerning Property -- Casualty Insurance Operations...................................................................................... S-4 Section 403.04.b -- Reconciliation of Beginning and Ending Class Reserves and Exhibit of Deficiencies (Redundancies)..................................................................... S-5
Schedules not listed above have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the Consolidated Financial Statements or Notes thereto. 3. EXHIBITS. The Exhibits listed on the accompanying Index to Exhibits immediately following the financial statement schedules are filed as part of, or incorporated by reference into, this Report. 21 Executive Compensation Plans and Arrangements: A. 1990 Stock Option Plan of Foundation Health Corporation (as amended and restated effective April 20, 1994) -- Exhibit 10.102; B. Foundation Health Corporation Profit Sharing and 401(k) Plan (as amended and restated effective January 1, 1994) -- Exhibit 10.103; C. Executive Incentive Plan of Foundation Health Corporation -- Exhibit 10.3; Form 10-K filed September 23, 1994; D. Employment Agreement between Foundation Health Corporation and Daniel D. Crowley dated April 30, 1994 -- Exhibit 10.84; Registration Statement No. 33-80432; E. Employment Agreement between Foundation Health Corporation and Steven D. Tough dated April 22, 1994 -- Exhibit 10.86; Registration Statement No. 33-80432; F. Employment Agreement between Foundation Health Corporation and Allen J. Marabito dated April 22, 1994 -- Exhibit 10.88; Registration Statement No. 33-80432; G. Employment Agreement between Foundation Health Corporation and Jeffrey L. Elder dated April 22, 1994 -- Exhibit 10.85; Registration Statement No. 33-80432; H. Employment Agreement between Foundation Health Corporation and Kirk A. Benson dated April 22, 1994 -- Exhibit 10.87; Registration Statement No. 33-80432; I. Employee Stock Purchase Plan -- Exhibit 10.53; Registration Statement No. 33-38867; J. Amended and Restated Foundation Health Corporation Deferred Compensation Plan -- Exhibit 10.99; K. Foundation Health Corporation Supplemental Executive Retirement Plan, as amended and restated -- Exhibit 10.100; L. Foundation Health Corporation Executive Retiree Medical Plan, as amended and restated -- Exhibit 10.101; (b) Reports on Form 8-K. The following reports on Form 8-K were filed by the Company during the fiscal quarter ended June 30, 1995: None 22 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. FOUNDATION HEALTH CORPORATION By /s/ JEFFREY L. ELDER ----------------------------------- Jeffrey L. Elder SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER Dated: September , 1995 KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Daniel D. Crowley, Allen J. Marabito and Patricia A. Burgess, and each of them, his true and lawful attorneys in fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys in fact, or his substitute or substitutes, may do or cause of be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ DANIEL D. CROWLEY Director, President and September 26, - ----------------------------------- Chief Executive Officer 1995 Daniel D. Crowley (Principal Executive Officer) and Chairman of the Board /s/ STEVEN D. TOUGH Director September 26, - ----------------------------------- 1995 Steven D. Tough /s/ JEFFREY L. ELDER Director, Senior Vice September 26, - ----------------------------------- President -- Chief 1995 Jeffrey L. Elder Financial Officer (Principal Financial and Accounting Officer) /s/ ROBERT ANDERSON Director September 26, - ----------------------------------- 1995 Robert Anderson /s/ DAVID A. BOGGS Director September 26, - ----------------------------------- 1995 David A. Boggs 23 /s/ EARL B. FOWLER Director September 26, - ----------------------------------- 1995 Earl B. Fowler /s/ RICHARD W. HANSELMAN Director September 26, - ----------------------------------- 1995 Richard W. Hanselman /s/ ROSS D. HENDERSON, M.D Director September 26, - ----------------------------------- 1995 Ross D. Henderson, M.D. /s/ FRANK A. OLSON Director September 26, - ----------------------------------- 1995 Frank A. Olson /s/ RICHARD J. STEGEMEIER Director September 26, - ----------------------------------- 1995 Richard J. Stegemeier /s/ RAYMOND S. TROUBH Director September 26, - ----------------------------------- 1995 Raymond S. Troubh
24 FOUNDATION HEALTH CORPORATION CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1994 AND 1995 25 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Foundation Health Corporation We have audited the accompanying consolidated balance sheets of Foundation Health Corporation and its subsidiaries (the "Company") as of June 30, 1994 and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended June 30, 1995. Our audits also included the financial statement schedules listed in the index at Item 14(a)(2). These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. The consolidated financial statements give retroactive effect to the merger of Foundation Health Corporation and CareFlorida Health Systems, Inc. on October 31, 1994, and to the merger of Foundation Health Corporation and Thomas-Davis Medical Centers, P.C. on November 1, 1994, both of which have been accounted for using the pooling of interests method of accounting as described in Note 1 to the consolidated financial statements. We did not audit the balance sheets of Thomas-Davis Medical Centers, P.C. as of December 31, 1992 and 1993, or the related statements of income, stockholders' equity and cash flows for the years ended December 31, 1992 and December 31, 1993, which statements reflect total assets of $174,705,000 and $192,493,000 as of December 31, 1992 and 1993, respectively, and total revenues of $317,672,000 and $419,283,000 for the respective years then ended. We also did not audit the balance sheets of CareFlorida Health Systems, Inc. as of December 31, 1992 and 1993, or the related statements of income, stockholders' equity and cash flows for the years ended December 31, 1992 and December 31, 1993, which statements reflect total assets of $33,765,000 and $51,451,000 as of December 31, 1992 and 1993, respectively, and total revenues of $112,474,000 and $154,122,000 for the respective years then ended. Those financial statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for Thomas-Davis Medical Centers, P.C. and CareFlorida Health Systems, Inc. for such periods, is based solely on the reports of the other auditors. As described in Note 1 to the consolidated financial statements, subsequent to the issuance of the reports of the other auditors, the financial statements of Thomas-Davis Medical Centers, P.C. and CareFlorida Health Systems, Inc. were restated to conform to the fiscal year of Foundation Health Corporation for each of the two years in the period ended June 30, 1994. 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 and the reports of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Foundation Health Corporation and its subsidiaries as of June 30, 1994 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1995 in conformity with generally accepted accounting principles. Also, in our opinion, the financial statement schedules referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. We also audited the adjustments described in Note 1 that were applied to restate the 1992 and 1993 financial statements of Thomas-Davis Medical Centers, P.C. and CareFlorida Health Systems, Inc. In our opinion, such adjustments are appropriate and have been properly applied. DELOITTE & TOUCHE LLP Sacramento, California July 25, 1995 26 FOUNDATION HEALTH CORPORATION CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) ASSETS
JUNE 30, ---------------------------- 1994 1995 ------------- ------------- Cash and cash equivalents........................................................... $ 165,209 $ 203,937 Investments: Available for sale................................................................ 541,596 Held to maturity.................................................................. 49,745 Short-term investments............................................................ 25,094 Fixed maturities.................................................................. 575,269 Amounts receivable under government contracts....................................... 136,188 81,089 Reinsurance receivable.............................................................. 122,046 98,255 Premium and patient receivables, net of allowance for doubtful accounts of $12,300 and $11,915 at June 30, 1994 and 1995.............................................. 93,127 100,727 Property and equipment, net......................................................... 143,088 230,278 Goodwill and other intangible assets, net........................................... 105,535 409,342 Deferred income taxes............................................................... 44,534 65,673 Other assets........................................................................ 88,418 183,565 ------------- ------------- $ 1,498,508 $ 1,964,207 ------------- ------------- ------------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY Reserves for claims, losses and loss adjustment expenses............................ $ 615,742 $ 700,281 Notes payable, capital leases, and other financing arrangements..................... 170,108 180,054 Amounts payable under government contracts.......................................... 50,953 47,584 Accrued dividends to policyholders.................................................. 30,026 16,405 Other liabilities................................................................... 209,236 262,984 ------------- ------------- 1,076,065 1,207,308 ------------- ------------- Stockholders' equity Common stock and additional paid-in capital, $.01 par value, 100,000,000 shares authorized, 48,479,134 and 57,142,606 shares issued and outstanding at June 30, 1994 and 1995.................................................................... 264,976 518,671 Retained earnings................................................................. 194,800 244,249 Unrealized investment gains and losses, net of taxes.............................. (2,974) Common stock held in treasury, at cost............................................ (37,333) (3,047) ------------- ------------- 422,443 756,899 ------------- ------------- $ 1,498,508 $ 1,964,207 ------------- ------------- ------------- -------------
The accompanying notes are an integral part of these consolidated financial statements 27 FOUNDATION HEALTH CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
YEAR ENDED JUNE 30, ------------------------------------------- 1993 1994 1995 ------------- ------------- ------------- Revenues: Commercial premiums................................................ $ 1,102,392 $ 1,358,616 $ 1,664,509 Government contracts............................................... 746,827 542,726 187,493 Specialty services revenue......................................... 89,135 380,726 509,807 Patient service revenue, net....................................... 43,483 41,358 41,323 Investment and other income........................................ 24,874 39,511 56,792 ------------- ------------- ------------- 2,006,711 2,362,937 2,459,924 ------------- ------------- ------------- Expenses: Commercial health care services.................................... 862,602 1,067,027 1,290,367 Government contracts health care services.......................... 188,139 152,185 67,508 Government contracts subcontractor costs........................... 432,903 252,743 66,551 Specialty services costs........................................... 79,366 355,208 438,124 Patient service costs.............................................. 38,156 37,599 33,561 Selling, general and administrative................................ 230,506 291,130 307,802 Amortization and depreciation...................................... 21,388 28,463 41,102 Interest expense................................................... 4,239 12,709 11,555 Acquisition and restructuring costs................................ 12,413 124,822 ------------- ------------- ------------- 1,869,712 2,197,064 2,381,392 ------------- ------------- ------------- Income before income taxes and minority interest..................... 136,999 165,873 78,532 Provision for income taxes......................................... 57,026 64,834 26,821 Minority interest.................................................. 6,636 7,398 2,262 ------------- ------------- ------------- Net income........................................................... $ 73,337 $ 93,641 $ 49,449 ------------- ------------- ------------- ------------- ------------- ------------- Earnings per share................................................... $ 1.53 $ 1.92 $ 0.90 ------------- ------------- ------------- ------------- ------------- ------------- Weighted average common and common stock equivalent shares outstanding......................................................... 47,840,576 48,688,221 54,780,162 ------------- ------------- ------------- ------------- ------------- -------------
The accompanying notes are an integral part of these consolidated financial statements 28 FOUNDATION HEALTH CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK UNREALIZED COMMON STOCK HELD IN TREASURY INVESTMENT ------------------------ ------------------------ RETAINED GAINS AND LOSSES, SHARES AMOUNT SHARES AMOUNT EARNINGS NET OF TAXES TOTAL ------------ ---------- ------------ ---------- ---------- ----------------- ---------- Balance at June 30, 1992.... 45,283,177 $ 235,604 2,357,089 $ (1,994) $ 29,817 $ 263,427 Issuance of common stock -- net........................ 2,370,347 677 677 Exercise of stock options... 590,197 6,746 6,746 Purchase of treasury stock...................... (1,024,624) 1,024,624 (7,673) (7,673) Tax benefits related to stock options exercised.... 5,884 5,884 Net income.................. 73,337 73,337 ------------ ---------- ------------ ---------- ---------- ------- ---------- Balance at June 30, 1993.... 47,219,097 248,911 3,381,713 (9,667) 103,154 342,398 Issuance of common stock -- net........................ 2,087,971 1,627 1,627 Purchase of treasury stock...................... (1,400,281) 1,400,281 (27,666) (27,666) Exercise of stock options... 572,347 8,661 8,661 Assumption of stock options.................... 367 367 Tax benefits related to stock options exercised.... 5,410 5,410 Dividends paid by predecessor company........ (1,995) (1,995) Net income.................. 93,641 93,641 ------------ ---------- ------------ ---------- ---------- ------- ---------- Balance at June 30, 1994.... 48,479,134 264,976 4,781,994 (37,333) 194,800 422,443 Cumulative effect of adoption of SFAS No. 115, net of taxes............... $ (9,019) (9,019) Issuance of common stock.... 8,432,676 280,465 280,465 Purchase of treasury stock...................... (100,000) 100,000 (3,047) (3,047) Retirement of treasury stock...................... (37,333) (4,781,994) 37,333 Exercise of stock options... 330,796 5,920 5,920 Tax benefits related to stock options exercised.... 4,643 4,643 Net unrealized holding gains...................... 6,045 6,045 Net income.................. 49,449 49,449 ------------ ---------- ------------ ---------- ---------- ------- ---------- Balance at June 30, 1995.... 57,142,606 $ 518,671 100,000 $ (3,047) $ 244,249 $ (2,974) $ 756,899 ------------ ---------- ------------ ---------- ---------- ------- ---------- ------------ ---------- ------------ ---------- ---------- ------- ----------
The accompanying notes are an integral part of these consolidated financial statements 29 FOUNDATION HEALTH CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED JUNE 30, ------------------------------- 1993 1994 1995 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................................... $ 73,337 $ 93,641 $ 49,449 Adjustments to reconcile net income to net cash provided by operating activities: Amortization and depreciation.............................................. 21,317 28,389 40,981 Amortization of bond discount.............................................. 83 3,719 5,396 Noncash restructuring costs................................................ 11,486 Change in assets and liabilities, net of effects from acquisition of businesses: Premium and patient receivables, net......................................... (9,792) 11,577 912 Reinsurance receivable....................................................... (6,589) 7,117 25,583 Other assets................................................................. (28,266) (40,164) Amounts receivable/payable under government contracts........................ (2,029) (10,761) 51,730 Reserves for claims, losses and loss adjustment expenses..................... 25,280 18,071 59,638 Accrued dividends to policyholders........................................... 7,115 (13,621) Other liabilities............................................................ 37,197 22,636 27,631 Deferred income taxes, net................................................... (18,917) (9,219) (17,265) --------- --------- --------- Net cash from operating activities............................................. 119,887 144,019 201,763 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of available for sale investments.................................. (765,510) Sales and maturities of available for sale investments....................... 770,673 Purchases of held to maturity investments.................................... (39,112) Maturities of held to maturity investments................................... 80,034 Purchases of short-term investments.......................................... (393,290) (367,253) Sales and maturities of short-term investments............................... 379,807 435,201 Purchases of fixed maturity investments...................................... (478,169) (731,324) Sales and maturities of fixed maturity investments........................... 357,671 641,404 Acquisition of property and equipment........................................ (29,071) (46,363) (107,257) Increase in goodwill and other intangible assets............................. (13) (1,171) (42,126) Increase in other assets..................................................... (5,852) (10,543) (35,376) Acquisition of businesses, net of cash acquired.............................. (3,921) (62,545) (41,874) --------- --------- --------- Net cash used for investing activities......................................... (172,838) (142,594) (180,548) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on notes payable and capital leases....................... (19,668) (8,218) (16,451) Proceeds from issuance of notes payable and capital leases................... 125,157 300 20,000 Proceeds from issuance of common stock -- net................................ 677 1,627 6,448 Proceeds from exercise of stock options...................................... 6,746 8,661 5,920 Tax benefits related to stock options........................................ 5,884 5,410 4,643 Purchase of treasury stock, net.............................................. (7,673) (27,666) (3,047) Dividends paid by predecessor company........................................ (1,995) --------- --------- --------- Net cash from (used for) financing activities.................................. 111,123 (21,881) 17,513 --------- --------- --------- Net increase (decrease) in cash and cash equivalents........................... 58,172 (20,456) 38,728 Cash and cash equivalents, beginning of year................................... 127,493 185,665 165,209 --------- --------- --------- Cash and cash equivalents, end of year......................................... $ 185,665 $ 165,209 $ 203,937 --------- --------- --------- --------- --------- --------- SUPPLEMENTAL CASH FLOWS DISCLOSURE: Interest paid................................................................ $ 4,793 $ 14,004 $ 13,907 Income taxes paid............................................................ 47,687 64,426 47,792 Noncash investing and financing activities: Capital lease obligations.................................................. 5,407 2,378 Deferred compensation...................................................... 3,789 5,383 5,429 Acquisition of businesses: Assets acquired.......................................................... 4,382 532,331 392,509 Liabilities assumed...................................................... (381) (439,740) (49,506) Issuance of notes payable and amounts held in escrow..................... (4,359) (7,909) Issuance of common stock................................................. (274,017) --------- --------- --------- Cash paid................................................................ 4,001 88,232 61,077 Fees and expenses........................................................ 116 Less cash acquired....................................................... (196) (25,687) (19,203) --------- --------- --------- Net cash paid............................................................ $ 3,921 $ 62,545 $ 41,874 --------- --------- --------- --------- --------- ---------
The accompanying notes are an integral part of these consolidated financial statements 30 FOUNDATION HEALTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 -- DESCRIPTION OF BUSINESS Foundation Health Corporation (the "Company") operates an integrated multi-state managed care organization. The Company's operations are focused on its commercial Health Maintenance Organization ("HMO") and Preferred Provider Organization ("PPO") operations, government-sponsored managed care programs, and specialty services operations. 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's wholly-owned subsidiary, Foundation Health Federal Services, Inc. ("Federal Services"), administers large, multi-year managed care government contracts. Federal Services was the prime contractor pursuant to the CHAMPUS Reform Initiative ("CRI") under the CRI Contract which commenced on February 1, 1988 to implement a program to provide health care services to CHAMPUS beneficiaries in California and Hawaii. Federal Services subcontracted with the Company's California HMO in northern and central California and other health care providers in southern California and Hawaii for the delivery of health care services in their respective designated service areas. The contract expired January 31, 1994 with a wind-down and termination period after expiration. In June 1991, Federal Services entered into a five-year agreement with the Department of Defense ("DoD") to develop, implement and operate managed health care programs for CHAMPUS beneficiaries in New Orleans, Louisiana, which in May 1993 was expanded to cover additional beneficiaries in other parts of Louisiana and Texas. In September 1994, the Company was awarded a similar contract to cover beneficiaries in Oregon and Washington which commenced health care delivery on March 1, 1995 and, in April 1995, the Company was awarded an additional contract for beneficiaries in Oklahoma, Arkansas, Louisiana and Texas with health care delivery scheduled to commence in November 1995. In August 1995 Federal Services was awarded a five year contract to provide services to CHAMPUS beneficiaries in California and Hawaii. The Company's specialty services subsidiaries offer managed care products related to behavioral health, dental, vision, pharmaceutical products and services, and workers' compensation insurance, administration and cost containment. The Company's largest specialty services subsidiary, California Compensation Insurance Company ("CalComp"), acquired in August 1993, is primarily engaged in writing workers' compensation insurance in California. CalComp enables the Company to utilize its managed care capabilities and provider networks to reduce the medical costs associated with workers' compensation claims and provides the Company with the ability to market "24 hour" risk products covering employees for medical care both on and off the job. The Company operates and manages Company-owned and leased health care centers in California, Arizona and Florida which provide primary and multi-specialty care to enrolled members. Physicians employed by professional corporations which are owned by Company-affiliated physicians provide services to the Company's members at the health care centers. The Company provides facilities and support functions to the health care centers and is reimbursed in the form of a management fee by the affiliated professional corporations. The Company owns and operates two hospitals, the East Los Angeles Doctors Hospital, a 128-bed general hospital located in East Los Angeles, California and the Memorial Hospital of Gardena, a 200-bed general hospital located in Gardena, California (the "Hospitals"). The health care services provided by the Hospitals are general medical and surgical services, subacute, pediatrics, intensive 31 FOUNDATION HEALTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1 -- DESCRIPTION OF BUSINESS (CONTINUED) and coronary care, physical therapy, respiratory care and emergency room services. The Hospitals received approximately 76.7% of their revenues from Medicare and Medicaid programs during the year ended June 30, 1995. CONSUMMATED BUSINESS ACQUISITIONS -- POOLING TRANSACTIONS In October 1992, 505,372 shares of the Company's common stock were issued in exchange for all of the outstanding common stock of Occupational Health Services, Inc. ("OHS"). OHS provides employee assistance and other managed care behavioral health and substance abuse programs on both a prepaid and self-funded basis to employers, governmental entities and other payors. In October 1992, 5,041,376 shares of the Company's common stock were issued in exchange for all of the outstanding common stock of Century MediCorp, Inc. ("CMC"). In addition, all outstanding CMC options were exchanged for options to purchase 303,520 shares of the Company's common stock. CMC owned three HMOs and the Hospitals in Southern California. In December 1992, CMC merged into the Company, and by March 1993, CMC's HMO subsidiaries had merged into one of the Company's HMO subsidiaries. In connection with the acquisitions of CMC and OHS, the Company charged $12,413,000 to operations during the year ended June 30, 1993 for acquisition and restructuring costs. These costs consist of $4,690,000 relating to the integration and restructuring of the combined entities, $4,533,000 in direct transaction costs (primarily professional fees) and $3,190,000 in contract terminations. The integration and restructuring costs consisted primarily of the disposition of duplicate computer hardware and software, costs of integrating membership and claims functions, personnel related costs and costs associated with closing or relocating duplicate facilities. These mergers have been accounted for as poolings of interests and accordingly, the accompanying consolidated financial statements and notes thereto have been restated to include the accounts of CMC and OHS for all periods presented. On October 31, 1994, 6,862,051 shares of the Company's common stock were issued in exchange for all of the outstanding common stock of CareFlorida Health Systems, Inc. ("CareFlorida"). At the time of acquisition, CareFlorida provided comprehensive health care services to approximately 143,000 members in Florida through its HMO and PPO subsidiaries. On November 1, 1994, 13,124,027 shares of the Company's common stock were issued in exchange for all of the outstanding common stock of Thomas-Davis Medical Centers, P.C. ("TDMC"), including its majority interest of 60.5% of the outstanding common stock of Intergroup Healthcare Corporation ("Intergroup"). Additionally, 7,577,336 shares were issued for the purchase of the remaining 39.5% minority interest of Intergroup. All outstanding Intergroup options were exchanged for options to purchase 500,290 shares of the Company's common stock. TDMC employed approximately 190 physicians at the date of merger who provided health care services to patients in Arizona through 15 primary care centers, five urgent care centers, two behavioral health centers and one surgery center. At the time of merger, Intergroup provided comprehensive health care services to approximately 379,000 HMO and life and accident insurance members and 104,000 PPO members primarily in Arizona and Utah. In connection with the mergers of CareFlorida, TDMC and Intergroup, the Company recorded a charge for integration, restructuring and pooling costs of $124.8 million. 32 FOUNDATION HEALTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1 -- DESCRIPTION OF BUSINESS (CONTINUED) The acquisition and restructuring charge represents the costs of acquiring and consolidating the companies' management information systems and administrative functions and positioning the Company to take advantage of best practices in healthcare delivery systems and managed care techniques after the mergers. The components of this charge include (in millions): Professional fees....................................................... $ 21.5 Cancellation of certain contractual obligations and other settlement costs.................................................................. 27.1 Write-off of certain redundant hardware, software and other settlement costs.................................................................. 17.9 Elimination of duplicate facilities..................................... 13.0 Transition and severance related payments to employees.................. 36.5 Other integration and restructuring..................................... 8.8 ------ Total............................................................... $124.8 ------ ------
These costs satisfy the definition of "exit costs" as set forth in Emerging Issues Task Force Issue 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)," that are directly related to the mergers. Management of the Company anticipates the integration and restructuring of the combined entities will be substantially complete by the end of the fourth quarter of fiscal year 1996. Full implementation of the restructuring plan will result in the termination of 638 employees (291 employees had been terminated as of June 30, 1995) by eliminating and consolidating duplicate administrative, information systems and sales functions. As of June 30, 1995, $62.8 million (primarily professional fees, transition and related severance payments and write-off of impaired assets) in merger, integration and restructuring costs have been paid or otherwise charged against the $124.8 million accrual. The remaining restructuring obligations are expected to be substantially paid as due through the fourth quarter of fiscal year 1996 utilizing existing cash resources of the Company. The amounts set forth above represent management's best estimate of the restructuring costs to be incurred and the timing of the restructuring and integration plan (the "Plan"). The progress of the Plan and the actual amounts incurred could vary from these estimates if future developments differ from the underlying assumptions used by management in developing the recorded accrual. In accordance with the pooling of interests method of accounting the Company's consolidated financial statements and notes thereto have been restated to include the accounts of TDMC (including its 60.5% interest in Intergroup) and CareFlorida for all periods presented. Prior to the mergers, CareFlorida and TDMC each reported on a calendar year basis. Accordingly, the consolidated financial 33 FOUNDATION HEALTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1 -- DESCRIPTION OF BUSINESS (CONTINUED) statements include CareFlorida's and TDMC's financial statements restated to the Company's fiscal year basis. Separate and combined results of the Company, CareFlorida and TDMC for the periods prior to consummation of the mergers are as follows (in thousands):
YEAR ENDED JUNE 30, ---------------------------- 1993 1994 ------------- ------------- Revenues: Foundation Health Corporation -- as previously reported................. $ 1,517,339 $ 1,717,821 TDMC -- year ended December 31, 1992 and 1993........................... 317,672 419,283 CareFlorida -- year ended December 31, 1992 and 1993.................... 112,474 154,122 Adjustments (1)......................................................... 59,226 71,711 ------------- ------------- Combined.................................................................. $ 2,006,711 $ 2,362,937 ------------- ------------- ------------- ------------- Net income: Foundation Health Corporation -- as previously reported................. $ 61,908 $ 82,153 TDMC -- year ended December 31, 1992 and 1993........................... 5,134 4,841 CareFlorida -- year ended December 31, 1992 and 1993.................... 2,701 6,664 Adjustments (1)......................................................... 3,594 (17) ------------- ------------- Combined.................................................................. $ 73,337 $ 93,641 ------------- ------------- ------------- ------------- (1) Primarily reflects adjustments to calendar year results to conform to the Company's fiscal year reporting and certain reclassifications to conform to the Company's presentation.
CONSUMMATED BUSINESS ACQUISITIONS -- PURCHASE TRANSACTIONS In August 1992, the Company acquired all of the outstanding common stock of American Citizens Life Insurance Company, now named Foundation Health National Life Insurance Company ("National Life"), a life and accident insurance company currently licensed in 16 states, for the purchase price of $2,171,000, paid in cash, which represented the fair market value of net assets of the acquired company as of the closing of the transaction, as well as intangible assets totaling $450,000. In October 1992, the Company acquired all of the outstanding common stock of AVP Vision Plans, a vision HMO, for the purchase price of $1,020,000, paid in cash, which resulted in goodwill of $912,000. In July 1993, the Company acquired all of the outstanding common stock of Managed Alternative Care, a subacute care management company, for $6,000,000, paid in cash, which resulted in goodwill of $5,500,000. In August 1993, the Company acquired all of the outstanding common stock of Business Insurance Corporation ("BICO"), a holding company primarily engaged in writing workers' compensation insurance in California through its wholly-owned subsidiary, CalComp, for $65,268,000, paid in cash. In addition, all outstanding BICO options were exchanged for options to purchase 29,475 shares of the Company's common stock. The acquisition resulted in goodwill of $5,001,000. In April 1994, the Company completed the acquisition of substantially all of the outstanding shares of common stock of Gem Holding Corporation ("Gem"), a holding company primarily engaged in writing health, individual life, annuities, group life, disability and dental insurance. At the date of acquisition, Gem provided services to approximately 83,000 individuals in six western states. The purchase price was $17,800,000 which was paid in cash. The acquisition resulted in goodwill of approximately $4,500,000. The effective date of the acquisition was January 1, 1994. 34 FOUNDATION HEALTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1 -- DESCRIPTION OF BUSINESS (CONTINUED) In April 1994, the Company acquired all of the outstanding common stock of Premier Medical Network ("Premier"). Premier provides third party administrative services to approximately 98,000 individuals through a PPO network in Utah. The purchase price was $1,500,000, paid in cash. The acquisition resulted in goodwill of $1,200,000. In July 1994, the Company acquired all of the outstanding common stock of The Noetics Group and all of the assets of Reviewco for consideration consisting of the issuance of 378,358 shares of the Company's common stock valued at $16 million, 118,236 shares of common stock valued at $5 million, which was placed in escrow and cash of $16 million. The release of the escrow shares is subject to the attainment of certain profitability targets by Reviewco. The acquisition resulted in goodwill of $27,773,000. The Noetics Group provides workers' compensation third party administration services for self-funded employers. Reviewco operates a medical bill review and cost-containment business for the workers' compensation industry. In November 1994, the Company acquired all of the outstanding common stock of Southern Colorado Health Plan, Inc. ("SCHP"), and its parent corporation for consideration consisting of 241,672 shares of the Company's common stock valued at $8,900,000. The acquisition resulted in goodwill of $6,755,000. At the date of acquisition, SCHP provided health care services to 7,100 members through its HMO based in Pueblo, Colorado. In November 1994, the Company acquired all of the outstanding common stock of Community Medical Plan, Inc. ("CMP") and certain affiliated health care centers for consideration of $32.9 million, consisting of $25 million in paid cash and at closing the issuance of promissory notes of $7.9 million due November 15, 1995. At the date of acquisition, CMP served approximately 25,000 Medicaid beneficiaries in Florida. The acquisition resulted in goodwill of $32,752,000. In November 1994, the Company issued 7,577,336 shares of its common stock for the purchase of 39.5% of the outstanding common stock of Intergroup (the "Intergroup Minority Interest"). The acquisition of the Intergroup Minority Interest, which was accounted for as a purchase, was valued at $249,109,000 and resulted in goodwill of $207,371,000. The unaudited pro forma combined total revenues, net income and earnings per share of the Company and the Intergroup Minority Interest, assuming the Company had acquired the Intergroup Minority Interest on July 1, 1993, are as follows (in thousands, except per share amounts):
PRO FORMA YEAR ENDED JUNE 30, ---------------------- 1994 1995 ---------- ---------- Total revenues................................................................. $ 2,362.9 $ 2,459.9 ---------- ---------- ---------- ---------- Net income..................................................................... $ 96.9 $ 50.6 ---------- ---------- ---------- ---------- Earnings per share............................................................. $ 1.74 $ 0.89 ---------- ---------- ---------- ----------
This unaudited pro forma information reflects the elimination of the Intergroup Minority Interest and the amortization of the goodwill related to the purchase of the Intergroup Minority Interest. The unaudited pro forma results of operations are not necessarily indicative of the combined results that would have occurred had the acquisition taken place on July 1, 1993, nor are they necessarily indicative of results that may occur in the future. Effective January 1, 1995, CalComp acquired a 50-state licensed property and casualty company for an aggregate purchase price of $13,201,000, consisting of the fair market value of investments and 35 FOUNDATION HEALTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1 -- DESCRIPTION OF BUSINESS (CONTINUED) intangible assets which was paid in cash at closing. This company had no insurance business in force at closing and will enable CalComp to geographically expand its managed care workers' compensation products. No goodwill was recorded as a result of this transaction. The above acquisitions have been accounted for under the purchase method of accounting and accordingly, the operations of these companies have been included in the Company's consolidated financial statements from their respective dates of acquisition. 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 subsidiaries. All significant intercompany transactions have been eliminated in consolidation. The accompanying consolidated financial statements have been restated for the mergers accounted for as poolings of interests as discussed in Note 1. REVENUE RECOGNITION Commercial premium revenue includes 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 premium. Revenue under government contracts is recognized in the month in which the eligible beneficiaries are entitled to health care services. Certain government contracts also contain cost and performance incentive provisions which adjust the contract price based on actual performance, and revenue under certain contracts is subject to price adjustments attributable to inflation and other factors. The effects of these adjustments are recognized on a monthly basis. 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 revenue is recognized in the month in which the administrative services are performed or the period that coverage for service is provided. Workers' compensation premium revenue is recognized ratably over the period to which the premium relates. The insurance policies currently written by the Company are for a period of one year or less. Billed premium in excess of premiums earned represents the liability for unearned premium. Premiums earned include an estimate for earned but unbilled premiums. Patient service revenue is recorded on the accrual basis in the period in which services are provided at established rates regardless of whether collection in full is anticipated. Contractual and charitable allowances, the results of other arrangements for providing services at less than established rates and the provision for doubtful accounts are reported as deductions from patient service revenue. Contractual allowances include differences between established billing rates and amounts estimated by management as recoverable in accordance with reimbursement rates in effect. Differences between final settlements and amounts accrued in previous years are reported as adjustments to the current year's provision for contractual allowance. Unearned premiums related to commercial and specialty services lines of business totaled $31,778,000 and $64,930,000 at June 30, 1994 and 1995 and are included in other liabilities on the consolidated balance sheet. 36 FOUNDATION HEALTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RESERVES FOR CLAIMS, LOSSES AND LOSS ADJUSTMENT EXPENSES AND HEALTH CARE SERVICES EXPENSES Except as discussed below, reserves for claims, losses and loss adjustment expenses and health care services expenses are based upon the accumulation of cost estimates for unpaid claims and losses reported prior to the close of the accounting period, together with a provision for the current estimate of the probable cost of claims, losses and loss adjustment expenses that have occurred but have not yet been reported. Such estimates are based on many variables including individual cases for reported losses, estimates of unreported losses using historical and statistical information and other factors. Workers' compensation claims, losses and loss adjustment expenses, and specialty health care services expenses are included in specialty services costs in the statements of operations. The methods for making the estimates and for establishing the resulting reserves are continually reviewed and updated, and any adjustments resulting therefrom 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 and the related expenses paid are dependent on future developments, management is of the opinion that the reserves for claims, losses and loss adjustment expenses is adequate to cover such claims, losses and expenses. These liabilities are reduced by estimated amounts recoverable from third parties for subrogation. The Company has capitation contracts with individual practice associations, medical groups and hospitals ("Capitated Providers") to provide medical care services to enrollees. The Capitated Providers are at risk for the cost of medical care services provided to the Company's enrollees in the relevant geographic areas; however, the Company is ultimately responsible for the provision of services to its enrollees should the Capitated Providers be unable to provide the contracted services. Certain Capitated Providers also provide claims processing and other administrative services. The Capitated Providers are either paid a fixed percentage of premiums collected in the geographic areas they service or a fixed amount per enrollee for enrollees in their respective service areas. Medical care expenses relating to these Capitated Providers are included in commercial health care services expense and amounted to $318,349,000, $398,700,000 and $467,735,000 for the years ended June 30, 1993, 1994 and 1995. The HMOs also contract with hospitals, physicians and other providers of health care, pursuant to discounted fee for service arrangements and hospital per diems under which providers bill the HMOs for each individual service provided to enrollees. CASH AND CASH EQUIVALENTS Cash and cash equivalents include investments with original maturities of three months or less. INVESTMENTS Prior to July 1, 1994, the Company classified its securities as short-term investments and fixed maturities. Securities with an original maturity of one year or less at the date of acquisition were classified as short-term investments. Such investments were carried at cost, which approximated market value. Declines in market value which were determined by management to be other than temporary were recorded as charges to the statement of operations. Investments with fixed maturities primarily included long-term investment grade bonds and were carried at amortized cost. It is the Company's policy to invest in notes, bonds and money market securities, limited by certain restrictions. The cost of investments sold is determined using the specific identification method. 37 FOUNDATION HEALTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Effective July 1, 1994, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The adoption of SFAS No. 115 did not have a material effect on the Company's consolidated financial position or results of operations. In accordance with SFAS No. 115, the Company classifies investments held by trustees or agencies pursuant to state regulatory requirements as held to maturity based on the Company's ability and intent to hold these investments to maturity. Such investments are presented at amortized cost. All other investments are classified as available for sale and are reported at fair value based on quoted market prices, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity, net of income tax effects. For purposes of calculating realized gains and losses on the sale of investments available for sale, the amortized cost of each investment sold is used. The Company has no trading securities. PROPERTY AND EQUIPMENT Property and equipment is recorded at cost. Depreciation is provided using the straight-line method for all assets over their estimated useful lives as follows: Buildings and improvements.............................................. 5-40 years Furniture and equipment................................................. 3-10 years
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, recorded cost and 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 consists primarily of goodwill and other intangibles which arise as a result of various business acquisitions and the acquisition of the Company through a leveraged buy-out on December 30, 1986, at which time the assets and liabilities of the Company were recorded at their appraised values. In addition, the Company's policy is to defer direct and incremental preoperating costs related to its HMO subsidiaries' geographic expansion and the opening of health care centers. These costs are deferred prior to the commencement of significant operations at which time the Company begins amortizing such costs over a three-year period. Goodwill and other intangible assets are amortized using the methods listed below over appropriate periods not exceeding 40 years. Fully amortized intangible assets and related accumulated amortization are removed from the accounts. The Company evaluates the carrying value of it intangible assets at each balance sheet date. Goodwill and other intangible assets are amortized as follows:
LIFE METHOD -------------------------------- --------------------- Subscribers.................................... 22 years Declining balance Employer group contracts....................... 22 years Straight line Goodwill....................................... 22-40 years Straight line Organization and preoperating costs............ 3-8 years Straight line Noncompetition and employment agreements....... Term of related agreement Straight line Debt issue costs............................... Term of related debt Straight line
38 FOUNDATION HEALTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Goodwill of $62,520,000 and $330,503,000 at June 30, 1994 and 1995, net of accumulated amortization of $33,226,000 and $49,138,000 at June 30, 1994 and 1995, is included in goodwill and other intangible assets. The Company intends to adopt Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of" ("FAS No. 121") during the year ending June 30, 1996. Adoption of FAS No. 121 will not have a significant effect on the Company's consolidated financial statements. INCOME TAXES The Company accounts for income taxes using the liability method. Deferred income tax assets and liabilities result from temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements that will result in taxable or deductible amounts in future years. The Company adopted SFAS No. 109, "Accounting for Income Taxes" effective July 1, 1993. The adoption of SFAS No. 109 did not have a significant effect on the Company's results of operations for the periods presented. No valuation allowance resulted from the adoption of SFAS No. 109. DEFERRED POLICY ACQUISITION COSTS Policy acquisition costs, including commissions, premium taxes and other acquisition costs related to the production or renewal of workers' compensation and indemnity business, are deferred. Such costs are amortized as the related premiums are earned. If it is determined that future policy revenues on existing insurance contracts are not adequate to cover related losses and expenses, deferred policy acquisition costs are written down. However, to date, no write-downs have been made. Earnings on invested funds between the time of premium receipts and related claim payments are considered in determining whether a premium deficiency exists. Deferred policy acquisition costs totaled $14,743,000 and $20,824,000 at June 30, 1994 and 1995 and are included in other assets. DIVIDENDS TO POLICYHOLDERS Dividends to workers' compensation policyholders are generally declared 18 months after expiration of the policies. A provision is made for estimated dividends to be paid related to premium revenue recognized. EARNINGS PER SHARE Earnings per share is calculated by dividing net income by the weighted average number of shares of common stock plus common stock equivalent shares outstanding using the treasury stock method. Earnings per share has been restated for all periods presented to reflect the mergers of CMC, OHS, CareFlorida and TDMC accounted for as poolings of interests as discussed in Note 1. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform to current year presentation. 39 FOUNDATION HEALTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3 -- INVESTMENTS The amortized cost and market value of fixed maturity investments as of June 30, 1994, were as follows (in thousands):
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE ----------- ----------- ---------- ----------- U.S. government and agencies......................... $ 115,338 $ 108 $ (3,791) $ 111,655 Obligations of states and other political subdivisions........................................ 449,173 2,455 (12,595) 439,033 Corporate debt securities............................ 9,444 137 (502) 9,079 Certificates of deposit.............................. 1,314 1,314 ----------- ----------- ---------- ----------- $ 575,269 $ 2,700 $ (16,888) $ 561,081 ----------- ----------- ---------- ----------- ----------- ----------- ---------- -----------
As of June 30, 1995, the amortized cost, gross unrealized holding gains and losses and fair value of the Company's investments were as follows (in thousands):
AVAILABLE FOR SALE ---------------------------------------------- GROSS GROSS UNREALIZED UNREALIZED AMORTIZED HOLDING HOLDING FAIR COST GAINS LOSSES VALUE --------- ---------- ---------- -------- U.S. government and agencies......... $108,951 $ 643 $(1,256) $108,338 Obligations of states and other political subdivisions.............. 385,827 580 (4,231) 382,176 Corporate debt securities............ 8,120 119 (267) 7,972 Equity securities.................... 4,089 39 (170) 3,958 Other debt securities................ 39,152 39,152 --------- ---------- ---------- -------- Total................................ $546,139 $1,381 $(5,924) $541,596 --------- ---------- ---------- -------- --------- ---------- ---------- -------- HELD TO MATURITY --------------------------------------------- GROSS GROSS UNREALIZED UNREALIZED AMORTIZED HOLDING HOLDING FAIR COST GAINS LOSSES VALUE --------- ---------- ---------- ------- U.S. government and agencies......... $17,263 $224 $ (45) $17,442 Obligations of states and other political subdivisions.............. 27,703 79 (249) 27,533 Corporate debt securities............ 845 111 956 Equity securities.................... Other debt securities................ 3,934 3,934 --------- ----- ---------- ------- Total................................ $49,745 $414 $(294) $49,865 --------- ----- ---------- ------- --------- ----- ---------- -------
At June 30, 1995, the contractual maturities of the Company's investments were as follows (in thousands):
AT AMORTIZED COST AT FAIR MARKET VALUE -------------------------------------------- -------------------------------------------- YEARS TO MATURITY YEARS TO MATURITY -------------------------------------------- -------------------------------------------- LESS THAN 1 TO 5 5 TO 10 OVER 10 LESS THAN 1 TO 5 5 TO 10 OVER 10 1 YEAR YEARS YEARS YEARS 1 YEAR YEARS YEARS YEARS ----------- --------- --------- --------- ----------- --------- --------- --------- AVAILABLE FOR SALE: U.S. government and agencies........ $ 30,877 $ 63,346 $ 14,532 $ 197 $ 30,671 $ 62,781 $ 14,677 $ 209 Obligations of states and other political subdivisions............. 41,212 101,674 136,709 106,231 41,141 101,075 134,250 105,709 Corporate debt securities........... 403 4,198 2,814 705 408 4,116 2,761 688 Equity securities................... 4,089 3,958 Other debt securities............... 39,152 39,152 ----------- --------- --------- --------- ----------- --------- --------- --------- Total............................... $ 115,733 $ 169,218 $ 154,055 $ 107,133 $ 115,330 $ 167,972 $ 151,688 $ 106,606 ----------- --------- --------- --------- ----------- --------- --------- --------- ----------- --------- --------- --------- ----------- --------- --------- --------- HELD TO MATURITY U.S. government and agencies........ $ 4,468 $ 11,979 $ 817 $ 4,467 $ 12,095 $ 880 Obligations of states and other political subdivisions............. 8,762 8,869 6,355 $ 3,717 8,758 8,852 6,289 $ 3,635 Corporate debt securities........... 247 300 297 270 341 344 Other debt securities............... 3,784 50 100 3,784 50 100 ----------- --------- --------- --------- ----------- --------- --------- --------- Total held to maturity.............. $ 17,014 $ 21,145 $ 7,572 $ 4,014 $ 17,009 $ 21,267 $ 7,610 $ 3,979 ----------- --------- --------- --------- ----------- --------- --------- --------- ----------- --------- --------- --------- ----------- --------- --------- ---------
40 FOUNDATION HEALTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3 -- INVESTMENTS (CONTINUED) Proceeds from the sales and maturities of fixed maturity investments during 1994 were $641,404,000, resulting in gross realized gains and losses of $173,000 and $267,000, respectively. Proceeds from sales and maturities of available for sale securities during 1995 were $770,673,000, resulting in gross realized gains and losses of $13,000 and $122,000, respectively. The Company's regulated subsidiaries are required to keep securities on deposit in various states where they are licensed. At June 30, 1995, $364,900,000 in securities are restricted to satisfy various state regulatory and licensing requirements. Additionally, at June 30, 1995, $5,600,000 in securities were pledged as collateral under reinsurance agreements. Investment income, including realized investment gains and losses, were as follows (in thousands):
YEAR ENDED JUNE 30, -------------------- 1994 1995 --------- --------- Short-term investments........................................................... $ 3,035 $ Fixed maturities................................................................. 26,832 Available for sale............................................................... 31,938 Held to maturity................................................................. 3,283 Other............................................................................ 6,096 7,763 Less-investment expenses......................................................... (991) (534) --------- --------- Net investment income............................................................ $ 34,972 $ 42,450 --------- --------- --------- ---------
Investment income for the year ended June 30, 1993 primarily related to fixed maturity investments. NOTE 4 -- LOSSES AND LOSS ADJUSTMENT EXPENSES Activity in the reserves for losses and loss adjustment expenses related to workers' compensation policies for the eleven months from date of acquisition to June 30, 1994 and the year ended June 30, 1995 is summarized as follows (in thousands):
JUNE 30, 1994 JUNE 30, 1995 ------------- ------------- Beginning balance......................................................... $ 358,645 $ 395,846 Less-ceded losses and loss adjustment expense reserves.................... (112,492) (103,318) ------------- ------------- Net beginning balance..................................................... 246,153 292,528 ------------- ------------- Incurred related to: Current fiscal year..................................................... 170,817 232,643 Prior fiscal years...................................................... 665 (7,614) ------------- ------------- Total incurred............................................................ 171,482 225,029 ------------- ------------- Paid related to: Current fiscal year..................................................... (37,597) (41,092) Prior fiscal years...................................................... (87,510) (143,802) ------------- ------------- Total paid................................................................ (125,107) (184,894) ------------- ------------- Net ending balance........................................................ 292,528 332,663 Plus-ceded losses and loss adjustment expense reserves.................... 103,318 81,667 ------------- ------------- Balance at June 30, 1994 and 1995, respectively........................... $ 395,846 $ 414,330 ------------- ------------- ------------- -------------
41 FOUNDATION HEALTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4 -- LOSSES AND LOSS ADJUSTMENT EXPENSES (CONTINUED) During the fiscal year ended June 30, 1995, the Company experienced favorable loss and loss adjustment expense reserve development of $7,614,000. This reduction of the estimated loss and loss adjustment expense is primarily related to the re-estimated liability for the 1993 and 1994 accident years. NOTE 5 -- EXCESS LIABILITY INSURANCE AND REINSURANCE Under reinsurance agreements, the Company reinsures certain workers' compensation risks to other insurance companies. Reinsurance contracts do not relieve the Company from its obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company; consequently, allowances are established for amounts deemed uncollectible. The Company regularly evaluates the financial condition of its reinsurers. Based on this evaluation, management believes the reinsurers are creditworthy and that any potential losses on these agreements will not have a material impact on the consolidated financial statements. In addition, the Company maintains letters of credit or trust agreements with each unauthorized reinsurer in the event that the unauthorized reinsurer is unable to meet its obligations. The Company maintains specific excess reinsurance on workers' compensation which provides coverage in excess of $500,000 per incident for policy years 1994 and forward, in excess of $350,000 per incident for policy years 1992 and 1993 and in excess of $250,000 per incident for policy years 1989 through 1991. The agreements provide coverage up to a maximum of $60 million per incident, including the Company's retention. In addition, the Company also maintained a pro rata reinsurance agreement wherein the reinsurer assumed a proportional amount of net premiums written and related losses. The quota share percentage ranged from 5% to 40% (5% at June 30, 1994) during the year ended June 30, 1994. As of July 1, 1994 the quota share agreement was terminated. The effect of reinsurance on workers' compensation premium written and earned, and losses incurred for the eleven months from August 1, 1993 (date of acquisition) to June 30, 1994 and the year ended June 30, 1995 is as follows (in thousands):
PREMIUMS PREMIUMS LOSSES WRITTEN EARNED INCURRED ----------- ----------- ----------- Eleven months ended June 30, 1994 Direct........................................................... $ 307,913 $ 309,379 $ 199,854 Assumed.......................................................... 20 16 (1,356) Ceded............................................................ (32,122) (35,448) (27,016) ----------- ----------- ----------- Net.............................................................. $ 275,811 $ 273,947 $ 171,482 ----------- ----------- ----------- ----------- ----------- ----------- Year ended June 30, 1995 Direct........................................................... $ 370,408 $ 373,954 $ 215,674 Assumed.......................................................... 4,423 4,393 973 Ceded............................................................ (19,396) (20,296) 8,382 ----------- ----------- ----------- Net.............................................................. $ 355,435 $ 358,051 $ 225,029 ----------- ----------- ----------- ----------- ----------- -----------
At June 30, 1995, the Company has an aggregate recoverable for workers' compensation losses, paid and unpaid, including incurred but not reported, loss adjustment expenses, and unearned premiums with a carrying value of $86,272,000 with a single reinsurer. 42 FOUNDATION HEALTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 5 -- EXCESS LIABILITY INSURANCE AND REINSURANCE (CONTINUED) The Company's HMO subsidiaries purchase individual excess liability insurance for hospital costs in excess of deductible amounts. Premiums for this insurance are included in commercial health care services expense. Amounts recoverable under such contracts are included as reductions of commercial health care services expense. NOTE 6 -- PROPERTY AND EQUIPMENT Property and equipment comprised the following (in thousands):
JUNE 30, ------------------------ 1994 1995 ----------- ----------- Land.......................................................................... $ 24,078 $ 29,840 Construction in progress...................................................... 2,527 22,362 Buildings and improvements.................................................... 65,908 106,450 Furniture and equipment....................................................... 125,109 168,075 ----------- ----------- 217,622 326,727 Less -- accumulated depreciation.............................................. (74,534) (96,449) ----------- ----------- $ 143,088 $ 230,278 ----------- ----------- ----------- -----------
Depreciation expense on property and equipment was $14,856,000, $20,450,000 and $25,190,000 for the years ended June 30, 1993, 1994 and 1995. NOTE 7 -- NOTES PAYABLE, CAPITAL LEASES AND OTHER FINANCING ARRANGEMENTS Notes payable, capital leases and other financing arrangements comprised the following (in thousands):
JUNE 30, ------------------------ 1994 1995 ----------- ----------- 7 3/4% Senior Notes due June 1, 2003.......................................... $ 124,545 $ 124,596 Capital lease obligations..................................................... 10,319 6,854 Unsecured notes payable pursuant to business acquisition, bearing interest at 4.167% due November 15, 1995 (Note 1)........................................ 7,909 Unsecured revolving line of credit bearing interest at 6.313% at June 30, 1995......................................................................... 20,000 Other......................................................................... 25,145 5,167 ----------- ----------- 160,009 164,526 Deferred compensation (Note 10)............................................... 10,099 15,528 ----------- ----------- $ 170,108 $ 180,054 ----------- ----------- ----------- -----------
In June 1993, the Company issued $125,000,000 of senior notes due June 1, 2003 ("Senior Notes"). The Senior Notes bear interest at 7 3/4% which is due semi-annually on December 1 and June 1. The Notes are general unsecured obligations of the Company, will rank PARI PASSU with all future unsecured and unsubordinated indebtedness of the Company and are effectively subordinated to creditors of the Company's subsidiaries. The indenture contains certain covenants that, among other things, (i) restrict the ability of the Company and its Restricted Subsidiaries (as defined) to (a) pay dividends and make other distributions and certain investments, (b) grant liens on their assets, (c) enter into or permit certain sale and lease-back transactions or (d) engage in certain mergers, consolidations and sales of assets, and (ii) restrict the ability of the Company's Restricted Subsidiaries to incur additional indebtedness or issue shares of preferred stock. 43 FOUNDATION HEALTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7 -- NOTES PAYABLE, CAPITAL LEASES AND OTHER FINANCING ARRANGEMENTS (CONTINUED) The Company has a $300 million unsecured revolving credit agreement with Citicorp USA, Inc., as Administrative Agent for the lenders thereto (the "Credit Agreement") which expires December 5, 1999. Principal amounts outstanding under the Credit Agreement bear interest, at the Company's option, at either Citibank's base rate or the Eurodollar rate plus a margin depending upon the Company's public debt rating or level of total debt to total capitalization. Any interest payments are due quarterly and principal is due at maturity. The agreement contains customary terms, events of default and covenants (including financial covenants related to net worth, fixed charge coverage and total debt to total capitalization) which, among other things, limit the incurring of additional debt. The Credit Agreement also limits the ability of the Company to make cash dividends and stock repurchases if the aggregate amount of such dividends and repurchases exceeds 50% of the cumulative consolidated net income of the Company beginning with the fiscal year ended June 30, 1994, plus the after tax effect of up to $125 million of restructuring charges, to the extent deducted from earnings, plus $25 million after June 30, 1995. As of June 30, 1995, the amount available for cash dividends and stock repurchases under the Credit Agreement was approximately $108,189,000. Subsequent to June 30, 1995, the Company drew an additional $40 million under the Credit Agreement. The Company leases some of its data processing and telecommunications equipment under capital leases that provide for minimum annual rentals and purchase options. Equipment under capital leases was $25,127,000 and $36,898,000 at June 30, 1994 and 1995 and the related accumulated depreciation was $12,308,000, and $15,202,000 at June 30, 1994 and 1995. Future minimum payments under notes payable, capital leases and other financing arrangements are as follows (in thousands):
YEAR ENDING JUNE 30, - ------------------------------------------------------------------------------------------- 1996....................................................................................... $ 24,370 1997....................................................................................... 13,629 1998....................................................................................... 12,663 1999....................................................................................... 31,822 2000....................................................................................... 10,656 Thereafter................................................................................. 154,156 ----------- 247,296 ----------- Less -- Amount representing interest....................................................... (82,770) ----------- $ 164,526 ----------- -----------
44 FOUNDATION HEALTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8 -- INCOME TAXES The provision for income taxes comprised the following (in thousands):
YEAR ENDED JUNE 30, -------------------------------- 1993 1994 1995 --------- --------- ---------- Current: Federal........................................................... $ 49,675 $ 55,352 $ 40,469 State............................................................. 10,530 9,586 7,491 --------- --------- ---------- Total current..................................................... 60,205 64,938 47,960 --------- --------- ---------- Deferred: Federal........................................................... (3,028) (336) (13,464) State............................................................. (151) 232 (7,675) --------- --------- ---------- Total deferred.................................................... (3,179) (104) (21,139) --------- --------- ---------- Total provision for income taxes.................................... $ 57,026 $ 64,834 $ 26,821 --------- --------- ---------- --------- --------- ----------
A reconciliation of the statutory federal income tax rate and the effective tax rate as a percentage of pretax income is as follows:
YEAR ENDED JUNE 30, ------------------------------------- 1993 1994 1995 ----- ----- ----- Statutory rate..................................................................... 34% 35% 35% State income and franchise taxes, net of federal tax benefit....................... 5 4 Amortization of goodwill........................................................... 1 1 5 Nondeductible acquisition costs.................................................... 4 4 Tax exempt interest income......................................................... (5) (4) (9) Taxes on undistributed income from subsidiaries.................................... 3 3 Other.............................................................................. (1) -- -- -- Effective tax rate................................................................. 42% 39% 34% -- -- -- -- -- --
The federal and state regular statutory rates were applicable for the years ended June 30, 1993, 1994 and 1995. 45 FOUNDATION HEALTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8 -- INCOME TAXES (CONTINUED) The tax effects of the significant temporary differences which comprise the net deferred tax asset at June 30, 1994 and 1995 were as follows (in thousands):
JUNE 30, -------------------- 1994 1995 --------- --------- Deferred state income taxes...................................................... $ 2,388 $ 1,771 Accrued vacation................................................................. 2,225 3,628 Deferred compensation............................................................ 4,504 5,973 Accrued expenses................................................................. 8,456 9,092 Insurance loss reserves.......................................................... 23,786 23,838 Policyholder dividends........................................................... 11,192 5,536 Restructuring costs.............................................................. 556 32,755 Policy acquisition costs......................................................... (5,005) (6,186) Depreciation and amortization.................................................... (1,167) (6,709) Bond premium/discount............................................................ (2,162) (1,759) Other............................................................................ (239) (2,266) --------- --------- Net deferred tax asset........................................................... $ 44,534 $ 65,673 --------- --------- --------- ---------
NOTE 9 -- CAPITAL STOCK PREFERRED STOCK The Company is authorized to issue 1,000,000 shares of $1 par value preferred stock. No preferred stock was outstanding as of June 30, 1994 or 1995. STOCKHOLDER RIGHTS PLAN The Company's Stockholder Rights Plan provides for distribution of Rights (as defined in the Stockholder Rights Plan) to holders of outstanding shares of common stock. Except as set forth below, each Right, when exercisable, entitles the stockholder to purchase from the Company one one-thousandth share of a new series of the Company's preferred stock at a price of $105 per share, subject to adjustment. The Rights are not currently exercisable, but would become exercisable if certain events occurred related to a person or group ("Acquiring Person") acquiring or attempting to acquire 15% or more of the outstanding shares of common stock. In the event that the Rights become exercisable, each Right (except for Rights beneficially owned by the Acquiring Person, which become null and void) would entitle the holder to purchase, for the exercise price then in effect, shares of the Company's common stock having a value of twice the exercise price. The Rights may be redeemed by the Board of Directors in whole, but not in part, at a price of $.01 per Right. The Rights have no voting or dividend privileges and are attached to, and do not trade separately from, the common stock. A total of 20,000 shares of preferred stock were reserved for future issuance under this Rights Agreement, which expire on October 10, 2001. AUTHORIZED COMMON STOCK In October 1992, the Company's stockholders approved an increase in the number of authorized shares of common stock from 40,000,000 to 100,000,000. 46 FOUNDATION HEALTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9 -- CAPITAL STOCK (CONTINUED) STOCK REPURCHASE PROGRAM In April 1993, the Board of Directors of the Company approved the establishment of a stock repurchase program which, as amended, authorizes acquisition from time to time, of up to 5.7 million shares of its outstanding common stock in the open market. As of June 30, 1993, 1994, and 1995 the repurchase of 241,100, 1,445,500 and 1,545,500 shares had been completed pursuant to this program. DIVIDENDS PAID During the year ended June 30, 1994, CareFlorida paid cash dividends of $2 million on its common stock. As discussed in Note 1, the Company's consolidated financial statements have been restated to reflect the results of CareFlorida in accordance with the pooling of interest method of accounting. Other than the CareFlorida dividend described above, the Company has never paid cash dividends on its common stock. The Company presently intends to retain its earnings for the development of its business and does not anticipate paying cash dividends on its common stock in the foreseeable future. STOCK OPTIONS Under the Company's Restated and Amended 1990 Stock Option Plan (the "1990 Plan"), options may be either incentive stock options or nonqualified stock options which expire no later than 10 years from the date of grant. Under the 1990 Plan, the Company has reserved 5,525,000 shares of common stock for the granting of options. During the years ended June 30, 1993, 1994, and 1995, the Company granted nonqualified options to purchase 722,265, 1,083,750 and 786,750 shares of the Company's common stock at exercise prices ranging from as 85 to 100% of the fair market value of the stock at the date of grant. Currently, options are granted at prices determined by the Compensation and Organizational Committee of the Board of Directors of the Company (the "Compensation Committee") but may not be less than 100% of the fair market value of the stock on the date of grant. As of June 30, 1994 and 1995, the total number of options outstanding under the 1990 Plan were 2,545,958 and 3,154,939. The Company has reserved 238,000 shares of the Company's common stock from the granting of options under the 1992 Nonstatutory Stock Option Plan (the "1992 Plan") established in connection with a business acquisition in May 1992. Under the 1992 Plan, options are granted to employees of the Company or its subsidiaries at the discretion of a committee of the subsidiary's Board of Directors. Options are granted at an exercise price equal to the fair market value of the stock at the date of grant, subject to a vesting schedule of up to three years, and expire no later than 10 years from the date of grant. Under the 1992 Plan, nonqualified options to purchase 49,300 shares were granted during the year ended June 30, 1993. As of June 30, 1994 and 1995, the number of options outstanding under the 1992 Plan were 46,571 and 38,036. The Company has reserved 600,000 shares of the Company's common stock under the 1993 Nonstatutory Stock Option Plan (the "1993 Plan") established in October 1993. Under the 1993 Plan, options are granted at the discretion of the Company's Board of Directors to physician employees of affiliated professional corporations. Options are granted at an exercise price equal to the fair market value of the stock at the date of grant. Under the 1993 Plan, nonqualified options to purchase 145,500 and 381,399 shares were granted during the years ended June 30, 1994 and 1995. As of June 30, 1994 and 1995, the number of options outstanding under the 1993 Plan were 145,500 and 499,874. Subsequent to June 30, 1995, the Company increased the number of shares reserved under the 1993 Plan to 1,600,000. 47 FOUNDATION HEALTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9 -- CAPITAL STOCK (CONTINUED) During the year ended June 30, 1992, the Company granted nonqualified stock options to purchase 172,500 shares of the Company's common stock at exercise prices determined as 85% of the fair market value of the stock at the date of grant pursuant to employment agreements entered into in connection with a business acquisition. Options vested 10% per year beginning July 1, 1992, with provisions for accelerated vesting in the event certain profitability targets of the acquired company were exceeded. During the year ended June 30, 1994, the employment agreements were terminated and all unvested options were canceled. A summary of the Company's nonqualified and incentive stock options outstanding is as follows:
WEIGHTED AVERAGE SHARES EXERCISE PRICE ----------- ---------------- Outstanding at June 30, 1992............................................ 1,742,613 $ 18.13 Options exchanged pursuant to acquisition (Note 1)...................... 303,520 6.06 Granted................................................................. 771,565 29.56 Exercised............................................................... (476,352) 8.06 Canceled................................................................ (43,767) 32.50 ----------- Outstanding at June 30, 1993............................................ 2,297,579 22.19 Options exchanged pursuant to acquisition (Note 1)...................... 29,475 9.41 Granted................................................................. 1,229,250 38.17 Exercised............................................................... (572,347) 14.66 Canceled................................................................ (202,482) 24.10 ----------- Outstanding at June 30, 1994............................................ 2,781,475 30.52 Options exchanged pursuant to acquisition (Note 1)...................... 500,290 18.09 Granted................................................................. 1,168,149 31.60 Exercised............................................................... (330,796) 18.05 Canceled................................................................ (229,021) 31.98 ----------- Outstanding at June 30, 1995............................................ 3,890,097 30.22 ----------- -----------
A summary of options exercisable and shares available for future grant under all option arrangements is as follows:
JUNE 30, ------------------------ 1994 1995 ----------- ----------- Options exercisable.......................................................... 921,798 1,609,941 Shares available for grant................................................... 1,562,603 1,665,609
The Company receives a tax deduction for the excess of the market value of the Company's common stock over the exercise price of the option at the date nonqualified options are exercised by employees of the Company. The related tax benefit is credited to common stock. The Company makes no charges against capital with respect to options granted. NOTE 10 -- EMPLOYEE BENEFIT PLANS EMPLOYEE STOCK PURCHASE PLAN The Company has reserved 750,000 shares of common stock under an employee stock purchase plan which became effective October 1, 1990. Full-time employees of the Company and substantially all of its subsidiaries are eligible to participate in this Plan if they have been continuously employed by the Company for not less than six months. Employees electing to participate authorize payroll 48 FOUNDATION HEALTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10 -- EMPLOYEE BENEFIT PLANS (CONTINUED) deductions of up to 10% of their base compensation to purchase shares of common stock at 85% of the then fair market value of the stock on the date of purchase. During the years ended June 30, 1993, 1994 and 1995, 19,775, 30,413 and 39,389 shares of common stock were purchased under this plan. DEFINED CONTRIBUTION PLANS The Company sponsors several defined contribution retirement plans intended to be qualified under Sections 401(a) and 401(k) of the Internal Revenue Code. Participation in the plans is available to substantially all employees. Generally, employees may contribute up to 10% of their annual compensation to the plans on a pre-tax basis and up to 10% on an after-tax basis. Under the plans, the Company makes matching contributions of up to 6% of each participating employee's base salary. The Company's contributions to the plans totaled $6,824,000, $5,961,000, and $4,173,000 for the years ended June 30, 1993, 1994, and 1995. DEFERRED COMPENSATION PLAN Under the Company's deferred compensation plan certain members of management, highly compensated employees and non-employee Board members may defer payment of up to 90% of their compensation. The Company makes matching contributions subject to a vesting schedule, of up to 10% of an employee participant's compensation if the participant's base salary is at least $100,000. The deferred compensation, together with Company matching amounts and accumulated interest which is accrued but unfunded, is distributable in cash by lump sum or in monthly, quarterly or annual installments (not exceeding 20 years) upon the date of distribution elected by the participant, termination of employment or the earlier of the date of distribution elected or termination of employment. At June 30, 1994 and 1995, the liability under this deferred compensation plan amounted to $4,769,000 and $9,139,000. The Company's expense under the plan totaled $1,415,000, $1,664,000 and $1,955,000 for the years ended June 30, 1993, 1994 and 1995. During the year ended June 30, 1995, the Company amended the plan by increasing the interest rate paid to participants to 140% of Moody's corporate bond rate and by allowing participants to receive 90% of vested funds before scheduled distributions by irrevocably forfeiting the remaining 10%. During 1993, TDMC established a deferred compensation plan which called for payment of deferred compensation to TDMC physicians with five years of service at termination of employment (the "TDMC Plan"); as part of the merger of TDMC with the Company the TDMC Plan was frozen in November 1994 and the present value of each participant's benefits was established. Under the terms of the TDMC Plan, interest accrues at the Citibank base rate plus 1/4%. The deferred compensation is distributable in annual installments (not to exceed 10) upon termination of employment. At June 30, 1994 and 1995, the liability under this deferred compensation plan amounted to $5,330,000 and $6,389,0000. The Company's expense under the plan totaled $2,281,000, $2,885,000 and $765,000 for the years ended June 30, 1993, 1994, and 1995. DEFINED BENEFIT RETIREMENT PLANS One of the Company's subsidiaries offers a non-contributory defined benefit retirement plan ("Retirement Plan") covering substantially all of its employees. The Retirement Plan is designed to meet the provisions of the Employee Retirement Income Security Act of 1974. The benefits are primarily based upon years of service and compensation. 49 FOUNDATION HEALTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10 -- EMPLOYEE BENEFIT PLANS (CONTINUED) During the fiscal year ended June 30, 1995, the Company adopted two unfunded non-qualified defined benefit pension plans, a Supplemental Executive Retirement Plan and a Directors' Retirement Plan (collectively the "SERP"), which cover key executives, as selected by the Board of Directors, and nonemployee directors. Currently there are sixteen participants in the plans. Benefits are based on years of service and compensation in the last five years of employment, or the highest three years within the last 10 years of service. The discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligations were 7.5% and 6% respectively, in 1993, 1994, and 1995 for the Retirement Plan, and 8% and 4%, in 1995 for the SERP. The tables below sets forth the funded status and amounts recognized in the Company's consolidated financial statements for the Retirement Plan and the SERP are as follows (in thousands):
YEAR ENDED JUNE 30, ------------------------------------------ RETIREMENT PLAN ------------------------------- SERP 1993 1994 1995 1995 --------- --------- --------- --------- Actuarial present value of: Vested benefit obligation.................................. $ (461) $ (540) $ (651) $ (470) Nonvested benefit obligation............................... (34) (38) (46) (315) --------- --------- --------- --------- Accumulated benefit obligation............................... (496) (578) (697) (785) Projected benefit obligation................................. (991) (1,184) (1,447) (1,130) Plan assets at fair value.................................... 659 783 1,380 --------- --------- --------- --------- Projected benefit obligation in excess of plan assets........ (332) (401) (67) (1,130) Deferred losses............................................ 174 212 153 Unrecognized net transition obligation..................... 128 118 109 296 --------- --------- --------- --------- Pension asset (liability).................................... $ (30) $ (71) $ 195 $ (834) --------- --------- --------- --------- --------- --------- --------- --------- Net pension expense was comprised of: Service cost................................................. $ 112 $ 136 $ 157 $ 788 Interest cost................................................ 66 83 99 25 Net amortization and deferral................................ 16 18 20 21 Return on plan assets........................................ (44) (57) (77) --------- --------- --------- --------- Net pension expense.......................................... $ 150 $ 180 $ 199 $ 834 --------- --------- --------- --------- --------- --------- --------- ---------
During the year ended June 30, 1995, the Company adopted an unfunded Executive Retiree Medical Plan, which covers key executives, as selected by the Board of Directors, and their spouses and dependents. The plan provides medical, dental, and vision benefits during retirement. At June 30, 1995, the projected benefit obligation was $343,000, the unrecognized net transition obligation was $194,000, the unrecognized net loss was $63,000, and the pension liability was $86,000. The components of postretirement benefit expense for the year ended June 30, 1995 included service cost of $45,000, interest cost of $19,000, and net amortization and deferral of $22,000 for total benefit expense of $86,000. The medical cost trend rate assumed was 14%, trending down to 6.5% over a ten year period. The weighted average discount rate used in determining the accumulated postretirement benefit obligation at June 30, 1995 was 7.5%. The Company purchases company-owned life insurance policies to cover the cost of benefits under the Supplemental Executive Retirement Plan, the Directors' Retirement Plan, the Executive Retiree Medical Plan, and the deferred compensation plan. The cash surrender value of these policies at June 30, 1995, included in other assets, was $13,090,000. 50 FOUNDATION HEALTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 11 -- RELATED PARTY TRANSACTIONS In December 1992, April 1993 and August 1994, as part of the consolidation of health care delivery systems resulting from the acquisition of CMC, a senior officer of the Company acquired two independent practice associations ("IPAs") which contract with physicians to provide medical services to the Company's enrollees. During fiscal 1995, an additional IPA was formed by a senior officer of the Company. During the years ended June 30, 1993, 1994 and 1995, charges for medical services provided by these IPAs to the Company's enrollees totaled approximately $5,645,000, $20,562,000 and $40,070,000. In April 1993, the Company entered into a revolving credit agreement with one of the IPAs, the terms of which restrict the ability of the IPA and its sole shareholder to pay dividends, to incur additional indebtedness, to transfer shares, or to otherwise merge, sell or dispose of assets. The credit agreement bears interest at the rate of prime plus 2% which is payable quarterly. Principal is due on demand, or if no demand, no later than April 30, 1997. At June 30, 1994 and 1995, $3,900,000 and $5,300,000 was outstanding under the credit agreement. During 1994, the Company contracted with two affiliated professional corporations (professional medical corporations each owned by a Company-affiliated physician) to provide health care services to the Company's enrollees at Company-managed health care centers. During the years ended June 30, 1994 and 1995, charges for medical services provided by these affiliated professional corporations to the Company's enrollees totaled approximately $1,700,000 and $85,000,000. The Company provides facilities and support functions to the health care centers and is reimbursed in the form of a management fee by the affiliated professional corporations. The management fee totaled $4,307,000 and $55,271,000 for the years ended June 30, 1994 and 1995. The Company has revolving credit agreements with the affiliated professional corporations the terms of which restrict the ability of the professional medical corporations to pay dividends and bonuses, acquire assets, enter into liens, incur additional indebtedness or to otherwise merge, sell or dispose of assets. The credit agreements bear interest at 7.75% and prime plus 1%, respectively. Principal and interest is due January 22, 1996 subject to automatic one year extensions of the maturity date unless the Company provides written notice of intent to terminate the agreements. At June 30, 1994 and 1995, $7,158,000 and $35,425,000 was outstanding under these agreements. Management evaluates the collectibility of these loans and, if necessary, reserves are recorded to reduce carrying amounts to amounts deemed to be recoverable. No reserves have been deemed necessary as of the dates of these financial statements. NOTE 12 -- REGULATORY AND CONTRACTUAL CAPITAL REQUIREMENTS The Company's HMO subsidiaries are required to maintain a minimum level of tangible net equity or minimum capital and surplus. The required total tangible net equity and minimum capital and surplus for all HMOs is approximately $34,310,000 at June 30, 1995. Under certain government contracts, Federal Services is required to maintain a current ratio of 1:1 and certain HMO subsidiaries are required to maintain a current ratio of 1:1 under Medicaid contracts. The Company's life, accident and health insurance subsidiaries are required by the Departments of Insurance in the states in which they are licensed to maintain minimum capital and surplus aggregating $17,250,000. The Company's workers' compensation insurance subsidiaries are required by the Departments of Insurance in the states in which they are licensed to maintain minimum capital and surplus of $5,000,000. The Company and its subsidiaries are in compliance with the applicable minimum regulatory and capital requirements described above. 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 51 FOUNDATION HEALTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 12 -- REGULATORY AND CONTRACTUAL CAPITAL REQUIREMENTS (CONTINUED) 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. As of June 30, 1995, restricted net assets of these subsidiaries totaled approximately $59,785,000. NOTE 13 -- COMMITMENTS AND CONTINGENCIES During the year ended June 30, 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 $4.7 million at June 30, 1995 under this agreement. The future minimum rental payments required under operating leases for all of the Company's office space and equipment and for properties under construction that have initial or remaining noncancelable lease terms in excess of one year are as follows (in thousands):
YEAR ENDING JUNE 30, - ----------------------------------------------------------------------------------- 1996............................................................................... $ 19,750 1997............................................................................... 15,739 1998............................................................................... 13,438 1999............................................................................... 9,935 2000............................................................................... 5,886 Thereafter......................................................................... 7,289 --------- $ 72,037 --------- ---------
Lease expense for office space and equipment was $15,390,000, $21,429,000 and $25,425,000 for the years ended June 30, 1993, 1994 and 1995. The Company maintains general liability and managed care professional liability and directors and officers insurance and other insurance coverage in amounts the Company believes to be adequate. The Company requires contracting health care providers to maintain malpractice insurance coverage in amounts customary in the industry. In the ordinary course of its business the Company is a party to claims and legal actions by enrollees, providers and others. The Company also undergoes governmental audits and investigations with regard to its government contracts and with respect to operations of its HMO, insurance, and third party administrator subsidiaries. After consulting with legal counsel, the Company is of the opinion that any liability that may ultimately be incurred as a result of these claims, legal actions, audits or investigations will not have a material adverse effect on the consolidated financial position or results of operations of the Company. 52 FOUNDATION HEALTH CORPORATION SUPPLEMENTAL SCHEDULE CONDENSED BALANCE SHEETS (IN THOUSANDS) ASSETS
JUNE 30, -------------------------- 1994 1995 ----------- ------------- Cash and cash equivalents............................................................. $ 31,857 $ 1,954 Investments: Available for sale investments...................................................... Held to maturity investments........................................................ Short-term investments.............................................................. 13,002 Fixed maturity investments.......................................................... 23,932 Advances to subsidiaries.............................................................. 47,008 10,336 Property and equipment, net........................................................... 2,428 8,510 Investment in subsidiaries............................................................ 388,560 822,142 Organization and debt issuance costs, net............................................. 2,593 14,047 Other assets.......................................................................... 64,503 167,311 ----------- ------------- $ 573,883 $ 1,024,300 ----------- ------------- ----------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY Notes payable and capital leases...................................................... $ 127,579 $ 177,674 Accounts payable and other liabilities................................................ 23,861 89,727 ----------- ------------- 151,440 267,401 ----------- ------------- Stockholders' equity: Common stock........................................................................ 264,976 518,671 Retained earnings................................................................... 194,800 244,249 Unrealized holding losses........................................................... (2,974) Common stock held in treasury, at cost.............................................. (37,333) (3,047) ----------- ------------- 422,443 756,899 ----------- ------------- $ 573,883 $ 1,024,300 ----------- ------------- ----------- -------------
S-1 FOUNDATION HEALTH CORPORATION SUPPLEMENTAL SCHEDULE CONDENSED STATEMENTS OF OPERATIONS (IN THOUSANDS)
YEAR ENDED JUNE 30, ------------------------------------- 1993 1994 1995 ----------- ----------- ----------- REVENUES: Government contracts..................................................... $ 846 $ 978 $ 1,432 Interest and other income................................................ 4,736 7,095 8,124 Intercompany charges..................................................... 70,328 82,516 31,906 Equity in subsidiary income.............................................. 49,321 64,872 88,552 ----------- ----------- ----------- 125,231 155,461 130,014 ----------- ----------- ----------- EXPENSES: Selling, general and administrative...................................... 25,104 31,852 19,438 Amortization and depreciation............................................ 1,725 303 754 Interest expense......................................................... 1,286 10,265 11,795 Provision for restructuring.............................................. 7,247 84,436 ----------- ----------- ----------- 35,362 42,420 116,423 ----------- ----------- ----------- Income before income taxes............................................... 89,869 113,041 13,591 Provision for income taxes............................................... 16,532 19,400 (35,858) ----------- ----------- ----------- Net income............................................................... $ 73,337 $ 93,641 $ 49,449 ----------- ----------- ----------- ----------- ----------- -----------
S-2 FOUNDATION HEALTH CORPORATION SUPPLEMENTAL SCHEDULE CONDENSED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED JUNE 30, -------------------------------------- 1993 1994 1995 ------------ ---------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................................................. $ 73,337 $ 93,641 $ 49,449 Adjustments to reconcile net income to cash provided by operating activities: Amortization and depreciation...................................... 1,772 305 830 Equity in subsidiary income........................................ (49,321) (64,986) (88,552) Change in assets and liabilities, net of effects from acquisition of businesses: Other assets..................................................... (5,814) (3,560) (44,736) Other liabilities................................................ 5,252 6,466 49,604 Deferred income taxes, net....................................... 2,422 (2,457) (11,163) Investment in and advances to subsidiaries....................... (8,865) (50,301) 36,672 ------------ ---------- ------------ Net cash from (used for) operating activities............................ 18,783 (20,892) (7,896) ------------ ---------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of property and equipment.................................. (603) (673) (6,399) Decrease (increase) in short-term investments.......................... (149,900) 112,966 Purchases of available for sale investments............................ (256,450) Sales and maturities of available for sale investments................. 292,344 Purchases of held to maturity investments.............................. (12,949) Maturities of held to maturity investments............................. 10,967 Notes receivable from affiliates....................................... (11,834) (35,708) (43,352) Acquisition of businesses.............................................. (4,117) (73,242) (15,727) ------------ ---------- ------------ Net cash from (used for) investing activities (166,454) 3,343 (31,566) ------------ ---------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on notes payable and capital leases................. (9,408) (282) (382) Proceeds from issuance of notes payable and capital leases............. 124,490 30,542 Proceeds from issuance of common stock -- net.......................... 572 812 6,448 Proceeds from exercise of stock options................................ 4,328 8,403 5,920 Tax benefits related to stock options.................................. 1,669 5,410 4,645 Cash dividends received................................................ 15,800 27,400 54,997 Purchase of note receivable............................................ (775) Purchase of treasury stock, net........................................ (6,798) (27,363) (3,047) Transfer of cash to subsidiary......................................... (2,270) (52,751) (89,564) ------------ ---------- ------------ Net cash from (used for) financing activities............................ 127,608 (38,371) 9,559 ------------ ---------- ------------ Net decrease in cash and cash equivalents................................ (20,063) (55,920) (29,903) Cash and cash equivalents, beginning of year............................. 107,840 87,777 31,857 ------------ ---------- ------------ Cash and cash equivalents, end of year................................... $ 87,777 $ 31,857 $ 1,954 ------------ ---------- ------------ ------------ ---------- ------------
S-3 FOUNDATION HEALTH CORPORATION SUPPLEMENTAL INFORMATION CONCERNING PROPERTY -- CASUALTY INSURANCE (AMOUNTS IN THOUSANDS)
GROSS RESERVES FOR UNPAID DEFERRED CLAIMS AND DISCOUNT IF POLICY CLAIMS ANY, GROSS NET ACQUISITION ADJUSTMENT DEDUCTED IN UNEARNED EARNED INVESTMENT AFFILIATION WITH COSTS EXPENSES COLUMN C PREMIUMS PREMIUMS INCOME REGISTRANT COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G - -------------------------------------------------- ----------- ---------- ----------- -------- -------- ---------- Consolidated property and casualty entities....... $18,851 $ 414,330 -- $11,305 $358,051 $21,437 CLAIMS & CLAIM ADJUSTMENT EXPENSES INCURRED AMORTIZATION RELATED TO OF DEFERRED PAID CLAIMS -------------------- POLICY AND CLAIM DIRECT (1) (2) ACQUISITION ADJUSTMENT PREMIUMS AFFILIATION WITH CURRENT PRIOR YEAR COSTS COLUMN EXPENSES WRITTEN REGISTRANT COLUMN A YEAR COLUMN H I COLUMN J COLUMN K - -------------------------------------------------- -------- ---------- ------------ ----------- -------- Consolidated property and casualty entities....... $232,643 $(7,614) $24,947 $152,081 $370,408
S-4 FOUNDATION HEALTH CORPORATION SECTION 403.04b RECONCILIATION OF BEGINNING AND ENDING LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES AND EXHIBIT OF REDUNDANCIES (DEFICIENCIES) (IN THOUSANDS)
YEAR ENDED DECEMBER 31, SIX MONTHS ---------------------------------------------------------------------------------------------- ENDED JUNE 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 30, 1995 -------- ------- ------- ------- ------- -------- -------- -------- -------- -------- ---------- Liability for unpaid losses and loss adjustment expenses.... $ 33,438 $43,944 $53,170 $55,089 $76,296 $158,268 $206,993 $219,464 $268,191 $322,394 $332,663 Paid (cumulative) as of: One year later........ 11,643 13,607 14,186 11,649 20,541 59,110 103,361 106,693 115,189 79,923 Two years later....... 19,268 23,110 21,998 20,780 36,151 106,334 167,932 191,397 136,582 Three years later..... 24,503 28,268 27,849 28,389 44,665 130,826 221,087 196,998 Four years later...... 27,470 32,229 33,527 31,492 50,240 146,186 217,888 Five years later...... 29,955 37,007 35,630 34,015 53,896 149,802 Six years later....... 32,827 38,526 37,448 35,975 55,178 Seven years later..... 33,752 40,088 39,121 36,633 Eight years later..... 34,870 41,441 39,696 Nine years later...... 36,136 41,933 Ten years later....... 36,540 Liability re-estimated as of: One year later........ 41,947 51,633 53,321 51,147 75,988 160,141 218,747 251,012 262,032 308,133 Two years later....... 44,821 50,702 52,382 51,991 65,376 162,040 242,231 257,134 254,661 Three years later..... 41,663 50,506 54,349 43,651 61,098 172,981 242,533 253,668 Four years later...... 43,838 55,059 47,241 41,513 66,135 172,269 240,948 Five years later...... 43,745 48,512 46,116 44,701 66,174 171,658 Six years later....... 43,332 47,898 47,011 45,364 65,900 Seven years later..... 42,249 48,650 47,928 45,122 Eight years later..... 42,528 49,625 47,743 Nine years later...... 43,677 49,686 Ten years later....... 43,740 Redundancy (deficiency)........... $(10,302) $(5,742) $ 5,427 $ 9,967 $10,396 $(13,390) $(33,955) $(34,204) $ 13,530 $ 14,261 Net reserve -- end of period................. $322,394 $332,663 Reinsurance recoverable on unpaid losses and loss adjustment expense................ 90,366 81,667 -------- ---------- Gross reserve -- end of period................. 412,760 414,330 Net re-estimated reserve -- end of period....... 308,133 Re-estimated reinsurance recoverable............ 93,339 -------- Gross re-estimated reserve -- end of period................. 401,472 -------- Gross cumulative redendancy............. $ 11,288 -------- --------
S-5 FOUNDATION HEALTH CORPORATION ANNUAL REPORT ON FORM 10-K YEAR ENDED JUNE 30, 1995
EXHIBIT NUMBER DESCRIPTION SEQUENTIAL PAGE - ----------- ----------------------------------------------------------------------------------------- --------------- 3.1(1) Restated Certificate of Incorporation of Foundation Health Corporation. 3.2(3) Amended and Restated Bylaws of Foundation Health Corporation. 4.1(6) Specimen of Foundation Health Corporation Common Stock certificate with Rights Legend. 4.2(6) Form of Rights Certificate (incorporated by reference to Foundation Health Corporation's Form 8-A dated September 27, 1991). 4.3(9) Form of Indenture. 4.4(9) Form of Senior Notes. 4.5 1993 Nonstatutory Stock Option Plan of Foundation Health Corporation, as amended. 10.3(16) Executive Incentive Plan of Foundation Health Corporation. 10.20(2) Lease Agreement between HAS-First Associates and Foundation Health Corporation dated August 1, 1988 and form of amendment thereto. 10.38(2) Stock Purchase and Asset Sale Agreement dated November 1, 1989 between Foundation Health Corporation and Foundation Health Federal Services, Inc. and amendment thereto. 10.39(2) Form of Indemnification Agreement. 10.53(1) Employee Stock Purchase Plan. 10.61(3) United States Government DoD Contract No. MDA 903-91-C-0155 between DoD and Foundation Health Federal Services, Inc. dated June 7, 1991. 10.62(4) Asset Purchase Agreement dated July 3, 1991 between Foundation Health Preferred Administrators and Preferred Administrators, Inc. 10.63(4) Asset Purchase Agreement dated December 1, 1991 among Foundation Health Pharmaceutical Services, Inc., Apollo Billing Service, and as to certain parts thereof, Anthony Ponzo, Patricia Ponzo and Robert Rhoads. 10.64(3) Agreement and Plan of Reorganization among Foundation Health Corporation, FH Acquisition Corporation and National Health Care Systems, Inc. 10.65(4) Stock Purchase Agreement dated February 14, 1991 between the Company and Western Universal Corporation. 10.67(5) Stock Purchase Agreement between Foundation Health Corporation, American Travelers Corporation and American Travelers Life Insurance Company dated March 31, 1992. 10.68(5) Stock and Asset Purchase Agreement among Foundation Health Corporation, Thomas R. and Linda S. Leonard and Bayport Leasing Company dated as of May 18, 1992. 10.69(5) Stock Purchase Agreement among Foundation Health Corporation, Deborah S. Greenfield and James Thompson dated as of May 15, 1992.
i
EXHIBIT NUMBER DESCRIPTION SEQUENTIAL PAGE - ----------- ----------------------------------------------------------------------------------------- --------------- 10.70(6) Stock Purchase Agreement among Foundation Health Corporation and the holders of common stock of Allstate Optical Services, Inc. dated as of June 8, 1992. 10.71(12) Agreement and Plan of Reorganization among Foundation Health Corporation, FHC Acquisition Corporation, Occupational Health Services, Inc. and the OHS shareholders dated July 31, 1992. 10.72(6) Agreement and Plan of Reorganization dated as of July 14, 1992, by and among Foundation Health Corporation, Century Medicorp, Inc. and FH Acquisition Corporation. 10.73(7) Century MediCorp, Inc. 1983 Incentive Stock Option Plan. 10.74(7) Century MediCorp, Inc. 1988 Nonstatutory Stock Option Plan. 10.75(7) Century MediCorp, Inc. 1989 Nonstatutory Stock Option Plan. 10.76(7) Century MediCorp, Inc. 1991 Nonstatutory Stock Option Plan. 10.79(9) Agreement and Plan of Reorganization among Foundation Health Corporation, FHC Acquisition Corporation and Business Insurance Corporation dated April 10, 1993. 10.80(10) 1989 Stock Plan of Business Insurance Corporation. 10.81(11) 1992 Nonstatutory Stock Option Plan of Foundation Health Corporation. 10.82(13) MDA 903-91-C-0155 Modification for Implementation of BRAC expansion sites in Louisiana and Texas. 10.83(14) Employment Agreement between Foundation Health Corporation and Daniel D. Crowley dated April 30, 1994. 10.85(14) Employment Agreement between Foundation Health Corporation and Jeffrey L. Elder dated April 22, 1994. 10.86(14) Employment Agreement between Foundation Health Corporation and Steven D. Tough dated April 22, 1994. 10.87(14) Employment Agreement between Foundation Health Corporation and Kirk A. Benson dated April 22, 1994. 10.88(14) Employment Agreement between Foundation Health Corporation and Allen J. Marabito dated April 22, 1994. 10.89(14) Agreement and Plan of Reorganization dated as of May 24, 1994 among Foundation Health Corporation, FHC Acquisition Subsidiary, Southern Colorado Health Plan, Inc., the stockholders of Southern Colorado Health Plan, Inc. and Southern Colorado Health Management, Inc. 10.90(14) Agreement and Plan of Reorganization dated as of May 2, 1994 among Foundation Health Corporation, The Noetics Group, Reviewco and the other parties signatory thereto. 10.91(15) Agreement and Plan of Reorganization dated as of June 27, 1994 by and among Foundation Health Corporation, CareFlorida Health Systems, Inc. and the other parties signatory thereto. 10.92(16) Agreement and Plan of Merger dated as of July 28, 1994 between Foundation Health Corporation and Intergroup Healthcare Corporation. 10.93(16) Agreement and Plan of Merger dated as of July 28, 1994 between Foundation Health Corporation and Thomas-Davis Medical Centers, P.C.
ii
EXHIBIT NUMBER DESCRIPTION SEQUENTIAL PAGE - ----------- ----------------------------------------------------------------------------------------- --------------- 10.96(13) Foundation Health Corporation Directors' Retirement Plan. 10.97(17) $300 Million Revolving Credit Agreement dated as of December 5, 1994 among Foundation Health Corporation, as Borrower, Citicorp USA, Inc., as Administrative Agent, Wells Fargo Bank, N.A. and NationsBank of Texas, N.A., as Co-Agents and Citicorp Securities, Inc., as Arranger, and the Other Banks and Financial Institutions Party thereto. 10.98 Participation Agreement dated as of May 25, 1995 among Foundation Health Medical Services, as Construction Agent and Lessee, Foundation Health Corporation, 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 Foundation Health Corporation for the benefit of First Security Bank of Utah, N.A. 10.99 Foundation Health Corporation Deferred Compensation Plan, as amended and restated. 10.100 Foundation Health Corporation Supplemental Executive Retirement Plan, as amended and restated. 10.101 Foundation Health Corporation Executive Retiree Medical Plan, as amended and restated. 10.102 Foundation Health Corporation 1990 Stock Option Plan, as amended and restated effective April 20, 1994. 10.103 Foundation Health Corporation Profit Sharing and 401(k) Plan (as amended and restated effective January 1, 1994). 11.0 Computation of Earnings per Share. 12.0 Computation of Ratios. 13.1 Report of Ernst & Young LLP. 13.2 Report of Stevenson, Jones & Holmaas, P.C. 13.3 Report of Coopers & Lybrand L.L.P. 21.0 Subsidiaries of Foundation Health Corporation. 23.1 Consent of Deloitte & Touche LLP. 23.2 Consent of Ernst & Young LLP. 23.3 Consent of Stevenson, Jones & Holmaas, P.C. 23.4 Consent of Coopers & Lybrand L.L.P. 24.1 Power of Attorney (included on page i). - ------------------------ (1) Incorporated by reference to the Exhibits to Registrant's Registration Statement on Form S-1 (File No. 33-38867). (2) Incorporated by reference to the Exhibits to Registrant's Registration Statement on Form S-1 (File No. 33-34963). (3) Incorporated by reference to the Exhibits to Registrant's Registration Statement on Form S-4 (File No. 33-42690).
iii (4) Incorporated by reference to the Exhibits to Registrant's Registration Statement on Form S-1 (File No.33-45513). (5) Incorporated by reference to the Exhibits to Registrant's Form 10-Q for the quarter ended March 31, 1992 filed with the Commission on May 14, 1992. (6) Incorporated by reference to the Exhibits to Registrant's Registration Statement on Form S-4 (File No. 33-51648). (7) Incorporated by reference to the Exhibits to Registrant's Registration Statement on Form S-8 (File No. 33-53468). (8) Incorporated by reference to the Exhibits to Registrant's Form 8-K filed on October 30, 1992. (9) Incorporated by reference to the Exhibits to Registrant's Registration Statement on Form S-3 (File No. 33-61684). (10) Incorporated by reference to the Exhibits to Registrant's Registration Statement on Form S-8 (File No. 33-67062). (11) Incorporated by reference to the Exhibits to Registrant's Registration Statement on Form S-8 (File No. 33-48561). (12) Incorporated by reference to the Exhibits to Registrant's Registration Statement on Form S-4 (File No. 33-51992). (13) Incorporated by reference to the Exhibits to Registrant's Form 10-K for the year ended June 30, 1994 filed with the Commission on September 24, 1994. (14) Incorporated by reference to the Exhibits to Registrant's Registration Statement on Form S-4 (File No. 33-80432). (15) Incorporated by reference to the Exhibits to Registrant's current report on Form 8-K filed with the Commission on June 28, 1994. (16) Incorporated by reference to the Exhibits to Registrant's current report on Form 8-K filed with the Commission on August 9, 1994. (17) Incorporated by reference to the Exhibits to Registrant's quarterly report on Form 10-Q for the quarter ended December 31, 1994 filed with the Commission on February 14, 1995.
iv EX-4.5 2 EXHIBIT 4.5 AMENDED AND RESTATED 1993 NONSTATUTORY STOCK OPTION PLAN OF FOUNDATION HEALTH CORPORATION (As amended and restated effective September 7, 1995) SECTION I. ESTABLISHMENT AND PURPOSE The Plan is being established to offer selected employees of the Company an opportunity to acquire a proprietary interest in the success of FHC, or to increase such interest, by exercising Options to purchase Shares of Stock. Options granted under the Plan are Nonstatutory Options. SECTION II. DEFINITIONS A. "BOARD OF DIRECTORS" shall mean the Board of Directors of FHC, as constituted from time to time. B. "CODE" shall mean the Internal Revenue Code of 1986, as amended. C. "COMMITTEE" shall mean a committee of the Board of Directors, as described in Section III (A). D. "COMPANY" shall mean Foundation Health Medical Group, Inc., a California professional medical corporation, and Thomas-Davis Medical Centers, P.C., an Arizona professional medical corporation, and such affiliated professional medical corporations as may be established from time to time by FHC. E. "EMPLOYEE" shall mean any individual who is an employee of the Company or any professional medical corporation of which the Company owns at least 25%, and who is considered a full-time equivalent employee for purposes of employee benefits provided by the Company or such professional medical corporation of which the Company owns at least 25%. F. "EXERCISE PRICE" shall mean the amount for which one Share may be purchased upon exercise of an Option, as specified in the applicable Stock Option Agreement. G. "FAIR MARKET VALUE" shall mean the market price of Stock, determined by the Committee as follows: (i) If the Stock was traded over-the-counter on the date in question but was not classified as a national market issue, then the Fair Market Value shall be equal to the mean between the last reported representative bid and asked prices quoted by the NASDAQ system for such date, or if such date is not a trading day, on the last trading day immediately preceding such date; (ii) If the Stock was traded over-the-counter on the date in question and was classified as a national market issue, then the Fair Market Value shall be equal to the last-transaction price quoted by the NASDAQ system for such date, or if such date is not a trading day, on the last trading day immediately preceding such date; (iii) If the Stock was traded on a stock exchange on the date in question, then the Fair Market Value shall be equal to the closing price reported by the applicable composite-transactions report for such date, or if such date is not a trading day, on the last trading day immediately preceding such date; and (iv) If none of the foregoing provisions is applicable, then the Fair Market Value shall be determined by the Committee in good faith on such basis as it deems appropriate. In all cases, the determination of Fair Market Value by the Committee shall be conclusive and binding on all persons. H. "FHC" shall mean Foundation Health Corporation, a Delaware corporation. I. "NONSTATUTORY OPTION" shall mean a stock option not described in section 422(b) or 423 (b) of the Code. J. "OPTION" shall mean a Nonstatutory Option granted under the Plan and entitling the 1 holder to purchase Shares. K. "OPTIONEE" shall mean an individual who holds an Option. L. "PLAN" shall mean this 1993 Nonstatutory Stock Option Plan of Foundation Health Corporation, as amended from time to time. M. "SERVICE" shall mean service as an Employee. N. "SHARE" shall mean one share of Stock, as adjusted in accordance with Section VIII (if applicable). O. "STOCK" shall mean the Common Stock, $.01 par value per share, of FHC. P. "STOCK OPTION AGREEMENT" shall mean the agreement between FHC and an Optionee which contains the terms, conditions and restrictions pertaining to his or her Option. Q. "SUBSIDIARY" shall mean any corporation, if the Company and/or one or more other Subsidiaries own not less than 50 percent of the total combined voting power of all classes of outstanding stock of such corporation. A corporation that attains the status of a Subsidiary on a date after the adoption of the Plan shall be considered a Subsidiary commencing as of such date. R. "TOTAL AND PERMANENT DISABILITY" shall mean that the Optionee is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted, or can be expected to last, for a continuous period of not less than 12 months. SECTION III. ADMINISTRATION. A. COMMITTEE MEMBERSHIP. The Plan shall be administered by the Committee, which shall consist of two or more members of the Board of Directors. The members of the Committee shall be appointed by the Board of Directors. If no Committee has been appointed, the entire Board of Directors shall constitute the Committee. B. COMMITTEE PROCEDURES. The Board of Directors shall designate one of the members of the Committee as chairperson. The Committee may hold meetings at such times and places as it shall determine. The acts of a majority of the Committee members present at meetings at which a quorum exists, or acts reduced to or approved in writing by all Committee members, shall be valid acts of the Committee. C. COMMITTEE RESPONSIBILITIES. Subject to the provisions of the Plan, the Committee shall have full authority and discretion to take the following actions: 1. To interpret the Plan and to apply its provisions; 2. To adopt, amend or rescind rules, procedures and forms relating to the Plan; 3. To authorize any person to execute, on behalf of FHC, any instrument required to carry out the purposes of the Plan; 4. To determine when Options are to be granted under the Plan; 5. To select the Optionees; 6. To determine the number of Shares to be made subject to each Option; 7. To prescribe the terms and conditions of each Option, including (without limitation) the Exercise Price, and to specify the provisions of the Stock Option Agreement relating to such Option; 8. To amend any outstanding Stock Option Agreement, subject to applicable legal restrictions and to the consent of the Optionee who entered into such agreement; 9. To prescribe the consideration for the grant of each Option under the Plan and to determine the sufficiency of such consideration; and 10. To take any other actions deemed necessary or advisable for the administration of the Plan. All decisions, interpretations and other actions of the Committee shall be final and binding on all Optionees and all persons deriving their rights from an Optionee. No member of the Committee shall be liable for any action that he or she has taken or has failed to take in good faith with 2 respect to the Plan or any Option. SECTION IV. ELIGIBILITY. EMPLOYEES. Employees shall be eligible for designation as Optionees by the Committee. SECTION V. STOCK SUBJECT TO PLAN. A. BASIC LIMITATION. Shares offered under the Plan shall be authorized but unissued Shares or treasury Shares. The aggregate number of Shares which may be issued under the Plan upon exercise of Options shall not exceed 1,600,000 Shares, subject to adjustment pursuant to Section VIII. The number of Shares which are subject to Options outstanding at any time under the Plan shall not exceed the number of Shares which then remain available for issuance under the Plan. FHC, during the term of the Plan, shall at all times reserve and keep available sufficient Shares to satisfy the requirements of the Plan. B. ADDITIONAL SHARES. In the event that any outstanding Option for any reason expires or is canceled or otherwise terminated, the Shares allocable to the unexercised portion of such Option shall again be available for the purposes of the Plan. In the event that Shares issued under the Plan are acquired by FHC pursuant to a forfeiture provision, a right of repurchase or a right of first refusal, such Shares shall again be available for the purposes of the Plan. SECTION VI. TERMS AND CONDITIONS OF OPTIONS. A. TERMS. 1. STOCK OPTION AGREEMENT. Each grant of an Option under the Plan shall be evidenced by a Stock Option Agreement between the Optionee and the Company. Such Option shall be subject to all applicable terms and conditions of the Plan and may be subject to any other terms and conditions which the Committee deems appropriate for inclusion in a Stock Option Agreement. The provisions of the various Stock Option Agreements entered into under the Plan need not be identical. 2. NUMBER OF SHARES. Each Stock Option Agreement shall specify the number of Shares that are subject to the Option and shall provide for the adjustment of such number in accordance with Section VIII. 3. EXERCISE PRICE. Each Stock Option Agreement shall specify the Exercise Price which shall be 100 percent of the Fair Market Value of a Share on the date of grant. The Exercise Price shall be payable in a form described in Section VII. 4. EXERCISABILITY AND TERM. Each Stock Option Agreement shall specify the date when all or any installment of the Option is to become exercisable. The vesting of any Option shall be determined by the Committee at its sole discretion. A Stock Option Agreement may provide for accelerated exercisability in the event of the Optionee's death, Total and Permanent Disability or retirement, a change in control with respect to FHC or other events. The Stock Option Agreement shall also specify the term of the Option. The term shall not exceed 10 years from the date of grant. Subject to the preceding sentence, the Committee at its sole discretion shall determine when an Option is to expire. B. WITHHOLDING TAXES. As a condition to the exercise of an Option, the Optionee shall make such arrangements as the Committee may require for the satisfaction of any federal, state, local or foreign withholding tax obligations that may arise in connection with such exercise. C. NONTRANSFERABILITY. No Option shall be transferable by the Optionee other than by will, by a beneficiary designation executed by the Optionee and delivered to FHC or by the laws of descent and distribution. An Option may be exercised during the lifetime of the Optionee only by him or her or by his or her guardian or legal representative. No Option or interest therein may be transferred, assigned, pledged or hypothecated by the Optionee during his 3 or her lifetime, whether by operation of law or otherwise, or be made subject to execution, attachment or similar process. D. TERMINATION OF SERVICE (EXCEPT BY DEATH). If an Optionee's Service terminates for any reason other than his or her death, then his or her Option(s) shall expire on the earliest of the following occasions: 1. The expiration date determined pursuant to Subsection A(4) above; 2. The date 90 days after the termination of his or her Service for any reason other than Total and Permanent Disability; or 3. The date 12 months after the termination of his or her Service by reason of Total and Permanent Disability. The Optionee may exercise all or part of his or her Option(s) at any time before the expiration of such Option(s) under the preceding sentence, but only to the extent that such Option(s) had become exercisable before his or her Service terminated or became exercisable as a result of the termination. The balance of such Option(s) shall lapse when the Optionee's Service terminates. In the event that the Optionee dies after the termination of his or her Service but before the expiration of his or her Option(s), all or part of such Option(s) may be exercised (prior to expiration) by the executors or administrators of the Optionee's estate or by any person who has acquired such Option(s) directly from him or her by bequest, beneficiary designation or inheritance, but only to the extent that such Option(s) had become exercisable before his or her Service terminated or became exercisable as a result of the termination. E. LEAVES OF ABSENCE. For purposes of Subsection D above, Service shall be deemed to continue while the Optionee is on a military leave, sick leave or other bona fide leave of absence (as determined by the Committee) which has been approved by the Company in writing. F. DEATH OF OPTIONEE. If an Optionee dies while he or she is in Service, then his or her Option(s) shall expire on the earlier of the following dates: 1. The expiration date determined pursuant to Subsection A(4) above; or 2. The date 12 months after his or her death. All or part of the Optionee's Option(s) may be exercised at any time before the expiration of such Option(s) under the preceding sentence by the executors or administrators of his or her estate or by any person who has acquired such Option(s) directly from him or her by bequest, beneficiary designation or inheritance, but only to the extent that such Option(s) had become exercisable before his or her death or became exercisable as a result of his or her death. The balance of such Option(s) shall lapse when the Optionee dies. G. NO RIGHTS AS A STOCKHOLDER. An Optionee, or a transferee of an Optionee, shall have no rights as a stockholder of FHC with respect to any Shares covered by his or her Option until the date of the issuance of a stock certificate for such Shares. No adjustments shall be made, except as provided in Section VIII. H. MODIFICATION, EXTENSION AND ASSUMPTION OF OPTIONS. Within the limitations of the Plan, the Committee may modify, extend or arrange for the assumption of outstanding Options or may accept the cancellation of outstanding Options (whether granted by FHC or another issuer) in return for the grant of new Options for the same or a different number of Shares and at the same or a different price. The foregoing notwithstanding, no modification of an Option shall, without the consent of the Optionee, impair his or her rights or increase his or her obligations under such Option. I. RESTRICTIONS ON TRANSFER OF SHARES. Any Shares issued upon exercise of an Option shall be subject to such special forfeiture conditions, rights of repurchase, rights of first refusal and other transfer restrictions as the Committee may determine. Such restrictions shall be set forth in the applicable Stock Option Agreement and shall apply in addition to any general restrictions that may apply to all holders of Shares. SECTION VII. PAYMENT FOR SHARES. A. GENERAL RULE. The entire Exercise Price of Shares issued under the Plan shall 4 be payable in lawful money of the United States of America at the time when such Shares are purchased, except that FHC (at its sole discretion) may accept payment in one or more of the forms described below: 1. SURRENDER OF STOCK. To the extent that this Subsection (1) is applicable, payment may be made all or in part with Shares which have already been owned by the Optionee or his or her representative for more than 12 months and which are surrendered to FHC in good form for transfer. Such Shares shall be valued at their Fair Market Value on the date when the new Shares are purchased under the Plan. 2. EXERCISE/SALE. To the extent that this Subsection (2) is applicable, payment may be made by the delivery (on a form prescribed by FHC) of an irrevocable direction to a securities broker approved by FHC to sell Shares and to deliver all or part of the sales proceeds to FHC in payment of all or part of the Exercise Price and any withholding taxes. 3. EXERCISE/PLEDGE. To the extent that this Subsection (3) is applicable, payment may be made by the delivery (on a form prescribed by FHC) of an irrevocable direction to pledge Shares to a securities broker or lender approved by FHC, as security for a loan and to deliver all or part of the loan proceeds to FHC in payment of all or part of the Exercise Price and any withholding taxes. 4. PROMISSORY NOTE. To the extent that this Subsection (4) is applicable, a portion of the Exercise Price of Shares issued under the Plan may be payable by a full-recourse promissory note, provided that (i) the par value of such Shares must be paid in lawful money of the United States of America at the time when such Shares are purchased, (ii) the Shares are security for payment of the principal amount of the promissory note and interest thereon, and (iii) the interest rate payable under the terms of the promissory note shall be no less than the minimum rate (if any) required to avoid the imputation of additional interest under the Code. Subject to the foregoing, the Committee (in its sole discretion) shall specify the term, interest rate, amortization requirements (if any), and other provisions of such note. SECTION VIII. ADJUSTMENT OF SHARES. A. GENERAL. In the event of a subdivision of the outstanding Stock, a declaration of a dividend payable in Shares, a declaration of a dividend payable in a form other than Shares in an amount that has a material effect on the value of Shares, a combination or consolidation of the outstanding Stock (by reclassification or otherwise) into a lesser number of Shares, a recapitalization or a similar occurrence, the Committee shall make appropriate adjustments in one or more of (i) the number of Shares available for future grants under Section V, (ii) the number of Shares covered by each outstanding Option, or (iii) the Exercise Price under each outstanding Option. B. MERGER; CONSOLIDATION. In the event that FHC is a party to a merger or consolidation, outstanding Options shall be subject to the agreement of merger or consolidation. Such agreement may provide, without limitation, (i) for the assumption of outstanding Options by the surviving corporation or its parent, (ii) for their continuation by FHC, if FHC is a surviving corporation, (iii) for payment of a cash settlement equal to the difference between the amount to be paid for one Share under such agreement and the Exercise Price, or (iv) for the acceleration of their exercisability followed by the cancellation of Options not exercised. In the case of Options that have been outstanding for less than 12 months, a cancellation need not be preceded by an acceleration. C. RESERVATION OF RIGHTS. Except as provided in this Section VIII, an Optionee shall have no rights by reason of (i) any subdivision or consolidation of shares of Stock of any class, (ii) the payment of any dividend, or (iii) any other increase or decrease in the number of shares of stock of any class. Any issue by FHC of shares of stock of any class, or securities convertible into shares of stock of any class, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or Exercise Price of Shares subject to an Option. The grant of an Option pursuant to the Plan shall not affect in any way the right or 5 power of FHC or the Company to make adjustments, reclassification, reorganizations or changes of its capital or business structure, to merge or consolidate or to dissolve, liquidate, sell or transfer all or any part of its business or assets. SECTION IX. SECURITIES LAWS. Shares shall not be issued under the Plan unless the issuance and delivery of such Shares complies with (or is exempt from) all applicable requirements of law, including (without limitation) the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder, state securities laws and regulations, and the regulations of any stock exchange on which FHC's securities may then be listed. SECTION X. NO RIGHTS TO SERVICE. No provision of the Plan, nor any Option granted under the Plan, shall be construed to give any person any right to become, to be treated as, or to remain an Employee. FHC, the Company and Subsidiaries and affiliates of the Company and FHC reserve the right to terminate any person's Service at any time and for any reason, subject to rights under employment agreements, if any. SECTION XI. DURATION AND AMENDMENTS. A. TERM OF THE PLAN. The Plan is effective as of October 1, 1993. The Plan shall terminate automatically on October 1, 2003 and may be terminated on any earlier date pursuant to Subsection B below. B. RIGHT TO AMEND OR TERMINATE THE PLAN. The Committee may amend, suspend or terminate the Plan at any time and for any reason except the consent of FHC shall be required to add shares available for the grant of options. C. EFFECT OF AMENDMENT OR TERMINATION. No Shares shall be issued under the Plan after the termination thereof, except upon exercise of an Option granted prior to such termination. The termination of the Plan, or any amendment thereof, shall not affect any Share previously issued or any Option previously granted under the Plan. SECTION XII. EXECUTION. FHC has caused its authorized officer to execute this amended and restated Plan as of September 7, 1995. FOUNDATION HEALTH CORPORATION By __________________________________ Daniel D. Crowley President and Chief Executive Officer 6 EX-10.98 3 EXHIBIT 10.98 PARTICIPATION AGREEMENT Dated as of May 25, 1995 among FOUNDATION HEALTH MEDICAL SERVICES, as Construction Agent and as Lessee, FOUNDATION HEALTH CORPORATION, as Guarantor, FIRST SECURITY BANK OF UTAH, N.A., not individually, except as expressly stated herein, but solely as Owner Trustee under the FH Trust 1995-1 SUMITOMO BANK LEASING AND FINANCE, INC. and 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 TABLE OF CONTENTS
PAGE SECTION 1. THE LOANS. . . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 2. HOLDER ADVANCES . . . . . . . . . . . . . . . . . . . . . 1 SECTION 3. SUMMARY OF TRANSACTIONS. . . . . . . . . . . . . . . . . . 2 3.1. Operative Agreements. . . . . . . . . . . . . . . . . . . . 2 3.2. Property Purchase . . . . . . . . . . . . . . . . . . . . . 2 3.3. Construction of Improvements; Lease or Disposition of Properties . . . . . . . . . . . . . . . . . 2 3.4. Holder Advances . . . . . . . . . . . . . . . . . . . . . . 3 SECTION 4. THE CLOSINGS . . . . . . . . . . . . . . . . . . . . . . . 3 4.1. Initial Closing Date. . . . . . . . . . . . . . . . . . . . 3 4.2. Initial Closing Date; Property Closing Dates. . . . . . . . 3 SECTION 5. FUNDING OF ADVANCES; REPORTING REQUIREMENTS ON COMPLETION DATE; LESSEE DELIVERY OF NOTICES . . . . . . . . . . . . . . . . . . . . . . 3 5.1. General . . . . . . . . . . . . . . . . . . . . . . . . . . 3 5.2. Procedures for Funding. . . . . . . . . . . . . . . . . . . 3 5.3. Conditions to the Holders' and the Lenders' Obligations to Advance funds for the Acquisition of Property . . . . . . . 4 5.4. Conditions to the Holders' and the Lenders' Obligations to Make Construction Advances for the Commencement of Construction of any Improvements . . . . . . . . . . . . . . . . . . . . 6 5.5. Conditions to the Holders' and the Lenders' Obligations to Make Construction Advances for the Ongoing Construction on any Property prior to the Construction Period Termination Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 5.6. Advances Subsequent to Completion Date; Reporting and Delivery Requirements on Completion Date . . . . . . . . . . . . . . . . . . . . . . 8 5.7. Construction Agent Delivery of Allocation Notice, Notice Regarding the Holder Construction Property Cost and Construction Budget Modifications. . . . . . . . . . . . . . . . . . . . 9 SECTION 6. CONDITIONS OF THE INITIAL CLOSING. . . . . . . . . . . . . 9 6.1. Conditions to the Lessor's and the Holders' Obligations . . 9 6.2. Conditions to the Lessee's Obligations. . . . . . . . . . . 11 6.3. Conditions to the Obligations . . . . . . . . . . . . . . . 13 SECTION 7. REPRESENTATIONS AND WARRANTIES ON THE INITIAL CLOSING DATE . . . 13 7.1. Representations and Warranties of the Holders . . . . . . . 13 7.2. Representations and Warranties of the Owner Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . 15 7.3. Representations and Warranties of the Construction Agent and the Lessee . . . . . . . . . . . . . 18 7.4. Representations and Warranties of the Agent . . . . . . . . 22 SECTION 8. REPRESENTATIONS AND WARRANTIES ON FUNDING DATES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 8.1. Representations and Warranties on Property Closing Dates . . . . . . . . . . . . . . . . . . . . . . . 23 8.2. Representations and Warranties Upon Initial Construction Advances . . . . . . . . . . . . . . . . . . . . . . 25 8.3. Representations and Warranties Upon the Date of Each Construction Advance that is not an Initial Advance . . . . . . . . . . . . . . . . . . . . . . 27 SECTION 9. PAYMENT OF CERTAIN EXPENSES. . . . . . . . . . . . . . . . 28 9.1. Transaction Expenses. . . . . . . . . . . . . . . . . . . . 28 9.2. Brokers' Fees and Stamp Taxes . . . . . . . . . . . . . . . 29 9.3. Certain Fees and Expenses . . . . . . . . . . . . . . . . . 29 9.4. Unused Fee. . . . . . . . . . . . . . . . . . . . . . . . . 29 SECTION 10. OTHER COVENANTS AND AGREEMENTS. . . . . . . . . . . . . . 30 10.1. Cooperation with the Construction Agent or the Lessee. . . 30 10.2. Covenants of the Owner Trustee and the Holders . . . . . . 30 10.3. Lessee and Guarantor Covenants, Consent and Acknowledgment 34 10.4. Sharing of Certain Payments. . . . . . . . . . . . . . . . 34 10.5. Grant of Easements, etc. . . . . . . . . . . . . . . . . . 35 10.6. Construction Period Termination Date . . . . . . . . . . . 35 SECTION 11. CREDIT AGREEMENT AND TRUST AGREEMENT. . . . . . . . . . . 36 11.1. Construction Agent's and Lessee's Credit Agreement Rights . . . . . . . . . . . . . . . . . . . . . 36 11.2. Construction Agent's and Lessee's Trust Agreement Rights . . . . . . . . . . . . . . . . . . . . . 37 SECTION 12. TRANSFER OF INTEREST. . . . . . . . . . . . . . . . . . . 37 12.1. Restrictions on Transfer . . . . . . . . . . . . . . . . . 37 12.2. Effect of Transfer . . . . . . . . . . . . . . . . . . . . 38 SECTION 13. INDEMNIFICATION.. . . . . . . . . . . . . . . . . . . . . 38 13.1. General Indemnity. . . . . . . . . . . . . . . . . . . . . 38 13.2. General Tax Indemnity. . . . . . . . . . . . . . . . . . . 41 13.3. Joint and Several Obligations of the Indemnity Provider. . 46 SECTION 14. MISCELLANEOUS.. . . . . . . . . . . . . . . . . . . . . . 46 14.1. Survival of Agreements . . . . . . . . . . . . . . . . . . 46 14.2. No Broker, etc . . . . . . . . . . . . . . . . . . . . . . 46 14.3. Notices. . . . . . . . . . . . . . . . . . . . . . . . . . 46 14.4. Counterparts . . . . . . . . . . . . . . . . . . . . . . . 48 14.5. Amendments and Termination . . . . . . . . . . . . . . . . 48 14.6. Headings, etc. . . . . . . . . . . . . . . . . . . . . . . 48 14.7. Parties in Interest. . . . . . . . . . . . . . . . . . . . 48 14.8. GOVERNING LAW; SUBMISSION TO JURISDICTION; WAIVER OF JURY TRIAL; FINAL AGREEMENT. . . . . . . . . . . 48 14.9. Severability . . . . . . . . . . . . . . . . . . . . . . . 49 14.10. Liability Limited. . . . . . . . . . . . . . . . . . . . . 50 14.11. Rights of Lessee . . . . . . . . . . . . . . . . . . . . . 51 14.12. Further Assurances . . . . . . . . . . . . . . . . . . . . 51 14.13. Calculations under Operative Agreements. . . . . . . . . . 52 14.14. Confidentiality. . . . . . . . . . . . . . . . . . . . . . 52
EXHIBITS A - Forms of Requisition - Sections 4.2 and 5.2 B - Officer's Certificate - Section 5.6 C - Legal Opinion - Section 6.1(c) D - Officer's Certificate - Section 6.1(g) E - Officer's Certificate - Section 6.1(h) F - Officer's Certificate - Section 6.2(d) G - Officer's Certificate - Section 6.2(e) H - Legal Opinion - Section 6.2(f) I - Form of Limited Power of Attorney Appendix A Rules of Usage and Definitions PARTICIPATION AGREEMENT PARTICIPATION AGREEMENT, dated as of May 25, 1995 (this "Agreement"), is by and among FOUNDATION HEALTH MEDICAL SERVICES, a California corporation ("Lessee" or the "Construction Agent"); FOUNDATION HEALTH CORPORATION, a Delaware corporation (the "Guarantor"), FIRST SECURITY BANK OF UTAH, N.A., a national banking association, not individually (in its individual capacity, the "Trust Company"), except as expressly stated herein, but solely as Owner Trustee under the FH Trust 1995-1 (the "Owner Trustee" or the "Lessor"); NATIONSBANK OF TEXAS, N.A., a national banking association, as Administrative Agent (in such capacity, the "Agent") for the Lenders, the Lenders (as herein defined); and SUMITOMO BANK LEASING AND FINANCE, INC., a Delaware corporation, THE BANK OF NOVA SCOTIA, a Canadian corporation, and NATIONSBANK OF TEXAS, N.A., a national banking association, as holders of the certificates issued with respect to the FH Trust 1995-1 (collectively, the "Holders" and individually, a "Holder"). Capitalized terms used but not otherwise defined in this Agreement shall have the meanings set forth in Appendix A hereto. In consideration of the mutual agreements herein contained and other good and valuable consideration, receipt of which is hereby acknowledged, the parties hereto hereby agree as follows: SECTION 1. THE LOANS. The Lenders agree to make loans to the Lessor from time to time in an aggregate principal amount of up to $58,200,000 in order for the Lessor to acquire the Properties and certain Improvements and to develop and construct certain improvements in accordance with the Agency Agreement and the terms and provisions hereof, and in consideration of the receipt of such Loan proceeds, the Lessor will issue the Notes (together with any note or notes issued in exchange or substitution therefor in accordance with the Credit Agreement, the "Notes"). The Loans shall be made and the Notes shall be issued pursuant to the Credit Agreement. Pursuant to Section 5 of this Agreement and Section 2 of the Credit Agreement, the Lenders agree to make the Loans from time to time at the request of the Construction Agent in consideration for the Construction Agent agreeing for the benefit of the Lessor, pursuant to the Agency Agreement, to acquire the Properties, to acquire the Equipment, to construct certain Improvements and to cause the Lessee to lease the Properties, each in accordance with the Agency Agreement and the other Operative Agreements. The Loans and the obligations of the Lessor under the Credit Agreement shall be secured by the Collateral. SECTION 2. HOLDER ADVANCES. Subject to the terms and conditions of this Agreement and in reliance on the representations and warranties of each of the parties hereto contained herein or made pursuant hereto on the Initial Closing Date, each Property Closing Date and each other date Advances are made in accordance with Section 5 hereof, each Holder shall make a Holder Advance on a pro rata basis to the Owner Trustee with respect to the FH Trust 1995-1 based on its Holder Commitment in an amount in immediately available funds such that the aggregate of all Holder Advances shall be three percent (3%) of the amount of the Advance being funded on such date; provided, no Holder shall be obligated for any Holder Advance in excess of its pro rata share of the Available Holder Commitment. No prepayment or any other payment with respect to any Advance shall be permitted such that the Holder Advance with respect to such Advance is less than 3% of the outstanding amount of such Advance, except in connection with termination or expiration of the Term or in connection with the exercise of remedies relating to the occurrence of a Lease Event of Default. The representations, warranties, covenants and agreements of the Holders herein and in the other Operative Agreements are several, and not joint or joint and several. SECTION 3. SUMMARY OF TRANSACTIONS. A. OPERATIVE AGREEMENTS. On the date hereof (the "Initial Closing Date"), each of the respective parties hereto and thereto shall execute and deliver this Agreement, the Lease, the Guaranty Agreement, the Agency Agreement, the Credit Agreement, the Trust Agreement, the Security Agreement and such other documents, instruments, certificates and opinions of counsel as agreed to by the parties hereto. B. PROPERTY PURCHASE. On each Property Closing Date and subject to the terms and conditions of this Agreement (a) the Holders will each make a Holder Advance in accordance with Section 2 of this Agreement and the terms and provisions of the Trust Agreement, (b) the Lenders will make Loans in accordance with Section 5 of this Agreement and the terms and provisions of the Credit Agreement, and (c) the Lessor will purchase the applicable Property identified by the Construction Agent and grant the Agent a Lien on such Property by execution of the required Security Documents. C. CONSTRUCTION OF IMPROVEMENTS; LEASE OR DISPOSITION OF PROPERTIES. Construction Advances will be made with respect to particular Improvements to be constructed and with respect to ongoing construction of particular Improvements, in each case, pursuant to the terms and conditions of this Agreement and the Agency Agreement. The Construction Agent will act as a construction agent on behalf of Lessor respecting the construction of such Improvements and the expenditures of the Construction Advances related thereto. The Construction Agent shall promptly notify Lessor upon Completion of the Improvements and at such time Lessee shall execute and deliver to Lessor a Lease Supplement relating to the particular Property, whereupon the Basic Term shall commence with respect to such Property. D. HOLDER ADVANCES. As more particularly provided in the Trust Agreement and Section 8 of the Credit Agreement, at all times prior to the Maturity Date or an Acceleration, the outstanding Holder Advances shall represent at least 3% of the sum of the outstanding Loans plus outstanding Holder Advances. SECTION 4. THE CLOSINGS. A. INITIAL CLOSING DATE. All documents and instruments required to be delivered on the Initial Closing Date shall be delivered at the offices of Moore & Van Allen, Charlotte, North Carolina, or at such other location as may be determined by the Lessor, the Agent and the Lessee. B. INITIAL CLOSING DATE; PROPERTY CLOSING DATES; CONSTRUCTION ADVANCES. The Construction Agent shall deliver to the Lessor and the Agent a requisition (a "Requisition"), in the form attached hereto as EXHIBIT A or in such other form as is reasonably satisfactory to the Lessor and the Agent, in connection with (a) the Initial Closing Date relating to the Transaction Expenses and other fees, expenses and disbursements payable by the Lessor pursuant to Section 9.1(a) with invoices (in form and substance acceptable to the Agent and the Lessor) for such Transaction Expenses and other fees, expenses and disbursements attached to such Requisition, (b) each Property Closing Date relating to each Acquisition Advance pursuant to Section 5.3 and (c) each date of a Construction Advance pursuant to Sections 5.4 or 5.5. SECTION 5. FUNDING OF ADVANCES; REPORTING REQUIREMENTS ON COMPLETION DATE; LESSEE DELIVERY OF NOTICES. A. GENERAL. To the extent funds have been made available to the Lessor as Loans by the Lenders and Holder Advances by the Holders, the Lessor will use such funds from time to time in accordance with the terms and conditions of this Agreement and the other Operative Agreements (i) to pay interest regarding the Loans relating to a Property and to pay the Holder Yield regarding the Holder Advances relating to a Property, in each case to the extent accrued under the Credit Agreement or Trust Agreement (as the case may be) during the period prior to the Basic Term Commencement Date with respect to such Property, (ii) at the direction of the Construction Agent to acquire Properties in accordance with the terms of this Agreement, the Agency Agreement, the Lease and the other Operative Agreements, and (iii) to make Advances to the Construction Agent to permit the development, construction, modification and renovation, as applicable, of Improvements in accordance with the terms of the Agency Agreement, the Lease and the other Operative Agreements. B. PROCEDURES FOR FUNDING. 1. The Construction Agent shall designate the date for the initial Advance in accordance with the requirements of this Agreement, and thereafter, each and every Advance shall be made on a Scheduled Interest Payment Date. Not less than three (3) Business Days prior to each date on which an Advance is to be made, the Construction Agent shall deliver to the Lessor and the Agent, (A) on the Initial Closing Date and on each Property Closing Date, a Requisition as described in Section 4.2 hereof (including without limitation a legal description of the Land, a schedule of the Improvements and a schedule of the Equipment acquired on such date, each of the foregoing in a form reasonably acceptable to the Lessor and the Agent) and (B) on each date for a Construction Advance, a Requisition identifying (among other things) the Work performed for which an Advance is requested and the Property to which such Work relates. 2. Each Requisition shall: (i) be irrevocable, (ii) request an amount that is not in excess of the total aggregate of the Available Commitments plus the Available Holder Commitments at such time, and (iii) request that the Holder make a Holder Advance and that the Lenders make Loans to the Lessor for the payment of the Property Acquisition Costs (in the case of a Property Closing Date) or other Property Costs (in the case of a Construction Advance) that have previously been incurred and were not the subject of a prior Requisition, in each case as specified in the Requisition. 3. So long as no Default or Event of Default has occurred and is continuing and subject to the Lessor and the Agent having each received the materials required by Sections 5.3, 5.4 or 5.5, as applicable, on each Property Closing Date or the date on which the Construction Advance is to be made, as applicable, (i) the Lenders shall make Loans to the Lessor in an aggregate amount equal to 97% of the Requested Funds specified in any Requisition, up to an aggregate principal amount equal to the Available Commitments, (ii) each Holder shall make a pro rata Holder Advance based on its Holder Commitment in an amount such that the aggregate of all Holder Advances at such time shall be 3% of the balance of the Requested Funds specified in such Requisition, provided no such Holder Advance shall exceed such Holder's pro rata share of the Available Holder Commitments; and (iii) the total amount of such Loans and Holder Advances made on such date shall (x) be used by the Lessor to pay the Property Acquisition Costs (in the case of a Property Closing Date), (y) be used by the Lessor to pay interest regarding the Loans and to pay the Holder Yield regarding the Holder Advances relating to a Property, in each case to the extent accrued under the Credit Agreement or Trust Agreement (as the case may be) during the period prior to the Basic Term Commencement Date with respect to such Property, or (z) be advanced by the Lessor to the Construction Agent or the Lessee to pay Property Costs, as applicable. C. CONDITIONS TO THE HOLDERS' AND THE LENDERS' OBLIGATIONS TO ADVANCE FUNDS FOR THE ACQUISITION OF PROPERTY. The obligations of the Holders to make a Holder Advance, and of the Lenders to make Loans to the Lessor, on a Property Closing Date for the purpose of providing funds to the Lessor necessary to pay the Transaction Expenses, fees, expenses and other disbursements payable by Lessor under Section 9.1(b) of this Agreement and to acquire a Property (an "Acquisition Advance") are subject to the prior or contemporaneous satisfaction or waiver of the following conditions: 1. the correctness on such Property Closing Date of the representations and warranties of the Owner Trustee, the Construction Agent, the Lessee, the Guarantor and the Holders contained herein and in each of the other Operative Agreements; 2. [intentionally omitted]; 3. the Agent and the Owner Trustee shall have received a fully executed counterpart of the Requisition, appropriately completed; 4. [intentionally omitted]; 5. the Construction Agent shall have delivered to the Lessor a Deed with respect to the Land and existing Improvements, respecting such of the foregoing as are being acquired on such Property Closing Date to the Lessor, and such Land and existing Improvements shall be located in an Approved State; 6. there shall not have occurred and be continuing any Default or Event of Default under any of the Operative Agreements and no Default or Event of Default under any of the Operative Agreements will have occurred after giving effect to the Advance requested by such Requisition; 7. the Construction Agent shall have delivered to the Agent and the Owner Trustee, title insurance policies in favor of the Owner Trustee and the Agent in form and substance acceptable to the Owner Trustee and the Agent, with such title exceptions thereto as are acceptable to the Owner Trustee and the Agent (it being agreed by the Owner Trustee and the Agent that title exceptions of the nature of or similar to those disclosed on title insurance policies reviewed by the Agent prior to the Initial Closing Date will be acceptable to the Owner Trustee and the Agent); 8. the Construction Agent shall have delivered to the Agent and the Owner Trustee (i) a Phase I environmental site assessment and (ii) a survey, in each case prepared by an independent recognized professional acceptable to the Agent and the Owner Trustee and in a form and substance that satisfies all applicable Legal Requirements and is otherwise acceptable to the Agent and the Owner Trustee; 9. the Construction Agent shall have caused to be delivered to the Agent and the Owner Trustee a legal opinion (in form and substance satisfactory to the Agent and the Owner Trustee) from counsel located in the state where the Property is located or, if the Agent and the Owner Trustee have previously received an opinion from counsel in such state, the Agent and the Owner Trustee (in their discretion) may accept an update or a reaffirmation of the previous opinion; 10. the Owner Trustee and the Agent shall be satisfied, in their discretion, that the acquisition of the Property and the execution of the Mortgage Instrument and the other Security Documents will not adversely affect the rights of the Owner Trustee, the Holders, the Agent or the Lenders under or with respect to the Operative Agreements in effect as of the applicable Property Closing Date (it being understood and acknowledged that the Agent and the Owner Trustee may require that the Construction Agent deliver an acceptable legal opinion in connection with this condition); and 11. the Lessor shall have delivered to the Agent and there shall have been recorded by the Agent a Mortgage Instrument and Lender Financing Statements respecting such Property, each in a form acceptable to the Agent. D. CONDITIONS TO THE HOLDERS' AND THE LENDERS' OBLIGATIONS TO MAKE CONSTRUCTION ADVANCES FOR THE COMMENCEMENT OF CONSTRUCTION OF ANY IMPROVEMENTS. The obligations of the Holders to make a Holder Advance, and the Lenders to make Loans to the Lessor for the purpose of providing funds to the Lessor necessary to pay the Transaction Expenses, fees, expenses and other disbursements payable by Lessor under Section 9.1(b) of this Agreement, to make an Initial Construction Advance or to pay interest regarding the Loans relating to a Property and to pay the Holder Yield regarding the Holder Advances relating to a Property, in each case regarding such interest and Holder Yield to the extent accrued and payable under the Credit Agreement or Trust Agreement (as the case may be), during the period prior to the Basic Term Commencement Date with respect to such Property, are subject to the satisfaction or waiver of the following conditions precedent: 1. the correctness on such date of the representations and warranties of the Owner Trustee, the Construction Agent, the Lessee, the Guarantor, and the Holders contained herein and in each of the other Operative Agreements; 2. [intentionally omitted]; 3. the Agent and the Owner Trustee shall have received a fully executed counterpart of the Requisition; 4. with respect to each Initial Construction Advance, the Agent and the Owner Trustee shall have received a copy of the Construction Budget for each Property for the completion of the Improvements for which such Advance relates and a copy of the Plans and Specifications for each such Property for which such Advance relates; 5. with respect to each Initial Construction Advance, the title insurance policy delivered in connection with the requirements of Section 5.3(g) shall provide for (or shall be endorsed to provide for) insurance in an amount at least equal to the maximum total Property Cost indicated by the Construction Budget referred to in subparagraph (d) above; 6. there shall not have occurred and be continuing any Default or Event of Default under any of the Operative Agreements and no Default or Event of Default under any of the Operative Agreements will have occurred after giving effect to the Advance requested by such Requisition; and 7. with respect to each Initial Construction Advance, based upon Construction Budgets which satisfy the requirements of subparagraph (d) above, the Available Commitment and the Available Holder Commitment (after deducting the Unfunded Amount) will be sufficient to complete the Improvements. E. CONDITIONS TO THE HOLDERS' AND THE LENDERS' OBLIGATIONS TO MAKE CONSTRUCTION ADVANCES FOR THE ONGOING CONSTRUCTION ON ANY PROPERTY PRIOR TO THE CONSTRUCTION PERIOD TERMINATION DATE. The obligations of the Holders to make a Holder Advance, and the Lenders to make Loans, to the Lessor, in connection with all subsequent requests for Advances to pay the Transaction Expenses, fees, expense and other disbursements payable by Lessor under Section 9.1(b) of this Agreement, to pay interest regarding the Loans relating to a Property and to pay the Holder Yield regarding the Holder Advances relating to a Property, in each case regarding such interest and Holder Yield to the extent accrued and payable under the Credit Agreement or Trust Agreement (as the case may be), during the period prior to the Basic Term Commencement Date with respect to such Property and to pay Property Costs with respect to any Property prior to the Construction Period Termination Date are subject to the satisfaction or waiver of the following conditions precedent: (a) the correctness on such date of the representations and warranties of the Owner Trustee, the Construction Agent, the Lessee, the Guarantor and the Holders contained herein and in each of the other Operative Agreements; (b) the performance by the Construction Agent and the Lessee hereto of their respective agreements contained herein and in the other Operative Agreements and to be performed by them on or prior to each such date; (c) the Agent and the Owner Trustee shall have received a fully executed counterpart of the Requisition, appropriately completed; (d) based upon Construction Budgets which satisfy the requirements of Section 5.4(d) of this Agreement, the Available Commitments and the Available Holder Commitment (after deducting the Unfunded Amount) will be sufficient to complete the Improvements; and (e) there shall not have occurred and be continuing any Default or Event of Default under any of the Operative Agreements and no Default or Event of Default under any of the Operative Agreements will have occurred after giving effect to the Construction Advance requested by such Requisition. F. ADVANCES SUBSEQUENT TO COMPLETION DATE; REPORTING AND DELIVERY REQUIREMENTS ON COMPLETION DATE. (a) The parties hereto acknowledge and agree that Construction Advances may be requested for a Property after the Completion Date for such Property, either to pay for Improvements constructed prior to such Completion Date for which invoices are not available until after the Completion Date or to pay for the construction of additional Improvements after the Completion Date; provided, however, (i) in no event shall such a Construction Advance be made after the Construction Period Termination Date, and (ii) any such Construction Advance made for the construction of Improvements after the Completion Date shall also require the compliance by the Lessee with the terms of Section 11.1 of the Lease. Within sixty (60) days after the Completion Date for each Property, the Construction Agent shall deliver to the Agent and the Owner Trustee an Officer's Certificate in the form attached hereto as EXHIBIT B specifying (y) the Completion Date for the construction of Improvements at the Property and (z) the aggregate Property Cost for the Property incurred through the Completion Date (with supporting documentation to the extent reasonably requested by the Agent). Such Officer's Certificate shall also include, in form reasonably acceptable to the Agent and the Holders, a certification to the effect that all Improvements have been constructed substantially in accordance with all applicable Legal Requirements, in a good and workmanlike manner and otherwise substantially in compliance with the standards and practices of the Construction Agent with respect to properties and improvements owned by the Construction Agent. If additional Improvements are constructed after the Completion Date of such Property as referred to in the first sentence of this Section 5.6, then such Officer's Certificate shall be updated and resubmitted to the Agent and the Owner Trustee within sixty (60) days after the completion of such additional Improvements. (b) Within thirty (30) days after the Completion Date for each Property the Construction Agent shall deliver to the Agent an Appraisal for such Property, which Appraisal shall indicate an appraised value for such Property of at least eighty percent (80%) of the Property Cost for such Property. (c) Within thirty (30) days after the Completion Date for each Property, the Construction Agent shall deliver originals of the following to the Agent (and copies thereof to the Owner Trustee) each of which shall be in a form reasonably acceptable to the Agent: (i) a Lease Supplement, (ii) a memorandum of lease with respect to such Lease Supplement (in form suitable for recording), and (iii) Lessor Financing Statements executed by the Lessee and the Lessor. G. CONSTRUCTION AGENT DELIVERY OF ALLOCATION NOTICE, NOTICE REGARDING THE HOLDER CONSTRUCTION PROPERTY COST AND CONSTRUCTION BUDGET MODIFICATIONS. The Construction Agent covenants and agrees to deliver (i) to the Agent each month during the Commitment Period the Allocation Notice referred to in the first sentence of Section 2.3(b) of the Credit Agreement, (ii) to the Owner Trustee each month during the Commitment Period a notice specifying the Holder Construction Property Cost of each of the Construction Period Properties for which an Advance was requested during such months and (iii) to the Agent and the Owner Trustee each month any modification to any Construction Budget regarding any Property; provided, no Construction Budget may be increased unless the title insurance policies referenced in Section 5.3(g) are also modified or endorsed, if necessary, to provide for insurance in an amount that satisfies the requirements of Section 5.4(e) of this Agreement. SECTION 6. CONDITIONS OF THE INITIAL CLOSING. A. CONDITIONS TO THE LESSOR'S AND THE HOLDERS' OBLIGATIONS. The obligations of the Lessor and the Holders to consummate the transactions contemplated by this Agreement, including the obligation to execute and deliver the applicable Operative Agreements to which each is a party on the Initial Closing Date, are subject to (i) the accuracy and correctness on the Initial Closing Date of the representations and warranties of the other parties hereto contained herein, (ii) the accuracy and correctness on the Initial Closing Date of the representations and warranties of the other parties hereto contained in any other Operative Agreement or certificate delivered pursuant hereto or thereto, (iii) the performance by the other parties hereto of their respective agreements contained herein and in the other Operative Agreements and to be performed by them on or prior to the Initial Closing Date and (iv) the satisfaction or waiver by the Lessor and the Holders of all of the following conditions on or prior to the Initial Closing Date: (a) Each of the Operative Agreements to be entered into on the Initial Closing Date shall have been duly authorized, executed and delivered by the parties thereto, other than the Lessor, and shall be in full force and effect, and no default shall exist thereunder (both before and after giving effect to the transactions contemplated by the Operative Agreements), and the Lessor shall have received a fully executed copy of each of the Operative Agreements (other than the Notes of which it shall have received specimens). The Operative Agreements (or memoranda thereof), any supplements thereto and any financing statements and fixture filings in connection therewith required under the Uniform Commercial Code shall have been filed, if necessary, in such manner as to enable the Lessee's counsel to render its opinion referred to in Section 6.1(c) hereof; (b) All taxes, fees and other charges in connection with the execution, delivery, recording, filing and registration of the Operative Agreements shall have been paid or provisions for such payment shall have been made to the satisfaction of the Lessor and the Agent; (c) Counsel for the Lessee and the Guarantor acceptable to the other parties hereto shall have issued to the Lessor, the Agent, the Lenders and the Holders its opinion in the form attached hereto as EXHIBIT C or in such other form as is reasonably acceptable to such parties; (d) All Governmental Actions necessary (or in the reasonable opinion of the Agent or its counsel, advisable) in connection with the transactions described herein, in each case required by any law or regulation enacted, imposed or adopted on or after the date hereof or by any change in fact or circumstances since the date hereof, shall have been obtained or made and be in full force and effect; (e) No action or proceeding shall have been instituted, nor shall any action or proceeding be overtly threatened, before any Governmental Authority, nor shall any order, judgment or decree have been issued or proposed to be issued by any Governmental Authority or to set aside, restrain, enjoin or prevent the full performance of this Agreement, any other Operative Agreement or any transaction contemplated hereby or thereby which is reasonably likely to have a Material Adverse Effect; (f) In the reasonable opinion of the Lessor and the Holders and their counsel, the transactions contemplated by the Operative Agreements do not and will not violate any material Legal Requirements and do not and will not subject the Lessor or the Holders to any adverse regulatory prohibitions or constraints, in each case enacted, imposed, adopted or proposed since the date hereof; (g) The Lessor and the Agent shall each have received an Officer's Certificate, dated as of the Initial Closing Date, of the Lessee and the Guarantor in the form attached hereto as EXHIBIT D or in such other form as is reasonably acceptable to such parties stating that (a) each and every representation and warranty of the Lessee contained in the Operative Agreements to which it is a party is true and correct in all material respects on and as of the Initial Closing Date; (b) no Default or Event of Default has occurred and is continuing under any Operative Agreement; (c) each Operative Agreement to which Lessee or the Guarantor is a party is in full force and effect with respect to it; and (d) the Lessee and the Guarantor have duly performed and complied with all material covenants, agreements and conditions contained herein or in any Operative Agreement required to be performed or complied with by them on or prior to the Initial Closing Date; (h) The Lessor and the Agent shall each have received (a) a certificate of the Secretary or an Assistant Secretary of Lessee and the Guarantor in the form attached hereto as EXHIBIT E or in such other form as is reasonably acceptable to such parties attaching and certifying as to (1) the resolutions of its Board of Directors duly authorizing the execution, delivery and performance by Lessee and the Guarantor, as applicable, of each of the Operative Agreements to which it is or will be a party, (2) its certificate of incorporation certified as of a recent date by the Secretary of State of the State of its incorporation and its by-laws, and (3) the incumbency and signature of persons authorized to execute and deliver on its behalf the Operative Agreements to which it is a party and (b) a good standing certificate from the appropriate officer of each state in which it is required to be qualified to do business as to its good standing in such state; and (i) As of the Initial Closing Date, there shall not have occurred any material adverse change in the consolidated assets, liabilities, operations, business or financial condition of the Lessee or the Guarantor from that set forth in Guarantor's consolidated financial statements dated December 31, 1994. B. CONDITIONS TO THE LESSEE'S OBLIGATIONS. The obligation of the Lessee to consummate the transactions contemplated by this Agreement, including the obligation to execute and deliver the Operative Agreements to which it is a party on the Initial Closing Date, is subject to (i) the accuracy and correctness on the Initial Closing Date of the representations and warranties of the other parties hereto contained herein, (ii) the accuracy and correctness on the Initial Closing Date of the representations and warranties of the other parties hereto contained in any other Operative Agreement or certificate delivered pursuant hereto or thereto, (iii) the performance by the other parties hereto of their respective agreements contained herein and in the other Operative Agreements, in each case to be performed by them on or prior to the Initial Closing Date, and (iv) the satisfaction or waiver by the Lessee of all of the following conditions on or prior to the Initial Closing Date: (a) In the reasonable opinion of the Lessee and its counsel, the transactions contemplated by the Operative Agreements do not violate any Legal Requirements and shall not subject Lessee to any adverse regulatory prohibitions or constraints, in each case enacted, imposed, adopted or proposed since the date hereof; (b) No action or proceeding shall have been instituted nor shall any action or proceeding be threatened, before any Governmental Authority, nor shall any order, judgment or decree have been issued or proposed to be issued by any Governmental Authority or to set aside, restrain, enjoin or prevent the full performance of this Agreement, any other Operative Agreement or any transaction contemplated hereby or thereby which is reasonably likely to have a Material Adverse Effect; (c) Each of the Operative Agreements shall have been duly authorized, executed and delivered by the parties thereto, other than the Lessee, and shall be in full force and effect, and no Default, other than Defaults of the Lessee, shall exist thereunder, and the Lessee shall have received a fully executed copy of each of the Operative Agreements; (d) The Lessee and the Agent shall have received an Officer's Certificate of the Lessor dated as of such Closing Date in the form attached hereto as EXHIBIT F or in such other form as is reasonably acceptable to Lessee and the Agent, stating that (i) each and every representation and warranty of the Lessor contained in the Operative Agreements to which it is a party is true and correct on and as of the Initial Closing Date; (ii) each Operative Agreement to which the Lessor is a party is in full force and effect with respect to it, and (iii) the Lessor has duly performed and complied with all covenants, agreements and conditions contained herein or in any Operative Agreement required to be performed or complied with by it on or prior to the Initial Closing Date; (e) The Lessee and the Agent shall have received (i) a certificate of the Secretary, an Assistant Secretary, Trust Officer or Vice President of the Lessor in the form attached hereto as EXHIBIT G or in such other form as is reasonably acceptable to Lessee and the Agent, attaching and certifying as to (A) the signing resolutions, (B) its articles of incorporation or other equivalent charter documents, as the case may be, certified as of a recent date by an appropriate officer of the Trust Company, (C) its by-laws and (D) the incumbency and signature of persons authorized to execute and deliver on its behalf the Operative Agreements to which it is a party and (ii) a good standing certificate from the state of incorporation of the Trust Company; and (f) Counsel for the Lessor acceptable to the other parties hereto shall have issued to the Lessee, the Holders, the Lenders and the Agent its opinion in the form attached hereto as EXHIBIT H or in such other form as is reasonably acceptable to such parties. C. CONDITIONS TO THE OBLIGATIONS OF THE AGENT AND THE LENDERS. The obligation of the Agent and each Lender to consummate the transactions contemplated by this Agreement on the Initial Closing Date, including the obligation to execute and deliver each of the Operative Agreements to which each such entity is a party on the Initial Closing Date, is subject to (i) the accuracy and correctness on the Initial Closing Date of the representations and warranties of the other parties hereto contained herein, (ii) the accuracy and correctness on the Initial Closing Date of the representations and warranties of the other parties hereto contained in any other Operative Agreement or certificate delivered pursuant hereto or thereto, (iii) the performance by the other parties hereto of their respective agreements contained herein and in the other Operative Agreements, in each case to be performed by them on or prior to the Initial Closing Date, and (iv) the receipt by the Agent of the items required to be delivered to the Agent pursuant to this Article 6. SECTION 7. REPRESENTATIONS AND WARRANTIES ON THE INITIAL CLOSING DATE. A. REPRESENTATIONS AND WARRANTIES OF THE HOLDERS. Effective as of the Initial Closing Date, each Holder severally as to itself, and not jointly, represents and warrants to each of the other parties hereto that: (a) (i) Sumitomo Bank Leasing and Finance, Inc. is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has the power and authority to carry on its business as now conducted and to enter into and perform its obligations under each Operative Agreement to which it is or is to be a party and each other agreement, instrument and document to be executed and delivered by it on or before each Closing Date in connection with or as contemplated by each such Operative Agreement to which it is or will be a party; (ii) The Bank of Nova Scotia is a corporation duly organized, validly existing and in good standing under the laws of Canada and has the power and authority to carry on its business as now conducted and to enter into and perform its obligations under each Operative Agreement to which it is or is to be a party and each other agreement, instrument and document to be executed and delivered by it on or before each Closing Date in connection with or as contemplated by each such Operative Agreement to which it is or will be a party; (iii) NationsBank of Texas, N.A. is a national banking association, validly existing and in good standing under the federal banking laws of the United States and has the power and authority to carry on its business as now conducted and to enter into and perform its obligations under each Operative Agreement to which it is or is to be a party and each other agreement, instrument and document to be executed and delivered by it on or before each Closing Date in connection with or as contemplated by each such Operative Agreement to which it is or will be a party; (b) The execution, delivery and performance of each Operative Agreement to which it is or will be a party have been duly authorized by all necessary action on its part and neither the execution and delivery thereof, nor the consummation of the transactions contemplated thereby, nor compliance by it with any of the terms and provisions thereof (i) requires or will require any approval of the partners or stockholders of, or approval or consent of any trustee or holder of any indebtedness or obligations of, such Holder which have not been obtained, (ii) contravenes or will contravene any Legal Requirement applicable to or binding on it (except no representation or warranty is made as to any Legal Requirement to which it may be subject solely as a result of the activities of the Lessee) as of the date hereof, (iii) does or will contravene or result in any breach of or constitute any default under, or result in the creation of any Lien upon any Property or any of the Improvements (other than Liens created by the Operative Agreements) under its certificate of incorporation or other equivalent charter documents, as the case may be, or any indenture, mortgage, chattel mortgage, deed of trust, conditional sales contract, bank loan or credit agreement or other agreement or instrument to which it is a party or by which it or its properties is bound or affected or (iv) does or will require any Governmental Action by any Governmental Authority (other than arising solely by reason of the business, condition or activities of the Lessee or any Affiliate thereof or the construction or use of the Properties or the Improvements); (c) Each Operative Agreement to which it is or will be a party has been, or will be, duly executed and delivered by it and constitutes, or upon execution and delivery will constitute, a legal, valid and binding obligation enforceable against it in accordance with the terms thereof; (d) There is no action or proceeding pending or, to its knowledge, threatened against it before any Governmental Authority that questions the validity or enforceability of any Operative Agreement to which it is or will become a party or that, if adversely determined, would materially and adversely affect its ability to perform its obligations under the Operative Agreements to which it is a party; (e) It has not assigned or transferred any of its right, title or interest in or under the Lease except in accordance with the Operative Agreements; (f) No Default or Event of Default under the Operative Agreements attributable to it has occurred and is continuing; (g) It is not a "holding company" or a "subsidiary company" of a "holding company" or an "affiliate" of a "holding company' or a "public utility" within the meaning of the Public Utility Holding Company Act of 1935, as amended, or a "public utility" within the meaning of the Federal Power Act, as amended. It is not an "investment company" or a company controlled by an "investment company" within the meaning of the Investment Company Act or an "investment adviser" within the meaning of the Investment Advisers Act of 1940, as amended; (h) Except as otherwise contemplated by the Operative Agreements, it shall not, nor shall it direct the Owner Trustee to, use the proceeds of any Holder Advance for any purpose other than the purchase and/or lease of Properties, the construction of Improvements and the payment of the Holder Yield regarding the Holder Advances which accrues under the Trust Agreement prior to the Basic Term Commencement Date with respect to a particular Property; and (i) It is acquiring its interest in the Trust Estate for its own account for investment and not with a view to any distribution (as such term is used in Section 2(11) of the Securities Act) thereof, and if in the future it should decide to dispose of its interest in the Trust Estate, it understands that it may do so only in compliance with the Securities Act and the rules and regulations of the Securities and Exchange Commission thereunder and any applicable state securities laws. Neither it nor anyone authorized to act on its behalf has taken or will take any action which would subject the issuance or sale of any interest in the Property, the Trust Estate or the Lease to the registration requirements of Section 5 of the Securities Act. No representation or warranty contained in this Section 7.1(i) shall include or cover any action or inaction of any Lessee or any Affiliate thereof whether or not purportedly on behalf of the Holders, the Owner Trustee or any of their Affiliates. B. REPRESENTATIONS AND WARRANTIES OF THE OWNER TRUSTEE. Effective as of the Initial Closing Date, Trust Company in its individual capacity and as the Owner Trustee, as indicated, represents and warrants to each of the other parties hereto as follows, provided, that the representations in the following paragraphs (h), (i), (j) and (k) are made solely in its capacity as the Owner Trustee: (a) It is a national banking association and is duly organized and validly existing and in good standing under the laws of the United States of America and has the power and authority to enter into and perform its obligations under the Trust Agreement and (assuming due authorization, execution and delivery of the Trust Agreement by the Holders) has the corporate and trust power and authority to act as the Owner Trustee and to enter into and perform the obligations under each of the other Operative Agreements to which Trust Company or the Owner Trustee, as the case may be, is or will be a party and each other agreement, instrument and document to be executed and delivered by it on or before such Closing Date in connection with or as contemplated by each such Operative Agreement to which Trust Company or the Owner Trustee, as the case may be, is or will be a party; (b) The execution, delivery and performance of each Operative Agreement to which it is or will be a party, either in its individual capacity or (assuming due authorization, execution and delivery of the Trust Agreement by the Holders) as the Owner Trustee, as the case may be, has been duly authorized by all necessary action on its part and neither the execution and delivery thereof, nor the consummation of the transactions contemplated thereby, nor compliance by it with any of the terms and provisions thereof (i) does or will require any approval or consent of any trustee or holders of any of its indebtedness or obligations, (ii) does or will contravene any current law, governmental rule or regulation relating to its banking or trust powers, (iii) does or will contravene or result in any breach of or constitute any default under, or result in the creation of any Lien upon any of its property under, (A) its charter or by-laws, or (B) any indenture, mortgage, chattel mortgage, deed of trust, conditional sales contract, bank loan or credit agreement or other agreement or instrument to which it is a party or by which it or its properties may be bound or affected, which contravention, breach, default or Lien under clause (B) would materially and adversely affect its ability, in its individual capacity or as Owner Trustee, to perform its obligations under the Operative Agreements to which it is a party or (iv) does or will require any Governmental Action by any Governmental Authority regulating its banking or trust powers; (c) The Trust Agreement and, assuming the Trust Agreement is the legal, valid and binding obligation of the Holders, each other Operative Agreement to which Trust Company or the Owner Trustee, as the case may be, is or will be a party have been, or on or before such Closing Date will be, duly executed and delivered by Trust Company or the Owner Trustee, as the case may be, and the Trust Agreement and each such other Operative Agreement to which Trust Company or the Owner Trustee, as the case may be, is a party constitutes, or upon execution and delivery will constitute, a legal, valid and binding obligation enforceable against Trust Company or the Owner Trustee, as the case may be, in accordance with the terms thereof; (d) There is no action or proceeding pending or, to its knowledge, threatened to which it is or will be a party, either in its individual capacity or as the Owner Trustee, before any Governmental Authority that, if adversely determined, would materially and adversely affect its ability, in its individual capacity or as Owner Trustee, to perform its obligations under the Operative Agreements to which it is a party or would question the validity or enforceability of any of the Operative Agreements to which it is or will become a party; (e) It has not assigned or transferred any of its right, title or interest in or under the Lease or the Agency Agreement except in accordance with the Operative Agreements; (f) No Default or Event of Default under the Operative Agreements attributable to it has occurred and is continuing; (g) Except as otherwise contemplated in the Operative Agreements, the proceeds of the Loans and Holder Advances have not been applied by the Owner Trustee for any purpose other than the payment of Transaction Expenses and the fees, expenses and other disbursements referenced in Sections 9.1(a) and (b) of this Agreement, the purchase and/or lease of the Properties, the acquisition of Equipment, the construction of Improvements and the payment of interest regarding the Loans and the payment of the Holder Yield regarding the Holder Advances, in each case to the extent accrued under the Credit Agreement or Trust Agreement (as the case may be), during the period prior to the Basic Term Commencement Date with respect to a particular Property; (h) Neither the Owner Trustee nor any Person authorized by the Owner Trustee to act on its behalf has offered or sold any interest in the Trust Estate or the Notes, or in any similar security relating to a Property, or in any security the offering of which for the purposes of the Securities Act would be deemed to be part of the same offering as the offering of the aforementioned securities to, or solicited any offer to acquire any of the same from, any Person other than, in the case of the Notes, the Agent, and neither the Owner Trustee nor any Person authorized by the Owner Trustee to act on its behalf will take any action which would subject, as a direct result of such action alone, the issuance or sale of any interest in the Trust Estate or the Notes to the provisions of Section 5 of the Securities Act or require the qualification of any Operative Agreement under the Trust Indenture Act of 1939, as amended; (i) The Owner Trustee's chief place of business, chief executive office and office where the documents, accounts and records relating to the transactions contemplated by this Agreement and each other Operative Agreement are kept are located at 79 South Main Street, Salt Lake City, Utah 84111; (j) The Owner Trustee is not engaged principally in, and does not have as one of its important activities, the business of extending credit for the purpose of purchasing or carrying any margin stock (within the meaning of Regulation U of the Board of Governors of the Federal Reserve System of the United States), and no part of the proceeds of the Loans or the Holder Advances will be used by it to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any such margin stock or for any purpose that violates, or is inconsistent with, the provisions of Regulations G, T, U, or X of the Board of Governors of the Federal Reserve System of the United States; and (k) The Owner Trustee is not an "investment company" or a company controlled by an "investment company" within the meaning of the Investment Company Act. C. REPRESENTATIONS AND WARRANTIES OF THE CONSTRUCTION AGENT AND THE LESSEE. Effective as of the Initial Closing Date the Construction Agent and the Lessee represent and warrant to each of the other parties hereto that: (a) Each of the Construction Agent and the Lessee is a corporation duly organized, validly existing and in good standing under the laws of the State of California; each of their Subsidiaries is duly organized and validly existing under the laws of the jurisdiction of its organization; and each of the Construction Agent and the Lessee and each of their Subsidiaries is duly qualified to do business in each other jurisdiction where the nature of its business makes such qualification necessary, except where such failure to so qualify would not have a Material Adverse Effect. (b) The execution and delivery by each of the Construction Agent and the Lessee of this Agreement and the other Operative Agreements to which the Construction Agent or the Lessee is a party and the performance by each of the Construction Agent and the Lessee of its respective obligations under this Agreement and the other Operative Agreements to which it is a party is within the corporate powers of each of the Construction Agent and the Lessee, has been duly authorized by all necessary corporate action on the part of each of the Construction Agent and the Lessee (including any necessary shareholder action), has received all governmental approval (to the extent necessary as of the Initial Closing Date), and does not and will not (i) violate any provision of applicable Law, decree, judgment or award which is binding on each of the Construction Agent and the Lessee or any of their Subsidiaries where such violation would be likely to have a Material Adverse Effect, (ii) contravene or conflict with, or result in a breach of, any provision of the Certificate of Incorporation, By-Laws or other organizational documents of either the Construction Agent or the Lessee or any of their Subsidiaries or of any agreement, indenture, instrument or other document which is binding on either of the Construction Agent or the Lessee or any of their Subsidiaries or (iii) result in, or require, the creation or imposition of any Lien (other than a Permitted Lien or as otherwise permitted pursuant to the terms of the Operative Agreements) on any asset of either of the Construction Agent or the Lessee or any of their Subsidiaries. (c) This Agreement is, and upon the execution and delivery thereof the other Operative Agreements to which the Construction Agent or the Lessee is a party will be, the legal, valid and binding obligation of each of the Construction Agent and the Lessee, enforceable against each of the Construction Agent and the Lessee in accordance with their terms, subject to applicable bankruptcy and insolvency laws and principles of equity. The Construction Agent and the Lessee have each executed the various Operative Agreements required to be executed as of the Initial Closing Date. (d) There no actions, suits or proceedings pending or, to the knowledge of the Construction Agent or the Lessee, overtly threatened with respect to Lessee that are reasonably likely to have a Material Adverse Effect; (e) Except to the extent already obtained, as of the Initial Closing Date no Governmental Action by any Governmental Authority or authorization, registration, consent, approval, waiver, notice or other action by, to or of any other Person is required to authorize or is required in connection with (i) the execution, delivery or performance of any Operative Agreement or (ii) the legality, validity, binding effect or enforceability of any Operative Agreement, in each case, except those which have been obtained; (f) [intentionally omitted] (g) Since the date of the financial statements described in Section 6.1(i), there has been no event or occurrence which has had or is reasonably likely to have a Material Adverse Effect. (h) No litigation (including, without limitation, derivative actions), arbitration proceeding or governmental proceeding is pending or, to the knowledge of either the Construction Agent or the Lessee, threatened against either of the Construction Agent or the Lessee or any of their Subsidiaries which, is reasonably likely to result, either individually or collectively, in a Material Adverse Effect. Other than any liability incident to such litigation or proceedings, none of the Construction Agent, the Lessee nor any of their Subsidiaries has any contingent liability not provided for or disclosed in the financial statements referred to in Section 7.3(f) which is reasonably likely to have a Material Adverse Effect. (i) Neither the Construction Agent nor the Lessee knows of any proposed material tax assessments against it which, is reasonably likely to have a Material Adverse Effect; (j) Neither the Construction Agent nor the Lessee has incurred any material accumulated unfunded deficiency within the meaning of ERISA nor has incurred any material liability to the PBGC established under ERISA (or any successor thereto under ERISA) in connection with the employee benefit plan established or maintained by the Construction Agent or the Lessee. Each of the Construction Agent and the Lessee is in compliance in all material respects with those provisions of ERISA and the regulations and public interpretations thereunder which are applicable to the Construction Agent or the Lessee. No Reportable Event has occurred with respect to any Plan; (k) Upon the execution and delivery of each Lease Supplement to the Lease, (i) the Lessee will have unconditionally accepted the Property subject to the Lease Supplement and will have a valid and subsisting leasehold interest in the Property, subject only to the Permitted Exceptions, and (ii) no offset will exist with respect to any Rent or other sums payable under the Lease; (l) Neither the Construction Agent nor the Lessee has filed a voluntary petition in bankruptcy or been adjudicated a bankrupt or insolvent, or filed any petition or answer seeking any reorganization, liquidation, receivership, dissolution or similar relief under any bankruptcy, receivership, insolvency, or other law relating to relief for debtors, or sought or consented to or acquiesced in the appointment of any trustee, receiver, conservator or liquidator of all or any part of its properties or its interest in any Property. No court of competent jurisdiction has entered an order, judgment, or decree approving a petition filed against the Construction Agent or the Lessee seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any federal or state bankruptcy, receivership, insolvency or other law relating to relief for debtors, and no other liquidator has been appointed for the Construction Agent or the Lessee or all or any part of its properties or its interest in any Property, and no such action is pending. Neither the Construction Agent nor the Lessee has given notice to any Governmental Authority or any Person of insolvency or pending insolvency, or suspension or pending suspension of operations; and (m) Except as otherwise contemplated by the Operative Agreements, the Construction Agent shall not use the proceeds of any Holder Advance or Loan for any purpose other than the purchase of Properties, the acquisition of Equipment, and the construction of Improvements. (n) [intentionally omitted] (o) Neither the Construction Agent, the Lessee nor any of their Subsidiaries is (a) an "investment company" or a company "controlled" by an "investment company", within the meaning of the Investment Company Act or (b) a "holding company", or a "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company", within the meaning of the Public Utility Holding Company Act of 1935, as amended. (p) Neither the Construction Agent, the Lessee nor any of their Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock, and no proceeds of any Advance will be used for the purpose, whether immediate, incidental or ultimate, of purchasing or carrying any margin stock or maintaining or extending credit to others for such purpose. (q) Each of the Construction Agent, the Lessee and their Subsidiaries has filed all material tax returns and reports required by Law to have been filed by it and has paid all Taxes and governmental charges thereby shown to be owing, except any such Taxes or charges which are either being diligently contested in good faith by appropriate proceedings and for which adequate reserves shall in accordance with GAAP have been set aside on its books or where the failure to make such payment would not have a Material Adverse Effect. (r) To the best of the knowledge of each of the Construction Agent and the Lessee, after inquiry it has deemed appropriate, each of the Construction Agent, the Lessee and their Subsidiaries is in compliance with all Environmental Laws and Occupational Safety and Health Laws where failure to comply would reasonably be expected to have a Material Adverse Effect. None of the Construction Agent, the Lessee nor any of their Subsidiaries has received notice of any claims that any of them is not in compliance in all material respects with any Environmental Law where failure to comply could have a Material Adverse Effect. (s) Each of the Construction Agent, the Lessee and their Subsidiaries is in compliance with all statutes, judicial and administrative orders, permits and governmental rules and regulations which are material to its business or the non-compliance with which would be reasonably likely to result in a Material Adverse Effect. (t) All written information heretofore or contemporaneously herewith furnished by either the Construction Agent or the Lessee or any of their Subsidiaries to the Agent, the Owner Trustee, any Lender or any Holder for purposes of or in connection with this Agreement and the transactions contemplated hereby is, and all written information hereafter furnished by or on behalf of the Construction Agent, the Lessee or any of their Subsidiaries to the Agent, the Owner Trustee, any Lender or any Holder pursuant hereto or in connection herewith will be, true and accurate in every material respect on the date as of which such information is dated or certified, and such information, taken as a whole, does not and will not omit to state any material fact necessary to make such information, taken as a whole, not misleading. C. REPRESENTATIONS AND WARRANTIES OF THE AGENT. Effective as of the Initial Closing Date, the Agent represents and warrants to each of the other parties hereto that: (a) It is a national banking association duly organized and validly existing under the laws of the United States of America and has the full power and authority to enter into and perform its obligations under this Agreement and each other Operative Agreement to which it is or will be a party; (b) This Agreement and each other Operative Agreement to which it is a party have been, or when executed and delivered will be, duly authorized by all necessary corporate action on the part of the Agent and have been, or on such Closing Date will have been, duly executed and delivered by the Agent and, assuming the due authorization, execution and delivery hereof and thereof by the other parties hereto and thereto, are, or upon execution and delivery thereof will be, legal, valid and binding obligations of the Agent, enforceable against it in accordance with their respective terms; (c) The execution, delivery and performance by the Agent of this Agreement and each other Operative Agreement to which it is or will be a party are not, and will not be, inconsistent with the articles of incorporation or by-laws or other charter documents of the Agent, do not and will not contravene any applicable Law of the State of Texas or of the United States of America governing its activities and will not contravene any provision of, or constitute a default under any indenture, mortgage, contract or other instrument of which it is a party or by which it or its properties are bound, or require any consent or approval of any Governmental Authority under any applicable law, rule or regulation of the State of Texas or any federal law, rule or regulation of the United States of America governing its activities; and (d) Except as otherwise contemplated by the Operative Agreements, the Agent shall not, nor shall it direct the Owner Trustee to, use the proceeds of any Loan for any purpose other than the purchase of Properties, the acquisition of Equipment, the construction of Improvements and the payment of interest regarding the Loans which accrue under the Credit Agreement during the period prior to the Basic Term Commencement Date with respect to a particular Property. SECTION 8. REPRESENTATIONS AND WARRANTIES ON FUNDING DATES. A. REPRESENTATIONS AND WARRANTIES ON PROPERTY CLOSING DATES. The Construction Agent, the Lessee and the Guarantor each hereby represent and warrant as of each Property Closing Date as follows: 1. The representations and warranties of the Construction Agent, the Lessee and the Guarantor set forth in the Operative Agreements are true and correct in all respects on and as of such Property Closing Date as if made on and as of such date. The Construction Agent, the Lessee and the Guarantor are in compliance with their respective obligations under the Operative Agreements and there exists no Default or Event of Default under any of the Operative Agreements which is continuing and which has not been cured within any cure period expressly granted under the terms of the applicable Operative Agreement. No Default or Event of Default will occur under any of the Operative Agreements as a result of, or after giving effect to, the Advance requested by the Requisition on such Property Closing Date; 2. The Properties to be acquired are being acquired at a price that is not in excess of fair market value and such Properties consist of (i) unimproved Land, (ii) Land and existing Improvements thereon which will be renovated and/or modified in accordance with the terms of this Agreement, or (iii) Equipment. Each of the Properties is located at the location set forth on the applicable Requisition, all of which are in one of the Approved States; 3. Upon the acquisition of each Property on such Property Closing Date, and at all times thereafter, the Lessor will have good and marketable title to such Property, subject only to Permitted Liens; 4. The execution and delivery of each Operative Agreement delivered by the Construction Agent and/or the Lessee on such Property Closing Date and the performance of the obligations of the Construction Agent and the Lessee under each Operative Agreement have been duly authorized by all requisite corporate action of the Construction Agent or the Lessee, as applicable; 5. Each Operative Agreement delivered on such Property Closing Date by the Construction Agent and/or the Lessee has been duly executed and delivered by the Construction Agent and/or the Lessee; 6. Each Operative Agreement delivered by the Construction Agent and/or the Lessee on such Property Closing Date is a legal, valid and binding obligation of the Construction Agent or the Lessee, as applicable, enforceable against the Construction Agent or the Lessee, as applicable, in accordance with its respective terms subject to applicable bankruptcy and insolvency loans and principles of equity; 7. [intentionally omitted]; 8. [intentionally omitted]; 9. No portion of any Property being acquired by the Lessor on such Property Closing Date is located in an area identified as a special flood hazard area by the Federal Emergency Management Agency or other applicable agency, or if any such Property is located in an area identified as a special flood hazard area by the Federal Emergency Management Agency or other applicable agency, then flood insurance has been obtained for such Property in accordance with Section 14.2(b) of the Lease and in accordance with the National Flood Insurance Act of 1968, as amended; 10. The Construction Agent has obtained insurance coverage for each Property being acquired by the Lessor on such Property Closing Date which meet the requirements of Article XIV of the Lease and all of such coverage is in full force and effect; 11. Each Property being acquired by the Lessor on such Property Closing Date complies with all material Legal Requirements (including, without limitation, all zoning and land use laws and Environmental Laws), except to the extent that failure to comply therewith would not, individually or in the aggregate, have a Material Adverse Effect; 12. [intentionally omitted]; 13. All utility services and facilities necessary for the construction of the Improvements existing on, or to be constructed after, such Property Closing Date (including, without limitation, gas, electrical, water and sewage services and facilities) are or will be available at the boundaries of the real property upon which such Improvements exist or will be constructed on each such Property; and 14. All conditions precedent contained in this Agreement and in the other Operative Agreements relating to the acquisition of a Property by the Lessor have been satisfied in full. B. REPRESENTATIONS AND WARRANTIES UPON INITIAL CONSTRUCTION ADVANCES. The Construction Agent, the Lessee and the Guarantor each hereby represent and warrant as of each date on which an Initial Construction Advance is made as follows: 1. The representations and warranties of the Construction Agent, the Lessee and the Guarantor set forth in the Operative Agreements are true and correct in all material respects on and as of the date of such Initial Construction Advance as if made on and as of such date. The Construction Agent, the Lessee and the Guarantor are in compliance with their respective obligations under the Operative Agreements and there exists no Default or Event of Default under any of the Operative Agreements. No Default or Event of Default will occur under any of the Operative Agreements as a result of, or after giving effect to, the Advance requested by the Requisition on such date; 2. The Lessor has good and marketable title to each Property, subject only to Permitted Liens; 3. Upon filing in the filing offices designated by the Construction Agent or the Lessee, the Lender Financing Statements, together with an assignment of the filed Lender Financing Statements, will create a valid and perfected first priority security interest in all the Properties and other collateral described therein in which a security interest can be perfected by filing under the UCC; 4. All consents, licenses, permits, authorizations, assignments and building permits required by all Legal Requirements or pursuant to the terms of any contract, indenture, instrument or agreement for construction, completion, occupancy, operation, leasing or subleasing of each Property with respect to which an Advance is being made have been obtained and are in full force and effect, except to the extent that the failure to so obtain would not, individually or in the aggregate, have a Material Adverse Effect; 5. The Construction Agent has obtained insurance coverage covering the Property which is the subject of such Advance which meets the requirements of Article VI of the Agency Agreement before commencing construction, repairs or modifications, as the case may be, and such coverage is in full force and effect; 6. The Improvements which are the subject of the Advance, as improved in accordance with the Plans and Specifications, will comply with all Legal Requirements and Insurance Requirements (including, without limitation, all zoning and land use laws and Environmental Laws), except to the extent the failure to comply therewith would not, individually or in the aggregate, have a Material Adverse Effect. The Plans and Specifications have been or will be prepared in accordance with all applicable Legal Requirements (including, without limitation, all applicable Environmental Laws and building, planning, zoning and fire codes), except to the extent the failure to comply therewith would not, individually or in the aggregate, have a Material Adverse Effect, and upon completion of such Improvements in accordance with the Plans and Specifications, such Improvements will not encroach in any manner onto any adjoining land (except as permitted by express written easements) and such Improvements and the use thereof by the Lessee and its agents, assignees, employees, invitees, lessees, licensees and tenants will comply in all respects with all applicable Legal Requirements (including, without limitation, all applicable Environmental Laws and building, planning, zoning and fire codes), except to the extent the failure to comply therewith would not, individually or in the aggregate, have a Material Adverse Effect. Upon completion of such Improvements in accordance with the Plans and Specifications, (i) there will be no material defects to such Improvements including, without limitation, the plumbing, heating, air conditioning and electrical systems thereof and (ii) all water, sewer, electric, gas, telephone and drainage facilities and all other utilities required to adequately service such Improvements for their intended use will be available pursuant to adequate permits (including any that may be required under applicable Environmental Laws), except to the extent that failure to obtain any such permit would not, individually or in the aggregate, have a Material Adverse Effect. There is no action, suit or proceeding (including any proceeding in condemnation or eminent domain or under any Environmental Law) pending or, to the best knowledge of the Lessee, the Construction Agent or the Guarantor, threatened which adversely affects the title to, or the use, operation or value of, such Properties. No fire or other casualty with respect to such Properties has occurred which fire or other casualty has had a Material Adverse Effect. All utilities serving the related Properties, or proposed to serve the related Properties in accordance with the Plans and Specifications, are located in, and in the future will be located in, and vehicular access to such Improvements is provided by, either public rights-of-way abutting the related Property or Appurtenant Rights. All licenses, approvals, authorizations, consents, permits (including, without limitation, building, demolition and environmental permits, licenses, approvals, authorizations and consents), easements and rights-of-way, including proof of dedication, required for (i) the use, treatment, storage, transport, disposal or disposition of any Hazardous Substance on, at, under or from the real property underlying such Improvements during the construction of such Improvements and the use and operation of such Improvements following such construction, (ii) the construction of such Improvements in accordance with the Plans and Specifications and the Agency Agreement and (iii) the use and operation of such Improvements following such construction with the applicable Equipment which such Improvements support for the purposes for which they were intended have either been irrevocably obtained from the appropriate Governmental Authorities having jurisdiction or from private parties, as the case may be, or will be irrevocably obtained from the appropriate Governmental Authorities having jurisdiction or from private parties, as the case may be, prior to commencing any such construction or use and operation, as applicable; and 7. All conditions precedent contained in this Agreement and in the other Operative Agreements relating to the initial Advance to the Construction Agent of funds for the purpose of commencing construction, repairs or modifications on any Property have been satisfied in full. C. REPRESENTATIONS AND WARRANTIES UPON THE DATE OF EACH CONSTRUCTION ADVANCE THAT IS NOT AN INITIAL ADVANCE. The Construction Agent, the Lessee and the Guarantor each hereby represent and warrant as of each date on which a Construction Advance is made, when such advance is not an Initial Construction Advance, as follows: 8. The representations and warranties of the Construction Agent, the Lessee and the Guarantor set forth in the Operative Agreements (including the representations and warranties set forth in Section 8.2) are true and correct in all material respects on and as of the date of such Construction Advance as if made on and as of such date. The Construction Agent, the Lessee and the Guarantor are in compliance with their respective obligations under the Operative Agreements and there exists no Default or Event of Default under any of the Operative Agreements which is continuing and which has not been cured within any cure period expressly granted under the terms of the applicable Operative Agreement. No Default or Event of Default will occur under any of the Operative Agreements as a result of, or after giving effect to, the Advance requested by the Requisition on such date; 9. Construction of the Improvements to date has been performed in a good and workmanlike manner, substantially in accordance with the Plans and Specifications and in compliance with all Insurance Requirements and Legal Requirements, except to the extent noncompliance with any Legal Requirements would not, individually or in the aggregate, have a Material Adverse Effect; 10. All consents, licenses, permits, authorizations, assignments and building permits required by all Legal Requirements or pursuant to the terms of any contract, indenture, instrument or agreement for construction, completion, occupancy, operation, leasing or subleasing of each Property have been obtained and are in full force and effect except to the extent the failure to so obtain would not, individually or in the aggregate, have a Material Adverse Effect; 11. When completed, the Improvements shall be wholly within any building restriction lines (unless consented to by applicable Government Authorities), however established; and 12. (i) Assuming that the applicable UCC Financing Statements have been filed in the filing offices designated by the Lessee or the Construction Agent, the Advance is secured by the Lien of the Security Agreement, and (ii) there have been no Liens against the applicable Improvements since the filing of the Lender Financing Statements other than Permitted Liens. SECTION 9. PAYMENT OF CERTAIN EXPENSES. A. TRANSACTION EXPENSES. (a) Lessor agrees on the Initial Closing Date, to pay, or cause to be paid, such Transaction Expenses (if any) as may be designated by the Lessee to the Lessor; provided, however, the Lessor shall pay such amounts described in this Section 9.1(a) only if (i) such amounts are properly described in a Requisition delivered on or before the Initial Closing Date, and (ii) funds are made available by the Lenders and the Holders in connection with such Requisition in an amount sufficient to allow such payment. On the Initial Closing Date after delivery and receipt of the Requisition referenced in Section 4.2(a) hereof and satisfaction of the other conditions precedent for such date, the Holders shall make Holder Advances and the Lenders shall make Loans to the Lessor to pay for the Transaction Expenses referenced in this Section 9.1(a). The Lessee and the Guarantor jointly and severally agree to pay all amounts designated by the Lessee for payment by the Lessor in accordance with the first sentence of this Section 9.1(a) to the extent such amounts are not paid by Lessor. (b) Lessor agrees on each Property Closing Date, on the date of any Construction Advance and on the Completion Date to pay, or cause to be paid, all reasonable fees, expenses and disbursements of the various legal counsels for the Lessor and the Agent in connection with the transactions contemplated by the Operative Agreements and incurred in connection with such Property Closing Date, the date of such Advance, or such Completion Date including all Transaction Expenses (arising from such Property Closing Date, the date of such Advance or such Completion Date), all fees, expenses and disbursements incurred with respect to the various items referenced in Sections 5.3, 5.4, 5.5 and/or 5.6 (including without limitation any premiums for title insurance policies and charges for any updates to such policies) and all other reasonable fees, expenses and disbursements in connection with such Property Closing Date, the date of such Advance or such Completion Date including, without limitation, all expenses relating to and all fees, taxes and expenses for the recording, registration and filing of documents; provided, however, the Lessor shall pay such amounts described in this Section 9.1(b) only if (i) such amounts are properly described in a Requisition delivered on the applicable date and (ii) funds are made available by the Lenders and the Holders in connection with such Requisition in an amount sufficient to allow such payment. On each Property Closing Date, on the date of any Construction Advance or any Completion Date, after delivery of the applicable Requisition in satisfaction of the other conditions precedent for such date, the Holders shall make a Holder Advance and the Lenders shall make Loans to the Lessor to pay for the Transaction Expenses, fees, expenses and other disbursements referenced in this Section 9.1(b). The Lessee and the Guarantor jointly and severally agree to pay all amounts referred to in this Section 9.1(b) to the extent not paid by the Lessor. B. BROKERS' FEES AND STAMP TAXES. Lessee agrees to pay or cause to be paid any brokers' fees and any and all stamp, transfer and other similar taxes, fees and excises, if any, including any interest and penalties, which are payable in connection with the transactions contemplated by this Agreement and the other Operative Agreements and not paid by the Lessor in accordance with the terms of Section 9.1(b). C. CERTAIN FEES AND EXPENSES. Lessee and Guarantor jointly and severally agree to pay or cause to be paid (i) the initial and annual Owner Trustee's fee and all reasonable expenses of the Owner Trustee and any necessary co-trustees (including without limitation reasonable counsel fees and expenses) or any successor owner trustee, for acting as owner trustee under the Trust Agreement, (ii) all reasonable costs and expenses incurred by the Construction Agent, Lessee, the Agent, the Lenders, the Holders or the Lessor in entering into any future amendments or supplements requested by Lessee with respect to any of the Operative Agreements, whether or not such amendments or supplements are ultimately entered into, or giving or withholding of waivers of consents hereto or thereto, which have been requested by the Lessee and (iii) all reasonable costs and expenses incurred by the Lessor, the Construction Agent, the Lessee, the Holders, the Lenders or the Agent in connection with any exercise of remedies under any Operative Agreement or any purchase of any Property by the Lessee pursuant to Article XX of the Lease. D. UNUSED FEE. The Lessee and the Guarantor jointly and severally agree to pay to the Agent for the account of each Lender a commitment fee (the "Lender Commitment Fee"), and to the Agent for the account of each Holder a commitment fee (the "Holder Commitment Fee"), in each case during the Commitment Period, computed at a rate per annum equal to the Commitment Fee Rate on the average daily amount, with respect to the Lenders, of the Available Commitment of such Lender and, with respect to the Holders, of the Available Holder Commitment of such Holder during the period for which payment is made, payable quarterly in arrears on each Commitment Fee Payment Date, commencing on the first such date to occur after the Initial Closing Date. Lender Commitment Fees and Holder Commitment Fees shall be calculated on the basis of a 365- (or 366-, as the case may be) day year for the actual days elapsed. If all or a portion of any Lender Commitment Fee or Holder Commitment Fee shall not be paid when due, such overdue amount shall bear interest, payable by the Lessee and the Guarantor on demand, at a rate per annum equal to the rate described in Section 2.7(b) of the Credit Agreement plus 2%, from the date of such non-payment until such amount is paid in full (as well after as before judgment). SECTION 10. OTHER COVENANTS AND AGREEMENTS. A. COOPERATION WITH THE CONSTRUCTION AGENT OR THE LESSEE. The Holders, the Owner Trustee (at the direction of the Holders) and the Agent shall, to the extent reasonably requested by the Construction Agent or Lessee (but without assuming additional liabilities on account thereof), at the Construction Agent's or the Lessee's expense cooperate with the Construction Agent or the Lessee in connection with its covenants contained herein including, without limitation, at any time and from time to time, upon the request of the Construction Agent or the Lessee to promptly and duly execute and deliver any and all such further instruments, documents and financing statements (and continuation statements related thereto) as the Construction Agent or the Lessee may reasonably request in order to perform such covenants. B. COVENANTS OF THE OWNER TRUSTEE AND THE HOLDERS. Each of the Owner Trustee and the Holders hereby agree that so long as this Agreement is in effect: (a) Each of the Holders and the Owner Trustee (both in its trust capacity and in its individual capacity) will not create or permit to exist at any time, and will, at its own cost and expense, promptly take such action as may be necessary duly to discharge, or to cause to be discharged, all Lessor Liens on the Properties attributable to it; provided, however, that the Holders and the Owner Trustee shall not be required to so discharge any such Lessor Lien while the same is being contested in good faith by appropriate proceedings diligently prosecuted so long as such proceedings shall not involve any material danger of impairment of the Liens of the Security Documents or of the sale, forfeiture or loss of, and shall not interfere with the use or disposition of, any Property or title thereto or any interest therein or the payment of Rent; (b) Without prejudice to any right under the Trust Agreement of the Owner Trustee to resign (subject to requirement set forth in the Trust Agreement that such resignation shall not be effective until a successor shall have agreed to accept such appointment), or the Holders' rights under the Trust Agreement to remove the institution acting as Owner Trustee (after consent to such removal by the Agent as provided in the Trust Agreement), each of the Holders and the Owner Trustee hereby agrees with the Lessee and the Agent (i) not to terminate or revoke the trust created by the Trust Agreement except as permitted by Article VIII of the Trust Agreement, (ii) not to amend, supplement, terminate or revoke or otherwise modify any provision of the Trust Agreement in such a manner as to adversely affect the rights of any such party without the prior written consent of such party and (iii) to comply with all of the terms of the Trust Agreement, the nonperformance of which would adversely affect such party; (c) (i) The Owner Trustee or any successor may resign or be removed by the Holders as Owner Trustee, a successor Owner Trustee may be appointed and a corporation may become the Owner Trustee under the Trust Agreement, only in accordance with the provisions of Article IX of the Trust Agreement and, with respect to such appointment, with the consent of the Lessee, which consent shall not be unreasonably withheld or delayed; and (ii) At the direction of the Lessee the Owner Trustee will be removed by the Holders and a successor appointed in accordance with the provisions of Article IX of the Trust Agreement, provided that (A) such successor meets the requirements of Section 9.1(c) of the Trust Agreement, and (B) such successor is approved in writing by the Agent and the Holders, which approval shall not be unreasonably withheld or delayed; (d) The Owner Trustee, in its capacity as Owner Trustee under the Trust Agreement, and not in its individual capacity, shall not contract for, create, incur or assume any indebtedness, or enter into any business or other activity, other than pursuant to or under the Operative Agreements; (e) The Holders will not instruct the Owner Trustee to take any action in violation of the terms of any Operative Agreement; (f) Neither any Holder nor the Owner Trustee shall (i) commence any case, proceeding or other action with respect to the Owner Trustee under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization, arrangement, winding- up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (ii) seek appointment of a receiver, trustee, custodian or other similar official with respect to the Owner Trustee or for all or any substantial benefit of the creditors of the Owner Trustee; and neither any Holder nor the Owner Trustee shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in this paragraph; (g) The Owner Trustee shall give prompt notice to the Lessee and the Agent if the Owner Trustee's chief place of business or chief executive office, or the office where the records concerning the accounts or contract rights relating to a Property are kept, shall cease to be located at 79 South Main Street, Salt Lake City, Utah 84111, or if it shall change its name; (h) Provided that no Lease Default or Lease Event of Default has occurred and is continuing, neither the Owner Trustee nor any Holder shall, without the prior written consent of the Lessee, consent to or permit any amendment, supplement or other modification of the terms and provisions of the Credit Agreement or the Notes; (i) Neither the Owner Trustee nor any Holder shall consent to or permit any amendment, supplement or other modification of the terms and provisions of any Operative Agreement, in each case without the prior written consent of the Agent except as described in Section 10.5 of this Agreement; (j) The Owner Trustee (i) shall take such actions and shall refrain from taking such actions with respect to the Operative Agreements and/or relating to the Properties and shall grant such approvals and otherwise act or refrain from acting with respect to the Operative Agreements and/or relating to the Properties in each case as directed in writing by the Agent, notwithstanding any contrary instruction or absence of instruction by any Holder or Holders; and (ii) shall not take any action, grant any approvals or otherwise act under or with respect to the Operative Agreements and/or any matters relating to the Properties without first obtaining the prior written consent of the Agent (and without regard to any contrary instruction or absence of instruction by any Holder); (k) The Owner Trustee shall provide to the Lessee on a quarterly basis copies of the books and records of the Owner Trustee relating to the Trust Estate; (l) The Owner Trustee may, by written request to the Holders given not later than 120 days and not more than 180 days prior to the Maturity Date, make a request (an "EXTENSION REQUEST") that the Maturity Date be extended from the then applicable Maturity Date (the "Existing Maturity Date") to a date that is one year after the Existing Maturity Date (the "EXTENDED MATURITY DATE"); provided, however, in no event shall the Maturity Date be extended beyond May 25, 2005. No later than the date (the "EXTENSION RESPONSE DATE") which is 30 days after such request has been delivered to each of the Holders, each Holder will notify the Owner Trustee in writing (with a copy to the Administrative Agent) whether or not it consents to such Extension Request (which consent may be granted or denied by each Holder in its sole discretion and may be conditioned on receipt of such financial information or other documentation as may be specified by such Lender), PROVIDED, that any Holder that fails to so advise the Owner Trustee on or prior to the Extension Response Date shall be deemed to have denied such Extension Request. The extension of the Existing Maturity Date contemplated by an Extension Request shall become effective as of the Existing Maturity Date (the "EXTENSION EFFECTIVE DATE") if, but only if, each of the following conditions is satisfied: (i) all of the Lenders (other than the Non-Consenting Lenders which have been replaced by Replacement Lenders in accordance with Section 2.5(d) of the Credit Agreement) shall have consented to such Extension Request and all of the Holders (other than non-consenting Holders which have been replaced in accordance with Section 10.2(m) hereof) shall have confirmed in writing to the Owner Trustee and the Administrative Agent that they have consented to such Extension Request; (ii) (x) each of the representations and warranties made by the Owner Trustee in or pursuant to the Credit Documents shall be true and correct in all material respects on and as of each of the date of such Extension Request and such Extension Effective Date as if made on and as of such date, except to the extent relating to an earlier date (y) no Default or Event of Default shall have occurred and be continuing on the date of such Extension Request or on such Extension Effective Date and (z) on each of the date of such Extension Request and such Extension Effective Date the Holders and the Administrative Agent shall have received a certificate of the Owner Trustee as to the matters set forth in clauses (x) and (y) above and (iii) the Administrative Agent and the Holders shall have received satisfactory evidence that the Expiration Date with respect to each Property under the Lease shall have been extended to the Extended Maturity Date; and (m) The Lessee shall be permitted to replace any Holder failing or refusing to give a consent requested under Section 10.2(e) hereof with a replacement bank or other financial institution (a "REPLACEMENT HOLDER") at any time on or prior to the Extension Effective Date; provided, that (i) such replacement does not conflict with any Requirement of Law, (ii) the Replacement Holder shall purchase, at par, the Certificate of such Holder and other amounts owing to such non-consenting Holder on or prior to the date of replacement (which other amounts shall include any Loans outstanding if such Holder (or an Affiliate of such Holder) is also a Lender), and (iii) the Replacement Holder shall have agreed to be subject to all of the terms and conditions of the Agreement (including the extension of the Maturity Date contemplated by the Extension Request) and the other Operative Agreements to which the Holders are a party. B. LESSEE AND GUARANTOR COVENANTS, CONSENT AND ACKNOWLEDGMENT. (a) Lessee and Guarantor hereby each acknowledge and agree that the Owner Trustee, pursuant to the terms and conditions of the Security Agreement and the Mortgage Instruments, shall create Liens respecting the various properties described therein in favor of the Agent (which property includes specifically without limitation all rights and claims of the Owner Trustee under the Guaranty Agreement). Lessee and Guarantor hereby each irrevocably consent to the creation, perfection and maintenance of such Liens and acknowledge and agree that the Agent may hereafter exercise any or all rights of the Owner Trustee with respect to the property on which such Liens are granted. (b) Lessor hereby instructs Lessee, and Lessee hereby acknowledges and agrees, that until such time as the Loans are paid in full and the Liens evidenced by the Security Agreement and the Mortgage Instruments have been released (i) any and all Rent and any and all other amounts of any kind or type under any of the Operative Agreements due and owing or payable to the Lessor or the Owner Trustee shall instead be paid directly to the Agent or as the Agent may direct from time to time and (ii) Lessee shall cause all notices, certificates, communications and other information which is delivered, or is required to be delivered, to the Lessor, the Owner Trustee or any Holder also to be delivered at the same time to the Agent. (c) Lessee shall not consent to or permit any amendment, supplement or other modification of the terms or provisions of any Operative Agreement without, in each case, obtaining the prior written consent of the Agent. C. SHARING OF CERTAIN PAYMENTS. The parties hereto acknowledge and agree that all payments due and owing by the Lessee to the Lessor under the Lease or any of the other Operative Agreements shall be made by the Lessee directly to the Agent as more particularly provided in Section 10.3 hereof. The Holders and the Agent, on behalf of the Lenders, acknowledge the terms of Section 8 of the Credit Agreement regarding the allocation of payments and other amounts made or received from time to time under the Operative Agreements and agree all such payments and amounts are to be allocated as provided in Section 8 of the Credit Agreement. In connection therewith the Holders hereby (a) appoint the Agent to act as collateral agent for the Holders in connection with the Lien granted by the Mortgage Instruments to secure the Holder Amount and (b) acknowledge and agree and direct that the rights and remedies of the beneficiaries of the Lien of the Mortgage Instruments shall be exercised by the Agent on behalf of the Lenders and the Holders as directed from time to time by the Lenders without notice to or consent from the Holders. D. GRANT OF EASEMENTS, ETC. 1. The Agent and the Holders hereby agree that, so long as no Event of Default shall have occurred and be continuing, and until such time as the Agent gives instructions to the contrary to the Owner Trustee, the Owner Trustee shall, from time to time at the request of the Lessee, in connection with the transactions contemplated by the Agency Agreement, the Lease or the other Operative Agreements, (i) grant easements and other rights in the nature of easements with respect to any Property, (ii) release existing easements or other rights in the nature of easements which are for the benefit of any Property, and (iii) execute and deliver to any Person any instrument appropriate to confirm or effect such grants or releases. 2. To the extent requested by the Lessee with respect to any individual Property, the Owner Trustee hereby agrees to provide the Lessee with a limited power of attorney in the form attached hereto as EXHIBIT I referring to such Property and permitting the Lessee to act on behalf of Lessor in connection with the matters described in such limited power of attorney; PROVIDED, the limited power of attorney may be utilized only to the extent (x) no Default or Event of Default shall have occurred or be continuing at the time of the contemplated exercise of the Limited Power of Attorney and (y) the agreements executed by the Lessee pursuant to such limited power of attorney shall be executed in the normal course of the Lessee's business, at market rates, on commercially reasonable terms and accomplished in a manner so as not to diminish the value of any Property in any material respect. Lessee shall provide to the Agent promptly after execution such documents and other instruments executed in connection with the limited power of attorney granted hereby. The Agent, the Holder, the Lenders, the Construction Agent, the Lessor and the Lessee acknowledge and agree to the foregoing. To the extent any Event of Default has occurred and is continuing or the Lessee has received written notice of the occurrence of any Default, the limited power of attorney shall immediately terminate and be of no further force or effect unless reinstated in writing by the Owner Trustee and acknowledged and agreed to by the Holder and the Agent. Each action taken by the Lessee under the limited power of attorney shall automatically be deemed to be a representation and warranty as of such date that the conditions set forth in the first sentence of this Section 10.5(b) are satisfied in full as of such date. E. CONSTRUCTION PERIOD TERMINATION DATE. The Lessee shall have the right to request that the Owner Trustee and the Agent extend the Construction Period Termination Date from May 25, 1997 to November 25, 1997 upon delivery of a written request for such extension to the Owner Trustee and the Agent at least ninety (90) and not more than one hundred and eighty (180) days prior to May 25, 1997. The Owner Trustee and the Agent (provided that the Agent has no actual knowledge of the existence of an Event of Default) shall not unreasonably deny such request. The Construction Agent agrees that it will not commence new construction with respect to a Property within one hundred and twenty (120) days prior to the Construction Period Termination Date. SECTION 11 CREDIT AGREEMENT AND TRUST AGREEMENT. A. CONSTRUCTION AGENT'S AND LESSEE'S CREDIT AGREEMENT RIGHTS. Notwithstanding anything to the contrary contained in the Credit Agreement, the Agent, the Construction Agent, the Lessee and the Owner Trustee hereby agree that, prior to the occurrence and continuation of any Credit Agreement Default, the Construction Agent and the Lessee (as designated below) shall have the following rights: 1. the Construction Agent shall have the right and obligation (as more specifically provided in Section 5.7 hereof) to designate the portion of the Loans on which interest is due and payable for purposes of the definition of "Allocated Interest" in Section 1.1 of the Credit Agreement; 2. the Construction Agent shall have the right to give the notice referred to in Section 2.3 of the Credit Agreement, to designate the account to which a borrowing under the Credit Agreement is to be credited pursuant to Section 2.3 of the Credit Agreement and to provide the Allocation Notice; 3. the Lessee shall have the right to terminate or reduce the Commitments pursuant to Section 2.5(a) of the Credit Agreement, to make an Extension Request pursuant to Section 2.5(c) of the Credit Agreement and to replace any Non-Consenting Lender pursuant to Section 2.5(d) of the Credit Agreement; 4. the Lessee shall have the right to replace any Lender pursuant to Section 2.13(b) of the Credit Agreement; 5. the Lessee shall have the right to cure Credit Agreement Events of Default to the extent not created by any act or omission of the Lessee, the Construction Agent or the Guarantor or any Subsidiary or affiliate thereof; 6. the Lessee shall have the right to approve or disapprove any successor agent pursuant to Section 7.9 of the Credit Agreement; 7. the Lessee shall have the right to consent (or to withhold consent) to any assignment by a Lender to which the Lessee has the right to consent pursuant to Section 9.8 of the Credit Agreement; and 8. without limiting the foregoing clauses (a) through (g), and in addition thereto, the Lessee shall have the right to exercise any other right of the Owner Trustee under the Credit Agreement upon not less than five (5) Business Days' prior written notice from the Lessee to the Owner Trustee, unless the Owner Trustee objects to such exercise within five (5) Business Days of receipt of such notice. B. CONSTRUCTION AGENT'S AND LESSEE'S TRUST AGREEMENT RIGHTS. Notwithstanding anything to the contrary contained in the Trust Agreement, the Construction Agent, the Lessee, the Owner Trustee and the Holders hereby agree that, prior to the occurrence and continuation of any Lease Default or Lease Event of Default, the Construction Agent and the Lessee (as designated below) shall have the following rights: 1. the Construction Agent shall have the right and the obligation (as more specifically provided in Section 5.7 hereof) to designate the portion of the Holder Advances on which Holder Yield is due and payable for purposes of the definition of Allocated Return in Section 3.1(c) of the Trust Agreement; 2. the Lessee shall have the right to request that another funding office be designated pursuant to Section 3.10(b) of the Trust Agreement; 3. no removal of the Owner Trustee and appointment of a successor Owner Trustee pursuant to Section 9.1 of the Trust Agreement shall be made without the prior written consent (not to be unreasonably withheld or delayed) of the Lessee; and 4. the Holders and the Owner Trustee shall not amend, supplement or otherwise modify any provision of the Trust Agreement in such a manner as to adversely affect the rights of the Lessee without the prior written consent (not to be unreasonably withheld or delayed) of the Lessee. SECTION 12 TRANSFER OF INTEREST. A. RESTRICTIONS ON TRANSFER. Any Lender may assign or transfer all or a portion of its interest hereunder and under the other Operative Agreements in accordance with the terms of Section 9.8 of the Credit Agreement. The Holders may, directly or indirectly, assign, convey or otherwise transfer any of their right, title or interest in or to the Trust Estate or the Trust Agreement with the consent of the Agent and the Lessee, which consent shall not be unreasonably withheld or delayed and, as more specifically provided in the Trust Agreement, with the consent of the other Holders; provided, however, (i) subject to the following subparagraph (ii), the Lessee may withhold its consent in its sole discretion with respect to any proposed assignment, transfer or other conveyance to any Person that is deemed by the Lessee to be a competitor of the Guarantor (or any of its affiliates) or to be an affiliate of such a competitor, and (ii) notwithstanding the foregoing provisions of this sentence, the consent of the Lessee to such assignment, transfer or other conveyance shall not be required during the existence and continuance of any Event of Default. The Owner Trustee may, subject to the Lien of the applicable Security Documents but only with the prior written consent of the Agent and the Holders (which consent may be withheld by the Agent and/or the Holders in their sole discretion), directly or indirectly, assign, convey, appoint an agent with respect to enforcement of, or otherwise transfer any of its right, title or interest in or to any Property, the Lease, the Trust Agreement, this Agreement (including, without limitation, any right to indemnification thereunder), or any other document relating to a Property or any interest in a Property as provided in the Trust Agreement and the Lease. B. EFFECT OF TRANSFER. From and after any transfer effected in accordance with this Section 12, the transferor shall be released, to the extent of such transfer, from its liability hereunder and under the other documents to which it is a party in respect of obligations to be performed on or after the date of such transfer. Upon any transfer by the Owner Trustee or a Holder or a Lender as above provided, any such transferee shall assume the obligations of the Owner Trustee and the Lessor or Holder or Lender, as the case may be, and shall be deemed an "Owner Trustee", "Lessor", "Holder", or "Lender" as the case may be, for all purposes of such documents and each reference herein to the transferor shall thereafter be deemed a reference to such transferee for all purposes, except as provided in the preceding sentence. Notwithstanding any transfer of all or a portion of the transferor's interest as provided in this Section 12, the transferor shall be entitled to all benefits accrued and all rights vested prior to such transfer including, without limitation, rights to indemnification under any such document. SECTION 13 INDEMNIFICATION. A. GENERAL INDEMNITY. Whether or not any of the transactions contemplated hereby shall be consummated, the Indemnity Provider hereby assumes liability for and agrees to defend, indemnify and hold harmless each Indemnified Person on an After Tax Basis from and against any Claims, which may be imposed on, incurred by or asserted against an Indemnified Person (other than to the extent such Claims arise from the gross negligence, willful misconduct or willful breach of such Indemnified Person) in any way relating to or arising or alleged to arise out of the execution, delivery, performance or enforcement of this Agreement, the Lease or any other Operative Agreement or on or with respect to any Property or any component thereof, including, without limitation, Claims in any way relating to or arising or alleged to arise out of (a) the financing, refinancing, purchase, acceptance, rejection, ownership, design, construction, development, delivery, acceptance, nondelivery, leasing, subleasing, possession, use, operation, repair, modification, transportation, condition, sale, return, repossession (whether by summary proceedings or otherwise), or any other disposition of a Property or any part thereof, including the acquisition, holding or disposition of any interest in any Property, lease or agreement comprising a portion of any thereof; (b) any latent or other defects in any property whether or not discoverable by an Indemnified Person or the Indemnity Provider; (c) a violation of Environmental Laws, Environmental Claims or other loss of or damage to any property or the environment relating to any Property, the Lease, the Agency Agreement or the Indemnity Provider; (d) the Operative Agreements, or any transaction contemplated thereby; (e) any breach by the Indemnity Provider of any of its representations or warranties under the Operative Agreements to which the Indemnity Provider is a party or failure by the Indemnity Provider to perform or observe any covenant or agreement to be performed by it under any of the Operative Agreement; (f) the transactions contemplated hereby or by any other Operative Agreement, in respect of the application of Parts 4 and 5 of Subtitle B of Title I of ERISA; and (g) personal injury, death or property damage, including Claims based on strict or absolute liability in tort. If a written Claim is made against any Indemnified Person or if any proceeding shall be commenced against such Indemnified Person (including a written notice of such proceeding), for any Claim, such Indemnified Person shall promptly notify the Indemnity Provider in writing and shall not take action with respect to such Claim without the consent of the Indemnity Provider for thirty (30) days after the receipt of such notice by the Indemnity Provider; provided, however, that, in the case of any such Claim, if action shall be required by law or regulation to be taken prior to the end of such 30-day period, such Indemnified Person shall, in such notice to the Indemnity Provider, inform the Indemnity Provider of such shorter period, and no action shall be taken with respect to such Claim without the consent of the Indemnity Provider before 7 days before the end of such shorter period; provided, further, that the failure of such Indemnified Person to give the notices referred to in this sentence shall not diminish the Indemnity Provider's obligation hereunder except to the extent such failure materially precludes the Indemnity Provider from contesting such Claim. If, within thirty (30) days of receipt of such notice from the Indemnified Person (or such shorter period as the Indemnified Person has notified the Indemnity Provider is required by law or regulation for the Indemnified Person to respond to such Claim), the Indemnity Provider shall request in writing that such Indemnified Person respond to such Claim, the Indemnified Person shall, at the expense of the Indemnity Provider, in good faith conduct and control such action (including, without limitation, by pursuit of appeals) (provided, however, that (A) if such Claim can be pursued by the Indemnity Provider on behalf of such Indemnified Person, the Indemnified Person, at the Indemnity Provider's request, shall allow the Indemnity Provider to conduct and control the response to such Claim and (B) in the case of any Claim, the Indemnified Person may request the Indemnity Provider to conduct and control the response to such Claim (with counsel to be selected by the Indemnity Provider and consented to by such Indemnified Person, such consent not to be unreasonably withheld; provided, however, that (i) any Indemnified Person may retain separate counsel at the expense of the Indemnity Provider in the event of a conflict that could have a materially adverse effect on the Indemnified Person and (ii) any such separate counsel shall be directed by the Indemnified Person to cooperate in good faith with the Indemnity Provider and its counsel)) by, in the sole discretion of the Person conducting and controlling the response to such Claim (1) resisting payment thereof, (2) not paying the same except under protest, if protest is necessary and proper, (3) if the payment be made, using reasonable efforts to obtain a refund thereof in appropriate administrative and judicial proceedings, or (4) taking such other action as is reasonably requested by the Indemnity Provider from time to time. The party controlling the response to any Claim shall consult in good faith with the non-controlling party and shall keep the non-controlling party reasonably informed as to the conduct of the response to such Claim; provided, that all decisions ultimately shall be made in the discretion of the controlling party. The parties agree that an Indemnified Person may at any time decline to take further action with respect to the response to such Claim and may settle such Claim if such settlement would not have a materially adverse effect on the Lessee or the Guarantor and if such Indemnified Person shall waive its rights to any indemnity from the Indemnity Provider that otherwise would be payable in respect of such Claim (and any future Claim, the pursuit of which is precluded by reason of such resolution of such Claim) and shall pay to the Indemnity Provider any amount previously paid or advanced by the Indemnity Provider pursuant to this Section 13.1 by way of indemnification or advance for the payment of an amount regarding such Claim. Notwithstanding the foregoing provisions of this Section 13.1, an Indemnified Person shall not be required to take any action and no Indemnity Provider shall be permitted to respond to any Claim in its own name or that of the Indemnified Person unless (A) the Indemnity Provider shall have agreed to pay and shall pay to such Indemnified Person on demand and on an After Tax Basis all reasonable costs, losses and expenses that such Indemnified Person actually incurs in connection with such Claim, including, without limitation, all reasonable legal, accounting and investigatory fees and disbursements, (B) in the case of a Claim that must be pursued in the name of an Indemnified Person (or an Affiliate thereof), the amount of the potential indemnity (taking into account all similar or logically related Claims that have been or could be raised for which the Indemnity Provider may be liable to pay an indemnity under this Section 13.1) exceeds $75,000, (C) the Indemnified Person shall have reasonably determined that the action to be taken will not result in any material danger of sale, forfeiture or loss of any Property, or any part thereof or interest therein, will not interfere with the payment of Rent, and will not result in risk of criminal liability, (D) if such Claim shall involve the payment of any amount prior to the resolution of such Claim, the Indemnity Provider shall provide to the Indemnified Person an interest-free advance in an amount equal to the amount that the Indemnified Person is required to pay (with no additional net after-tax cost to such Indemnified Person), and (E) no Event of Default shall have occurred and be continuing. In addition, an Indemnified Person shall not be required to contest any Claim in its name (or that of an Affiliate) if the subject matter thereof shall be of a continuing nature and shall have previously been decided adversely by a court of competent jurisdiction pursuant to the contest provisions of this Section 13.1, unless there shall have been a change in law (or interpretation thereof) and the Indemnified Person shall have received, at the Indemnity Provider's expense, an opinion of independent counsel selected by the Indemnified Person and reasonably acceptable to the Indemnity Provider stating that as a result of such change in law (or interpretation thereof), it is more likely than not that the Indemnified Person will prevail in such contest. B. GENERAL TAX INDEMNITY. (a) The Indemnity Provider shall pay and assume liability for, and does hereby agree to indemnify, protect and defend each Property and all Indemnified Persons, and hold them harmless against, all Impositions on an After Tax Basis, and all payments pursuant to the Operative Agreements shall be made free and clear of and without deduction for any and all present and future Impositions. (b) Notwithstanding anything to the contrary in Section 13.2(a) hereof, franchise taxes or taxes imposed on the overall gross or net income of an Indemnified Person (other than taxes in the nature of sales, use, rental, transfer, property or similarly-based taxes) shall be excluded from the indemnity required by Section 13.2(a); PROVIDED, HOWEVER, that the provisions of this Section 13.2(b) shall not exclude from the indemnity described in Section 13.2(a) hereof (i) income taxes imposed on the Lessor to the extent that such taxes do not relieve an Indemnified Person other than Lessor from income taxes that would not have been subject to indemnification under Section 13.2(a), and (ii) franchise or income taxes to the extent that such taxes are imposed on an Indemnified Person by any state or local jurisdiction in which the Indemnified Person would not be subject to such taxes but for the location, possession or use of any Property in such jurisdiction (it being understood that any such indemnity would be payable only to the extent of the net harm incurred by such Indemnified Person from such taxes, taking into account any incremental tax benefit in another tax jurisdiction resulting from payment of such taxes). (c) (i) Subject to the terms of Section 13.2(f), the Indemnity Provider shall pay or cause to be paid all Impositions directly to the taxing authorities where feasible and otherwise to the Indemnified Person, as appropriate, and the Indemnity Provider shall at its own expense, upon such Indemnified Person's reasonable request, furnish to such Indemnified Person copies of official receipts or other satisfactory proof evidencing such payment. (ii) In the case of Impositions for which no contest is conducted pursuant to Section 13.2(f) and which the Indemnity Provider pays directly to the taxing authorities, the Indemnity Provider shall pay such Impositions prior to the latest time permitted by the relevant taxing authority for timely payment. In the case of Impositions for which the Indemnity Provider reimburses an Indemnified Person, the Indemnity Provider shall do so within thirty (30) days after receipt by the Indemnity Provider of demand by such Indemnified Person describing in reasonable detail the nature of the Imposition and the basis for the demand (including the computation of the amount payable). In the case of Impositions for which a contest is conducted pursuant to Section 13.2(f), the Indemnity Provider shall pay such Impositions or reimburse such Indemnified Person for such Impositions, to the extent not previously paid or reimbursed pursuant to subsection (a), prior to the latest time permitted by the relevant taxing authority for timely payment after conclusion of all contests under Section 13.2(f). (d) The Indemnity Provider shall be responsible for preparing and filing any real and personal property or ad valorem tax returns in respect of each Property. In case any other report or tax return shall be required to be made with respect to any obligations of the Indemnity Provider under or arising out of subsection (a) and of which the Indemnity Provider has knowledge, the Indemnity Provider, at its sole cost and expense, shall notify the relevant Indemnified Person of such requirement and (except if such Indemnified Person notifies the Indemnity Provider that such Indemnified Person intends to file such report or return) (A) to the extent required or permitted by and consistent with Legal Requirements, make and file in Indemnity Provider's name such return, statement or report; and (B) in the case of any other such return, statement or report required to be made in the name of such Indemnified Person, advise such Indemnified Person of such fact and prepare such return, statement or report for filing by such Indemnified Person or, where such return, statement or report shall be required to reflect items in addition to any obligations of the Indemnity Provider under or arising out of subsection (a), provide such Indemnified Person at the Indemnity Provider's expense with information sufficient to permit such return, statement or report to be properly made with respect to any obligations of the Indemnity Provider under or arising out of subsection (a). Such Indemnified Person shall, upon the Indemnity Provider's request, provide any data maintained by such Indemnified Person (and not otherwise available to or within the control of the Indemnity Provider) with respect to each Property which the Indemnity Provider may reasonably require to prepare any required tax returns or reports, and the Indemnity Provider shall reimburse the Indemnified Person for any third party and out-of-pocket costs that the Indemnified Person may incur in providing such information. Notwithstanding anything to the contrary in this subsection (d), the Indemnity Provider shall not be required to prepare any income or franchise tax returns for any Indemnified Person. (e) If an Indemnified Person does not notify the Indemnity Provider in writing within thirty (30) days after its receipt of a written Claim for any Imposition against such Indemnified Person (or within such shorter period of time as may be necessary to notify the Indemnity Provider at least seven (7) days prior to the time that action is required by law or regulation to be taken with respect to such Claim, but in no event less than ten (10) days after the Indemnified Person's receipt of such Claim), then the Indemnity Provider shall have no obligation under Section 13.2(a) to indemnify such Indemnified Person for any interest, penalties or additions to tax attributable to the period during which notice is not provided as required by this subsection (e). (f) (i) If a written Claim is made against any Indemnified Person or if any proceeding shall be commenced against such Indemnified Person (including a written notice of such proceeding), for any Impositions, such Indemnified Person shall promptly notify the Indemnity Provider in writing and shall not take action with respect to such Claim or proceeding without the consent of the Indemnity Provider for thirty (30) days after the receipt of such notice by the Indemnity Provider; provided, however, that, in the case of any such Claim or proceeding, if action shall be required by law or regulation to be taken prior to the end of such 30-day period, such Indemnified Person shall, in such notice to the Indemnity Provider, inform the Indemnity Provider of such shorter period, and no action shall be taken with respect to such Claim or proceeding without the consent of the Indemnity Provider before 7 days before the end of such shorter period; provided, further, that the failure of such Indemnified Person to give the notices referred to this sentence shall not diminish the Indemnity Provider's obligation hereunder except to the extent such failure materially precludes the Indemnity Provider from contesting such Claim. (ii) If, within thirty (30) days of receipt of such notice from the Indemnified Person (or such shorter period as the Indemnified Person has notified the Indemnity Provider is required by law or regulation for the Indemnified Person to commence such contest), the Indemnity Provider shall request in writing that such Indemnified Person contest such Imposition, the Indemnified Person shall, at the expense of the Indemnity Provider, in good faith conduct and control such contest (including, without limitation, by pursuit of appeals) relating to the validity, applicability or amount of such Impositions (provided, however, that (A) if such contest involves a tax other than a tax on net income and can be pursued independently from any other proceeding involving a tax liability of such Indemnified Person, the Indemnified Person, at the Indemnity Provider's request, shall allow the Indemnity Provider to conduct and control such contest and (B) in the case of any contest, the Indemnified Person may request the Indemnity Provider to conduct and control such contest (with counsel to be selected by the Indemnity Provider and consented to by such Indemnified Person, such consent not to be unreasonably withheld; provided, however, that any Indemnified Person may retain separate counsel at the expense of the Indemnity Provider in the event of a conflict)) by, in the sole discretion of the Person conducting and controlling such contest, (1) resisting payment thereof, (2) not paying the same except under protest, if protest is necessary and proper, (3) if the payment be made, using reasonable efforts to obtain a refund thereof in appropriate administrative and judicial proceedings, or (4) taking such other action as is reasonably requested by the Indemnity Provider from time to time. (iii) The party controlling any contest shall consult in good faith with the non-controlling party and shall keep the non- controlling party reasonably informed as to the conduct of such contest; provided, that all decisions ultimately shall be made in the sole discretion of the controlling party. The parties agree that an Indemnified Person may at any time decline to take further action with respect to the contest of any Imposition and may settle such contest if such Indemnified Person shall waive its rights to any indemnity from the Indemnity Provider that otherwise would be payable in respect of such Claim (and any future Claim by any taxing authority, the contest of which is precluded by reason of such resolution of such Claim) and shall pay to the Indemnity Provider any amount previously paid or advanced by the Indemnity Provider pursuant to this Section 13.2 by way of indemnification or advance for the payment of an Imposition other than expenses of such contest. (iv) Notwithstanding the foregoing provisions of this Section 13.2, an Indemnified Person shall not be required to take any action and no Indemnity Provider shall be permitted to contest any Impositions in its own name or that of the Indemnified Person unless (A) the Indemnity Provider shall have agreed to pay and shall pay to such Indemnified Person on demand and on an After Tax Basis all reasonable third party and out-of-pocket costs, losses and expenses that such Indemnified Person actually incurs in connection with contesting such Impositions, including, without limitation, all reasonable legal, accounting and investigatory fees and disbursements, (B) in the case of a Claim that must be pursued in the name of an Indemnified Person (or an Affiliate thereof), the amount of the potential indemnity (taking into account all similar or logically related Claims that have been or could be raised in any audit involving such Indemnified Person for which the Indemnity Provider may be liable to pay an indemnity under this Section 13.2) exceeds $75,000, (C) the Indemnified Person shall have reasonably determined that the action to be taken will not result in any material danger of sale, forfeiture or loss of any Property, or any part thereof or interest therein, will not interfere with the payment of Rent, and will not result in risk of criminal liability, (D) if such contest shall involve the payment of the Imposition prior to the contest, the Indemnity Provider shall provide to the Indemnified Person an interest-free advance in an amount equal to the Imposition that the Indemnified Person is required to pay (with no additional net after- tax cost to such Indemnified Person), and (E) no Event of Default shall have occurred and be continuing. In no event shall an Indemnified Person be required to appeal an adverse judicial determination to the United States Supreme Court. In addition, an Indemnified Person shall not be required to contest any Claim in its name (or that of an Affiliate) if the subject matter thereof shall be of a continuing nature and shall have previously been decided adversely by a court of competent jurisdiction pursuant to the contest provisions of this Section 13.2, unless there shall have been a change in law (or interpretation thereof) and the Indemnified Person shall have received, at the Indemnity Provider's expense, an opinion of independent tax counsel selected by the Indemnified Person and reasonably acceptable to the Indemnity Provider stating that as a result of such change in law (or interpretation thereof), it is more likely than not that the Indemnified Person will prevail in such contest. (g) EXCEPTION. Notwithstanding anything to the contrary in Sections 13.2(a) or (b) hereof, an Indemnity Provider shall not be required to indemnify any Indemnified Person to the extent that any action taken or failed to be taken by any Indemnified Person causes or otherwise results in the amount of any tax-related Imposition or other tax-related indemnifiable liability to be greater than the amount such Imposition or liability would otherwise have been; PROVIDED THAT, this exception shall only apply to the extent that: (i) such action or inaction restricts, limits or otherwise expressly or impliedly modifies or amends one or more of the provision of the Operative Agreements without the consent of the Indemnity Provider and such restriction, limitation or modification results in an increase in the amount of a tax-related Imposition or other tax-related indemnifiable liability; or (ii) such action or inaction constitutes gross negligence or willful misconduct on the part of an Indemnified Person, or constitutes a material breach of a covenant applicable to an Indemnified Person under the Operative Agreements. C. JOINT AND SEVERAL OBLIGATIONS OF THE INDEMNITY PROVIDER. Notwithstanding any of the provisions of any other Operative Agreement, Foundation Health Medical Services and Foundation Health Corporation hereby acknowledge and agree that such entities have jointly and severally assumed and undertaken the indemnity obligations and other obligations under this Section 13. SECTION 14 MISCELLANEOUS. A. SURVIVAL OF AGREEMENTS. The representations, warranties, covenants, indemnities and agreements of the parties provided for in the Operative Agreements, and the parties' obligations under any and all thereof, shall survive the execution and delivery of this Agreement, the transfer of any Property to the Owner Trustee, the acquisition of any Equipment, the construction of any Improvements, any disposition of any interest of the Owner Trustee in any Property or any interest of the Holders in the Owner Trust, the payment of the Notes and any disposition thereof and shall be and continue in effect notwithstanding any investigation made by any party and the fact that any party may waive compliance with any of the other terms, provisions or conditions of any of the Operative Agreements. Except as otherwise expressly set forth herein or in other Operative Agreements, the indemnities of the parties provided for in the Operative Agreements shall survive the expiration or termination of any thereof. B. NO BROKER, ETC. Each of the parties hereto represents to the others that it has not retained or employed any broker, finder or financial adviser to act on its behalf in connection with this Agreement, nor has it authorized any broker, finder or financial adviser retained or employed by any other Person so to act. Any party who is in breach of this representation shall indemnify and hold the other parties harmless from and against any liability arising out of such breach of this representation. C. NOTICES. Unless otherwise specifically provided herein, all notices, consents, directions, approvals, instructions, requests and other communications required or permitted by the terms hereof to be given to any Person shall be given in writing by United States mail, by nationally recognized courier service or by hand and any such notice shall become effective upon receipt and shall be directed to the address of such Person as indicated: If to the Lessee, the Construction Agent or the Guarantor, to it at the following address: Foundation Health Corporation 3400 Data Drive Rancho Cordova, California 95670 Attn: Chief Financial Officer Telephone No.: (916) 631-5000 Telecopy No.: (916) 631-5335 If to the Owner Trustee, to it at the following address: First Security Bank of Utah, N.A. 79 South Main Street Salt Lake City, Utah 84111 Attn: Val T. Orton Telephone No.: (801) 246-5300 Telecopy No.: (801) 246-5053 If to the Holders, to each such Holder at the following address: Sumitomo Bank Leasing and Finance, Inc. 277 Park Avenue New York, New York 10172 Attn: Chief Credit Officer Telephone No.: (212) 224-5205 Telecopy No.: (212) 224-5222 The Bank of Nova Scotia 101 California Street, 48th Floor San Francisco, California 94111 Attn: Alan Pendergast Telephone No.: (415) 986-1100 Telecopy No.: (415) 397-0791 NationsBank of Texas, N.A. 444 S. Flower Street, Suite 1500 Los Angeles, California 90071 Attn: Mr. Brad DeSpain Telephone No.: (213) 234-4912 Telecopy No.: (213) 624-5815 If to the Agent, to it at the following address: NationsBank of Texas, N.A. 444 S. Flower Street, Suite 1500 Los Angeles, California 90071 Attn: Mr. Brad DeSpain Telephone No.: (213) 236-4912 Telecopy No.: (213) 624-5815 With a copy to: NationsBank of Texas, N.A. Corporate Credit Services 901 Main Street, 13th Floor Dallas, Texas 95201 Attn: Marie Lancaster Telecopy No.: (214) 508-2515 From time to time any party may designate a new address for purposes of notice hereunder by notice to each of the other parties hereto. D. COUNTERPARTS. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument. E. AMENDMENTS AND TERMINATION. Neither this Agreement nor any of the terms hereof may be terminated, amended, supplemented, waived or modified except by an instrument in writing signed by the party against which the enforcement of the termination, amendment, supplement, waiver or modification shall be sought. This Agreement may be terminated by an agreement signed in writing by the Owner Trustee, the Holders, the Lessee, the Guarantor, the Agent and the Lenders. F. HEADINGS, ETC. The Table of Contents and headings of the various Articles and Sections of this Agreement are for convenience of reference only and shall not modify, define, expand or limit any of the terms or provisions hereof. G. PARTIES IN INTEREST. Except as expressly provided herein, none of the provisions of this Agreement are intended for the benefit of any Person except the parties hereto; provided, that the Lenders are intended to be third-party beneficiaries of this Agreement. H. GOVERNING LAW; SUBMISSION TO JURISDICTION; WAIVER OF JURY TRIAL; FINAL AGREEMENT. (a) THIS AGREEMENT AND THE OTHER OPERATIVE AGREEMENTS AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES OF SUCH STATE (EXCEPT TO THE EXTENT MATTERS RELATED TO A PROPERTY ARE NECESSARILY GOVERNED BY THE LAW OF THE STATE IN WHICH SUCH PROPERTY IS LOCATED). (b) THE LESSEE, THE GUARANTOR, THE AGENT, THE HOLDERS, THE LESSOR AND THE TRUST COMPANY, TO THE FULLEST EXTENT PERMITTED BY LAW, EACH HEREBY KNOWINGLY, INTENTIONALLY AND VOLUNTARILY, WITH AND UPON THE ADVICE OF COMPETENT COUNSEL, (i) SUBMITS TO PERSONAL JURISDICTION IN THE STATE OF CALIFORNIA OVER ANY SUIT, ACTION OR PROCEEDING BY ANY PERSON ARISING FROM OR RELATING TO THIS AGREEMENT OR ANY OTHER OF THE OPERATIVE AGREEMENTS, (ii) AGREES THAT ANY SUCH ACTION, SUIT OR PROCEEDING MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION SITTING IN LOS ANGELES COUNTY, CALIFORNIA, (iii) SUBMITS TO THE JURISDICTION OF SUCH COURTS, AND (iv) TO THE FULLEST EXTENT PERMITTED BY LAW, THE LESSEE AND THE GUARANTOR AGREE THAT THEY WILL NOT BRING ANY ACTION, SUIT OR PROCEEDING IN ANY FORUM OTHER THAN LOS ANGELES COUNTY, CALIFORNIA (BUT NOTHING HEREIN SHALL AFFECT THE RIGHT OF AGENT (ON BEHALF OF THE LENDERS) OR THE TRUSTEE (ON BEHALF OF THE HOLDERS OR THE LENDERS) TO BRING ANY ACTION, SUIT OR PRECEDING IN ANY OTHER FORUM. THE LESSEE, THE GUARANTOR, THE AGENT, THE HOLDERS, THE LESSOR AND THE TRUST COMPANY EACH FURTHER CONSENTS AND AGREES TO SERVICE OF ANY SUMMONS, COMPLAINT OR OTHER LEGAL PROCESS IN ANY SUCH SUIT, ACTION OR PROCEEDING BY REGISTERED OR CERTIFIED U.S. MAIL, POSTAGE PREPAID, TO SUCH PERSON AT THE ADDRESS FOR NOTICES DESCRIBED IN SECTION 14.3 HEREOF, AND CONSENTS AND AGREES THAT SUCH SERVICE SHALL CONSTITUTE IN EVERY RESPECT VALID AND EFFECTIVE SERVICE (BUT NOTHING HEREIN SHALL AFFECT THE VALIDITY OR EFFECTIVENESS OF PROCESS SERVED IN ANY OTHER MANNER PERMITTED BY LAW). (c) THE LESSEE, THE GUARANTOR, THE AGENT, THE HOLDERS, THE LESSOR AND THE TRUST COMPANY, TO THE FULLEST EXTENT PERMITTED BY LAW, EACH HEREBY KNOWINGLY, INTENTIONALLY AND VOLUNTARILY, WITH AND UPON THE ADVICE OF COMPETENT COUNSEL, WAIVES, RELINQUISHES AND FOREVER FORGOES THE RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO THIS AGREEMENT, OR IN CONNECTION WITH ANY OF THE OTHER OPERATIVE AGREEMENTS, IN EACH OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE. (d) THE WRITTEN OPERATIVE AGREEMENT REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. I. SEVERABILITY. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. J. LIABILITY LIMITED. (a) The Agent, the Lessee, the Guarantor and the Holders each acknowledge and agree that the Owner Trustee is (except as otherwise expressly provided herein or therein) entering into this Agreement and the other Operative Agreements to which it is a party (other than the Trust Agreement and to the extent otherwise provided in Section 7.2 of this Agreement), solely in its capacity as trustee under the Trust Agreement and not in its individual capacity and that Trust Company shall not be liable or accountable under any circumstances whatsoever in its individual capacity for or on account of any statements, representations, warranties, covenants or obligations stated to be those of the Owner Trustee, except for its own gross negligence or willful misconduct and as otherwise expressly provided herein or in the other Operative Agreements. (b) Anything to the contrary contained in this Agreement, the Credit Agreement, the Notes or in any other Operative Agreement notwithstanding, neither the Lessor nor any Holder nor any officer, director, shareholder, or partner thereof, nor any of the successors or assigns of the foregoing (all such Persons being hereinafter referred to collectively as the "Exculpated Persons"), shall be personally liable in any respect for any liability or obligation relating to the payment of the principal of, or interest on, the Notes. The Agent (for itself and on behalf of the Lenders) agrees that, in the event the Agent or any Lender pursues any remedies available to them under the Credit Agreement, the Notes, this Agreement, the Security Agreement, the Mortgage Instruments or under any other Operative Agreement, neither the Lenders nor the Agent shall have any recourse against any Exculpated Person, for any deficiency, loss or Claim for monetary damages or otherwise resulting therefrom and recourse shall be had solely and exclusively against the Trust Estate and the Lessee; but nothing contained herein shall be taken to prevent recourse against or the enforcement of remedies against the Trust Estate in respect of any and all liabilities, obligations and undertakings contained herein, in the Credit Agreement, in the Notes, in the Security Agreement, the Mortgage Instruments or in any other Operative Agreement. Notwithstanding the provisions of this Section, nothing in this Agreement, the Credit Agreement, the Notes, the Security Agreement, the Mortgage Instruments or any other Operative Agreement shall: (i) constitute a waiver, release or discharge of any indebtedness or obligation evidenced by the Notes or arising under this Agreement, the Security Agreement, the Mortgage Instruments or the Credit Agreement or secured by the Security Agreement, the Mortgage Instruments or any other Operative Agreement, but the same shall continue until paid or discharged; (ii) relieve the Lessor from liability and responsibility for (but only to the extent of the damages arising by reason of): (a) active waste knowingly committed by the Lessor with respect to the Properties or (b) any fraud on the part of the Lessor or any such Exculpated Person; (iii) relieve the Lessor from liability and responsibility for (but only to the extent of the moneys misappropriated, misapplied or not turned over) misappropriation or misapplication by the Lessor (i.e., application in a manner contrary to any Operative Agreement) of any insurance proceeds or condemnation award paid or delivered to the Lessor by any Person other than the Agent, or any deposits or any escrows or amounts owed by the Lessee under the Agency Agreement held by the Lessor, or any rents or other income received by the Lessor from the Lessee that are not turned over to the Agent; or (iv) affect or in any way limit the Agent's rights and remedies under any Operative Agreement with respect to the Rents and its rights and powers thereunder or to obtain a judgment against the Lessor's interest in the Properties or to the extent the Lessor may be personally liable as otherwise contemplated in clauses (ii) and (iii) of this Section. K. RIGHTS OF LESSEE. Notwithstanding any provision of the Operative Agreements, if at any time all obligations (i) of the Owner Trustee under the Credit Agreement and the Security Documents and (ii) of the Lessee under the Operative Agreements have in each case been satisfied or discharged in full, then the Lessee shall be entitled to (a) terminate the Lease and (b) receive all amounts then held under the Operative Agreements and all proceeds with respect to any of the Properties. Upon the termination of the Lease pursuant to the foregoing clause (a), the Lessor shall transfer to the Lessee all of its right, title and interest in and to any Properties then subject to the Lease and any amounts or proceeds referred to in the foregoing clause (b) shall be paid over to the Lessee. L. FURTHER ASSURANCES. The parties hereto shall promptly cause to be taken, executed, acknowledged or delivered, at the sole expense of the Lessee and the Guarantor, all such further acts, conveyances, documents and assurances as the other parties may from time to time reasonably request in order to carry out and effectuate the intent and purposes of this Participation Agreement, the other Operative Agreements and the transactions contemplated hereby and thereby (including, without limitation, the preparation, execution and filing of any and all Uniform Commercial Code financing statements and other filings or registrations which the parties hereto may from time to time request to be filed or effected). The Lessee and the Guarantor, at their own expense and without need of any prior request from any other party, shall take such action as may be necessary (including any action specified in the preceding sentence), or (if Owner Trustee shall so request) as so requested, in order to maintain and protect all security interests provided for hereunder or under any other Operative Agreement. M. CALCULATIONS UNDER OPERATIVE AGREEMENTS. The parties hereto agree that all calculations and numerical determinations to be made under the Operative Agreements by the Owner Trustee shall be made by the Agent. N. CONFIDENTIALITY. Each of the Owner Trustee, the Holders, the Agent and the Lenders severally agrees to use reasonable efforts to keep confidential all non-public information pertaining to the Guarantor, the Lessee and their respective Subsidiaries which is provided to it by the Guarantor, the Lessee or their Subsidiaries, and shall not disclose such information to any Person except: 1. to the extent such information is public when received by such Person or becomes public thereafter due to the act or omission of any party other than such Person; 2. to the extent such information is independently obtained from a source other than the Lessee or the Guarantor or any of their Subsidiaries and such information from such source is not, to such Person's knowledge, subject to an obligation of confidentiality or, if such information is subject to an obligation of confidentiality, that disclosure of such information is permitted; 3. to counsel, auditors or accountants retained by any such Person or any Affiliates of any such Person provided they agree to keep such information confidential as if such Person or Affiliate were party to this Agreement and to financial institution regulators, including examiners of any Lender, the Agent or the Owner Trustee, any Holder or any Affiliate in the course of examinations of such Persons; 4. in connection with any litigation or the enforcement or preservation of the rights of the Agent, the Owner Trustee, the Lessor, any Lender or any Holder under the Operative Agreements; 5. to the extent required by any applicable statute, rule or regulation or court order (including, without limitation, by way of subpoena) or pursuant to the request of any regulatory or Governmental Authority having jurisdiction over any such Person; provided, however, that such Person shall endeavor (if not otherwise prohibited by Law) to notify the Lessee prior to any disclosure made pursuant to this clause (e), except that no such Person shall be subject to any liability whatsoever for any failure to so notify the Lessee; 6. the Agent may disclose such information to the Lenders and the Owner Trustee may disclose such information to the Holders; or 7. to the extent disclosure to other financial institutions or other Persons is appropriate in connection with any proposed or actual (i) assignment or grant of a participation by any of the Lenders of interests in the Credit Agreement and/or any Note to such other financial institutions (who will in turn be required by the Agent to agree in writing to maintain confidentiality as if they were Lenders originally party to the Credit Agreement) or (ii) assignment by any Holder of interests in the Trust Agreement to another Person (who will in turn be required by the transferring Holder to agree in writing to maintain confidentiality as if it were a Holder originally party to this Participation Agreement). [signature pages follow] IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective officers thereunto duly authorized as of the day and year first above written. FOUNDATION HEALTH MEDICAL SERVICES, as Construction Agent and as Lessee By: ---------------------- Name: -------------------- Title: ------------------- FOUNDATION HEALTH CORPORATION, as Guarantor By: --------------------- Name: ------------------- Title: ------------------ FIRST SECURITY BANK OF UTAH, N.A., not individually, except as expressly stated herein, but solely as Owner Trustee under the FH Trust 1995-1 By: --------------------- Name: ------------------- Title: ------------------ SUMITOMO BANK LEASING AND FINANCE, INC., as a Holder By: --------------------- Name: ------------------- Title: ------------------ THE BANK OF NOVA SCOTIA, as a Holder By: --------------------- Name: ------------------- Title: ------------------ NATIONSBANK OF TEXAS, N.A., as a Holder By: --------------------- Name: ------------------- Title: ------------------ NATIONSBANK OF TEXAS, N.A., as Administrative Agent and as a Lender By: --------------------- Name: ------------------- Title: ------------------ THE SUMITOMO BANK, LIMITED, SAN FRANCISCO BRANCH, as a Lender By: --------------------- Name: ------------------- Title: ------------------ THE BANK OF NOVA SCOTIA, as a Lender By: --------------------- Name: ------------------- Title: ------------------ EXHIBIT A REQUISITION FORM (Pursuant to Sections 4.2 and 5.2 of the Participation Agreement) Foundation Health Medical Services, a California corporation ("FOUNDATION") hereby certifies as true and correct and delivers the following Requisition to First Security Bank of Utah, N.A., not individually, except as expressly stated in the Participation Agreement (hereinafter defined), but solely as Owner Trustee under the FH Trust 1995-1 ("LESSOR"), ____________________ and ________________, as holders (the "HOLDERS") and NationsBank of Texas, N.A., as Administrative Agent for the Lenders pursuant to the Credit Agreement (the "AGENT"): Reference is made herein to that certain Participation Agreement dated as of __________ ___, 1995 (as such may be amended from time to time, the "PARTICIPATION AGREEMENT") among Foundation, in its capacity as Lessee, Foundation Health Corporation, as Guarantor and as Construction Agent, the Lessor, the Holders and the Agent. Capitalized terms used herein but not otherwise defined herein shall have the meanings set forth therefor in the Participation Agreement. Check one: ____ INITIAL CLOSING DATE: _________________ (one Business Day prior notice required for Advance) ____ PROPERTY CLOSING DATE:_________________ (three Business Days prior notice required for Advance) ____ CONSTRUCTION ADVANCE DATE:_____________ (three Business Days prior notice required for Advance) 1. On a Property by Property basis, Transaction Expenses and other fees, expenses and disbursements under Section 9.1(a) or (b) of the Participation Agreement and any and all Property Costs and other amounts contemplated to be financed under the Participation Agreement including without limitation any Work, broker's fees, taxes, recording fees and the like (with supporting invoices attached): Party to Whom Amount Owed Amount is Owed (in U.S. Dollars) Total: 2. Legal Description of Land (which shall be a legal description of the Land in connection with an Advance to pay Property Acquisition Costs and which shall otherwise be a street address for the applicable Property): See attached SCHEDULE 1 3. Aggregate Loans and Holder Advances requested since the Initial Closing Date with respect to each Property for which Advances are requested under this Requisition (listed on a Property by Property basis), including all amounts requested under this Requisition: In connection with this Requisition, Foundation hereby requests that the Lenders make Loans to the Lessor in the amount of $______________ and that the Holder make a Holder Advance to the Lessor in the amount of $________________. Foundation hereby certifies (i) that the foregoing amounts requested do not exceed the total aggregate of the Available Commitments plus the Available Holder Commitment and (ii) that each of the provisions of the Participation Agreement applicable to the Loans and the Holder Advances requested hereunder have been compiled with as of the date of this Requisition. Foundation has caused this Requisition to the executed by its duly authorized officer as of this _____ day of __________, 199__. FOUNDATION HEALTH MEDICAL SERVICES By: --------------------- Name: ------------------- Title: ------------------ SCHEDULE 1 Legal Description of Land EXHIBIT B FOUNDATION HEALTH MEDICAL SERVICES OFFICER'S CERTIFICATE (Pursuant to Section 5.6 of the Participation Agreement) FOUNDATION HEALTH MEDICAL SERVICES, a California corporation (the "Company") DOES HEREBY CERTIFY as follows: 1. The address for the subject Property is ___________________ __________________________________. 2. The Completion Date for the construction of Improvements at the Property occurred on ______________. 3. The aggregate Property Cost for the Property was $___________. 4. All Improvements have been made in accordance with all applicable material Legal Requirements, in a good and workmanlike manner and otherwise in substantial compliance with the standards and practices of the Company with respect to Company-owned properties and improvements. Capitalized terms used in this Officer's Certificate and not otherwise defined have the respective meanings ascribed thereto in the Participation Agreement dated as of __________ __, 1995 among the Company, as Lessee, Foundation Health Corporation, as Guarantor, ___________________ and __________________ as Holders, First Security Bank of Utah, N.A., as Owner Trustee and NationsBank of Texas, N.A., as the Administrative Agent. IN WITNESS WHEREOF, the Company has caused this Officer's Certificate to be duly executed and delivered as of this ____ day of ______________, 199__. FOUNDATION HEALTH MEDICAL SERVICES By: --------------------- Name: ------------------- Title: ------------------ EXHIBIT A EXHIBIT C [Outside Counsel Opinion for Lessee and Guarantor] (Pursuant to Section 6.1(c) of the Participation Agreement) __________ ___, 1995 TO THOSE ON THE ATTACHED DISTRIBUTION LIST Re: Tax Retention Operating Lease Financing Provided in favor of Foundation Health Medical Services Dear Sirs: We have acted as special counsel to Foundation Health Medical Services, a California corporation (the "Lessee") and Foundation Health Corporation, a Delaware corporation (the "Guarantor"), in connection with certain transactions contemplated by the Participation Agreement dated as of __________ ___, 1995 (the "Participation Agreement"), among the Lessee, First Security Bank of Utah, N.A. (the "Owner Trustee"), the Guarantor, ____________________ and __________________, as Holders (the "Holders") and NationsBank of Texas, N.A., as the administrative agent for the Lenders (the "Administrative Agent"). This opinion is delivered pursuant to Section 6.1(c) of the Participation Agreement. All capitalized terms used herein, and not otherwise defined herein, shall have the meanings assigned thereto in Appendix A to the Participation Agreement. In connection with the foregoing, we have examined originals, or copies certified to our satisfaction, of the Operative Agreements, and such other corporate documents and records of the Lessee and the Guarantor, certificates of public officials and representatives of the Lessee and the Guarantor as to certain factual matters, and such other instruments and documents which we have deemed necessary or advisable to examine for the purpose of this opinion. With respect to such examination, we have assumed (i) the statements of fact made in all such certificates, documents and instruments are true, accurate and complete; (ii) the due authorization, execution and delivery of the Operative Agreements by the parties thereto other than the Lessee or the Guarantor; (iii) the genuineness of all signatures (other than the signatures of persons signing on behalf of the Lessee and the Guarantor), the authenticity and completeness of all documents, certificates, instruments, records and corporate records submitted to us as originals and the conformity to the original instruments of all documents submitted to us as copies, and the authenticity and completeness of the originals of such copies; (iv) that all parties other than the Lessee or the Guarantor have all requisite corporate power and authority to execute, deliver and perform the Operative Agreements; and (v) the enforceability of the Operative Agreements against all parties thereto other than the Lessee or the Guarantor. Based on the foregoing, and having due regard for such legal considerations as we deem relevant, and subject to the limitations and assumptions set forth herein, including the matters set forth in the last two paragraphs hereof, we are of the opinion that: (a) The Lessee is a corporation duly incorporated, validly existing and in good standing under the laws of the State of California and has the corporate power and authority to conduct its business as presently conducted and to execute, deliver and perform its obligations under the Operative Agreements to which it is a party. The Lessee is duly qualified as a foreign corporation to do business and is in good standing in the States of ____________ and ____________ and all other jurisdictions in which its failure to so qualify would materially impair its ability to perform its obligations under the Operative Agreements to which it is a party or its financial position or its business as now and now proposed to be conducted. (b) The Guarantor is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware and has the corporate power and authority to conduct its business as presently conducted and to execute, deliver and perform its obligations under the Operative Agreements to which it is a party. The Guarantor is duly qualified as a foreign corporation to do business and is in good standing in all jurisdictions in which its failure to so qualify would materially impair its ability to perform its obligations under the Operative Agreements to which it is a party or its financial position or its business as now and now proposed to be conducted. (c) The execution, delivery and performance by the Lessee of the Operative Agreements to which it is a party have been duly authorized by all necessary corporate action on the part of the Lessee and the Operative Agreements to which the Lessee is a party have been duly executed and delivered by the Lessee. (d) The execution, delivery and performance by the Guarantor of the Operative Agreements to which it is a party have been duly authorized by all necessary corporate action on the part of the Guarantor and the Operative Agreements to which the Guarantor is a party have been duly executed and delivered by the Guarantor. (e) The Operative Agreements to which the Lessee is a party constitute valid and binding obligations of the Lessee enforceable against the Lessee in accordance with the terms thereof, subject to bankruptcy, insolvency, liquidation, reorganization, fraudulent conveyance, and similar laws affecting creditors' rights generally, and general principles of equity (regardless of whether the application of such principles is considered in a proceeding in equity or at law). (f) The Operative Agreements to which the Guarantor is a party constitute valid and binding obligations of the Guarantor enforceable against the Guarantor in accordance with the terms thereof, subject to bankruptcy, insolvency, liquidation, reorganization, fraudulent conveyance, and similar laws affecting creditors' rights generally, and general principles of equity (regardless of whether the application of such principles is considered in a proceeding in equity or at law). Without limiting the generality of the foregoing the Owner Trustee or the Agent, as applicable, shall have the right to proceed against the Guarantor under the Guaranty Agreement and obtain and enforce a judgment thereunder following an Event of Default without first having to proceed against the Lessee or any other Person or against any security held by the Owner Trustee or the Agent at any time or having to pursue any other remedy available to the Owner Trustee or the Agent under any of the Operative Agreements, and without waiving any security, rights or remedies that the Owner Trustee or the Agent may have under any of the other Operative Agreements. (gP The execution and delivery by the Lessee of the Operative Agreements to which it is a party and compliance by the Lessee with all of the provisions thereof do not and will not (i) contravene the provisions of, or result in any breach of or constitute any default under, or result in the creation of any Lien (other than Permitted Liens) upon any of its property under, its Certificate of Incorporation or By-Laws or any indenture, mortgage, chattel mortgage, deed of trust, lease, conditional sales contract, bank loan or credit agreement or other agreement or instrument to which the Lessee is a party or by which it or any of its property may be bound or affected, or (ii) contravene any Laws or any order of any Governmental Authority applicable to or binding on the Lessee. (h) The execution and delivery by the Guarantor of the Operative Agreements to which it is a party and compliance by the Guarantor with all of the provisions thereof do not and will not (i) contravene the provisions of, or result in any breach of or constitute any default under, or result in the creation of any Lien (other than Permitted Liens) upon any of its property under, its Certificate of Incorporation or By-Laws or any indenture, mortgage, chattel mortgage, deed of trust, lease, conditional sales contract, bank loan or credit agreement or other agreement or instrument to which the Guarantor is a party or by which it or any of its property may be bound or affected, or (ii) contravene any Laws or any order of any Governmental Authority applicable to or binding on the Guarantor. (i) No Governmental Action by, and no notice to or filing with, any Governmental Authority is required for the due execution, delivery or performance by the Lessee of any of the Operative Agreements to which it is a party. (j) No Governmental Action by, and no notice to or filing with, any Governmental Authority is required for the due execution, delivery or performance by the Guarantor of any of the Operative Agreements to which it is a party. (k) There are no actions, suits or proceedings pending or to our knowledge, threatened against the Lessee in any court or before any Governmental Authority, that concern any Property or the Lessee's interest therein or that question the validity or enforceability of any Operative Agreement to which the Lessee is a party or the overall transaction described in the Operative Agreements to which the Lessee is a party. (l) There are no actions, suits or proceedings pending or to our knowledge, threatened against the Guarantor in any court or before any Governmental Authority or that question the validity or enforceability of any Operative Agreement to which the Guarantor is a party or the overall transaction described in the Operative Agreements to which the Guarantor is a party. (m) Neither the nature of the Properties, nor any relationship between the Lessee and any other Person, nor any circumstance in connection with the execution, delivery and performance of the Operative Agreements to which the Lessee is a party is such as to require any approval of stockholders of, or approval or consent of any trustee or holders of indebtedness of, the Lessee, except for such approvals and consents which have been duly obtained and are in full force and effect. (n) Neither the nature of the Properties, nor any relationship between the Guarantor and any other Person, nor any circumstance in connection with the execution, delivery and performance of the Operative Agreements to which the Guarantor is a party is such as to require any approval of stockholders of, or approval or consent of any trustee or holders of indebtedness of, the Guarantor, except for such approvals and consents which have been duly obtained and are in full force and effect. (o) The Credit Agreement creates, for the benefit of the holders of the Notes, the security interest in the Trust Estate which by its terms it purports to create. (p) The issuance, sale and delivery of the Notes and the issuance and delivery of the Certificates under the circumstances contemplated by the Participation Agreement do not, under existing law, require registration of the Notes or the certificates being issued on the date hereof under the Securities Act of 1933, as amended, the California Corporate Securities Law of 1968, as amended, or the qualification of the Loan Agreement under the Trust Indenture Act of 1939, as amended. (q) The Operative Agreements (other than the Trust Agreement) to which First Security Bank of Utah, N.A., individually or as Owner Trustee, as the case may be, is a party constitute valid and binding obligations of First Security Bank of Utah, N.A., individually or as Owner Trustee, as the case may be, enforceable against First Security Bank of Utah, N.A., individually or as Owner Trustee, in accordance with the terms thereof, subject to bankruptcy, insolvency, liquidation, reorganization, fraudulent conveyance, and similar laws affecting creditors, rights generally, and general principles of equity (regardless of whether the application of such principles is considered in a proceeding in equity or at law). (r) The execution and delivery by First Security Bank of Utah, N.A., individually or as Owner Trustee, as the case may be, of the Operative Agreements (other than the Trust Agreement) to which it is a party and compliance by First Security Bank of Utah, N.A., individually or as Owner Trustee, with all of the provisions thereof do not and will not contravene any law, rule or regulation of the States of ____________ or ___________. (s) The amounts to be paid by the Lessee and the Borrower under the Operative Agreements do not violate the usury laws of the State of California. (t) The choice of law and choice of forum provisions in each of the Operative Agreements will be enforced by the courts of the State of California. (u) No intangibles tax, mortgage recording tax, documentary transfer tax or similar taxes or charges, other than nominal recordation or filing fees, are required to be paid as a condition of the legality or enforceability of the Operative Agreements. This opinion is limited to the matters stated herein and no opinion is implied or may be inferred beyond the matters stated herein. This opinion is based on and is limited to the laws of the States of ____________ and ____________ [STATES OF PROPERTY LOCATIONS] the federal laws of the United States of America and, as applicable, the General Corporation Law of the States of Delaware and California. Insofar as the foregoing opinion relates to matters of law other than the foregoing, no opinion is hereby given. This opinion is for the sole benefit of Lessee, Guarantor, NationsBank of Texas, N.A, as the Administrative Agent, the Holders and First Security Bank of Utah, N.A., not individually, but solely as Owner Trustee under the FH Trust 1995-1 and may not be relied upon by any other person other than such parties and their successors and assigns without the express written consent of the undersigned. The opinions expressed herein are as of the date hereof and we make no undertaking to amend or supplement such opinions if facts come to our attention or changes in the current law of the jurisdictions mentioned herein occur which could affect such opinions. Very truly yours, [LESSEE'S OUTSIDE COUNSEL] Distribution List NationsBank of Texas, N.A., as Administrative Agent Foundation Health Medical Services Foundation Health Corporation ______________________, as a Holder ______________________, as a Holder First Security Bank of Utah, N.A., not individually, but solely as Owner Trustee under the FH Trust 1995-1 EXHIBIT D FOUNDATION HEALTH MEDICAL SERVICES OFFICER'S CERTIFICATE (Pursuant to Section 6.1(g) of the Participation Agreement) FOUNDATION HEALTH MEDICAL SERVICES, a California corporation (the "Company"), DOES HEREBY CERTIFY as follows: 1. Each and every representation and warranty of the Company contained in the Operative Agreements to which it is a party is true and correct on and as of the date hereof. 2. No Default or Event of Default has occurred and is continuing under any Operative Agreement. 3. Each Operative Agreement to which the Company is a party is in full force and effect with respect to it. 4. The Company has duly performed and complied with all covenants, agreements and conditions contained in the Participation Agreement (hereinafter defined) or in any Operative Agreement required to be performed or complied with by it on or prior to the date hereof. Capitalized terms used in this Officer's Certificate and not otherwise defined herein have the respective meanings ascribed thereto in the Participation Agreement dated as of __________ ___, 1995 among the Company, as Lessee, Foundation Health Corporation, as Guarantor, __________________ and ___________________, as Holders, First Security Bank of Utah, N.A., as the Owner Trustee and NationsBank of Texas, N.A., as the Administrative Agent. IN WITNESS WHEREOF, the Company has caused this Officer's Certificate to be duly executed and delivered as of this _____ day of __________, 1995. [FOUNDATION HEALTH MEDICAL SERVICES/FOUNDATION HEALTH CORPORATION] By: --------------------- Name: ------------------- Title: ------------------ EXHIBIT E FOUNDATION HEALTH MEDICAL SERVICES OFFICER'S CERTIFICATE (Pursuant to Section 6.1(h) of the Participation Agreement) FOUNDATION HEALTH MEDICAL SERVICES, a California corporation (the "Company") DOES HEREBY CERTIFY as follows: 1. Attached hereto as EXHIBIT A is a true, correct and complete copy of the resolutions of the Board of Directors of the Company duly adopted by the Board of Directors of the Company on __________. Such resolutions have not been amended, modified or rescinded since their date of adoption and remain in full force and effect as of the date hereof. 2. Attached hereto as EXHIBIT B is a true, correct and complete copy of the Articles of Incorporation of the Company on file in the Office of ____________. Such Articles of Incorporation have not been amended, modified or rescinded since their date of adoption and remain in full force and effect as of the date hereof. 3. Attached hereto as EXHIBIT C is a true, correct and complete copy of the Bylaws of the Company. Such Bylaws have not been amended, modified or rescinded since their date of adoption and remain in full force and effect as of the date hereof. 4. The persons named below now hold the offices set forth opposite their names, and the signatures opposite their names and titles are their true and correct signatures. Name Office Signature _____________ _________________ ____________________ _____________ _________________ ____________________ IN WITNESS WHEREOF, the Company has caused this Officer's Certificate to be duly executed and delivered as of this _____ day of ___________, 1995. FOUNDATION HEALTH MEDICAL SERVICES EXHIBIT A BOARD RESOLUTIONS EXHIBIT B ARTICLES OF INCORPORATION EXHIBIT C BYLAWS EXHIBIT F FIRST SECURITY BANK OF UTAH, N.A. OFFICER'S CERTIFICATE (Pursuant to Section 6.2(d) of the Participation Agreement) _____________________, not individually (except with respect to paragraph 1 below, to the extent any such representations and warranties are made in its individual capacity) but solely as owner trustee under the FH Trust 1995-1 (the "Owner Trustee"), DOES HEREBY CERTIFY as follows: (a) Each and every representation and warranty of the Owner Trustee contained in the Operative Agreements to which it is a party is true and correct on and as of the date hereof. (b) Each Operative Agreement to which the Owner Trustee is a party is in full force and effect with respect to it. (c) The Owner Trustee has duly performed and complied with all covenants, agreements and conditions contained in the Participation Agreement (hereinafter defined) or in any Operative Agreement required to be performed or complied with by it on or prior to the date hereof. Capitalized terms used in this Officer's Certificate and not otherwise defined herein have the respective meanings ascribed thereto in the Participation Agreement dated as of __________ ___, 1995 among Foundation Health Medical Services, as Lessee, Foundation Health Corporation, as Guarantor, ____________________ and ___________________, as Holders, First Security Bank of Utah, N.A., as Owner Trustee and NationsBank of Texas, N.A., as the Administrative Agent. IN WITNESS WHEREOF, the Owner Trustee has caused this Officer's Certificate to be duly executed and delivered as of this _____ day of __________ 1995. ____________, not individually, except as expressly stated herein, but solely as Owner Trustee under the FH Trust 1995-1 By: --------------------- Name: ------------------- Title: ------------------ EXHIBIT G FIRST SECURITY BANK OF UTAH, N.A. OFFICER'S CERTIFICATE (Pursuant to Section 6.2(e) of the Participation Agreement) ______________, a ___________ corporation (the "Owner Trustee") DOES HEREBY CERTIFY as follows: 1. Attached hereto as EXHIBIT A is a true, correct and complete copy of the resolutions of the Board of Directors of the Owner Trustee duly adopted by the Board of Directors of the Owner Trustee on __________. Such resolutions have not been amended, modified or rescinded since their date of adoption and remain in full force and effect as of the date hereof. 2. Attached hereto as EXHIBIT B is a true, correct and complete copy of the Articles of Incorporation of the Owner Trustee on file in the Office of ____________. Such Articles of Incorporation have not been amended, modified or rescinded since their date of adoption and remain in full force and effect as of the date hereof. 3. Attached hereto as EXHIBIT C is a true, correct and complete copy of the Bylaws of the Owner Trustee. Such Bylaws have not been amended, modified or rescinded since their date of adoption and remain in full force and effect as of the date hereof. 4. The persons named below now hold the offices set forth opposite their names, and the signatures opposite their names and titles are their true and correct signatures. Name Office Signature _____________ _________________ ____________________ _____________ _________________ ____________________ IN WITNESS WHEREOF, the Owner Trustee has caused this Officer's Certificate to be duly executed and delivered as of this _____ day of __________ 1995. FIRST SECURITY BANK OF UTAH, N.A. By: --------------------- Name: ------------------- Title: ------------------ EXHIBIT A BOARD RESOLUTIONS EXHIBIT B ARTICLES OF INCORPORATION EXHIBIT C BYLAWS EXHIBIT H [Owner Trustee's Outside Counsel Opinion] (Pursuant to Section 6.2(f) of the Participation Agreement) __________ __, 1995 TO THOSE ON THE ATTACHED DISTRIBUTION LIST RE: TRUST AGREEMENT DATED AS OF __________ ___, 1995 Dear Sirs: We have acted as special counsel for First Security Bank of Utah, N.A., a national banking association, in its individual capacity ("FSB") and in its capacity as trustee (the "Owner Trustee") under the Trust Agreement dated as of ___________ ___, 1995 (the "Trust Agreement") by and among it, NationsBank of Texas, N.A. (the "Beneficiary"), in connection with the execution and delivery by the Owner Trustee of the Operative Agreements to which it is a party. Except as otherwise defined herein, the terms used herein shall have the meanings set forth in Appendix A to the Participation Agreement dated as of __________ ___, 1995 (the "Participation Agreement") by and among Foundation Health Medical Services, Foundation Health Corporation, __________________ and _____________________, as Holders, First Security Bank of Utah, N.A., in its individual capacity as expressly set forth therein and otherwise as Owner Trustee and NationsBank of Texas, N.A., as Administrative Agent. We have examined originals or copies, certified or otherwise identified to our satisfaction, of such documents, corporate records and other instruments as we have deemed necessary or advisable for the purpose of rendering this opinion. Based upon the foregoing, we are of the opinion that: 1. FSB is a national banking association duly organized, validly existing and in good standing under the laws of United States of America and each of FSB and the Owner Trustee has under the laws of the State of Utah and federal banking law the power and authority to enter into and perform its obligations under the Trust Agreement and each other Operative Agreement to which it is a party. 2. The Owner Trustee is the duly-appointed trustee under the Trust Agreement. 3. The Trust Agreement has been duly authorized, executed and delivered by one of the officers of FSB and, assuming due authorization, execution and delivery by the beneficiary, is a legal, valid and binding obligation of the Owner Trustee (and to the extent set forth therein, against FSB), enforceable against the Owner Trustee (and to the extent set forth therein, against FSB) in accordance with its terms, and the Trust Agreement creates under the laws of the State of Utah for the Beneficiary the beneficial interest in the Trust Estate it purports to create and is a valid trust under the laws of the State of Utah. 4. The Operative Agreements to which it is party have been duly authorized, executed and delivered by FSB, and, assuming due authorization, execution and delivery by the other parties thereto, are legal, valid and binding obligations of FSB, enforceable against FSB in accordance with their respective terms. 5. The Operative Agreements to which it is party have been duly authorized, executed and delivered by the Owner Trustee, and, assuming due authorization, execution and delivery by the other parties thereto, are legal, valid and binding obligations of the Owner Trustee, enforceable against the Owner Trustee in accordance with their respective terms. The Notes and the Certificates have been duly issued, executed and delivered by the Owner Trustee, pursuant to authorization contained in the Trust Agreement, and the Certificates are entitled to the benefits and security afforded by the Trust Agreement in accordance with its terms and the terms of the Trust Agreement. 6. The execution and delivery by each of FSB and the Owner Trustee of the Trust Agreement and the Operative Agreements to which it is a party, and compliance by FSB or Owner Trustee, as the case may be, with all of the provisions thereof do not and will not contravene any Laws applicable to or binding on FSB, or as Owner Trustee, or contravene the provisions of, or constitute a default under, its charter documents or by-laws or, to our knowledge after due inquiry, any indenture, mortgage contract or other agreement or instrument to which FSB or Owner Trustee is a party or by which it or any of its property may be bound or affected. 7. The execution and delivery of the Operative Agreements by each of FSB and the Owner Trustee and the performance by each of FSB and the Owner Trustee of their respective obligations thereunder does not require on or prior to the date hereof the consent or approval of, the giving of notice to, the registration or filing with, or the taking of any action in respect of any Governmental Authority or any court. 8. Assuming that the trust created by the Trust Agreement is treated as a grantor trust for federal income tax purposed within the contemplation of Section 671 through 678 of the Internal Revenue Code of 1986, there are no fees, taxes, or other charges (except taxes imposed on fees payable to the Owner Trustee) payable to the State of Utah or any political subdivision thereof in connection with the execution, delivery or performance by the Owner Trustee, the Agent, the Lenders, the Lessee or the Holder, as the case may be, of the Operative Agreements or in connection with the acquisition of any Property by the Owner Trustee or in connection with the making by the Holder of its investment in the Trust or its acquisition of the beneficial interest in the Trust Estate or in connection with the issuance and acquisition of the Certificate, or the Notes, and neither the Owner Trustee, the Trust Estate nor the trust created by the Trust Agreement will be subject to any fee, tax or other governmental charge (except taxes on fees payable to the Owner Trustee) under the laws of the State of Utah or any political subdivision thereof on, based on or measured by, directly or indirectly, the gross receipts, net income or value of the Trust Estate by reason of the creation or continued existence of the trust under the terms of the Trust Agreement pursuant to the laws of the State of Utah or the Owner Trustee's performance of its duties under the Trust Agreement. 9. There is no fee, tax or other governmental charge under the laws of the State of Utah or any political subdivision thereof in existence on the date hereof on, based on or measured by any payments under the Certificates, Notes or the beneficial interests in the Trust Estate, by reason of the creation of the trust under the Trust Agreement pursuant to the laws of the State of Utah or the Owner Trustee's performance of its duties under the Trust Agreement within the State of Utah. 10. Upon the filing of the financing statement on form UCC-1 in the form attached hereto as Exhibit A with the _____________, the Administrative Agent's security interest in the Trust Estate, for the benefit of the Lenders, will be perfected, to the extent that such perfection is governed by Article 9 of the Uniform Commercial Code as in effect in the State of Utah (the "Utah UCC"). Your attention is directed to the Utah UCC, which provides, in part, that a filed financing statement which does not state a maturity date or which states a maturity date of more than five years is effective only for a period of five years from the date of filing, unless within six months prior to the expiration of said period a continuation statement is filed in the same office or offices in which the original statement was filed. The continuation statement must be signed by the secured party, identify the original statement by file number and state that the original statement is still effective. Upon the timely filing of a continuation statement, the effectiveness of the original financing statement is continued for five years after the last date to which the original statement was effective. Succeeding continuation statements may be filed in the same manner to continue the effectiveness of the original statement. The opinions set forth in paragraphs 3 and 4 above are subject to the qualification that enforceability of the Trust Agreement and the other Operative Agreements to which the Owner Trustee is a party, in accordance with their respective terms, may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting enforcement of creditors' rights generally. We are attorneys admitted to practice in the State of Utah and in rendering the foregoing opinions we have not passed upon, or purported to pass upon, the laws of any jurisdictions other than the State of Utah and the federal banking law governing the banking and trust powers of FSB. Very truly yours, [NAME OF OWNER TRUSTEE'S OUTSIDE COUNSEL] DISTRIBUTION LIST NationsBank of Texas, N.A., as Administrative Agent Foundation Health Medical Services Foundation Health Corporation _______________________, as a Holder _______________________, as a Holder First Security Bank of Utah, N.A., not individually, but solely as Owner Trustee under the FH Trust 1995-1 Appendix A Rules of Usage and Definitions 1. Rules of Usage The following rules of usage shall apply to this Appendix A and the Operative Agreements (and each appendix, schedule, exhibit and annex to the foregoing) unless otherwise required by the context or unless otherwise defined therein: (a) Except as otherwise expressly provided, any definitions set forth herein or in any other document shall be equally applicable to the singular and plural forms of the terms defined. (b) Except as otherwise expressly provided, references in any document to articles, sections, paragraphs, clauses, annexes, appendices, schedules or exhibits are references to articles, sections, paragraphs, clauses, annexes, appendices, schedules or exhibits in or to such document. (c) The headings, subheadings and table of contents used in any document are solely for convenience of reference and shall not constitute a part of any such document nor shall they affect the meaning, construction or effect of any provision thereof. (d) References to any Person shall include such Person, its successors and permitted assigns and transferees. (e) Except as otherwise expressly provided, reference to any agreement means such agreement as amended, modified, extended, supplemented, restated and/or replaced from time to time in accordance with the applicable provisions thereof. (f) Except as otherwise expressly provided, references to any law includes any amendment or modification to such law and any rules or regulations issued thereunder or any law enacted in substitution or replacement therefor. (g) When used in any document, words such as "hereunder", "hereto", "hereof" and "herein" and other words of like import shall, unless the context clearly indicates to the contrary, refer to the whole of the applicable document and not to any particular article, section, subsection, paragraph or clause thereof. (h) References to "including" means including without limiting the generality of any description preceding such term and for purposes hereof the rule of ejusdem generis shall not be applicable to limit a general statement, followed by or referable to an enumeration of specific matters, to matters similar to those specifically mentioned. (i) Each of the parties to the Operative Agreements and their counsel have reviewed and revised, or requested revisions to, the Operative Agreements, and the usual rule of construction that any ambiguities are to be resolved against the drafting party shall be inapplicable in the construing and interpretation of the Operative Agreements and any amendments or exhibits thereto. 2. Definitions "Supplemental Rent" shall mean all amounts, liabilities and obligations (other than Basic Rent) which the Lessee assumes or agrees to pay to Lessor, the Holders, the Administrative Agent or any other Person under the Lease or under any of the other Operative Agreements including, without limitation, payments of Purchase Option Price, Termination Value and the Maximum Residual Guarantee Amount and all indemnification amounts, liabilities and obligations. "ABR" shall have the meaning specified in Section 1.1 of the Credit Agreement. "acquire" or "purchase" shall mean, with respect to any Property, the acquisition or purchase of such Property by the Owner Trustee from any Person. "Acceleration" shall have the meaning specified in Section 1.1 of the Credit Agreement. "Acquisition Advance" shall mean an advance of funds to pay Property Acquisition Costs pursuant to Section 5.3 of the Participation Agreement. "Advance" shall mean a Construction Advance or an Acquisition Advance. "Affiliate" shall have the meaning specified in Section 1.1 of the Credit Agreement. "After Tax Basis" shall mean, with respect to any payment to be received, the amount of such payment increased or decreased so that, after deduction of the amount of all taxes required to be paid by the recipient calculated at the then maximum marginal rates generally applicable to Persons of the same type as the recipients (less any tax savings realized as a result of the payment of the indemnified amount and the item which gives rise to the indemnification obligation) with respect to the receipt by the recipient of such amounts, such increased or decreased payment (as so reduced) is equal to the payment otherwise required to be made. "Agency Agreement" shall mean the Agency Agreement, dated as of the Initial Closing Date, between the Construction Agent and the Owner Trustee. "Agency Agreement Event of Default" shall mean an "Event of Default" as defined in Section 5.1 of the Agency Agreement. "Agent" or "Administrative Agent" shall mean NationsBank of Texas, N.A., as Administrative Agent for the Lenders pursuant to the Credit Agreement, or any successor agent appointed in accordance with the terms of the Credit Agreement. "Allocated Interest" shall have the meaning specified in Section 1.1 of the Credit Agreement. "Allocated Return" with respect to any Construction Period Property for which the Basic Term has not commenced shall mean, as of any Scheduled Interest Payment Date, the amount of Holder Yield due and payable on such date with respect to a portion of the Holder Advances (which portion shall be designated by the Owner Trustee by written notice to the Holders) having an aggregate stated amount equal to the Holder Construction Property Cost of such Property as of such date. "Applicable Margin" shall have the meaning given such term in Section 1.1 of the Credit Agreement. "Appraisal" shall mean, with respect to any Property a limited appraisal in summary format to be delivered in connection with Section 5.6 of the Participation Agreement or in accordance with the terms of Section 10.1(e) of the Lease, which Appraisal shall, in each case (i) be prepared by a reputable MAI appraiser reasonably acceptable to the Agent, (ii) be prepared using the income approach and the cost approach to determine the appraised value of the applicable Property (based on the intended use of such Property) and using an appraisal methodology based on usual comparative data collection and conceptual analyses employed in more extensive narrative appraisals, and (iii) in the judgment of counsel to the Agent, comply with all of the provisions of the Financial Institutions Reform, Recovery and Enforcement Act of 1989, as amended, the rules and regulations adopted pursuant thereto, and all other applicable Legal Requirements. "Appraisal Procedure" shall have the meaning given such term in Section 22.4 of the Lease. "Approved State" shall mean California, Texas, Arizona and any other state located in the United States in which the Guarantor or any of its Subsidiaries operates or intends to operate a Medical Facility. "Appurtenant Rights" shall mean (i) all agreements, easements, rights of way or use, rights of ingress or egress, privileges, appurtenances, tenements, hereditaments and other rights and benefits at any time belonging or pertaining to the Land underlying any Improvements, or the Improvements, including, without limitation, the use of any streets, ways, alleys, vaults or strips of land adjoining, abutting, adjacent or contiguous to the Land and (ii) all permits, licenses and rights, whether or not of record, appurtenant to such Land. "Available Commitment" shall have the meaning specified in Section 1.1 of the Credit Agreement. "Available Holder Commitments" shall mean an amount equal to the excess, if any, of (i) the amount of the Holder Commitments over (ii) the aggregate amount of the Holder Advances made since the Initial Closing Date minus Holder Advances repaid or prepaid as a result of the purchase by the Construction Agent of a Construction Period Property pursuant to the terms of Section 6.3 of the Agency Agreement (but without giving effect to any other repayments of any Holder Advances). "Average Eurodollar Margin" shall have the meaning specified in Section 1.1 of the Credit Agreement. "Basic Rent" shall mean, the sum of (i) the Loan Basic Rent and (ii) the Lessor Basic Rent, calculated as of the applicable date on which Basic Rent is due. "Basic Term" shall have the meaning specified in Section 2.2(a) of the Lease. "Basic Term Commencement Date" shall have the meaning specified in Section 2.2(a) of the Lease. "Basic Term Expiration Date" shall have the meaning specified in Section 2.2(a) of the Lease. "Best's" shall mean A.M. Best Company, Inc. "Borrowing Date" shall have the meaning specified in Section 1.1 of the Credit Agreement. "Business Day" shall mean a day other than a Saturday, Sunday or other day on which commercial banks in Sacramento, California or Dallas, Texas, are authorized or required by law to close; PROVIDED, HOWEVER, that when used in connection with a Loan bearing interest based on the Eurodollar Rate, the term "Business Day" shall also exclude any day on which banks are not open for dealings in dollar deposits in the London interbank market. "Capital Lease" means any lease of property (whether real, personal or mixed) which is, in accordance with GAAP, required to be classified and accounted for on the books of the lessee as a capital lease. "Casualty" shall mean any damage or destruction of all or any portion of a Property as a result of a fire, earthquake or other casualty. "CERCLA" shall mean the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, 42 U.S.C. Sections 9601 et seq., as amended by the Superfund Amendments and Reauthorization Act of 1986. "Certificate" shall mean a Certificate in favor of each Holder regarding the Holder Commitment of such Holder issued pursuant to the terms and conditions of the Trust Agreement in favor of each Holder. "Certifying Party" shall have the meaning specified in Section 26.1 of the Lease. "Claims" shall mean any and all obligations, liabilities, losses, actions, suits, penalties, claims, demands, costs and expenses (including, without limitation, reasonable attorney's fees and expenses) of any nature whatsoever. "Closing Date" shall mean the Initial Closing Date and each Property Closing Date. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, or any successor statute hereto. "Collateral" shall have the meaning specified in Section 1.1 of the Credit Agreement. "Commitment" shall have the meaning defined in Section 1.1 of the Credit Agreement. "Commitment Fee Payment Date" shall mean the last day of each March, June, September and December and the last day of the Commitment Period, or such earlier date as the Commitments shall terminate as provided in the Credit Agreement. "Commitment Fee Rate" shall mean, with respect to the Commitments or the Holder Commitments, a rate equal to 15 basis points (0.15%) per annum for the Commitment Period. "Commitment Period" shall mean the period from the Initial Closing Date to and including the Construction Period Termination Date, or such earlier date as the Commitments shall terminate as provided in the Credit Agreement. "Completion" shall mean, with respect to a Property, such time as final completion of the Improvements on such Property has been achieved in accordance with the Plans and Specifications, the Agency Agreement and/or the Lease, and in compliance with all material Legal Requirements and Insurance Requirements and a certificate of occupancy has been issued with respect to such Property by, and certificate of completion recorded with, the appropriate governmental entity. "Completion Date" shall mean, with respect to a Property, the earlier of (i) the date on which Completion for such Property has occurred and (ii) the Construction Period Termination Date. "Condemnation" shall mean any taking or sale of the use, access, occupancy, easement rights or title to any Property or any part thereof, wholly or partially (temporarily or permanently), by or on account of any actual or threatened eminent domain proceeding or other taking of action by any Person having the power of eminent domain, including an action by a Governmental Authority to change the grade of, or widen the streets adjacent to, any Property or alter the pedestrian or vehicular traffic flow to any Property so as to result in a change in access to such Property, or by or on account of an eviction by paramount title or any transfer made in lieu of any such proceeding or action. "Construction Advance" shall mean an advance of funds to pay Property Costs pursuant to Section 5.4 or 5.5 of the Participation Agreement. "Construction Agent" shall mean Foundation Health Medical Services, a California corporation, as construction agent under the Agency Agreement. "Construction Budget" shall mean the cost of constructing and developing any Improvements as determined by the Construction Agent in its reasonable, good faith judgment. "Construction Commencement Date" shall mean, with respect to Improvements, the date on which construction of such Improvements commences pursuant to the Agency Agreement. "Construction Period" shall mean, with respect to a Property, the period commencing on the Construction Commencement Date for such Property and ending on the Completion Date for such Property. "Construction Period Termination Date" shall mean May 25, 1997, as such date may be extended to November 25, 1997 in accordance with the terms of Section 10.6 of the Participation Agreement. "Construction Period Property" shall have the meaning specified in Section 1.1 of the Credit Agreement. "Co-Owner Trustee" shall have the meaning specified in Section 9.2 of the Trust Agreement. "Credit Agreement" shall mean the Credit Agreement, dated as of the Initial Closing Date, among the Lessor, the Agent and the Lenders, as specified therein. "Credit Agreement Default" shall mean any event or condition which, with the lapse of time or the giving of notice, or both, would constitute a Credit Agreement Event of Default. "Credit Agreement Event of Default" shall mean any event or condition defined as an "Event of Default" in Section 6 of the Credit Agreement. "Credit Documents" shall have the meaning specified in Section 1.1 of the Credit Agreement. "Deed" shall mean a warranty deed regarding Land and/or Improvements in form and substance satisfactory to the Owner Trustee and the Agent. "Default" shall mean any event, act or condition which with notice or lapse of time, or both, would constitute an Event of Default. "Election Notice" shall have the meaning given to such term in Section 20.2 of the Lease. "Employee Benefit Plan" or "Plan" shall mean an employee benefit plan (within the meaning of Section 3(3) of ERISA, including any Multiemployer Plan), or any "plan" as defined in Section 4975(e)(1) of the Code and as interpreted by the Internal Revenue Service and the Department of Labor in rules, regulations, releases or bulletins in effect on any Closing Date. "Environmental Claims" shall mean any investigation, notice, violation, demand, allegation, action, suit, injunction, judgment, order, consent decree, penalty, fine, lien, proceeding, or claim (whether administrative, judicial, or private in nature) arising (a) pursuant to, or in connection with, an actual or alleged violation of, any Environmental law, (b) in connection with any Hazardous Substance, (c) from any abatement, removal, remedial, corrective, or other response action in connection with a Hazardous Material, Environmental Law, or other order of a Tribunal or (d) from any actual or alleged damage, injury, threat, or harm to health, safety, natural resources, or the environment. "Environmental Laws" shall mean any Law, permit, consent, approval, license, award, or other authorization or requirement of any Tribunal relating to emissions, discharges, releases, threatened releases of any Hazardous Substance into ambient air, surface water, ground water, publicly owned treatment works, septic system, or land, or otherwise relating to the handling, storage, treatment, generation, use, or disposal of Hazardous Substances, pollution or to the protection of health or the environment, including without limitation CERCLA, the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., and state statutes analogous thereto. "Environmental Violation" shall mean any activity, occurrence or condition that violates or threatens (if the threat requires remediation under any Environmental Law and is not remediated during any grace period allowed under such Environmental Law) to violate or results in or threatens (if the threat requires remediation under any Environmental Law and is not remediated during any grace period allowed under such Environmental Law) to result in noncompliance with any Environmental Law. "Equipment" shall mean equipment, apparatus, furnishings and fittings acquired using the proceeds of the Loans or the Holder Advances by the Construction Agent, the Lessee or the Lessor as covered by a Requisition, whether or not now or subsequently attached to, contained in or used or usable in any way in connection with any operation of any Improvements or other improvements to real property. "Equipment Schedule" shall mean (a) each Equipment Schedule attached to the applicable Requisition and (b) each Equipment Schedule attached to the applicable Lease Supplement as Schedule I-A. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder. "ERISA Affiliate" shall have the meaning given to such term as the Guaranty Agreement. "Eurocurrency Reserve Requirements" shall have the meaning specified in Section 1.1 of the Credit Agreement. "Eurodollar Holder Advance" shall mean a Holder Advance bearing a Holder Yield based on the Eurodollar Rate. "Eurodollar Rate" shall have the meaning specified in Section 1.1 of the Credit Agreement. "Eurodollar Reserve Rate" shall have the meaning specified in Section 1.1 of the Credit Agreement. "Event of Default" shall mean a Lease Event of Default, a Guaranty Event of Default, an Agency Agreement Event of Default or a Credit Agreement Event of Default. "Excepted Payments" shall mean: (a) all indemnity payments (including indemnity payments made pursuant to Section 13 of the Participation Agreement), whether made by adjustment to Basic Rent or otherwise, to which the Owner Trustee, any Holder or any of their respective Affiliates, agents, officers, directors or employees is entitled; (b) any amounts (other than Basic Rent, Termination Value, or Purchase Option Price) payable under any Operative Agreement to reimburse the Owner Trustee, any Holder or any of their respective Affiliates (including the reasonable expenses of the Owner Trustee, the Trust Company and the Holders incurred in connection with any such payment) for performing or complying with any of the obligations of the Lessee under and as permitted by any Operative Agreement; (c) any amount payable to a Holder by any transferee of such interest of a Holder as the purchase price of such Holder's interest in the Trust Estate (or a portion thereof); (d) any insurance proceeds (or payments with respect to risks self-insured or policy deductibles) under liability policies other than such proceeds or payments payable to the Agent; (e) any insurance proceeds under policies maintained by the Owner Trustee or any Holder; (f) Transaction Expenses or other amounts or expenses paid or payable to or for the benefit of the Owner Trustee or any Holder; (g) all right, title and interest of any Holder or the Owner Trustee to any Property or any portion thereof or any other property to the extent any of the foregoing has been released from the Liens of the Security Documents and the Lease pursuant to the terms thereof; (h) upon termination of the Credit Agreement pursuant to the terms thereof, all remaining property covered by the Lease or Security Documents; (i) all payments in respect of the Holder Yield; (j) any payments in respect of interest to the extent attributable to payments referred to in clauses (a) through (i) above; and (k) any rights of either the Owner Trustee or Trust Company to demand, collect, sue for or otherwise receive and enforce payment of any of the foregoing amounts. "Excepted Rights" shall mean the rights retained by the Owner Trustee pursuant to Section 8.2(a)(i) of the Credit Agreement and all right, title and interest of Owner Trustee in the Shared Rights. "Excess Proceeds" shall mean the excess, if any, of the aggregate of all awards, compensation or insurance proceeds payable in connection with a Casualty or Condemnation over the Termination Value paid by the Lessee pursuant to the Lease with respect to such Casualty or Condemnation. "Existing Credit Agreement" shall have the meaning given to such term in the Guaranty Agreement. "Expiration Date" shall mean the Basic Term Expiration Date or the last day of any Extended Term, if applicable. "Expiration Date Purchase Option" shall mean the Lessee's option to purchase all (but not less than all) of the Properties on the Expiration Date. "Extended Term" shall mean the five periods each of one year's duration which immediately follow the end of the Basic Term with respect to which Lessee has exercised its Renewal Option pursuant to Section 21.1 of the Lease. "Eurodollar Margin Increase" shall have the meaning given to such term in the Credit Agreement. "Fair Market Sales Value" shall mean, with respect to any Property, the amount, which in any event, shall not be less than zero, that would be paid in cash in an arms-length transaction between an informed and willing purchaser and an informed and willing seller, neither of whom is under any compulsion to purchase or sell, respectively, such Property. Fair Market Sales Value of any Property shall be determined based on the assumption that, except for purposes of Section 17 of the Lease, such Property is in the condition and state of repair required under Section 10.1 of the Lease and the Lessee are in compliance with the other requirements of the Operative Agreements. "FH Trust 1995-1" shall mean the grantor trust created pursuant to the terms and conditions of the Trust Agreement. "Fixtures" shall mean all fixtures relating to the Improvements, including all components thereof, located in or on the Improvements, together with all replacements, modifications, alterations and additions thereto. "Force Majeure Event" shall mean any event beyond the control of the Construction Agent, other than a Casualty or Condemnation, including, but not limited to, strikes, lockouts, adverse soil conditions, acts of God, adverse weather conditions, inability to obtain labor or materials, governmental activities, civil commotion and enemy action; but excluding any event, cause or condition that results from the Construction Agent's financial condition. "GAAP" shall have the meaning given to such term in the Existing Credit Agreement. "Governmental Action" shall mean all permits, authorizations, registrations, consents, approvals, waivers, exceptions, variances, orders, judgments, written interpretations, decrees, licenses, exemptions, publications, filings, notices to and declarations of or with, or required by, any Governmental Authority, or required by any Legal Requirement, and shall include, without limitation, all environmental and operating permits and licenses that are required for the full use, occupancy, zoning and operating of any Property. "Governmental Authority" shall mean any nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Guarantor" shall mean Foundation Health Corporation, a Delaware corporation. "Guarantor Revolving Credit Facility" shall have the meaning specified in Section 1.1 of the Credit Agreement. "Guaranty Agreement" shall mean the Guaranty Agreement dated as of the date hereof pursuant to which the Guarantor guarantees the obligations of the Lessee under the Lease and the obligations of the Construction Agent under the Construction Agency Agreement. "Guaranty Default" shall mean any event or condition which, with the lapse of time or the giving of notice, or both, would constitute a Guaranty Event of Default. "Guaranty Event of Default" shall mean an Event of Default as defined in Section 2.05 of the Guaranty Agreement. "Hazardous Substance" shall mean any of the following: (i) any petroleum or petroleum product, explosives, radioactive materials, asbestos, formaldehyde, polychlorinated biphenyls, lead and radon gas; (ii) any substance, material, product, derivative, compound or mixture, mineral, chemical, waste, gas, medical waste, or pollutant, in each case whether naturally occurring, man-made or the by-product of any process, that is toxic, harmful or hazardous to the environment or human health or safety as determined in accordance with any Environmental Law; or (iii) any substance, material, product, derivative, compound or mixture, mineral, chemical, waste, gas, medical waste or pollutant that would support the assertion of any claim under any Environmental Law, whether or not defined as hazardous as such under any Environmental Law. "Holder Advance" shall mean any advance made by any Holder to the Owner Trustee pursuant to the terms of the Trust Agreement or the Participation Agreement. "Holder Amount" shall mean as of any date, the aggregate amount of Holder Advances made by each Holder to the Trust Estate pursuant to Section 2 of the Participation Agreement and Section 3.1 of the Trust Agreement less any payments of any Holder Advances received by the Holders pursuant to Section 3.4 of the Trust Agreement. "Holder Applicable Margin" shall mean the sum of (a) .93%, plus (b) the Eurodollar Margin Increase. "Holder Commitment Fee" shall have the meaning specified in Section 9.4(b) of the Participation Agreement. "Holder Commitments" shall mean $1,800,000, provided, that the Holder Commitment of each Holder shall mean $600,000. "Holder Construction Property Cost" shall mean, with respect to each Construction Period Property for which the Basic Term has not commenced, at any date of determination, an amount equal to the outstanding Holder Advances made with respect thereto under Section 3.1(a) and (c) of the Trust Agreement. "Holder Overdue Rate" shall mean the lesser of (i) the ABR plus two and one-half percent (2 1/2%) and (ii) the highest rate permitted by applicable law. "Holder Property Cost" shall mean with respect to a Property an amount equal to the outstanding Holder Advances with respect thereto. "Holders" shall mean the several banks and other financial institutions which are from time to time holders of Certificates in connection with the FH Trust 1995-1. "Holder Yield" shall mean the Eurodollar Reserve Rate plus the Holder Applicable Margin; provided, however, (i) upon delivery of the notice described in Section 3.7(c) of the Trust Agreement, the outstanding Holder Advances of each Holder shall bear a yield at the ABR applicable from time to time from and after the dates and during the periods specified in Section 3.7(c) of the Trust Agreement, and (ii) upon the delivery by a Holder of the notice described in Section 3.8(c) of the Trust Agreement, the Holder Advances of such Holder shall bear a yield at the ABR applicable from time to time after the dates and during the periods specified in Section 3.8(c) of the Trust Agreement. "Impositions" shall mean any and all liabilities, losses, expenses, costs, charges and Liens of any kind whatsoever for fees, taxes, levies, imposts, duties, charges, assessments or foreign withholdings ("Taxes") and all interest, additions to tax and penalties thereon, which at any time prior to, during or with respect to the Term or in respect of any period for which the Lessee shall be obligated to pay Supplemental Rent, may be levied, assessed or imposed by any Governmental Authority upon or with respect to (a) any Property or the leasing, financing, refinancing, demolition, construction, substitution, subleasing, assignment, control, condition, occupancy, servicing, maintenance, repair, ownership, possession, activity conducted on, delivery, insuring, use, operation, improvement, transfer of title, return or other disposition of such Property or any part thereof or interest therein; (b) the Notes or Certificates or any part thereof or interest therein; or (c) the Operative Agreements, the performance thereof, or any payment made or accrued pursuant thereto or otherwise in connection with the transactions contemplated thereby. "Improvements" shall mean, with respect to the construction, renovation and/or Modification of a Medical Facility, all buildings, structures, Fixtures, and other improvements of every kind existing at any time and from time to time on or under the Land purchased, leased or otherwise acquired using the proceeds of the Loans or the Holder Advances, together with any and all appurtenances to such buildings, structures or improvements, including sidewalks, utility pipes, conduits and lines, parking areas and roadways, and including all Modifications and other additions to or changes in the Improvements at any time, including without limitation (a) any Improvements existing as of the Property Closing Date as such Improvements may be referenced on the applicable Requisition and (b) any Improvements made subsequent to such Property Closing Date. "Indebtedness" shall have the meaning specified in Section 1.1 of the Credit Agreement. "Indemnified Person" shall mean the Lessor, the Owner Trustee, in its individual and its trust capacity, the Agent, the Holders, the Lenders and their respective successors, assigns, directors, shareholders, partners, officers, employees, agents and Affiliates. "Indemnity Provider" shall mean each of (i) Foundation Health Medical Services, a California corporation and (ii) Foundation Health Corporation, a Delaware corporation, with such entities acting on a joint and several basis. "Initial Closing Date" shall mean the date of the Participation Agreement. "Initial Construction Advance" shall mean any initial Advance to pay for: (i) Property Costs for construction of any Improvements; and (ii) the Property Costs of restoring or repairing any Property which is required to be restored or repaired in accordance with Section 15.1(e) of the Lease. "Insurance Company" shall mean an organization licensed under the Insurance Regulations to conduct insurance operations (or an organization required to be licensed as such). "Insurance Regulation" means any Law applicable to an Insurance Company as such. "Insurance Regulator" means any Person charged with the administration, oversight or enforcement of any Insurance Regulation. "Insurance Requirements" shall mean all terms and conditions of any insurance policy either required by the Lease to be maintained by the Lessee or required by the Agency Agreement to be maintained by the Construction Agent, and all requirements of the issuer of any such policy and, regarding self insurance, any other requirements of Lessee. "Insurance Subsidiary" means any Subsidiary of the Guarantor that is an Insurance Company at the time of determination. "Interest Period" shall have the meaning specified in Section 1.1 of the Credit Agreement. "Investment Company Act" shall mean the Investment Company Act of 1940, as amended, together with the rules and regulations promulgated thereunder. "Land" shall mean a parcel of real property described on (a) the Requisition issued by the Construction Agent on the Property Closing Date relating to such parcel and (b) Schedule I-C to each applicable Lease Supplement executed and delivered in accordance with the requirements of Section 2.4 of the Lease. "Law" shall mean any statute, law, ordinance, regulation, rule, directive, order, writ, injunction or decree of any Tribunal. "Lease" or "Lease Agreement" shall mean the Lease Agreement (Tax Retention Operating Lease) dated as of the Initial Closing Date, between the Lessor and the Lessee, together with any Lease Supplements thereto, as such Lease Agreement may from time to time be supplemented, amended or modified in accordance with the terms thereof. "Lease Default" shall mean any event or condition which, with the lapse of time or the giving of notice, or both, would constitute a Lease Event of Default. "Lease Event of Default" shall have the meaning specified in Section 17.1 of the Lease. "Lease Supplement" shall mean each Lease Supplement substantially in the form of Exhibit A to the Lease, together with all attachments and schedules thereto, as such Lease Supplement may be supplemented, amended or modified from time to time. "Legal Requirements" shall mean all foreign, Federal, state, county, municipal and other governmental statutes, laws, rules, orders, regulations, ordinances, judgments, decrees and injunctions affecting the Owner Trustee, the Holders, the Agent, any Lender or any Improvements or the taxation, demolition, construction, use or alteration of such Improvements, whether now or hereafter enacted and in force, including any that require repairs, modifications or alterations in or to any Property or in any way limit the use and enjoyment thereof (including all building, zoning and fire codes and the Americans with Disabilities Act of 1990, 42 U.S.C. Section 12101 et. seq., and any other similar Federal, state or local laws or ordinances and the regulations promulgated thereunder) and any that may relate to environmental requirements (including all Environmental Laws), and all permits, certificates of occupancy, licenses, authorizations and regulations relating thereto, and all covenants, agreements, restrictions and encumbrances contained in any instruments which are either of record or known to the Lessee affecting any Property or the Appurtenant Rights. "Lender Commitment Fee" shall have the meaning specified in Section 9.4(a) of the Participation Agreement. "Lender Financing Statements" shall mean UCC financing statements and fixture filings appropriately completed and executed for filing in the applicable jurisdiction in order to procure a security interest in favor of the Agent in any Equipment or in any Improvements. "Lenders" shall mean the several banks and other financial institutions from time to time party to the Credit Agreement. "Lessee" shall have the meaning set forth in the Lease. "Lessor" shall mean the Owner Trustee, not in its individual capacity, but as Lessor under the Lease. "Lessor Basic Rent" shall mean the scheduled Holder Yield due on the Holder Advances on any Specified Interest Payment Date pursuant to the Trust Agreement (but not including (i) any such scheduled Holder Yield due on the Holder Advances prior to the Basic Term Commencement Date with respect to the Property to which such Holder Advances relate or (ii) overdue amounts under the Trust Agreement or otherwise). "Lessor Financing Statements" shall mean UCC financing statements and fixture filings appropriately completed and executed for filing in the applicable jurisdictions in order to protect the Lessor's interest under the Lease to the extent the Lease is a security agreement or a mortgage. "Lessor Lien" shall mean any Lien, true lease or sublease or disposition of title arising as a result of (a) any claim against the Lessor or Trust Company, in its individual capacity, not resulting from the transactions contemplated by the Operative Agreements, (b) any act or omission of the Lessor or Trust Company, in its individual capacity, which is not required by the Operative Agreements or is in violation of any of the terms of the Operative Agreements, (c) any claim against the Lessor or Trust Company, in its individual capacity, with respect to Taxes or Transaction Expenses against which the Lessee is not required to indemnify Lessor or Trust Company, in its individual capacity, pursuant to Section 13 of the Participation Agreement or (d) any claim against the Lessor arising out of any transfer by the Lessor of all or any portion of the interest of the Lessor in the Properties, the Trust Estate or the Operative Agreements other than the transfer of title to or possession of any Properties by the Lessor pursuant to and in accordance with the Lease, the Credit Agreement or the Participation Agreement or pursuant to the exercise of the remedies set forth in Article XVII of the Lease. "Lien" shall mean any mortgage, pledge, security interest, encumbrance, lien, option or charge of any kind. "Limited Recourse Amount" shall mean with respect to the Properties on an aggregate basis, an amount equal to the sum of the Termination Values with respect to all of the Properties on each Payment Date, less the Maximum Residual Guarantee Amount as of such date with respect to the Properties. "Loans" shall have the meaning specified in Section 2.1(a) of the Credit Agreement. "Loan Basic Rent" shall mean the interest due on the Loans on any Specified Interest Payment Date pursuant to the Credit Agreement (but not including interest on (i) any such Loan prior to the Basic Term Commencement Date with respect to the Property to which such Loan relates or (ii) any overdue amounts under Section 2.7(b) of the Credit Agreement or otherwise). "Loan Property Cost" shall have the meaning specified in Section 1.1 of the Credit Agreement. "Majority Lenders" shall have the meaning specified in Section 1.1 of the Credit Agreement. "Marketing Period" shall mean, if the Lessee has given a Sale Notice in accordance with Section 20.2 of the Lease, the period commencing on the date such Sale Notice is given and ending on the anniversary date of the Initial Closing Date next succeeding the date such Sale Note is given. "Material Adverse Effect", for purposes of all the Operative Agreements, shall mean a material adverse effect on (a) the business, condition (financial or otherwise), assets, liabilities or operations of the Guarantor and its Subsidiaries taken as a whole; provided, however, it is understood and agreed that such Material Adverse Effect shall not be deemed to occur under this subparagraph (a) unless the matter at issue will have a monetary effect in an amount that, when added to other matters occurring during the fiscal year in which such matter in question occurred, would cause a reduction of the Net Worth of the Guarantor and its Subsidiaries during such fiscal year of ten percent (10%) or more, (b) the ability of the Guarantor, the Lessee or any Subsidiary to perform its respective obligations under any Operative Agreement to which it is a party, (c) the validity or enforceability of any Operative Agreement or the rights and remedies of the Agent, the Lenders, the Holders, or the Lessor thereunder, (d) the validity, priority or enforceability of any Lien on any Property created by any of the Operative Agreements, or (e) the value, utility or useful life of any Property or the use, or ability of the applicable Lessee to use, any Property for the purpose for which it was intended. "Maturity Date" shall have the meaning specified in Section 1.1 of the Credit Agreement. "Maximum Property Cost" shall mean the aggregate amount of the Property Costs for all Properties subject to the Lease as of the applicable determination date. "Maximum Residual Guarantee Amount" shall mean an amount equal to the product of the aggregate Property Cost for all of the Properties times 87%. "Medical Facility" shall mean (i) any real property location used by the Lessee or any of its affiliates to provide health care, and (ii) any corporate office facility used by the Lessee or any of its affiliates. "Modifications" shall have the meaning specified in Section 11.1(a) of the Lease. "Moody's" shall have the meaning specified in Section 1.1 of the Credit Agreement. "Mortgage Instrument" shall mean any mortgage, deed of trust or any other instrument executed by the Owner Trustee in favor of the Agent and evidencing a Lien on a Property, in form and substance reasonably acceptable to the Agent. "Multiemployer Plan" shall mean any plan described in Section 4001(a)(3) of ERISA to which contributions are or have been made or required by the Lessee or any of its Subsidiaries or ERISA Affiliates. "Multiple Employer Plan" shall mean a plan to which the Lessee or any ERISA Affiliate and at least one other employer other than an ERISA Affiliate is making or accruing an obligation to make, or has made or accrued an obligation to make, contributions. "Net Proceeds" shall mean all amounts paid in connection with any Casualty or Condemnation, and all interest earned thereon, less the expense of claiming and collecting such amounts, including all costs and expenses in connection therewith for which the Agent or Lessor are entitled to be reimbursed pursuant to the Lease. "Net Sale Proceeds Shortfall" shall mean the amount by which the proceeds of a sale described in Section 22.1 of the Lease (net of all expenses of sale) are less than the Limited Recourse Amount with respect to the Properties if it has been determined that the Fair Market Sales Value of the Properties at the expiration of the term of the Lease has been impaired by greater than expected wear and tear during the Term of the Lease. "Net Worth" shall have the meaning specified in Section 1.01 of the Guaranty Agreement. "Notes" shall have the meaning specified in Section 1.1 of the Credit Agreement. "Occupational Safety and Health Law" shall mean the Occupational Safety and Health Act of 1970 and any other federal, state or local statute, law, ordinance, code, rule, regulation, order or decree regulating or relating to, or imposing liability or standards of conduct concerning, employee health and/or safety, as now or at any time hereafter in effect. "Officer's Certificate" shall mean a certificate signed by any individual holding the office of vice president or higher, which certificate shall certify as true and correct the subject matter being certified to in such certificate. "Operative Agreements" shall mean the following: the Participation Agreement, the Agency Agreement, the Trust Agreement, the Certificates, the Credit Agreement, the Notes, the Guaranty Agreement, the Lease (and a memorandum thereof in a form reasonably acceptable to the Agent), each Lease Supplement (and a memorandum thereof in a form reasonably acceptable to the Agent), the Security Agreement and each Mortgage Instrument. "Overdue Rate" shall mean (i) with respect to Basic Rent, and any other amount owed under or with respect to the Credit Agreement or the Security Documents, the rate specified in Section 2.7(b) of the Credit Agreement, (ii) with respect to Lessor Basic Rent, the Holder Yield and any other amount owed under or with respect to the Trust Agreement, the applicable rate specified in the Trust Agreement, and (iii) with respect to any other amount, the amount referred to in clause (y) of Section 2.7(c) of the Credit Agreement. "Owner Trustee" shall mean First Security Bank of Utah, N.A., not individually, except as expressly stated in the various Operative Agreements, but solely as Owner Trustee under the FH Trust 1995-1, and any successor or replacement Owner Trustee expressly permitted under the Operative Agreements. "Participation Agreement" shall mean the Participation Agreement dated as of May 25, 1995, among the Lessee, the Guarantor, the Owner Trustee, not in its individual capacity except as expressly stated therein, the Holders and the Agent, as such Participation Agreement may be amended, supplemented or otherwise modified from time to time in accordance with the terms thereof or of any other Operative Agreement. "Payment Date" shall mean any Specified Interest Payment Date and any date on which interest or Holder Yield in connection with a prepayment of principal on the Loans or of the Holder Advances is due under the Credit Agreement or the Trust Agreement. "PBGC" shall mean the Pension Benefit Guaranty Corporation created by Section 4002(a) of ERISA or any successor thereto. "Pension Plan" means a "pension plan", as such term is defined in section 3(2) of ERISA, which is subject to title IV of ERISA (other than a Multiemployer Plan), and to which the Company or any ERISA Affiliate may have any liability, including any liability by reason of having been a substantial employer within the meaning of section 4063 of ERISA at any time during the preceding five years, or by reason of being deemed to be a contributing sponsor under section 4069 of ERISA. "Permitted Exceptions" shall mean: (i) Liens of the types described in clauses (i), (ii) and (v) of the definition of Permitted Liens; (ii) Liens for Taxes not yet due; and (iii) all encumbrances, exceptions, restrictions, easements, rights of way, servitudes, encroachments and irregularities in title, other than Liens which, in the reasonable assessment of the Agent, do not materially impair the use of the Property for its intended purpose. "Permitted Liens" shall mean: (i) the respective rights and interests of the parties to the Operative Agreements as provided in the Operative Agreements; (ii) the rights of any sublessee or assignee under a sublease or an assignment expressly permitted by the terms of the Lease; (iii) Liens for Taxes that either are not yet due or are being contested in accordance with the provisions of Section 13.1 of the Lease; (iv) Liens arising by operation of law, materialmen's, mechanics', workmen's, repairmen's, employees', carriers', warehousemen's and other like Liens relating to the construction of the Improvements or in connection with any Modifications or arising in the ordinary course of business for amounts that either are not more than 30 days past due or are being diligently contested in good faith by appropriate proceedings, so long as such proceedings satisfy the conditions for the continuation of proceedings to contest Taxes set forth in Section 13.1 of the Lease; (v) Liens of any of the types referred to in clause (iv) above that have been bonded for not less than the full amount in dispute (or as to which other security arrangements satisfactory to the Lessor and the Agent have been made), which bonding (or arrangements) shall comply with applicable Legal Requirements, and shall have effectively stayed any execution or enforcement of such Liens; (vi) Liens arising out of judgments or awards with respect to which appeals or other proceedings for review are being prosecuted in good faith and for the payment of which adequate reserves have been provided as required by GAAP or other appropriate provisions have been made, so long as such proceedings have the effect of staying the execution of such judgments or awards and satisfy the conditions for the continuation of proceedings to contest Taxes set forth in Section 13.1 of the Lease; (vii) Liens in favor of municipalities to the extent agreed to by the Lessor and Lessee; and (viii) Permitted Exceptions. "Person" shall mean any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization, governmental authority or any other entity. "Plans and Specifications" shall mean, with respect to Improvements, the construction documents for such Improvements to be constructed or already existing, as such construction documents may be amended, modified or supplemented from time to time in accordance with the terms of the Participation Agreement. "Prime Lending Rate" shall have the meaning specified in Section 1.1 of the Credit Agreement. "Property" shall mean, with respect to each Medical Facility that is acquired, constructed and/or renovated pursuant to the terms of the Operative Agreements, the Land and each item of Equipment and the various Improvements, in each case located on such Land. "Property Acquisition Cost" shall mean the cost to Lessor to purchase a Property on a Property Closing Date. "Property Closing Date" shall mean each date on which the Lessor purchases a Property. "Property Cost" shall mean with respect to a Property the aggregate amount of the Loan Property Cost, plus the Holder Property Cost for such Property (as such amounts shall be increased equally among all Properties respecting the Holder Advances and the Loans extended from time to time to pay for the Transaction Expenses, fees, expenses and other disbursements referenced in Sections 9.1(a) and (b) of the Participation Agreement), it being specifically understood and agreed that Property Cost shall include all amounts requested in a Requisition submitted pursuant to the terms of this Participation Agreement provided that such amount relates to the Property in question and is a cost that can be capitalized with respect to such Property in accordance with GAAP (including specifically without limitation any allocated overhead costs that may be so capitalized). "Purchase Option" shall have the meaning given to such term in Section 20.2 of the Lease. "Release" shall mean any release, pumping, pouring, emptying, injecting, escaping, leaching, dumping, seepage, spill, leek, flow, discharge, disposal or emission of a Hazardous Substance. "Renewal Option" shall have the meaning specified in Section 21.1 of the Lease. "Rent" shall mean, collectively, the Basic Rent and the Supplemental Rent, in each case payable under the Lease. "Reportable Event" shall have the meaning specified in ERISA. "Requested Funds" shall mean any funds requested by the Lessee or the Construction Agent, as applicable, in accordance with Section 5 of the Participation Agreement. "Requirement of Law" shall have the meaning specified in Section 1.1 of the Credit Agreement. "Requisition" shall have the meaning specified in Section 4.2 of the Participation Agreement. "Responsible Officer" shall mean the Chairman or Vice Chairman of the Board of Directors, the Chairman or Vice Chairman of the Executive Committee of the Board of Directors, the President, any Senior Vice President or Executive Vice President, any Vice President, the Secretary, any Assistant Secretary, the Treasurer, or any Assistant Treasurer, except that when used with respect to the Trust Company or the Owner Trustee, "Responsible Officer" shall also include the Cashier, any Assistant Cashier, any Trust Officer or Assistant Trust Officer, the Controller and any Assistant Controller or any other officer of the Trust Company or the Owner Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his knowledge of and familiarity with the particular subject. "Sale Date" shall have the meaning given to such term in Section 22.1(a) of the Lease. "Sale Notice" shall mean a notice given to Lessor in connection with the election by Lessee of its Sale Option. "Sale Option" shall have the meaning given to such term in Section 20.2 of the Lease. "Scheduled Interest Payment Date" shall have the meaning specified in Section 1.1 of the Credit Agreement. "Securities Act" shall mean the Securities Act of 1933, as amended, together with the rules and regulations promulgated thereunder. "Security Agreement" shall mean the Security Agreement, dated as of the Initial Closing Date between the Owner Trustee and the Agent. "Security Documents" shall have the meaning specified in Section 1.1 of the Credit Agreement. "Shared Rights" shall mean the rights retained by the Lessor, but not to the exclusion of the Agent, pursuant to Section 8.2(a)(ii) of the Credit Agreement. "S&P" shall have the meaning specified in Section 1.1 of the Credit Agreement. "Specified Interest Payment Date" shall have the meaning specified in Section 1.1 of the Credit Agreement. "Subsidiary" shall have the meaning specified in Section 1.1 of the Credit Agreement. "Supplemental Rent" shall mean all amounts, liabilities and obligations (other than Basic Rent) which the Lessee assumes or agrees to pay to Lessor, the Holders, the Administrative Agent or any other Person under the Lease or under any of the other Operative Agreements including, without limitation, payments of Purchase Option Price, Termination Value and the Maximum Residual Guarantee Amount and all indemnification amounts, liabilities and obligations. "Taxes" shall have the meaning specified in the definition of Impositions. "Term" shall mean the Basic Term and each Extended Term, if any. "Termination Date" shall have the meaning specified in Section 16.2(a) of the Lease. "Termination Event" shall mean (a) with respect to any Plan, the occurrence of a Reportable Event or an event described in Section 4062(e) of ERISA, (b) the withdrawal of the Lessee or any ERISA Affiliate from a Multiple Employer Plan during a plan year in which it was a substantial employer (as such term is defined in Section 4001(a)(2) of ERISA), or the termination of a Multiple Employer Plan, (c) the distribution of a notice of intent to terminate a Plan or Multiemployer Plan pursuant to Section 4041(a)(2) or 4041A of ERISA, (d) the institution of proceedings to terminate a Plan or Multiemployer Plan by the PBGC under Section 4042 of ERISA, (e) any other event or condition which might constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan or Multiemployer Plan, or (f) the complete or partial withdrawal of the Lessee or any ERISA Affiliate from a Multiemployer Plan. "Termination Notice" shall have the meaning specified in Section 16.1 of the Lease. "Termination Value" shall mean (a) with respect to all Properties, an amount equal to the sum of (i) the aggregate outstanding principal and interest balance on the Notes, plus (ii) the aggregate outstanding principal amount of the Holder Advances plus the accrued and unpaid Holder Yield thereon, in each case as of the applicable Payment Date and (b) with respect to a particular Property, an amount equal to the product of the Termination Value of all the Properties times a fraction, the numerator of which is the Property Cost allocatable to the particular Property in question and the denominator of which is the aggregate Property Cost for all the Properties. "Total Condemnation" shall mean a Condemnation that involves a taking of Lessor's entire title to a Property. "Transaction Expenses" shall mean all costs and expenses incurred in connection with the preparation, execution and delivery of the Operative Agreements and the transactions contemplated by the Operative Agreements including without limitation: (a) the reasonable fees, out-of-pocket expenses and disbursements of counsel (other than counsel to the Lenders, the Agent or the Holders) in negotiating the terms of the Operative Agreements and the other transaction documents, preparing for the closings under, and rendering opinions in connection with, such transactions and in rendering other services customary for counsel representing parties to transactions of the types involved in the transactions contemplated by the Operative Agreements; (b) any and all other reasonable fees, charges or other amounts payable to the Lenders, Agent, the Holders, the Owner Trustee or any broker which arises under any of the Operative Agreements; (c) any other reasonable fee, out-of-pocket expenses, disbursement or cost of any party to the Operative Agreements or any of the other transaction documents; and (d) any and all Taxes and fees incurred in recording or filing any Operative Agreement or any other transaction document, any deed, declaration, mortgage, security agreement, notice or financing statement with any public office, registry or governmental agency in connection with the transactions contemplated by the Operative Agreement. "Tribunal" shall mean any state, commonwealth, federal, foreign, territorial, or other court or government body, subdivision agency, department, commission, board, bureau or instrumentality of a governmental body. "Trust Agreement" shall mean the Trust Agreement dated as of the Initial Closing Date, between the Holders and the Owner Trustee. "Trust Company" shall mean First Security Bank of Utah, N.A. in its individual capacity, and any successor owner trustee under the Trust Agreement in its individual capacity. "Trust Estate" shall have the meaning specified in Section 2.2 of the Trust Agreement. "UCC Financing Statements" shall mean collectively the Lender Financing Statements and the Lessor Financing Statements. "Unfunded Amount" shall have the meaning specified in Section 3.2 of the Agency Agreement. "Uniform Commercial Code" and "UCC" shall mean the Uniform Commercial Code as in effect in any applicable jurisdiction. "Voting Power" shall mean, with respect to securities issued by any Person, the combined voting power of all securities of such person which are issued and outstanding at the time of determination and which are entitled to vote in the election of directors or such Person, other than securities having such power only by reason of the happening of a contingency. "Withdrawal Liability" shall mean liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA. "Work" shall mean the furnishing of labor, materials, components, furniture, furnishings, fixtures, appliances, machinery, equipment, tools, power, water, fuel, lubricants, supplies, goods and/or services with respect to any Property. EXHIBIT I [Form of Limited Power of Attorney] - ------------------------------------------------------------------------------- LEASE AGREEMENT (Tax Retention Operating Lease) Dated as of May 25, 1995 between FIRST SECURITY BANK OF UTAH, N.A., not individually, but solely as Owner Trustee under the FH Trust 1995-1, as Lessor and FOUNDATION HEALTH MEDICAL SERVICES, as Lessee - ------------------------------------------------------------------------------- This Lease Agreement is subject to a security interest in favor of NationsBank of Texas, N.A., as Administrative Agent (the "Agent") under a Credit Agreement dated as of May 25, 1995, among First Security Bank of Utah, N.A., not individually except as expressly stated therein, but solely as Owner Trustee under the FH Trust 1995-1, the Lenders and the Agent, as amended, modified, supplemented, restated and/or replaced from time to time. This Lease Agreement has been executed in several counterparts. To the extent, if any, that this Lease Agreement constitutes chattel paper (as such term is defined in the Uniform Commercial Code as in effect in any applicable jurisdiction), no security interest in this Lease Agreement may be created through the transfer or possession of any counterpart other than the original counterpart containing the receipt therefor executed by the Agent on the signature page hereof. TABLE OF CONTENTS ARTICLE I. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1 Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2.1 Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2.2 Lease Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.3 Title. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.4 Lease Supplements. . . . . . . . . . . . . . . . . . . . . . . . . . 2 ARTICLE III. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 3.1 Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 3.2 Payment of Basic Rent. . . . . . . . . . . . . . . . . . . . . . . . 3 3.3 Supplemental Rent. . . . . . . . . . . . . . . . . . . . . . . . . . 3 3.4 Performance on a Non-Business Day. . . . . . . . . . . . . . . . . . 3 3.5 Rent Payment Provisions. . . . . . . . . . . . . . . . . . . . . . . 4 ARTICLE IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 4.1 Utility Charges. . . . . . . . . . . . . . . . . . . . . . . . . . . 4 ARTICLE V. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 5.1 Quiet Enjoyment. . . . . . . . . . . . . . . . . . . . . . . . . . . 4 ARTICLE VI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 6.1 Net Lease. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 6.2 No Termination or Abatement. . . . . . . . . . . . . . . . . . . . . 5 ARTICLE VII. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 7.1 Ownership of the Property. . . . . . . . . . . . . . . . . . . . . . 5 ARTICLE VIII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 8.1 Condition of the Property. . . . . . . . . . . . . . . . . . . . . . 6 8.2 Possession and Use of the Property . . . . . . . . . . . . . . . . . 7 ARTICLE IX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 9.1 Compliance With Legal Requirements and Insurance Requirements. . . . 7 ARTICLE X. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 10.1 Maintenance and Repair; Return; Appraisals . . . . . . . . . . . . . 8 10.2 Environmental Inspection . . . . . . . . . . . . . . . . . . . . . . 9 ARTICLE XI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 11.1 Modifications, Substitutions and Replacements. . . . . . . . . . . . 9 ARTICLE XII. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 12.1 Warranty of Title. . . . . . . . . . . . . . . . . . . . . . . . . 10 ARTICLE XIII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 13.1 Permitted Contests Other Than in Respect of Indemnities. . . . . . 11 ARTICLE XIV. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 14.1 Public Liability and Workers' Compensation Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 14.2 Hazard and Other Insurance . . . . . . . . . . . . . . . . . . . . 12 14.3 Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 ARTICLE XV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 15.1 Casualty and Condemnation. . . . . . . . . . . . . . . . . . . . . 14 15.2 Environmental Matters. . . . . . . . . . . . . . . . . . . . . . . 15 15.3 Notice of Environmental Matters. . . . . . . . . . . . . . . . . . 16 ARTICLE XVI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 16.1 Termination Upon Certain Events. . . . . . . . . . . . . . . . . . 16 16.2 Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 ARTICLE XVII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 17.1 Lease Events of Default. . . . . . . . . . . . . . . . . . . . . . 17 17.2 Surrender of Possession. . . . . . . . . . . . . . . . . . . . . . 19 17.3 Reletting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 17.4 Damages. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 17.5 [intentionally omitted]. . . . . . . . . . . . . . . . . . . . . . 20 17.6 Final Liquidated Damages . . . . . . . . . . . . . . . . . . . . . 20 17.7 [Intentionally Omitted]. . . . . . . . . . . . . . . . . . . . . . 21 17.8 Waiver of Certain Rights . . . . . . . . . . . . . . . . . . . . . 21 17.9 Assignment of Rights Under Contracts . . . . . . . . . . . . . . . 21 17.10 Remedies Cumulative . . . . . . . . . . . . . . . . . . . . . 21 ARTICLE XVIII. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 18.1 Lessor's Right to Cure Lessee's Lease Defaults . . . . . . . . . . 21 ARTICLE XIX. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 19.1 Provisions Relating to Lessee's Exercise of its Purchase Option. . 21 19.2 No Termination With Respect to Less than All of a Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 ARTICLE XX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 20.1 Individual Purchase Option . . . . . . . . . . . . . . . . . . . . 22 20.2 Anniversary Date Purchase or Sale Option . . . . . . . . . . . . . 23 20.3 Lessor's Transfer Option . . . . . . . . . . . . . . . . . . . . . 23 ARTICLE XXI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 21.1 Renewal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 ARTICLE XXII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 22.1 Sale Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . 24 22.2 Application of Proceeds of Sale. . . . . . . . . . . . . . . . . . 26 22.3 Indemnity for Excessive Wear . . . . . . . . . . . . . . . . . . . 26 22.4 Appraisal Procedure. . . . . . . . . . . . . . . . . . . . . . . . 26 22.5 Certain Obligations Continue . . . . . . . . . . . . . . . . . . . 27 ARTICLE XXIII. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 23.1 Holding Over . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 ARTICLE XXIV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 24.1 Risk of Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 ARTICLE XXV. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 25.1 Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 25.2 Subleases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 ARTICLE XXVI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 26.1 No Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 ARTICLE XXVII. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 27.1 Acceptance of Surrender. . . . . . . . . . . . . . . . . . . . . . 29 27.2 No Merger of Title . . . . . . . . . . . . . . . . . . . . . . . . 29 ARTICLE XXVIII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 28.1 [Intentionally Omitted]. . . . . . . . . . . . . . . . . . . . . . 30 ARTICLE XXIX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 29.1 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 ARTICLE XXX. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 30.1 Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . 31 30.2 Amendments and Modifications . . . . . . . . . . . . . . . . . . . 31 30.3 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . 31 30.4 Headings and Table of Contents . . . . . . . . . . . . . . . . . . 31 30.5 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 30.6 GOVERNING LAW. . . . . . . . . . . . . . . . . . . . . . . . . . . 31 30.7 Calculation of Rent. . . . . . . . . . . . . . . . . . . . . . . . 31 30.8 Memoranda of Lease and Lease Supplements . . . . . . . . . . . . . 31 30.9 Allocations between the Lenders and the Holders. . . . . . . . . . 31 30.10 Limitations on Recourse . . . . . . . . . . . . . . . . . . . 32 EXHIBITS EXHIBIT A - Lease Supplement No. ___ EXHIBIT B - Other Names and Locations of Lessee LEASE AGREEMENT (Tax Retention Operating Lease Agreement) THIS LEASE AGREEMENT (Tax Retention Operating Lease) (this "LEASE"), dated as of May 25, 1995, is between FIRST SECURITY BANK OF UTAH, N.A., a national banking association, having its principal office at 79 South Main Street, Salt Lake City, Utah 84111, not individually, but solely as Owner Trustee under the FH Trust 1995-1, as lessor (the "LESSOR"), and FOUNDATION HEALTH MEDICAL SERVICES, a California corporation, having its principal place of business at 3400 Data Drive, Rancho Cordova, California 95670, as lessee (the "LESSEE"). W I T N E S S E T H: A. WHEREAS, subject to the terms and conditions of the Agency Agreement, Lessor will (i) purchase various parcels of real property from one or more third parties designated by Lessee and (ii) fund the development, and construction by the Construction Agent of Improvements on such real property; and B. WHEREAS, the Basic Term shall commence with respect to each Property upon the earlier to occur of the Completion of such Property or if such Property is a Construction Period Property as of the date of any Agency Agreement Event of Default, the date of such Agency Agreement Event of Default; and C. WHEREAS, Lessor desires to lease to Lessee, and Lessee desires to lease from Lessor, each Property; NOW, THEREFORE, in consideration of the foregoing, and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I 1.1 DEFINITIONS. Capitalized terms used but not otherwise defined in this Lease have the respective meanings specified in APPENDIX A to the Participation Agreement of even date herewith (as such may be amended, modified, supplemented, restated and/or replaced from time to time, the "PARTICIPATION AGREEMENT") among the Lessee, the Guarantor, First Security Bank of Utah, N.A., not individually, except as expressly stated therein, as Owner Trustee under the FH Trust 1995-1, the Holders, the Lenders and the Agent. ARTICLE II 2.1 PROPERTY. Subject to the terms and conditions hereinafter set forth and contained in the respective Lease Supplement relating to each Property, Lessor hereby leases to Lessee and Lessee hereby leases from Lessor, each Property. 2.2 LEASE TERM. The term of this Lease with respect to each Property (the "BASIC TERM") shall begin upon the earlier to occur of (i) the Completion Date for such Property or (ii) if such Property is a Construction Period Property as of the date of any Agency Agreement Event of Default, the date of such Agency Agreement Event of Default (in each case the "BASIC TERM COMMENCEMENT DATE") and shall end on May 25, 2000 (the "BASIC TERM EXPIRATION DATE"), unless the Term is extended or earlier terminated in accordance with the provisions of this Lease. 2.3 TITLE. Each Property is leased to Lessee without any representation or warranty, express or implied, by Lessor and subject to the rights of parties in possession, the existing state of title (including, without limitation, the Permitted Exceptions) and all applicable Legal Requirements. Lessee shall in no event have any recourse against Lessor for any defect in title to any Property other than in connection with Lessor Liens. 2.4 LEASE SUPPLEMENTS. On or prior to each Basic Term Commencement Date, Lessee and Lessor shall each execute and deliver a Lease Supplement for the Property to be leased effective as of such Basic Term Commencement Date in substantially the form of EXHIBIT A hereto. Lessee hereby irrevocably appoints Lessor as Lessee's attorney-in-fact, with power of substitution, in the name of Lessor or the name of Lessee or otherwise, to execute any Lease Supplement which Lessee fails or refuses to sign in accordance with the terms of this Section 2.4 (including specifically without limitation any Lease Supplement required in connection with any Construction Period Property upon the occurrence of an Agency Agreement Event of Default). ARTICLE III 3.1 RENT. (a) Lessee shall pay Basic Rent on each Payment Date, and on any date on which this Lease shall terminate with respect to any or all Properties during the Term; provided, however, with respect to each individual Property Lessee shall have no obligation to pay Basic Rent with respect to such Property until the Basic Term has commenced with respect to such Property. (b) Basic Rent shall be due and payable in lawful money of the United States and shall be paid by wire transfer of immediately available funds on the due date therefor to such account or accounts at such bank or banks as Lessor shall from time to time direct. (c) Neither Lessee's inability or failure to take possession of all or any portion of any Property when delivered by Lessor, nor Lessor's inability or failure to deliver all or any portion of any Property to Lessee on or before the applicable Basic Term Commencement Date, whether or not attributable to any act or omission of Lessee or any act or omission of Lessor (other than an act or omission that constitutes gross negligence or wilful misconduct of Lessor), or for any other reason whatsoever, shall delay or otherwise affect Lessee's obligation to pay Rent for such Property in accordance with the terms of this Lease. 3.2 PAYMENT OF BASIC RENT. Basic Rent shall be paid absolutely net to Lessor or its designee, so that this Lease shall yield to Lessor the full amount thereof, without setoff, deduction or reduction. 3.3 SUPPLEMENTAL RENT. Lessee shall pay to Lessor or its designee or to the Person entitled thereto any and all Supplemental Rent promptly as the same shall become due and payable, and if Lessee fails to pay any Supplemental Rent, Lessor shall have all rights, powers and remedies provided for herein or by law or equity or otherwise in the case of nonpayment of Basic Rent. Lessee shall pay to Lessor, as Supplemental Rent, among other things, on demand, to the extent permitted by applicable Legal Requirements, (a) any and all unpaid fees, charges, payments and other obligations (other than the obligations of Lessor to pay the principal amount of the Loans and the Holder Amount) due and owing by Lessor under the Credit Agreement, under the Trust Agreement and/or under any other Operative Agreement (including specifically without limitation any amounts owing to the Lenders under Section 2.10 or Section 2.11 of the Credit Agreement and any amounts owing to the Holders under Section 3.8 or Section 3.9 of the Trust Agreement) and (b) interest at the applicable Overdue Rate on any installment of Basic Rent not paid when due for the period for which the same shall be overdue and on any payment of Supplemental Rent not paid when due or demanded by Lessor for the period from the due date or the date of any such demand, as the case may be, until the same shall be paid. The expiration or other termination of Lessee's obligations to pay Basic Rent hereunder shall not limit or modify the obligations of Lessee with respect to Supplemental Rent. Unless expressly provided otherwise in this Lease, in the event of any failure on the part of Lessee to pay and discharge any Supplemental Rent as and when due, Lessee shall also promptly pay and discharge any fine, penalty, interest or cost which may be assessed or added for nonpayment or late payment of such Supplemental Rent, all of which shall also constitute Supplemental Rent. 3.4 PERFORMANCE ON A NON-BUSINESS DAY. If any payment is required hereunder on a day that is not a Business Day, then such payment shall be due on the next succeeding Business Day or, with respect to Basic Rent, the Scheduled Interest Payment Date to which such Basic Rent relates. 3.5 RENT PAYMENT PROVISIONS. Lessee shall make payment of all Basic Rent and Supplemental Rent when due regardless of whether any of the Operative Agreements pursuant to which same is calculated and is owing shall have been rejected, avoided or disavowed in any bankruptcy or insolvency proceeding involving any of the parties to any of the Operative Agreements. Such provisions of such Operative Agreements and their related definitions are incorporated herein by reference and shall survive any termination, amendment or rejection of any such Operative Agreements. ARTICLE IV 4.1 UTILITY CHARGES. Lessee shall pay or cause to be paid all charges for electricity, power, gas, oil, water, telephone, sanitary sewer service and all other rents and utilities used in or on a Property and related real property during the Term. Lessee shall be entitled to receive any credit or refund with respect to any utility charge paid by Lessee. The amount of any credit or refund received by Lessor on account of any utility charges paid by Lessee, net of the costs and expenses incurred by Lessor in obtaining such credit or refund, shall be promptly paid over to Lessee. All charges for utilities imposed with respect to a Property for a billing period during which this Lease expires or terminates shall be adjusted and prorated on a daily basis between Lessor and Lessee, and each party shall pay or reimburse the other for such party's pro rata share thereof. ARTICLE V 5.1 QUIET ENJOYMENT. Subject to the rights of Lessor contained in Sections 17.2, 17.3 and 20.3 and the other terms of this Lease and so long as no Lease Event of Default shall have occurred and be continuing, Lessee shall peaceably and quietly have, hold and enjoy each Property for the applicable Term, free of any claim or other action by Lessor or anyone rightfully claiming by, through or under Lessor (other than Lessee) with respect to any matters arising from and after the applicable Basic Term Commencement Date. ARTICLE VI 6.1 NET LEASE. This Lease shall constitute a net lease. Any present or future law to the contrary notwithstanding, this Lease shall not terminate, nor shall Lessee be entitled to any abatement, suspension, deferment, reduction, setoff, counterclaim, or defense with respect to the Rent, nor shall the obligations of Lessee hereunder be affected (except as expressly herein permitted and by performance of the obligations in connection therewith) by reason of: (i) any damage to or destruction of any Property or any part thereof; (ii) any taking of any Property or any part thereof or interest therein by Condemnation or otherwise; (iii) any prohibition, limitation, restriction or prevention of Lessee's use, occupancy or enjoyment of any Property or any part thereof, or any interference with such use, occupancy or enjoyment by any Person or for any other reason; (iv) any title defect, Lien or any matter affecting title to any Property; (v) any eviction by paramount title or otherwise; (vi) any default by Lessor hereunder; (vii) any action for bankruptcy, insolvency, reorganization, liquidation, dissolution or other proceeding relating to or affecting Lessor or any Governmental Authority; (viii) the impossibility or illegality of performance by Lessor, Lessee or both; (ix) any action of any Governmental Authority; (x) Lessee's acquisition of ownership of all or part of any Property; (xi) breach of any warranty or representation with respect to any Property or any Operative Agreement; (xii) any defect in the condition, quality or fitness for use of any Property or any part thereof; or (xiii) any other cause or circumstance whether similar or dissimilar to the foregoing and whether or not Lessee shall have notice or knowledge of any of the foregoing. The parties intend that the obligations of Lessee hereunder shall be covenants, agreements and obligations that are separate and independent from any obligations of Lessor hereunder and shall continue unaffected unless such covenants, agreements and obligations shall have been modified or terminated in accordance with an express provision of this Lease. Lessor and Lessee acknowledge and agree that the provisions of this Section 6.1 have been specifically reviewed and subject to negotiation. 6.2 NO TERMINATION OR ABATEMENT. Lessee shall remain obligated under this Lease in accordance with its terms and shall not take any action to terminate, rescind or avoid this Lease, notwithstanding any action for bankruptcy, insolvency, reorganization, liquidation, dissolution, or other proceeding affecting Lessor or any Governmental Authority, or any action with respect to this Lease or any Operative Agreement which may be taken by any trustee, receiver or liquidator of Lessor or any Governmental Authority or by any court with respect to Lessor or any Governmental Authority. Lessee hereby waives all right (i) to terminate or surrender this Lease or (ii) to avail itself of any abatement, suspension, deferment, reduction, setoff, counterclaim or defense with respect to any Rent. Lessee shall remain obligated under this Lease in accordance with its terms and Lessee hereby waives any and all rights now or hereafter conferred by statute or otherwise to modify or to avoid strict compliance with its obligations under this Lease. Notwithstanding any such statute or otherwise, Lessee shall be bound by all of the terms and conditions contained in this Lease. ARTICLE VII 7.1 OWNERSHIP OF THE PROPERTY. (a) Lessor and Lessee intend that (i) for financial accounting purposes with respect to Lessee (A) this Lease will be treated as an "operating lease" pursuant to Statement of Financial Accounting Standards No. 13, as amended, (B) Lessor will be treated as the owner and lessor of each Property and (C) Lessee will be treated as the lessee of each Property, but (ii) for federal and all state and local income tax purposes, for bankruptcy purposes and for all other purposes (A) this Lease will be treated as a financing arrangement and (B) Lessee will be treated as the owner of the Properties and will be entitled to all tax benefits ordinarily available to owners of property similar to the Properties for such tax purposes. (b) To the extent this Lease is hereafter deemed to constitute a finance lease and not a true lease, then and only in such event, Lessor and Lessee intend and agree that, for the purpose of securing Lessee's obligations hereunder, (i) this Lease shall be deemed to be a security agreement and financing statement within the meaning of Article 9 of the Uniform Commercial Code respecting each of the Properties to the extent such is personal property and an irrevocable grant and conveyance of a lien and mortgage on each of the Properties to the extent such is real property; (ii) the conveyance provided for in Article II shall be deemed to be a grant by Lessee to Lessor of a lien on and security interest in all of Lessee's right, title and interest in and to the Property and all proceeds (including without limitation insurance proceeds) of the conversion, voluntary or involuntary, of the foregoing into cash, investments, securities or other property, whether in the form of cash, investments, securities or other property, and an assignment of all rents, profits and income produced by the Property; and (iii) notifications to Persons holding such property, and acknowledgements, receipts or confirmations from financial intermediaries, bankers or agents (as applicable) of Lessee shall be deemed to have been given for the purpose of perfecting such security interest under applicable law. Lessor and Lessee shall, to the extent consistent with this Lease, take such actions as may be necessary (including without limitation the filing of Uniform Commercial Code Financing Statements, Uniform Commercial Code Fixture Filings and the Mortgage Instruments) to ensure that, if this Lease were deemed to create a lien and security interest in the Property in accordance with this Section, such lien and security interest would be deemed to be a perfected lien and security interest of first priority under applicable law and will be maintained as such throughout the Term. ARTICLE VIII 8.1 CONDITION OF THE PROPERTY. LESSEE ACKNOWLEDGES AND AGREES THAT IT IS LEASING EACH PROPERTY "AS IS" WITHOUT REPRESENTATION, WARRANTY OR COVENANT (EXPRESS OR IMPLIED) BY LESSOR AND IN EACH CASE SUBJECT TO (A) THE EXISTING STATE OF TITLE, (B) THE RIGHTS OF ANY PARTIES IN POSSESSION THEREOF, (C) ANY STATE OF FACTS WHICH AN ACCURATE SURVEY OR PHYSICAL INSPECTION MIGHT SHOW, (D) ALL APPLICABLE LEGAL REQUIREMENTS AND (E) VIOLATIONS OF LEGAL REQUIREMENTS WHICH MAY EXIST ON THE DATE HEREOF. NEITHER LESSOR NOR THE AGENT NOR ANY LENDER NOR ANY HOLDER HAS MADE OR SHALL BE DEEMED TO HAVE MADE ANY REPRESENTATION, WARRANTY OR COVENANT (EXPRESS OR IMPLIED) OR SHALL BE DEEMED TO HAVE ANY LIABILITY WHATSOEVER AS TO THE TITLE, VALUE, HABITABILITY, USE, CONDITION, DESIGN, OPERATION, MERCHANTABILITY OR FITNESS FOR USE OF ANY PROPERTY (OR ANY PART THEREOF), OR ANY OTHER REPRESENTATION, WARRANTY OR COVENANT WHATSOEVER, EXPRESS OR IMPLIED, WITH RESPECT TO ANY PROPERTY (OR ANY PART THEREOF), AND NEITHER LESSOR NOR THE AGENT NOR ANY LENDER NOR ANY HOLDER SHALL BE LIABLE FOR ANY LATENT, HIDDEN, OR PATENT DEFECT THEREIN OR THE FAILURE OF ANY PROPERTY, OR ANY PART THEREOF, TO COMPLY WITH ANY LEGAL REQUIREMENT. THE LESSEE HAS OR WILL HAVE BEEN AFFORDED FULL OPPORTUNITY TO INSPECT THE PROPERTY AND THE IMPROVEMENTS THEREIN, IS OR WILL BE (INSOFAR AS THE LESSOR, THE AGENT, EACH LENDER AND EACH HOLDER ARE CONCERNED) SATISFIED WITH THE RESULTS OF ITS INSPECTIONS AND IS ENTERING INTO THIS LEASE SOLELY ON THE BASIS OF THE RESULTS OF ITS OWN INSPECTIONS, AND ALL RISKS INCIDENT TO THE MATTERS DESCRIBED IN THE PRECEDING SENTENCE, AS BETWEEN THE LESSOR, THE AGENT, THE LENDERS AND THE HOLDERS, ON THE ONE HAND, AND THE LESSEE, ON THE OTHER HAND, ARE TO BE BORNE BY LESSEE. 8.2 POSSESSION AND USE OF THE PROPERTY. (a) At all times during the Term with respect to each Property, such Property shall be used by Lessee in the ordinary course of its business. Lessee shall pay, or cause to be paid, all charges and costs required in connection with the use of the Properties as contemplated by this Lease. Lessee shall not commit or permit any waste of the Properties or any part thereof. (b) The address stated below the signature of Lessee herein or on the applicable Lease Supplement is the chief place of business and chief executive office of Lessee (as such terms are used in Section 9-103(3) of the Uniform Commercial Code of any applicable jurisdiction). Regarding a particular Property, each Lease Supplement contains an accurate legal description for the related parcel of Land. Lessee has no other places of business where the Equipment or Improvements will be located other than those identified on the applicable Lease Supplement. ARTICLE IX 9.1 COMPLIANCE WITH LEGAL REQUIREMENTS AND INSURANCE REQUIREMENTS. Subject to the terms of Article XIII relating to permitted contests, Lessee, at its sole cost and expense, shall (i) comply with all material Legal Requirements (including without limitation all material Environmental Laws), and all material Insurance Requirements relating to the Properties, including the use, development, construction, operation, maintenance, repair, and restoration thereof, whether or not compliance therewith shall require structural or extraordinary changes in the Improvements or interfere with the use and enjoyment of the Properties, and (ii) procure, maintain and comply with all material licenses, permits, orders, approvals, consents and other authorizations required for the construction, use, maintenance and operation of the Properties and for the use, development, construction, operation, maintenance, repair and restoration of the Improvements. ARTICLE X 10.1 MAINTENANCE AND REPAIR; RETURN; APPRAISALS. (a) Lessee, at its sole cost and expense, shall maintain each Property in good condition, repair and working order (ordinary wear and tear excepted) and make all necessary repairs thereto, of every kind and nature whatsoever, whether interior or exterior, ordinary or extraordinary, structural or nonstructural or foreseen or unforeseen, in each case as required by all material Legal Requirements, material Insurance Requirements, and material manufacturer's specifications and standards and on a basis consistent with the operation and maintenance of properties or equipment comparable in type and function to the applicable Property and in compliance with standard industry practice subject, however, to the provisions of Article XV with respect to Condemnation and Casualty. (b) Lessee shall not use or locate any component of any Property outside of any Approved State. Lessee shall not move or relocate any component of any Property beyond the boundaries of the Land (comprising part of the Property) described in the applicable Lease Supplement. (c) All components which are added to the Property shall immediately become the property of, and title thereto shall vest in, Lessor, and shall be deemed incorporated in the Property and subject to the terms of this Lease as if originally leased hereunder. (d) Upon reasonable advance notice, Lessor and its agents shall have the right to inspect each Property and all maintenance records with respect thereto at any reasonable time during normal business hours but shall not, in the absence of a Lease Event of Default, materially disrupt the business of Lessee. (e) Lessee shall cause to be delivered to Lessor (at Lessee's sole expense) any Appraisals (or reappraisals) as Lessor may request if any one of Lessor, the Agent, any Lender or any Holder is required pursuant to any applicable Legal Requirement to obtain such an Appraisal (or reappraisal) in addition to the Appraisals delivered in connection with Section 5.6(b) of the Participation Agreement. (f) Lessor shall under no circumstances be required to build any improvements on any Property, make any repairs, replacements, alterations or renewals of any nature or description to any Property, make any expenditure whatsoever in connection with this Lease or maintain any Property in any way. Lessor shall not be required to maintain, repair or rebuild all or any part of any Property, and Lessee waives the right to (i) require Lessor to maintain, repair, or rebuild all or any part of any Property, or (ii) make repairs at the expense of Lessor pursuant to any Legal Requirement, Insurance Requirement, contract, agreement, covenants, condition or restriction at any time in effect. (g) Lessee shall, upon the expiration or earlier termination of this Lease with respect to a Property, if Lessee shall not have exercised its Purchase Option or Expiration Date Purchase Option with respect to such Property, surrender such Property to Lessor, or the third party purchaser, as the case may be, subject to Lessee's obligations under this Lease (including without limitation Sections 9.1, 10.1(a)-(f), 10.2, 11.1, 12.1, 22.1 and 23.1). 10.2 ENVIRONMENTAL INSPECTION. If Lessee has not given notice of exercise of its Expiration Date Purchase Option pursuant to Section 20.2, then not more than 120 days nor less than 60 days prior to the Expiration Date, Lessee shall, at its sole cost and expense, provide to Lessor a normal and customary Phase I environmental report by a reputable environmental consultant selected by Lessee and acceptable to Lessor, and any additional report or reports recommended by such phase one environmental report. ARTICLE XI 11.1 MODIFICATIONS, SUBSTITUTIONS AND REPLACEMENTS. (a) Lessee may, either at its sole cost and expense, or with the proceeds of Construction Advances made pursuant to the terms of the Participation Agreement during the Construction Period (as specifically described in Section 5.6 of the Participation Agreement) at any time and from time to time without the consent of Lessor, make alterations, renovations, improvements and additions to the Property or any part thereof and substitutions and replacements therefor (collectively, "MODIFICATIONS"); PROVIDED, that: (i) except for any Modification required to be made pursuant to a Legal Requirement, no Modification shall materially impair the value, utility or useful life of the Property from that which existed immediately prior to such Modification; (ii) the Modification shall be done in a good and workmanlike manner; (iii) Lessee shall comply in all material respects with all Legal Requirements (including all material Environmental Laws) and Insurance Requirements applicable to the Modification, including the obtaining of all permits and certificates of occupancy, and the structural integrity of the Property shall not be adversely affected; and (iv) to the extent required by Section 14.2(a), Lessee shall maintain builders' risk insurance at all times when a Modification is in progress; (v) subject to the terms of Article XIII relating to permitted contests, Lessee shall pay all costs and expenses and discharge any liens arising with respect to the Modification; and (vi) such Modification shall comply with the requirements of this Lease (including without limitation Sections 8.2 and 10.1). All Modifications shall become property of the Lessor and shall be subject to this Lease, and title to any component of any Property comprising any such Modifications shall immediately vest in Lessor. (b) The construction process provided for in the Agency Agreement is acknowledged by Lessor and the Agent to be consistent with and in compliance with the terms and provisions of this Article XI. ARTICLE XII 12.1 WARRANTY OF TITLE. (a) Lessee agrees that, except as otherwise provided herein and subject to the terms of Article XIII relating to permitted contests, Lessee shall not directly or indirectly create or allow to remain, and shall promptly discharge at its sole cost and expense, any Lien, defect, attachment, levy, title retention agreement or claim upon any Property or any Modifications or any Lien, attachment, levy or claim with respect to the Rent or with respect to any amounts held by the Agent pursuant to the Credit Agreement, other than Permitted Liens and Lessor Liens. Lessee shall promptly notify Lessor in the event it receives actual knowledge that a Lien other than a Permitted Lien or Lessor Lien has occurred with respect to a Property, and Lessee represents and warrants to, and covenants with, Lessor that the Liens in favor of the Lessor created by the Operative Agreements are first priority perfected liens subject only to Permitted Liens. (b) Nothing contained in this Lease shall be construed as constituting the consent or request of Lessor, expressed or implied, to or for the performance by any contractor, mechanic, laborer, materialman, supplier or vendor of any labor or services or for the furnishing of any materials for any construction, alteration, addition, repair or demolition of or to any Property or any part thereof. NOTICE IS HEREBY GIVEN THAT LESSOR IS NOT AND SHALL NOT BE LIABLE FOR ANY LABOR, SERVICES OR MATERIALS FURNISHED OR TO BE FURNISHED TO LESSEE, OR TO ANYONE HOLDING A PROPERTY OR ANY PART THEREOF THROUGH OR UNDER LESSEE, AND THAT NO MECHANIC'S OR OTHER LIENS FOR ANY SUCH LABOR, SERVICES OR MATERIALS SHALL ATTACH TO OR AFFECT THE INTEREST OF LESSOR IN AND TO ANY PROPERTY. ARTICLE XIII 13.1 PERMITTED CONTESTS OTHER THAN IN RESPECT OF INDEMNITIES. Except to the extent otherwise provided for in Section 13 of the Participation Agreement, Lessee, on its own or on Lessor's behalf but at Lessee's sole cost and expense, may contest, by appropriate administrative or judicial proceedings conducted in good faith and with due diligence, the amount, validity or application, in whole or in part, of any Legal Requirement, or utility charges payable pursuant to Section 4.1 or any Lien, attachment, levy, encumbrance or encroachment, and Lessor agrees not to pay, settle or otherwise compromise any such item, provided that (a) the commencement and continuation of such proceedings shall suspend the collection of any such contested amount from, and suspend the enforcement thereof against, the applicable Properties, Lessor, the Holders, the Agent and the Lenders; (b) there shall be no risk of the imposition of a Lien (other than Permitted Liens) on any Property and no part of any Property nor any Rent would be in any danger of being sold, forfeited, lost or deferred; (c) at no time during the permitted contest shall there be a risk of the imposition of criminal liability or material civil liability on Lessor, any Holder, the Agent or any Lender for failure to comply therewith; and (d) in the event that, at any time, there shall be a material risk of extending the application of such item beyond the end of the Term, then Lessee shall deliver to Lessor an Officer's Certificate certifying as to the matters set forth in clauses (a), (b) and (c) of this Section 13.1. Lessor, at Lessee's sole cost and expense, shall execute and deliver to Lessee such authorizations and other documents as may reasonably be required in connection with any such contest and, if reasonably requested by Lessee, shall join as a party therein at Lessee's sole cost and expense. ARTICLE XIV 14.1 PUBLIC LIABILITY AND WORKERS' COMPENSATION INSURANCE. During the Term of each Property, Lessee shall procure and carry, at Lessee's sole cost and expense, commercial general liability insurance for claims for injuries or death sustained by persons or damage to property while on the Properties or the premises where the Equipment is located and such other public liability coverages as are then customarily carried by similarly situated companies conducting business similar to that conducted by Lessee. Such insurance shall be on terms and in amounts that (a) are no less favorable than insurance maintained by Lessee with respect to similar properties and equipment that it owns and (b) are then carried by similarly situated companies conducting business similar to that conducted by Lessee. The policies shall be endorsed to name Lessor, the Holders, the Agent and the Lenders as additional insureds. The policies shall also specifically provide that such policies shall be considered primary insurance which shall apply to any loss or claim before any contribution by any insurance which Lessor, the Holders, the Agent or the Lenders may have in force. Lessee shall, in the operation of the Properties, comply with the applicable workers' compensation laws and protect Lessor, the Holders, the Agent and the Lenders against any liability under such laws. 14.2 HAZARD AND OTHER INSURANCE. (a) During the Term for each Property, Lessee shall keep, or cause to be kept, such Property insured against loss or damage by fire and other risks and shall maintain builders' risk insurance during construction of any Improvements or Modifications on terms and in amounts that (a) are no less favorable than insurance covering other similar properties owned by Lessee and (b) are then carried by similarly situated companies conducting business similar to that conducted by Lessee. The policies shall be endorsed to name Lessor, the Holders, the Agent and the Lenders, to the extent of their respective interests, as additional loss payees; PROVIDED, so long as no Lease Event of Default exists, any loss payable under the insurance policies required by this Section will be paid to Lessee. (b) During the Term with respect to a Property the area in which such Property is located is designated a "flood-prone" area pursuant to the Flood Disaster Protection Act or 1973, or any amendments or supplements thereto, then Lessee shall comply with the National Flood Insurance Program as set forth in the Flood Disaster Protection Act of 1973. In addition, Lessee will fully comply with the requirements of the National Flood Insurance Act of 1968 and the Flood Disaster Protection Act of 1973, as each may be amended from time to time, and with any other Legal Requirement, concerning flood insurance to the extent that it may apply to any such Property. 14.3 COVERAGE. (a) As of the date of this Lease and annually thereafter, Lessee shall furnish Lessor and the Agent with certificates showing the insurance required under Sections 14.1 and 14.2 to be in effect, naming Lessor, the Holders, the Agent and the Lenders as additional insureds and loss payees and evidencing the other requirements of this Article XIV. All such insurance shall be at the cost and expense of Lessee. Such certificates shall include a provision for thirty (30) days' advance written notice by the insurer to Lessor and the Agent in the event of cancellation or material alteration of such insurance. If a Lease Event of Default has occurred and is continuing and Lessor so requests, Lessee shall deliver to Lessor copies of all insurance policies required by Sections 14.1 and 14.2. (b) Lessee agrees that the insurance policy or policies required by Sections 14.1, 14.2(a) and 14.2(b) shall include an appropriate clause pursuant to which any such policy shall provide that it will not be invalidated should Lessee waive, at any time, any or all rights of recovery against any party for losses covered by such policy. Lessee hereby waives any and all such rights against the Lessor, the Holders, the Agent and the Lenders to the extent of payments made to any such Person under any such policy. (c) Neither Lessor nor Lessee shall carry separate insurance concurrent in kind or form or contributing in the event of loss with any insurance required under this Article XIV, except that Lessor may carry separate liability insurance at Lessor's sole cost so long as (i) Lessee's insurance is designated as primary and in no event excess or contributory to any insurance Lessor may have in force which would apply to a loss covered under Lessee's policy and (ii) each such insurance policy will not cause Lessee's insurance required under this Article XIV to be subject to a coinsurance exception of any kind. (d) Lessee shall pay as they become due all premiums for the insurance required by Section 14.1 and Section 14.2, shall renew or replace each policy prior to the expiration date thereof or otherwise maintain the coverage required by such Sections without any lapse in coverage. (e) The insurance required to be maintained by Lessee under Sections 14.1 and 14.2 shall be maintained with responsible and reputable insurance companies or associations having a rating of A or better from Best's. Lessee shall be deemed to be in compliance with requirements of this Section 14.3(e) if Lessee insures through a captive Insurance Subsidiary; provided, that each re-insurer to which coverage is ceded by such captive Insurance Subsidiary has the ratings specified in this Section 14.3(e) and the level of self-insurance retained by Lessee is substantially similar to the level Lessee would have maintained under Sections 14.1 and 14.2. Lessee may self-insure for workers' compensation liabilities if such self- insurance is approved by Lessee's board of directors and is conducted in accordance with applicable Law. ARTICLE XV 15.1 CASUALTY AND CONDEMNATION. (a) Subject to the provisions of this Article XV and Article XVI (in the event Lessee delivers, or is obligated to deliver, a Termination Notice), and prior to the occurrence and continuation of a Lease Default or Lease Event of Default, Lessee shall be entitled to receive (and Lessor hereby irrevocably assigns to Lessee all of Lessor's right, title and interest in) any award, compensation or insurance proceeds under Sections 14.2(a) or (b) hereof to which Lessee or Lessor may become entitled by reason of their respective interests in a Property (i) if all or a portion of such Property is damaged or destroyed in whole or in part by a Casualty or (ii) if the use, access, occupancy, easement rights or title to such Property or any part thereof is the subject of a Condemnation; PROVIDED, HOWEVER, if a Lease Default or Lease Event of Default shall have occurred and be continuing such award, compensation or insurance proceeds shall be paid directly to Lessor or, if received by Lessee, shall be held in trust for Lessor, and shall be paid over by Lessee to Lessor and held in accordance with the terms of this paragraph (a). All amounts held by Lessor hereunder on account of any award, compensation or insurance proceeds either paid directly to Lessor or turned over to Lessor shall be held as security for the performance of Lessee's obligations hereunder. (b) Lessee may appear in any proceeding or action to negotiate, prosecute, adjust or appeal any claim for any award, compensation or insurance payment on account of any such Casualty or Condemnation and shall pay all expenses thereof. At Lessee's reasonable request, and at Lessee's sole cost and expense, Lessor and the Agent shall participate in any such proceeding, action, negotiation, prosecution or adjustment. Lessor and Lessee agree that this Lease shall control the rights of Lessor and Lessee in and to any such award, compensation or insurance payment. (c) If Lessee shall receive notice of a Casualty or a possible Condemnation of a Property or any interest therein where damage to the affected Property is estimated to equal or exceed ten percent (10%) of the Property Cost of such Property, Lessee shall give notice thereof to the Lessor and to the Agent promptly after the receipt of such notice. (d) In the event of a Casualty or a Condemnation (regardless of whether notice thereof must be given pursuant to paragraph (c)), this Lease shall terminate with respect to the applicable Property in accordance with Section 16.1 if Lessee, within thirty (30) days after such occurrence, delivers to Lessor and the Agent a notice to such effect. (e) If pursuant to this Section 15.1 this Lease shall continue in full force and effect following a Casualty or Condemnation with respect to the affected Property, Lessee shall, at its sole cost and expense and using, if available, the proceeds of any award, compensation or insurance with respect to such Casualty or Condemnation (including, without limitation, any such award, compensation or insurance which has been received by the Agent and which should be turned over to Lessee pursuant to the terms of the Operative Agreements), promptly and diligently repair any damage to the applicable Property caused by such Casualty or Condemnation in conformity with the requirements of Sections 10.1 and 11.1, using the as-built plans and specifications or manufacturer's specifications for the applicable Improvements or Equipment (as modified to give effect to any subsequent Modifications, any Condemnation affecting the Property and all applicable Legal Requirements), so as to restore as nearly as practicable the applicable Property to the same condition, operation, function and value as existed immediately prior to such Casualty or Condemnation. In such event, title to the applicable Property shall remain with Lessor. (f) In no event shall a Casualty or Condemnation with respect to which this Lease remains in full force and effect under this Section 15.1 affect Lessee's obligations to pay Rent pursuant to Section 3.1. (g) Notwithstanding anything to the contrary set forth in Section 15.1(a) or Section 15.1(e), if during the Term with respect to a Property a Casualty occurs with respect to such Property or Lessee receives notice of a Condemnation with respect to such Property, and following such Casualty or Condemnation, the applicable Property cannot reasonably be restored, repaired or replaced on or before the 180th day prior to the Expiration Date (if such Casualty or Condemnation occurs during the Term) to the same condition as existed immediately prior to such Casualty or Condemnation or on or before such day such Property is not in fact so re-stored, repaired or replaced, then Lessee shall be required to purchase such Property on the next Payment Date and pay Lessor the Termination Value for such Property and any and all Rent then due and owing and all other amounts then due and owing (including without limitation amounts described in clause FIRST of Section 22.2). 15.2 ENVIRONMENTAL MATTERS. Promptly upon Lessee's actual knowledge of the presence of Hazardous Substances in any portion of any Property or Properties in concentrations and conditions that constitute an Environmental Violation and which, in the reasonable opinion of Lessee, the cost to undertake any legally required response, clean up, remedial or other action will result in a cost to Lessee of more than $100,000, Lessee shall notify Lessor in writing of such condition. In the event of any Environmental Violation (regardless of whether notice thereof must be given), Lessee shall, not later than thirty (30) days after Lessee has actual knowledge of such Environmental Violation, either deliver to Lessor a Termination Notice with respect to the applicable Property or Properties pursuant to Section 16.1, if applicable, or, at Lessee's sole cost and expense, promptly and diligently undertake any response, clean up, remedial or other action necessary to remove, cleanup or remediate the Environmental Violation in accordance with all Environmental Laws. If Lessee does not deliver a Termination Notice with respect to such Property pursuant to Section 16.1, Lessee shall, upon completion of remedial action by Lessee, cause to be prepared by a reputable environmental consultant acceptable to Lessor a report describing the Environmental Violation and the actions taken by Lessee (or its agents) in response to such Environmental Violation, and a statement by the consultant that the Environmental Violation has been remedied to the extent required by applicable Environmental Law. 15.3 NOTICE OF ENVIRONMENTAL MATTERS. Promptly, but in any event within five (5) Business Days from the date Lessee has actual knowledge thereof, Lessee shall provide to Lessor written notice of any material pending or threatened claim, action or proceeding involving any Environmental Law or any Release on or in connection with any Property or Properties. All such notices shall describe in reasonable detail the nature of the claim, action or proceeding and Lessee's proposed response thereto. In addition, Lessee shall provide to Lessor, within ten (10) Business Days of receipt, copies of all material written communications with any Governmental Authority relating to any Environmental Law in connection with any Property. Lessee shall also promptly provide such detailed reports of any such material environmental claims as may reasonably be requested by Lessor. ARTICLE XVI 16.1 TERMINATION UPON CERTAIN EVENTS. If any of the following occur: (i) Lessee has delivered a written notice to the Lessor (in the form described in Section 16.2(a) (a "TERMINATION NOTICE") pursuant to Section 15.1(d) that following the applicable Casualty or Condemnation this Lease shall terminate with respect to the affected Property, or (ii) Lessee has delivered a Termination Notice pursuant to the second sentence of Section 15.2 that, due to the occurrence of an Environmental Violation, this Lease shall terminate with respect to the affected Property, then this Lease shall terminate with respect to the applicable Property. 16.2 PROCEDURES. (a) A Termination Notice shall contain: (i) notice of termination of this Lease with respect to the affected Property on a Payment Date not more than sixty (60) days after Lessor's receipt of such Termination Notice but not later than the Expiration Date, (the "TERMINATION DATE"); and (ii) a binding and irrevocable agreement of Lessee to pay the Termination Value for the applicable Property, any and all Rent then due and owing and all other amounts then due and owing (including without limitation amounts described in clause FIRST of Section 22.2) and purchase such Property on such Termination Date. (b) On each Termination Date, Lessee shall pay to Lessor the Termination Value for the applicable Property, any and all Rent then due and owing and all other amounts then due and owing (including without limitation amounts described in clause FIRST of Section 22.2) theretofore accruing, and Lessor shall convey such Property or the remaining portion thereof, if any, to Lessee (or Lessee's designee), all in accordance with Section 19.1. ARTICLE XVII 17.1 LEASE EVENTS OF DEFAULT. If any one or more of the following events (each a "LEASE EVENT OF DEFAULT") shall occur: (a) Lessee shall fail to make payment of (i) any Basic Rent (except as set forth in clause (ii)) within five (5) days after the same has become due and payable or (ii) any Termination Value, on the date any such payment is due, or any payment of Basic Rent or Supplemental Rent due on the due date of any such payment of Termination Value, or any amount due on the Expiration Date; (b) Lessee shall fail to make payment of any Supplemental Rent (other than Supplemental Rent referred to in Section 17(a)(ii)) due and payable within thirty (30) days after receipt of notice thereof (which notice shall be in lieu of, and not in addition to, any notice required under California Code of Civil Procedure Section 1161 or any similar or successor law); (c) Lessee shall fail to maintain insurance as required by Article XIV of this Lease; (d) Lessee shall fail to observe or perform any term, covenant or condition of Lessee under this Lease or any other Operative Agreement to which Lessee is a party other than those set forth in Sections 17.1(a), (b) or (c) hereof, or any representation or warranty made by Lessee set forth in this Lease or in any other Operative Agreement or in any document entered into in connection herewith or therewith or in any document, certificate or financial or other statement delivered in connection herewith or therewith shall be false or inaccurate in any material way; provided, however, to the extent such failure or misrepresentation or breach of warranty is capable of being cured an Event of Default shall not occur under this Section 17.1(d) unless and until such failure or breach shall remain uncured for a period of thirty (30) days after receipt of written notice from Lessor thereof (which notice shall be in lieu of, and not in addition to, any notice required under California Code of Civil Procedure Section 1161 or any similar or successor law); (e) an Agency Agreement Event of Default shall have occurred and be continuing; (f) a Guaranty Agreement Event of Default shall have occurred and be continuing; (g) Lessee shall (i) admit in writing its inability to pay its debts generally as they become due, (ii) file a petition under the United States bankruptcy laws or any other applicable insolvency law or statute of the United States of America or any State or Commonwealth thereof, (iii) make a general assignment for the benefit of its creditors, (iv) consent to the appointment of a receiver of itself or the whole or any substantial part of its property, (v) fail to cause the discharge of any custodian, trustee or receiver appointed for Lessee or the whole or a substantial part of its property within ninety (90) days after such appointment, or (vi) file a petition or answer seeking or consenting to reorganization under the United States bankruptcy laws or any other applicable insolvency law or statute of the United States of America or any State or Commonwealth thereof; or (h) insolvency proceedings or a petition under the United States bankruptcy laws or any other applicable insolvency law or statute of the United States of America or any State or Commonwealth thereof shall be filed against Lessee and not dismissed within ninety (90) days from the date of its filing, or a court of competent jurisdiction shall enter an order or decree appointing, with the consent of Lessee, a receiver of Lessee or the whole or a substantial part of its property, and such order or decree shall not be vacated or set aside within ninety (90) days from the date of the entry thereof; then, in any such event, (i) all Construction Period Properties shall become Properties subject to the terms of this Lease as more specifically provided in Section 2.2 and thereafter all references hereunder to "Property" or "Properties" and all obligations of the Lessee with respect to the Properties (including specifically without limitation the obligations of the Lessee contained in this Article XVII) shall be deemed to include such Construction Period Properties, and (ii) Lessor may, in addition to the other rights and remedies provided for in this Article XVII and in Section 18.1, terminate this Lease by giving Lessee five (5) days notice of such termination, and this Lease shall terminate, and all rights of Lessee under this Lease shall cease. Lessee shall, to the fullest extent permitted by law, pay as Supplemental Rent all costs and expenses incurred by or on behalf of Lessor, including without limitation fees and expenses of counsel, as a result of any Lease Event of Default hereunder. 17.2 SURRENDER OF POSSESSION. If a Lease Event of Default shall have occurred and be continuing, and whether or not this Lease shall have been terminated pursuant to Section 17.1, Lessee shall, upon thirty (30) days written notice, surrender to Lessor possession of the Properties. Lessor may enter upon and repossess the Properties by such means as are available at law or in equity, and may remove Lessee and all other Persons and any and all personal property and Lessee's equipment and personalty and severable Modifications from the Properties. Lessor shall have no liability by reason of any such entry, repossession or removal performed in accordance with applicable law. Upon the written demand of Lessor, Lessee shall return the Properties promptly to Lessor, in the manner and condition required by, and otherwise in accordance with the provisions of, Section 22.1(c) hereof. 17.3 RELETTING. If a Lease Event of Default shall have occurred and be continuing, and whether or not this Lease shall have been terminated pursuant to Section 17.1, Lessor may, but shall be under no obligation to, relet any or all of the Properties, for the account of Lessee or otherwise, for such term or terms (which may be greater or less than the period which would otherwise have constituted the balance of the Term) and on such conditions (which may include concessions or free rent) and for such purposes as Lessor may determine, and Lessor may collect, receive and retain the rents resulting from such reletting. Lessor shall not be liable to Lessee for any failure to relet any Property or for any failure to collect any rent due upon such reletting. 17.4 DAMAGES. Neither (a) the termination of this Lease as to all or any of the Properties pursuant to Section 17.1; (b) the repossession of all or any of the Properties; nor (c) the failure of Lessor to relet all or any of the Properties, the reletting of all or any portion thereof, nor the failure of Lessor to collect or receive any rentals due upon any such reletting, shall relieve Lessee of its liabilities and obligations hereunder, all of which shall survive any such termination, repossession or reletting. If any Lease Event of Default shall have occurred and be continuing and notwithstanding any termination of this Lease pursuant to Section 17.1, Lessee shall forthwith pay to Lessor all Rent and other sums due and payable hereunder to and including the date of such termination (it being intended that Lessor have the remedy described in California Civil Code Section 1951.4). Thereafter, on the days on which the Basic Rent or Supplemental Rent, as applicable, are payable under this Lease or would have been payable under this Lease if the same had not been terminated pursuant to Section 17.1 and until the end of the Term hereof or what would have been the Term in the absence of such termination, Lessee shall pay Lessor, as current liquidated damages (it being agreed that it would be impossible accurately to determine actual damages) an amount equal to the Basic Rent and Supplemental Rent that are payable under this Lease or would have been payable by Lessee hereunder if this Lease had not been terminated pursuant to Section 17.1, less the net proceeds, if any, which are actually received by Lessor with respect to the period in question of any reletting of any Property or any portion thereof; PROVIDED that Lessee's obligation to make payments of Basic Rent and Supplemental Rent under this Section 17.4 shall continue only so long as Lessor shall not have received the amounts specified in Section 17.6. In calculating the amount of such net proceeds from reletting, there shall be deducted all of Lessor's, any Holder's, the Agent's and any Lenders' reasonable expenses in connection therewith, including repossession costs, brokerage or sales commissions, fees and expenses for counsel and any necessary repair or alteration costs and expenses incurred in preparation for such reletting. To the extent Lessor receives any damages pursuant to this Section 17.4, such amounts shall be regarded as amounts paid on account of Rent. 17.5 [intentionally omitted] 17.6 FINAL LIQUIDATED DAMAGES. If a Lease Event of Default shall have occurred and be continuing, whether or not this Lease shall have been terminated pursuant to Section 17.1 and whether or not Lessor shall have collected any current liquidated damages pursuant to Section 17.4, Lessor shall have the right to recover, by demand to Lessee and at Lessor's election, and Lessee shall pay to Lessor, as and for final liquidated damages, but exclusive of the indemnities payable under Section 13 of the Participation Agreement, and in lieu of all current liquidated damages beyond the date of such demand (it being agreed that it would be impossible accurately to determine actual damages) the sum of (a) the Termination Value for all Properties remaining under this Lease, PLUS (b) all other amounts owing in respect of Rent and Supplemental Rent heretofore accruing under this Lease. Upon payment of the amount specified pursuant to the first sentence of this Section 17.6, Lessee shall be entitled to receive from Lessor, either at Lessee's request or upon Lessor's election, in either case at Lessee's cost, a grant and assignment of Lessor's entire right, title and interest in and to the Properties, the Improvements, Fixtures, Modifications and Equipment, in each case in recordable form and otherwise in conformity with local custom and free and clear of the Lien of this Lease and any Lessor Liens. The Properties shall be conveyed to Lessee (or Lessee's designee) "AS IS" and in their then present physical condition. If any statute or rule of law shall limit the amount of such final liquidated damages to less than the amount agreed upon, Lessor shall be entitled to the maximum amount allowable under such statute or rule of law; PROVIDED, HOWEVER, Lessee shall not be entitled to receive Lessor's interest in the Properties, the Improvements, Fixtures, Modifications or Equipment or documents unless Lessee shall have paid in full the Termination Value and all other amounts due and owing hereunder and under the other Operative Agreements. 17.7 [Intentionally Omitted]. 17.8 WAIVER OF CERTAIN RIGHTS. If this Lease shall be terminated pursuant to Section 17.1, Lessee waives, to the fullest extent permitted by law, (a) any notice of re-entry or the institution of legal proceedings to obtain re-entry or possession; (b) any right of redemption, re-entry or possession; (c) the benefit of any laws now or hereafter in force exempting property from liability for rent or for debt; and (d) any other rights which might otherwise limit or modify any of Lessor's rights or remedies under this Article XVII. 17.9 ASSIGNMENT OF RIGHTS UNDER CONTRACTS. If a Lease Event of Default shall have occurred and be continuing, and whether or not this Lease shall have been terminated pursuant to Section 17.1, Lessee shall upon Lessor's demand immediately assign, transfer and set over to Lessor all of Lessee's right, title and interest in and to each agreement executed by Lessee in connection with the purchase, construction, development, use or operation of the Properties (including, without limitation, all right, title and interest of Lessee with respect to all warranty, performance, service and indemnity provisions), as and to the extent that the same relate to the purchase, construction, use and operation of the Properties. 17.10 REMEDIES CUMULATIVE. The remedies herein provided shall be cumulative and in addition to (and not in limitation of) any other remedies available at law, equity or otherwise, including, without limitation, any mortgage foreclosure remedies. ARTICLE XVIII 18.1 LESSOR'S RIGHT TO CURE LESSEE'S LEASE DEFAULTS. Lessor, without waiving or releasing any obligation or Lease Event of Default, may (but shall be under no obligation to) remedy any Lease Event of Default for the account and at the sole cost and expense of Lessee, including the failure by Lessee to maintain the insurance required by Article XIV, and may, to the fullest extent permitted by law, and notwithstanding any right of quiet enjoyment in favor of Lessee, enter upon any Property, or real property owned or leased by Lessee and take all such action thereon as may be necessary or appropriate therefor. No such entry shall be deemed an eviction of any lessee. All reasonable out-of-pocket costs and expenses so incurred (including without limitation fees and expenses of counsel), together with interest thereon at the Overdue Rate from the date on which such sums or expenses are paid by Lessor, shall be paid by Lessee to Lessor on demand. ARTICLE XIX 19.1 PROVISIONS RELATING TO LESSEE'S EXERCISE OF ITS PURCHASE OPTION. Subject to Section 19.2, in connection with any termination of this Lease with respect to any Property pursuant to the terms of Section 16.2, or in connection with Lessee's exercise of its Purchase Option, upon the date on which this Lease is to terminate with respect to a Property or all of the Properties, and upon tender by Lessee of the amounts set forth in Sections 16.2(b) or 20.2, as applicable, Lessor shall execute and deliver to Lessee (or to Lessee's designee) at Lessee's cost and expense a grant and assignment of Lessor's entire interest in the applicable Property (which shall include an assignment of all of Lessor's right, title and interest in and to any Net Proceeds not previously received by Lessor), in each case in recordable form and otherwise in conformity with local custom and free and clear of the Lien of the Lease and any Lessor Liens attributable to Lessor but without any other warranties (of title or otherwise) from the Lessor. The applicable Property shall be conveyed to Lessee "AS IS" "WHERE IS" and in then present physical condition. 19.2 NO TERMINATION WITH RESPECT TO LESS THAN ALL OF A PROPERTY. Lessee shall not be entitled to exercise its Purchase Option separately with respect to Property consisting of Land, Equipment and Improvements but shall be required to exercise its Purchase Option with respect to an entire Property. ARTICLE XX 20.1 INDIVIDUAL PURCHASE OPTION. Provided that the Election Notice referred to in Section 20.2 has not been delivered, Lessee shall have the option, exercisable by giving Lessor no more than sixty (60) days and no less than thirty (30) days irrevocable written notice of Lessee's election to exercise such option, to either (a) purchase one or more (but not all) of the Properties on the Scheduled Interest Payment Date identified in such written notice, at a price equal to the Termination Value for such Property or Properties (which the parties do not intend to be a "bargain" purchase price), and Lessee at such time shall also pay any and all Rent then due and owing and all other amounts then due and owing with respect to the Properties to be purchased (including without limitation amounts, if any, described in clause FIRST of Section 22.2); provided, however, that the option referred to in this subclause (a) may not be exercised by the Lessee (i) if, after giving effect to such exercise, the aggregate Property Cost of all Properties then subject to the Lease would be less than $25,000,000 or there would be less than four (4) separate Properties subject to the terms of this Lease or (ii) if any Lease Default of the types specified in Sections 17.1(a), (b), (g) or (h) or any Lease Event of Default shall have occurred and be continuing; or (b) purchase all of the Properties on any Scheduled Interest Payment Date occurring after the Construction Period Termination Date as identified in such written notice, at a price equal to the Termination Value for all of the Properties (which the parties do not intend to be a "bargain" purchase) and the Lessee at such time shall also pay all Rent and other amounts then due and payable under this Lease and under any other Operative Agreement (including without limitation the amounts described in clause FIRST of Section 22.2). If Lessee exercises its option to purchase a Property or Properties pursuant to this Section 20.1, Lessor shall transfer to Lessee all of Lessor's right, title and interest in and to such Property as of the Scheduled Interest Payment Date on which such purchase occurs. 20.2 ANNIVERSARY DATE PURCHASE OR SALE OPTION. Not less than 90 days and no more than 180 days prior to the third anniversary of the Initial Closing Date and any subsequent annual anniversary of the Initial Closing Date, Lessee may give Lessor and Agent irrevocable written notice (the "ELECTION NOTICE") that Lessee is electing to exercise either (a) the option to purchase all of the Properties on the next succeeding anniversary of the Initial Closing Date (the "Purchase Option") or (b) the option to remarket the Properties and cause a sale of the Properties to occur on the next succeeding anniversary of the Initial Closing Date pursuant to the terms of Section 22.1 (the "Sale Option"). If Lessee does not give an Election Notice indicating the Sale Option at least 90 days and not more than 180 days prior to the then current Expiration Date, then Lessee shall be deemed to have elected the Purchase Option for the Expiration Date. If Lessee shall either (i) elect (or be deemed to elect) to exercise the Purchase Option or (ii) elect to remarket the Properties pursuant to Section 22.1 and fail to cause all of the Properties to be sold in accordance with the terms of Section 22.1 on the applicable anniversary of the Initial Closing Date on which such a sale is required in connection with such election, then in either case, Lessee shall pay to Lessor on the applicable anniversary date of the Initial Closing Date an amount equal to the Termination Value for all the Properties (which the parties do not intend to be a "bargain" purchase) and, upon receipt of such amount plus all Rent and other amounts then due and payable under this Lease and under any other Operative Agreement (including without limitation the amounts described in clause FIRST of Section 22.2), Lessor shall grant and transfer to Lessee all of Lessor's right, title and interest in and to the Properties in accordance with Section 19.1. 20.3 LESSOR'S TRANSFER OPTION. If, on the Construction Period Termination Date, either the aggregate Property Cost for all Properties then subject to the terms of this Lease is less than $25,000,000 or there are less than four (4) separate Properties subject to the terms of this Lease, then Lessor shall have the option to give Lessee irrevocable written notice that Lessor, on a Scheduled Interest Payment Date that is not less than thirty (30) days after the date of such written notice and not more than sixty (60) days after the Construction Period Termination Date, shall transfer and convey all of its right, title and interest in and to any or all of the Properties to Lessee. On any transfer and conveyance date specified by Lessor pursuant to this Section 20.3, (i) Lessor shall transfer and convey all of its right, title and interest in and to any or all of the Properties previously specified to Lessee, (ii) Lessee shall accept such transfer and conveyance of right, title and interest in and to the respective Property or Properties and (iii) Lessee shall pay the Termination Value for such respective Property or Properties and all Rent and other amounts then due and payable under this Lease and under any other Operative Agreement (including without limitation all costs and expenses referred to in clause FIRST of Section 22.2), in accordance with Section 19.1. ARTICLE XXI 21.1 RENEWAL. Provided that no Lease Event of Default shall have occurred and be continuing and provided that the Lenders have agreed to extend the Maturity Date to a date that is identical to the final day of the Extended Term, at the Basic Term Expiration Date or at the expiration of any Extended Term, Lessee may renew this Lease (the "RENEWAL OPTION") for an Extended Term. Each renewal of this Lease for an Extended Term shall be on the same terms and conditions as set forth in this Lease for the original Term (which the parties do not intend to be "bargain" renewals). ARTICLE XXII 22.1 SALE PROCEDURE. (a) During the Marketing Period, Lessee, on behalf of the Lessor, shall obtain bids for the cash purchase of all of the Properties in connection with a sale to one or more purchasers to be consummated on the Expiration Date for the highest price available, shall notify Lessor promptly of the name and address of each prospective purchaser and the cash price which each prospective purchaser shall have offered to pay for any Property and shall provide Lessor with such additional information about the bids and the bid solicitation procedure as Lessor may reasonably request from time to time. Lessor may reject any and all bids and may assume sole responsibility for obtaining bids by giving Lessee written notice to that effect; PROVIDED, HOWEVER, that notwithstanding the foregoing, Lessor may not reject the bids for the Properties submitted by the Lessee if such bids, in the aggregate, are greater than or equal to the sum of the Limited Recourse Amount for all of the Properties, plus all costs and expenses referred to in clause FIRST of Section 22.2 and represent bona fide offers from one or more third party purchasers. If the price which a prospective purchaser or purchasers shall have offered to pay for the Properties is less than the sum of the Limited Recourse Amount plus all costs and expenses referred to in clause FIRST of Section 22.2, Lessor may elect to retain the Properties by giving Lessee prior written notice of Lessor's election to retain the Properties, and upon receipt of such notice, Lessee shall surrender the Properties to Lessor pursuant to Section 10.1. Unless Lessor shall have elected to retain the Properties pursuant to the preceding sentence, Lessee shall arrange for Lessor to sell the Properties free of any Lessor Liens attributable to it, without recourse or warranty (of title or otherwise), for cash on the last day of the Marketing Period (such date being hereafter referred to as the "Sale Date") to the purchaser or purchasers identified by Lessee or Lessor, as the case may be; PROVIDED, HOWEVER, solely as to Lessor or the Trust Company, in its individual capacity, any Lessor Lien shall not constitute a Lessor Lien so long as Lessor or the Trust Company, in its individual capacity, is diligently contesting such Lessor Lien by appropriate proceedings. Lessee shall surrender the Property so sold or subject to such documents to each purchaser in the condition specified in Section 10.1. Lessee shall not take or fail to take any action where the taking or failure to take such action would have the effect of discouraging bona fide third party bids for any Property. If the Properties are not either (i) sold on the Sale Date in accordance with the terms of this Section 22.1, or (ii) retained by the Lessor pursuant to an affirmative election made by the Lessor pursuant to the third sentence of this Section 22.1(a), then the Lessee shall be obligated to pay the Lessor on the Sale Date an amount equal to the Termination Value for all of the Properties (plus all Rent and other amounts then due and payable under this Lease and any other Operative Agreements) in accordance with the terms of Section 20.2. (b) If the Properties are sold on the Sale Date to one or more third party purchasers in accordance with the terms of Section 22.1(a) and the aggregate purchase price paid for the Properties minus the sum of all costs and expenses referred to in clause FIRST of Section 22.2 is less than the sum of the aggregate Termination Values for all of the Properties plus all Rent and other amounts then due and payable under this Lease and under any other Operative Agreements (hereinafter such difference shall be referred to as the "Deficiency Balance"), then the Lessee hereby unconditionally promises to pay to the Lessor on the Sale Date the lesser of (i) the Deficiency Balance, or (ii) the Maximum Residual Guarantee Amount for all of the Properties. If the Properties are retained by the Lessor pursuant to an affirmative election made by the Lessor pursuant to the third sentence of Section 22.1(a), then the Lessee hereby unconditionally promises to pay to the Lessor on the Sale Date an amount equal to the aggregate Maximum Residual Guaranty Amounts for all of the Properties. (c) In the event that the Properties are either sold to one or more third party purchasers on the Sale Date or retained by the Lessor in connection with an affirmative election made by the Lessor pursuant to the third sentence of Section 22.1(a), then in either case on the Sale Date the Lessee shall provide Lessor or such third party purchaser with (i) all permits, certificates of occupancy, governmental licenses and authorizations necessary to use and operate such Property for its intended purposes, and (ii) such easements, licenses, rights-of-way and other rights and privileges in the nature of an easement as are reasonably necessary or desirable in connection with the use, repair, access to or maintenance of such Property for its intended purpose or otherwise as the Lessor shall reasonably request. All assignments, licenses, easements, agreements and other deliveries required by clauses (i) and (ii) of this paragraph (c) shall be in form satisfactory to the Lessor or such third party purchaser, as applicable, and shall be fully assignable (including both primary assignments and assignments given in the nature of security) without payment of any fee, cost or other charge. 22.2 APPLICATION OF PROCEEDS OF SALE. The Lessor shall apply the proceeds of sale of any Property in the following order of priority: (i) FIRST, to pay or to reimburse Lessor for the payment of all reasonable third party costs and expenses incurred by Lessor in connection with the sale; (ii) SECOND, so long as the Credit Agreement is in effect and any Holder Advances or any amount is owing to the Holders under any Operative Agreement, to the Agent to be applied pursuant to inter-creditor provisions between the Lenders and the Holders contained in the Operative Agreements; and (iii) THIRD, to the Lessee. 22.3 INDEMNITY FOR EXCESSIVE WEAR. If the proceeds of the sale described in Section 22.1 with respect to the Properties, less all expenses incurred by Lessor in connection with such sale, shall be less than the Limited Recourse Amount with respect to the Properties, and at the time of such sale it shall have been determined (pursuant to the Appraisal Procedure) that the Fair Market Sales Value of the Properties, shall have been impaired by greater than reasonably expected wear and tear during the term of the Lease, Lessee shall pay to Lessor within ten (10) days after receipt of Lessor's written statement (i) the amount of such excess wear and tear determined by the Appraisal Procedure or (ii) the amount of the Net Sale Proceeds Shortfall, whichever amount is less. 22.4 APPRAISAL PROCEDURE. For determining the Fair Market Sales Value of any Property or any other amount which may, pursuant to any provision of any Operative Agreement, be determined by an appraisal procedure, Lessor and Lessee shall use the following procedure (the "APPRAISAL PROCEDURE"). Lessor and Lessee shall endeavor to reach a mutual agreement as to such amount for a period of ten (10) days from commencement of the Appraisal Procedure under the applicable section of the Lease, and if they cannot agree within ten (10) days, then two qualified appraisers, one chosen by Lessee and one chosen by Lessor, shall mutually agree thereupon, but if either party shall fail to choose an appraiser within twenty (20) days after notice from the other party of the selection of its appraiser, then the appraisal by such appointed appraiser shall be binding on Lessee and Lessor. If the two appraisers cannot agree within twenty (20) days after both shall have been appointed, then a third appraiser shall be selected by the two appraisers or, failing agreement as to such third appraiser within (30) days after both shall have been appointed, by the American Arbitration Association. The decisions of the three appraisers shall be given within twenty (20) days of the appointment of the third appraiser and the decision of the appraiser most different from the average of the other two shall be discarded and such average shall be binding on Lessor and Lessee; PROVIDED that if the highest appraisal and the lowest appraisal are equidistant from the third appraisal, the third appraisal shall be binding on Lessor and Lessee. The fees and expenses of the appraiser appointed by Lessee shall be paid by Lessee; the fees and expenses of the appraiser appointed by Lessor shall be paid by Lessor (such fees and expenses not being indemnified pursuant to Section 13 of the Participation Agreement); and the fees and expenses of the third appraiser shall be divided equally between Lessee and Lessor. 22.5 CERTAIN OBLIGATIONS CONTINUE. During the Marketing Period, the obligation of Lessee to pay Rent with respect to the Properties (including the installment of Basic Rent due on the Expiration Date) shall continue undiminished until payment in full to Lessor of the sale proceeds, if any, the Maximum Residual Guarantee Amount, the amount due under Section 22.3, if any, and all other amounts due to Lessor with respect to all Properties. Lessor shall have the right, but shall be under no duty, to solicit bids, to inquire into the efforts of Lessee to obtain bids or otherwise to take action in connection with any such sale, other than as expressly provided in this Article XXII. ARTICLE XXIII 23.1 HOLDING OVER. If Lessee shall for any reason remain in possession of a Property after the expiration or earlier termination of this Lease as to such Property (unless such Property is conveyed to Lessee), such possession shall be as a tenancy at sufferance during which time Lessee shall continue to pay Supplemental Rent that would be payable by Lessee hereunder were the Lease then in full force and effect with respect to the Property and Lessee shall continue to pay Basic Rent at 110% of the Basic Rent that would otherwise be due and payable at such time. Such Basic Rent shall be payable from time to time upon demand by Lessor and such additional 10% amount shall be applied by the Lessor to the payment of the Loans pursuant to the Credit Agreement and the Holder Advances pursuant to the Trust Agreement pro rata between the Loans and the Holder Advances. During any period of tenancy at sufferance, Lessee shall, subject to the second preceding sentence, be obligated to perform and observe all of the terms, covenants and conditions of this Lease, but shall have no rights hereunder other than the right, to the extent given by law to tenants at sufferance, to continue their occupancy and use of such Property. Nothing contained in this Article XXIII shall constitute the consent, express or implied, of Lessor to the holding over of Lessee after the expiration or earlier termination of this Lease as to any Property (unless such Property is conveyed to Lessee) and nothing contained herein shall be read or construed as preventing Lessor from maintaining a suit for possession of such Property or exercising any other remedy available to Lessor at law or in equity. ARTICLE XXIV 24.1 RISK OF LOSS. During the Term, unless Lessee shall not be in actual possession of the Property in question solely by reason of Lessor's exercise of its remedies of dispossession under Article XVII, the risk of loss or decrease in the enjoyment and beneficial use of such Property as a result of the damage or destruction thereof by fire, the elements, casualties, thefts, riots, wars or otherwise is assumed by Lessee, and Lessor shall in no event be answerable or accountable therefor. ARTICLE XXV 25.1 ASSIGNMENT. (a) Lessee may not assign this Lease or any of its rights or obligations hereunder in whole or in part to any Person unless either (i) the Lessee obtains the prior written consent of the Agent and the Lessor, with such consent to be given or withheld in the sole discretion of each such party or (ii) such transfer is to the Guarantor or a wholly owned subsidiary of the Guarantor and the Guarantor consents in writing to such assignment. (b) No such assignment or other relinquishment of possession to any Property shall in any way discharge or diminish any of the obligations of Lessee to Lessor hereunder and Lessee shall remain directly and primarily liable under this Lease as to any assignment regarding this Lease. 25.2 SUBLEASES. (a) Promptly following the execution and delivery of any sublease permitted by this Article XXV, Lessee shall notify Lessor and the Agent of the execution of such sublease. As of the date of each Lease Supplement, Lessee shall lease the respective Properties described in such Lease Supplement from Lessor, and any existing tenant respecting such Property shall automatically be deemed to be a subtenant of Lessee and not a tenant of Lessor. (b) Without the consent of the Lessor, Lessee may (i) sublet up to 100% of an undivided Property to any wholly-owned direct or indirect subsidiary of the Guarantor, or (ii) sublet not more than 50% of an undivided Property to any other Person or Persons provided that, in each case, the term of such sublease or subleases does not extend beyond the Term. Lessee may not sublet any Property or portion thereof in addition to that referenced in the preceding sentence without first obtaining the prior written consent of the Lessor, which consent will not be unreasonably withheld. (c) No such sublease or other relinquishment of possession to any Property shall in any way discharge or diminish any of Lessee's obligations to Lessor hereunder and Lessee shall remain directly and primarily liable under this Lease as to the Property, or portion thereof, so sublet. ARTICLE XXVI 26.1 NO WAIVER. No failure by Lessor or Lessee to insist upon the strict performance of any term hereof or to exercise any right, power or remedy upon a default hereunder, and no acceptance of full or partial payment of Rent during the continuance of any such default, shall constitute a waiver of any such default or of any such term. To the fullest extent permitted by law, no waiver of any default shall affect or alter this Lease, and this Lease shall continue in full force and effect with respect to any other then existing or subsequent default. ARTICLE XXVII 27.1 ACCEPTANCE OF SURRENDER. No surrender to Lessor of this Lease or of all or any portion of any Property or of any part thereof or of any interest therein shall be valid or effective unless agreed to and accepted in writing by Lessor and, prior to the payment or performance of all obligations under the Credit Documents, the Agent, and no act by Lessor or the Agent or any representative or agent of Lessor or the Agent, other than a written acceptance, shall constitute an acceptance of any such surrender. 27.2 NO MERGER OF TITLE. There shall be no merger of this Lease or of the leasehold estate created hereby by reason of the fact that the same Person may acquire, own or hold, directly or indirectly, in whole or in part, (a) this Lease or the leasehold estate created hereby or any interest in this Lease or such leasehold estate, (b) any right, title or interest in any Property, (c) any Notes, or (d) a beneficial interest in Lessor. ARTICLE XXVIII 28.1 [Intentionally Omitted]. ARTICLE XXIX 29.1 NOTICES. All notices, demands, requests, consents, approvals and other communications hereunder shall be in writing and delivered personally or by a nationally recognized overnight courier service or mailed (by registered or certified mail, return receipt requested, postage prepaid), addressed to the respective parties, as follows: If to Lessee: Foundation Health Medical Services 3400 Data Drive Rancho Cordova, California, 95670 Attention: Chief Financial Officer Telephone No.: (916) 631-5000 Telecopy No.: (916) 631-5335 If to Lessor: First Security Bank of Utah, N.A. 79 South Main Street Salt Lake City, Utah 84111 Attention: Val T. Orton Telephone No.: (801) 246-5300 Telecopy No.: (801) 246-5053 with a copy to the Agent: NationsBank of Texas, N.A. 444 S. Flower Street, Suite 1500 Los Angeles, California 90071 Attention: Mr. Brad DeSpain Telephone No.: (213) 236-4916 Telecopy No.: (213) 624-5815 with a copy to: NationsBank of Texas, N.A. Corporate Credit Services 901 Main Street, 13th Floor Dallas, Texas 75201 Attention: Marie Lancaster Telecopy No.: (214) 508-2515 or such additional parties and/or other address as such party may hereafter designate, and shall be effective upon receipt or refusal thereof. ARTICLE XXX 30.1 MISCELLANEOUS. Anything contained in this Lease to the contrary notwithstanding, all claims against and liabilities of Lessee or Lessor arising from events commencing prior to the expiration or earlier termination of this Lease shall survive such expiration or earlier termination. If any provision of this Lease shall be held to be unenforceable in any jurisdiction, such unenforceability shall not affect the enforceability of any other provision of this Lease and such jurisdiction or of such provision or of any other provision hereof in any other jurisdiction. 30.2 AMENDMENTS AND MODIFICATIONS. Neither this Lease, any Lease Supplement nor any provision hereof may be amended, waived, discharged or terminated except by an instrument in writing in recordable form signed by Lessor and Lessee. 30.3 SUCCESSORS AND ASSIGNS. All the terms and provisions of this Lease shall inure to the benefit of the parties hereto and their respective successors and permitted assigns. 30.4 HEADINGS AND TABLE OF CONTENTS. The headings and table of contents in this Lease are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. 30.5 COUNTERPARTS. This Lease may be executed in any number of counterparts, each of which shall be an original, but all of which shall together constitute one and the same instrument. 30.6 GOVERNING LAW. THIS LEASE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA (EXCEPT TO THE EXTENT MATTERS RELATED TO A PROPERTY ARE NECESSARILY GOVERNED BY THE LAW OF THE STATE IN WHICH SUCH PROPERTY IS LOCATED). 30.7 CALCULATION OF RENT. All calculation of Rent payable hereunder shall be computed based on the actual number of days elapsed over a year of 360 days. 30.8 MEMORANDA OF LEASE AND LEASE SUPPLEMENTS. Lessor and Lessee shall promptly after the date hereof record this Lease (or a memorandum hereof) and shall also record each Lease Supplement (or a memorandum thereof), in all cases at Lessee's cost and expense, and as required under applicable law to sufficiently evidence this Lease or any such Lease Supplement in the applicable real estate filing records. 30.9 ALLOCATIONS BETWEEN THE LENDERS AND THE HOLDERS. Notwithstanding any other term or provision of this Lease to the contrary, the allocations of the proceeds of the Properties and any and all other Rent and other amounts received hereunder shall be subject to the inter-creditor provisions between the Lenders and the Holders contained in the Operative Agreement (or as otherwise agreed among the Lenders and the Holders from time to time). 30.10 LIMITATIONS ON RECOURSE. Notwithstanding anything contained in this Lease to the contrary, Lessee agrees to look solely to Lessor's estate and interest in the Properties for the collection of any judgment requiring the payment of money by Lessor in the event of liability by Lessor, and no other property or assets of Lessor or any shareholder, owner or partner (direct or indirect) in or of Lessor, or any director, officer, employee, beneficiary, Affiliate of any of the foregoing shall be subject to levy, execution or other enforcement procedure for the satisfaction of the remedies of Lessee under or with respect to this Lease, the relationship of Lessor and Lessee hereunder or Lessee's use of the Properties or any other liability of Lessor to Lessee. Nothing in this Section shall be interpreted so as to limit the terms of Sections 6.1 or 6.2. [Signature pages follow] IN WITNESS WHEREOF, the parties have caused this Lease to be duly executed and delivered as of the date first above written. FOUNDATION HEALTH MEDICAL SERVICES By: --------------------------------------------- Name: ------------------------------------------- Title: ------------------------------------------ Address: 3400 Data Drive Rancho Cordova, California 95670 Attention: Chief Financial Officer Telephone No.: (916) 631-5000 Telecopy No.: (916) 631-5335 FIRST SECURITY BANK OF UTAH, N.A., not individually, but solely as Owner Trustee under the FH Trust 1995-1 By: ---------------------------------------------- Name: ------------------------------------------- Title: ------------------------------------------ Address: 79 South Main Street Salt Lake City, Utah 84111 Attention: Val T. Orton Telephone No.: (801) 246-5300 Telecopy No: (801) 246-5053 Receipt of this original counterpart of the foregoing Lease is hereby acknowledged as the date hereof NATIONSBANK OF TEXAS, N.A., as Agent By: ---------------------------------------------- Name: -------------------------------------------- Title: ------------------------------------------- Address: 444 S. Flower Street, Suite 1500 Los Angeles, CA 90071 Attention: Mr. Brad DeSpain Telephone No.: (213) 236-4912 Telecopy No: (213) 624-5815 EXHIBIT A TO THE LEASE LEASE SUPPLEMENT NO. ___ THIS LEASE SUPPLEMENT NO. ___ (this "LEASE SUPPLEMENT") dated as of [________________] between First Security Bank of Utah, N.A., not individually, but solely as Owner Trustee under the FH Trust 1995-1, as lessor (the "LESSOR"), and FOUNDATION HEALTH MEDICAL SERVICES, as lessee (the "LESSEE"). WHEREAS, the Lessor is the owner or will be owner of the Property described on SCHEDULE I hereto (the "LEASED PROPERTY") and wishes to lease the same to Lessee; NOW, THEREFORE, in consideration of the premises and the mutual agreements herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: SECTION 1. DEFINITIONS; RULES OF USAGE. For purposes of this Lease Supplement, capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to them in APPENDIX A to the Participation Agreement, dated as of _________, 1995, among the Lessee, the Lessor, not individually, except as expressly stated therein, but solely as Owner Trustee under the FH Trust 1995-1, __________ and ____________, as the Holders and NationsBank of Texas, N.A., as Agent for the Lenders. SECTION 2. THE PROPERTIES. Attached hereto as Schedule I is the description of the Leased Property, with an Equipment Schedule attached hereto as Schedule I-A, an Improvement Schedule attached hereto as Schedule I-B and a legal description of the Land for such Project attached hereto as Schedule I-C. Effective upon the execution and delivery of this Lease Supplement by the Lessor and the Lessee, the Leased Property shall be subject to the terms and provisions of the Lease. SECTION 3. RATIFICATION. Except as specifically modified hereby, the terms and provisions of the Lease and the Operative Agreements are hereby ratified and confirmed and remain in full force and effect. SECTION 4. ORIGINAL LEASE SUPPLEMENT. The single executed original of this Lease Supplement marked "THIS COUNTERPART IS THE ORIGINAL EXECUTED COUNTERPART" on the signature page thereof and containing the receipt of the Agent therefor on or following the signature page thereof shall be the original executed counterpart of this Lease Supplement (the "ORIGINAL EXECUTED COUNTERPART"). To the extent that this Lease Supplement constitutes chattel paper, as such term is defined in the Uniform Commercial Code as in effect in any applicable jurisdiction, no security interest in this Lease Supplement may be created through the transfer or possession of any counterpart other than the Original Executed Counterpart. SECTION 5. GOVERNING LAW. THIS LEASE SUPPLEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF [_________]. SECTION 6. COUNTERPART EXECUTION. This Lease Supplement may be executed in any number of counterparts and by each of the parties hereto in separate counterparts, all such counterparts together constituting but one and the same instrument. [THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK.] IN WITNESS WHEREOF, each of the parties hereto has caused this Lease Supplement to be duly executed by an officer thereunto duly authorized as of the date and year first above written. FIRST SECURITY BANK OF UTAH, N.A., not individually, but solely as Owner Trustee under the FH Trust 1995-1, as Lessor By: ----------------------------------- Name: ---------------------------------- Title: --------------------------------- FOUNDATION HEALTH MEDICAL SERVICES, as Lessee By: ---------------------------------------- Name: -------------------------------------- Title: -------------------------------------- Receipt of this original counterpart of the foregoing Lease Supplement is hereby acknowledged as the date hereof. NATIONSBANK OF TEXAS, N.A., as Agent By: ------------------------------------ Name: ---------------------------------- Title: -------------------------------- STATE OF _______________ ) ) ss: COUNTY OF ______________ ) The foregoing Lease Supplement was acknowledged before me, the undersigned Notary Public, in the County of _________________ this _____ day of ______________, by ________________, as __________________ of First Security Bank of Utah, N.A., a national banking association, not individually, but solely as Owner Trustee under the FH Trust 1995-1, on behalf of the Owner Trustee. [Notarial Seal] Notary Public My commission expires:____________ STATE OF _______________ ) ) ss: COUNTY OF ______________ ) The foregoing Lease Supplement was acknowledged before me, the undersigned Notary Public, in the County of _________________ this _____ day of ______________, by ________________, as __________________ of FOUNDATION HEALTH MEDICAL SERVICES, a California corporation, on behalf of the corporation. [Notarial Seal] Notary Public My commission expires:____________ STATE OF _______________ ) ) ss: COUNTY OF ______________ ) The foregoing Lease Supplement was acknowledged before me, the undersigned Notary Public, in the County of _________________ this _____ day of ______________, by ________________, as __________________ of NATIONSBANK OF TEXAS, N.A., a national banking association, as Agent. [Notarial Seal] Notary Public My commission expires:____________ SCHEDULE I TO LEASE SUPPLEMENT NO. ____ SCHEDULE I-A TO LEASE SUPPLEMENT NO. ____ (Equipment) SCHEDULE I-B TO LEASE SUPPLEMENT NO. ____ (Improvements) SCHEDULE I-C TO LEASE SUPPLEMENT NO. ____ (Land) EXHIBIT B TO THE LEASE OTHER NAMES AND LOCATIONS OF LESSEE GUARANTY AGREEMENT THIS GUARANTY AGREEMENT, dated as of May 25, 1995 (the "GUARANTY AGREEMENT"), is given by FOUNDATION HEALTH CORPORATION, a Delaware corporation (the "Guarantor"), for the benefit of FIRST SECURITY BANK OF UTAH, N.A., a national banking association, not individually but solely as Owner Trustee under the FH Trust 1995-1 (together with its successors and permitted assigns, the "Owner Trustee"), as lessor under the Lease (hereinafter defined). W I T N E S S E T H: WHEREAS, the Owner Trustee, Foundation Health Medical Services, a California corporation and a wholly-owned subsidiary of the Guarantor ("FHMS"), the Guarantor, the Holders (hereinafter defined) and the Agent (hereinafter defined) are party to a Participation Agreement dated as of the date hereof (as such may be amended from time to time, the "Participation Agreement") which describes and references certain Operative Agreements (hereinafter defined) and provides for a financing of certain real estate assets provided by the Lenders and the Holders in favor of FHMS; WHEREAS, the Owner Trustee and FHMS are party to an Agency Agreement dated as of the date hereof (as such may be amended from time to time, the "Agency Agreement") which provides for FHMS to act as agent for the Owner Trustee in the acquisition, development and construction of certain real estate assets; WHEREAS, the Owner Trustee and FHMS are party to a Lease Agreement dated as of the date hereof (as such may be amended from time to time, the "Lease") which provides for the leasing by the Owner Trustee to FHMS of certain real estate assets; WHEREAS, the financing arrangement evidenced by the documents described above constitutes a substantial benefit to the Guarantor; NOW, THEREFORE, IT IS AGREED: ARTICLE I DEFINITIONS 1.01 DEFINED TERMS. As used herein, the following terms shall have the meanings herein specified unless the context otherwise requires. Capitalized terms used in this Guaranty Agreement and not defined in this Section 1.01 shall have the meanings given to such terms in APPENDIX A to the Participation Agreement. Defined terms herein shall include in the singular number the plural and in the plural the singular: "ACQUISITION" means the purchase of capital stock (or options, warrants or similar instruments convertible into capital stock) of, or merger with, purchase of assets of, purchase of convertible debt of, a Person not an Affiliate of the Guarantor or one of its Subsidiaries on the date of determination, or any combination thereof, in each case involving a purchase in connection with which the acquiring Person owns 50% or more of the equity interest of such Person after giving effect to such purchase, substantially all of such Person's assets, or a line of business or business of such Person, but excluding purchases of inventory, equipment and supplies in the ordinary course of business. "AFFILIATE" means, with respect to any Person, any other Person directly or indirectly controlling, controlled by or under common control with such Person. The term "control" means the possession, directly or indirectly, of the power, whether or not exercised, to direct or cause the direction of the management or policies of any Person, whether through ownership of voting securities, by contract or otherwise. "AGENCY AGREEMENT" shall have the meaning given to such term in the second "WHEREAS" clause hereof. "AGENT" means NationsBank, as Agent for the Lenders under the Credit Agreement, together with its successors and assigns. "CAPITAL LEASE OBLIGATION" means, with respect to any lease of property which, in accordance with GAAP, should be capitalized on the balance sheet of any Person, the amount of the liability which should be so capitalized. "CHANGE OF CONTROL" means an event or series of events by which: (i) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), provided that in no event shall an existing Guarantor employee stock ownership plan or any other Guarantor employee benefit plan which may hereafter be established by the Guarantor be deemed a "person" or part of a "group") is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly of 50% or more of the Guarantor's then outstanding voting stock, otherwise than through a transaction consummated with the prior approval of the Guarantor's Board of Directors, a majority of whose members are Continuing Directors (as defined below); or (ii) during any period of two consecutive calendar years, individuals who, on the date hereof, constitute the Guarantor's Board of Directors (together with any new director whose election by the Guarantor's Board of Directors or whose nomination for election by the Guarantor's stockholders was approved by a vote of at least a majority of the directors then still in office who either were directors on the date hereof or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the directors then in office. For the purposes of the foregoing, the term "Continuing Directors" means, as of the date of any such approval, (1) individuals who, on the date hereof, are members of the Guarantor's Board of Directors and (2) any new director whose election by the Guarantor's Board of Directors or whose nomination for election by the Guarantor's stockholders is approved by a vote of a least a majority of the directors then still in office who either are directors on the date hereof or whose election or nomination for election was previously so approved. "CONSOLIDATED", "CONSOLIDATING" and similar derivatives of each such word refers to the consolidation of accounts in accordance with GAAP. "CODE" means the Internal Revenue Code of 1986, as amended from time to time. "DEBT" of any Person means, without duplication, (i) all indebtedness of such Person for borrowed money or for the deferred purchase price of property or services (including, without limitation, all obligations, contingent or otherwise, of such Person in connection with the drawn portion of any letter of credit facilities, acceptance facilities or other similar facilities and in connection with any agreement to purchase, redeem, exchange, convert or otherwise acquire for value any capital stock of such Person or any warrants, rights or options to acquire such capital stock, now or hereafter outstanding), excluding payables for goods or services incurred in the ordinary course of business and not overdue for a period of ninety days or more and deferred compensation arrangements with officers, directors and employees, (ii) all obligations of such Person evidenced by bonds, notes, debentures or other similar instruments, (iii) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), (iv) all Capital Lease Obligations of such Person (but excluding any obligation of such Person under a lease that is an operating lease as determined in accordance with GAAP), (v) all obligations, contingent or otherwise, of such Person in connection with interest rate exchange agreements, foreign exchange rate agreements and similar agreements (provided that the obligations under such agreements shall be recorded on a net basis and marked to market on a current basis), (vi) all Debt of another Person secured by (or for which the holder of such Debt has an existing right, contingent or otherwise, to be secured by) any lien, security interest or other charge or encumbrance upon or in property (including, without limitation, accounts and contract rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such Debt, (vii) all Guaranteed Debt and (viii) if an ERISA Event shall have occurred with respect to any Plan, the Insufficiency (if any) of such Plan (or, in the case of a Plan with respect to which an ERISA Event described in clause (iii) through (vi) of the definition of ERISA Event shall have occurred, the liability related thereto). "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder. "ERISA AFFILIATE" means any Person that for the purposes of Title IV of ERISA is a member of the Guarantor's controlled group, or under common control with the Guarantor within the meaning of Section 414 of the Code and the regulations promulgated and rulings issued thereunder. "ERISA EVENT" means (i) the occurrence of a reportable event, within the meaning of Section 4043 of ERISA, unless the 30-day notice requirement with respect thereto has been waived by the PBGC; (ii) the provision by the administrator of any Plan of a notice of intent to terminate such Plan, pursuant to Section 4041(a)(2) of ERISA (including any such notice with respect to a plan amendment referred to in Section 4041(e) of ERISA); (iii) the cessation of operations at a facility in the circumstances described in Section 4068(f) of ERISA; (iv) the withdrawal by the Guarantor or an ERISA Affiliate from a Multiple Employer Plan during a plan year for which it was a substantial employer, as defined in Section 4001(a)(2) of ERISA; (v) the failure by the Guarantor or any ERISA Affiliate to make a payment to a Plan required under Section 302(f)(l) of ERISA, which Section imposes a lien for failure to make required payments; (vi) the adoption of an amendment to a Plan requiring the provision of security to such Plan, pursuant to Section 307 of ERISA; or (vii) the institution by the PBGC of proceedings to terminate a Plan, pursuant to Section 4042 of ERISA, or the occurrence of any event or condition which might constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, a Plan. "EVENT OF DEFAULT" shall have the meaning given to such term in Section 2.05(a) hereof. "EXISTING CREDIT AGREEMENT" shall mean the Original Credit Agreement, as such may hereafter be amended, modified, supplemented, restated and/or replaced from time to time. "EXISTING CREDIT AGREEMENT EVENT OF DEFAULT" shall mean an "Event of Default" as such term is defined in the Existing Credit Agreement. "FHMS" shall have the meaning given to such term in the first "WHEREAS" clause hereof. "FHMS OBLIGATIONS" shall have the meaning given to such term in Section 2.01 hereof. "FISCAL YEAR" means, with respect to any Person, a fiscal year of such Person. "GAAP" shall have the meaning given to such term in the Participation Agreement. "GUARANTEED DEBT" of any Person means all Debt referred to in clause (i), (ii), (iii), (iv) or (v) of the definition of "Debt" in this Section 1.01 guaranteed directly or indirectly in any manner by such Person, or in effect guaranteed directly or indirectly by such Person through an agreement (i) to pay or purchase such Debt or to advance or supply such funds for the payment or purchase of such Debt, (ii) to purchase, sell or lease (as lessee or lessor) property, or to purchase or sell services, primarily for the purpose of enabling the debtor to make payment of such Debt or to assure the holder of such Debt against loss, (iii) to supply funds to, or in any other manner invest in, the debtor (including any agreement to pay for property or services irrespective of whether such property is received or such services are rendered) or (iv) otherwise to assure a creditor against loss. "GUARANTOR" shall have the meaning given to such term in the first paragraph hereof. "GUARANTY AGREEMENT" shall have the meaning given to such term in the first paragraph hereof. "GUARANTY DOCUMENTS" shall mean, collectively, the Guaranty Agreement and the Participation Agreement. "HMO" means a health maintenance organization doing business as such (or required to qualify or to be licensed as such) under HMO Regulations. "HMO EVENT" means material non-compliance by the Guarantor or any of its Material Subsidiaries with any of the terms and provisions of the HMO Regulations pertaining to fiscal soundness, solvency or financial condition; or the assertion in writing, after the date hereof, by an HMO Regulator that it intends to take administrative action against the Guarantor or any of its Material Subsidiaries to revoke or modify any material contract of insurance, license, charter or permit, or to enforce the fiscal soundness, solvency or financial provisions or requirements of the HMO Regulations against any of such entities as a result of any material non-compliance therewith. "HMO REGULATIONS" means all laws, regulations, directives and administrative orders applicable under federal or state law to HMOs as such. "HMO REGULATOR" means any Person charged with the administration, oversight or enforcement of an HMO Regulation. "HOLDERS" shall have the meaning given to such term in APPENDIX A to the Participation Agreement. "INCORPORATED COVENANTS" shall have the meaning given to such term in Article IV hereof. "INCORPORATED FINANCIAL COVENANTS" means the financial covenants contained in Section 5.03 of the Original Credit Agreement, together with any amendments, modifications, substitutions or replacements thereof which are part of the Incorporated Covenants in accordance with the terms of Article IV hereof. "INCORPORATED REPRESENTATIONS AND WARRANTIES" shall have the meaning given to such term in Article III hereof. "INSUFFICIENCY" means with respect to any Plan, the amount, if any, of its unfunded benefit liabilities, as defined in Section 4001(a)(18) of ERISA. "LEASE" shall have the meaning given to such term in the third "WHEREAS" clause hereof. "LENDER" or "LENDERS" means each of the Lender now or hereafter named under the Credit Agreement. "LIEN" shall have the meaning given to such term in APPENDIX A to the Participation Agreement. "LOSS" shall have the meaning given to such term in Section 5.04(c) hereof. "MATERIAL SUBSIDIARY" means each Subsidiary that (i) for the most recent Fiscal Year of the Guarantor, accounted for more than 5% of the Consolidated revenues of the Guarantor or (ii) as at the end of such fiscal year, was the owner, directly or indirectly, of more than 5% of the Consolidated assets of the Guarantor, all as shown on its Consolidated financial statements for such Fiscal Year, PROVIDED that in the case of a Subsidiary acquired during a Fiscal Year, clause (i) shall not be applicable until the following Fiscal year and clause (ii) shall be determined on a pro forma basis in the case of such Subsidiary, giving effect to such acquisition as if it occurred at the end of such Fiscal year. "MULTIEMPLOYER PLAN" means a "multiemployer plan" as defined in Section 4001(a)(3) of ERISA to which the Guarantor or any ERISA Affiliate is making or accruing an obligation to make contributions, or has within any of the preceding five plan years made or accrued an obligation to make contributions, such plan being maintained pursuant to one or more collective bargaining agreements. "MULTIPLE EMPLOYER PLAN" means a single employer plan, as defined in Section 4001(a)(15) of ERISA, which (i) is maintained for employees of the Guarantor or an ERISA Affiliate and at least one Person other than the Guarantor and its ERISA Affiliates or (ii) was so maintained and in respect of which the Guarantor or any ERISA Affiliate could have liability under Section 4064 or 4069 of ERISA in the event such plan has been or were to be terminated. "NATIONSBANK" means NationsBank of Texas, N.A., a national banking association, and its successors and assigns. "NET WORTH" of any Person on any date of determination means an amount equal to the excess of Total Assets over Total Liabilities of such Person. "NEW FACILITY" shall have the meaning given to such term in Article IV hereof. "OPERATIVE AGREEMENTS" shall have the meaning given to such term in APPENDIX A to the Participation Agreement. "ORIGINAL CREDIT AGREEMENT" shall mean the Revolving Credit Agreement dated as of December 5, 1994 among the Guarantor, the various banks and financial institutions which are parties thereto, CitiCorp USA, Inc., as administrative agent, Wells Fargo Bank, N.A. and NationsBank, as co-agents and CitiCorp Securities, Inc., as arranger. "OWNER TRUSTEE" shall have the meaning given to such term in the first paragraph hereof. "PARTICIPATION AGREEMENT" shall have the meaning given to such term in the first "WHEREAS" clause hereof. "PBGC" means the Pension Benefit Guaranty Corporation. "PERSON" means any individual, partnership, joint venture, firm, corporation, association, trust or other enterprise (whether or not incorporated), or any government or political subdivision or any agency, department or instrumentality thereof. "PLAN" means a Single-Employer Plan or a Multiple Employer Plan. "SINGLE-EMPLOYER PLAN" means a single employer plan, as defined in Section 4001(a)(15) of ERISA, which (i) is maintained for employees of the Guarantor or an ERISA Affiliate and no Person other than the Guarantor and its ERISA Affiliates or (ii) was so maintained and in respect of which the Guarantor or an ERISA Affiliate could have liability under Section 4069 of ERISA in the event such plan has been or were to be terminated. "SUBSIDIARY" of any Person means any corporation, partnership, joint venture, trust or estate of which (or in which) more than 50% of: (i) the outstanding capital stock having ordinary voting power to elect a majority of the Board of Directors of such corporation (irrespective of whether or not at the time capital stock of any other class or classes of such corporation shall or might have voting power upon the occurrence of any contingency), (ii) the interest in the capital or profits of such partnership or joint venture, or (iii) the beneficial interest of such trust or estate, is at the time directly or indirectly owned by such Person, by such Person and one or more of its other Subsidiaries, or by one or more of such Person's other Subsidiaries, "TOTAL ASSETS" of any Person means all property, whether real, personal, tangible, intangible or otherwise, that, in accordance with GAAP, should be included in determining total assets as shown on the assets portion of a balance sheet of such Person. "TOTAL LIABILITIES" of any Person at any date means all obligations that, in accordance with GAAP, would be included in determining total liabilities as shown on the liabilities side of a balance sheet of such Person at such date. "WITHDRAWAL LIABILITY" has the meaning given such term under Part I of Subtitle E of Title IV of ERISA. 1.02 COMPUTATION OF TIME PERIODS. For purposes of computation of periods of time hereunder, the word "from" means "from and including" and the words "to" and "until" each mean "to and including." 1.03 ACCOUNTING TERMS. Accounting terms used but not otherwise defined herein shall have the meanings provided, and be construed in accordance with, GAAP. ARTICLE II BASIC GUARANTY PROVISIONS 2.01 THE GUARANTEE. The Guarantor hereby guarantees to the Owner Trustee, (i) the payment by FHMS when due (whether by acceleration or otherwise) of all amounts owing under the Agency Agreement, the Lease and/or under any of the other Operative Agreements to which FHMS is a party, including specifically without limitation all payments under the Agency Agreement, Basic Rent, Supplemental Rent, and other amounts now or hereafter owing by FHMS in connection with the Agency Agreement, the Lease and/or the other Operative Agreements to which FHMS is a party, as such obligations may be modified, extended or renewed from time to time, and (ii) the performance by FHMS of all obligations under the Agency Agreement, the Lease, the Participation Agreement and/or the other Operative Agreements to which FHMS is a party, (hereinafter such obligations under subsections (i) and (ii) may be referred to herein as the "FHMS Obligations"). 2.02 OBLIGATIONS UNCONDITIONAL. The Guarantor agrees that the obligations of the Guarantor under Section 2.01 hereof are absolute and unconditional, irrespective of the value, genuineness, validity, regularity or enforceability of any of the Operative Agreements, or any other agreement or instrument referred to therein, or any substitution, release or exchange of any other guarantee of or security for any of the FHMS Obligations, and, to the fullest extent permitted by applicable law, irrespective of any other circumstance whatsoever which might otherwise constitute a legal or equitable discharge or defense of a surety, guarantor or co-obligor, it being the intent of this Section 2.02 that the obligations of the Guarantor hereunder shall be absolute and unconditional under any and all circumstances. Without limiting the generality of the foregoing, it is agreed that the occurrence of any one or more of the following shall not alter or impair the liability of the Guarantor hereunder which shall remain absolute and unconditional as described above: (i) at any time or from time to time, without notice to the Guarantor, the time for any performance of or compliance with any of the FHMS Obligations shall be extended, or such performance or compliance shall be waived; (ii) any of the acts mentioned in any of the provisions of any of the Operative Agreements or any other agreement or instrument referred therein shall be done or omitted; (iii) the maturity of any of the FHMS Obligations shall be accelerated, or any of the FHMS Obligations shall be modified, supplemented or amended in any respect, or any right under any of the Operative Agreements or any other agreement or instrument referred to therein shall be waived or any other guarantee of any of the FHMS Obligations or any security therefor shall be released or exchanged in whole or in part or otherwise dealt with; (iv) any Lien granted to, or in favor of, the Agent, the Lenders or the Holders as security for any of the FHMS Obligations (or as security for the guarantee thereof by the Guarantor) shall fail to attach or be perfected; or (v) any of the FHMS Obligations shall be determined to be void or voidable or shall be subordinated to the claims of any Person. 2.03 REINSTATEMENT. The obligations of the Guarantor under this Section 2 shall be automatically reinstated if and to the extent that for any reason any payment by or on behalf of any Person in respect of the FHMS Obligations is rescinded or must be otherwise restored by any holder of any of the FHMS Obligations, whether as a result of any proceedings in bankruptcy or reorganization or otherwise. 2.04 WAIVERS BY THE GUARANTOR. (a) With respect to its obligations hereunder, the Guarantor hereby expressly waives diligence, presentment, demand of payment, protest and all notices whatsoever, and any requirement that the Owner Trustee exhaust any right, power or remedy or proceed against any Person under any of the Operative Agreements or any other agreement or instrument referred to therein, or against any other Person under any other guarantee of, or security for, any of the FHMS Obligations. Without limiting the generality of the foregoing or of any other provision of this Guaranty Agreement, and to the extent permitted by law, the Guarantor also hereby waives and agrees not to assert or take advantage of (as a defense or otherwise): (i) Any right to require the Owner Trustee to proceed against FHMS or any other Person or to proceed against or exhaust any security held by the Owner Trustee at any time or to pursue any other remedy available to the Owner Trustee under any other agreement before proceeding against the Guarantor hereunder; (ii) The defense of the statute of limitations in any action hereunder; (iii) Any defense that may arise by reason of the incapacity, lack of authority, death or disability of any other Person or Persons or the failure of the Owner Trustee to file or enforce a claim against the estate (in administration, bankruptcy or any other proceeding) of any other Person or Persons; (iv) Any failure on the part of the Owner Trustee to ascertain the extent or nature of the collateral subject to any of the Security Documents or any insurance or other rights with respect thereto, or the liability of any party liable with respect to the FHMS Obligations; (v) Any defense based upon an election of remedies by the Owner Trustee; (vi) Any right or claim to cause a marshaling of the assets of the Guarantor; (vii) Any principle or provision of law, statutory or otherwise, which is or might be in conflict with the terms and provisions of this Guaranty Agreement; (viii) Any duty on the part of the Owner Trustee to disclose to the Guarantor any facts that the Owner Trustee may now or hereafter know about FHMS or the Properties, regardless of whether the Owner Trustee has reason to believe that any such facts materially increase the risk beyond that which the Guarantor intends to assume or has reason to believe that such facts are unknown to the Guarantor or has a reasonable opportunity to communicate such facts to the Guarantor, it being understood and agreed that the Guarantor is fully responsible for being and keeping informed of the financial condition of FHMS, of the condition of the Properties, and of any and all circumstances bearing on the risk that liability may be incurred by the Guarantor hereunder; (ix) Any lack of notice of disposition or of manner of disposition of any collateral subject to any of the Security Documents; (x) Failure to properly record any document or any other lack of due diligence by the Owner Trustee in creating or perfecting a security interest in or collection, protection or realization upon any Property or in obtaining reimbursement or performance from any Person or entity now or hereafter liable for the FHMS Obligations; (xi) The inaccuracy of any representation or other provision contained in any Operative Agreement (other than a representation by the Owner Trustee); (xii) Any sale or assignment of the FHMS Obligations or the Operative Agreements, in whole or in part; (xiii) Any sale or assignment by FHMS of any Property, or any portion thereof or interest therein, whether or not consented to by the Owner Trustee and any release by the Owner Trustee of any Property; (xiv) Any invalidity, irregularity or unenforceability, in whole or in part, of any one or more of the Operative Agreements; (xv) Any lack of commercial reasonableness in dealing with any Property; (xvi) Any deficiencies in any Property or any deficiency in the ability of the Owner Trustee to collect or to obtain performance from any Persons or entities now or hereafter liable for the payment and performance of any of the FHMS Obligations; (xvii) An assertion or claim that the automatic stay provided by 11 U.S.C. Section 362 (arising upon the voluntary or involuntary bankruptcy proceeding of FHMS) or any other stay provided under any other debtor relief law (whether statutory, common law, case law or otherwise) of any jurisdiction whatsoever, now or hereafter in effect, which may be or become applicable, shall operate or be interpreted to stay, interdict, condition, reduce or inhibit the ability of the Owner Trustee, to enforce any of its rights, whether now or hereafter acquired, which the Owner Trustee may have against the Guarantor or the Property; (xviii) Any modification of the Operative Agreements or any obligation of FHMS relating to the FHMS Obligations by operation of law or by action of any court, whether pursuant to the Bankruptcy Reform Act of 1978, as amended, or any other debtor relief law (whether statutory, common law, case law or otherwise) of any jurisdiction whatsoever, now or hereafter in effect, or otherwise; (xix) Any change in the composition of FHMS; (xx) The release of FHMS or of any other Person or entity from performance or observance of any of the agreements, covenants, terms or conditions contained in any agreements, documents or instruments; and (xxi) Without limiting the generality of the foregoing, any rights and benefits which might otherwise be available to any guarantor under California Civil Code Sections 2809, 2810, 2815, 2819, 2822, 2839, 2845 through 2847, 2848, 2849, 2850, 2899 and 3433, and California Code of Civil Procedure Sections 580a, 580b, 580d and 726, and any successor sections to such sections of the Civil Code and Code of Civil Procedures. The Guarantor expressly acknowledges and agrees to the foregoing waivers in subclause (xxi) and the Guarantor further understands (with respect to California law) that: (A) Section 580d of the California Code of Civil Procedure generally prohibits a deficiency judgment against a borrower after a non- judicial foreclosure; (B) Guarantor's subrogation rights may be destroyed by a non-judicial foreclosure under the Mortgage Instrument (because the Guarantor may not be able to pursue FHMS for a deficiency judgment by reason of the application of Section 580d of the California Code of Civil Procedure); (C) under UNION BANK V. GRADSKY, 265 Cal. App. 2nd 40 (1968), a lender may be estopped from pursuing a guarantor for a deficiency judgment after a non- judicial foreclosure (on the theory that a guarantor should be exonerated if a lender elects a remedy that eliminates the guarantor's subrogation rights) absent an explicit waiver, and (D) GRADSKY, SUPRA PROVIDES THAT THE GUARANTOR MAY WAIVE THAT DEFENSE, THUS ALLOWING A LENDER TO PURSUE THE GUARANTOR ON ITS GUARANTEE EVEN THOUGH THE GUARANTOR WILL NOT BE ABLE TO PURSUE FHMS BECAUSE THE GUARANTOR'S SUBROGATION RIGHTS WILL HAVE BEEN DESTROYED. Without limitation on the generality of the other waivers contained in this Guaranty Agreement, the Guarantor hereby waives all rights and defenses arising out of an election of remedies by the creditor, even though that election of remedies, such as a nonjudicial foreclosure with respect to security for a guaranteed obligation, has destroyed the Guarantor's rights of subrogation and reimbursement against the principal by the operation of Section 580d of the Code of Civil Procedure of California or otherwise. (b) Without limitation to the provisions of the preceding subparagraph (a) or any other term or provision of this Guaranty Agreement, the Guarantor specifically acknowledges and agrees and consents to (i) the conveyance by the Owner Trustee from time to time of all or any part of the Property, as determined by Owner Trustee in its sole discretion, without notice to or consent of the Guarantor, and (ii) the non-recourse provisions of Section 14.10 of the Participation Agreement. 2.05 EVENTS OF DEFAULT; REMEDIES. (a) EVENTS OF DEFAULT. If any of the following events (each an "Event of Default" and collectively "Events of Default") shall occur and be continuing: (i) The Guarantor shall (A) fail to perform or observe any term, covenant or agreement of any of the Incorporated Financial Covenants, or (B) fail to perform or observe any term, covenant or agreement referenced in Article IV (other than the Incorporated Financial Covenants referred to in subclause (A)) or the Guarantor shall fail to perform or observe any other term, covenant or agreement contained in this Guaranty Agreement or in any other Operative Agreement on its part to be performed or observed if such failure shall remain unremedied for 30 days after written notice thereof shall have been given to the Guarantor by the Agent, any Lender or any Holder; or (ii) The Guarantor or any of its Subsidiaries shall fail to pay any Debt in a principal payment amount (whether singly or in the aggregate) equal to or in excess of $10,000,000 (but excluding Debt outstanding under the Existing Credit Agreement or the promissory notes issued in connection with the Existing Credit Agreement) of the Guarantor or such Subsidiary, as the case may be, when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise (and inclusive of principal, interest, fees and penalties)), and such failure shall continue after the applicable grace period, if any, specified in the agreements or instruments relating to such Debt; or any other event shall occur or condition shall exist under any agreements or instruments relating to any such Debt and shall continue after the applicable grace period (which grace period, if shorter than 30 days, shall be deemed extended to 30 days for purposes of this subsection (ii) if (A) such Debt was assumed in connection with an Acquisition and is in aggregate principal amount of not in excess of $20,000,000, (B) not more than 90 days have elapsed since the consummation of such Acquisition and (C) the Guarantor shall have segregated cash in an amount sufficient to pay the principal amount of such Debt plus interest and premium, if any, then due thereon within such 30 day period), if any, specified in such agreements or instruments, if the effect of such event or condition is to accelerate, or to permit the acceleration of, the maturity of such Debt; or any such Debt shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), prior to the stated maturity thereof; or (iii) The Guarantor, any of its Material Subsidiaries or two or more of the Guarantor's Subsidiaries in any twelve-month period shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against the Guarantor or any of its Subsidiaries seeking to adjudicate the issue as to whether the entity is bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief of the appointment of a receiver, trustee, or other similar official for it or for any substantial part of its property, and, in the case of any such proceeding instituted against it (but not instituted by it), either such proceeding shall remain undismissed or unstayed for a period of 60 days, or any of the actions sought in such proceeding (including, without limitation, the entry of an order for relief against, or the appointment of a receiver, trustee, custodian or similar official for, the entity or for any substantial part of its property) shall occur; or the Guarantor or any of its Subsidiaries shall take any corporate action to authorize any of the actions set forth above in this subsection (iii); or (iv) Any judgment or order for the payment of money in an aggregate amount in excess of $10,000,000 (less any payments made in respect thereof) shall be rendered against the Guarantor or any of its Subsidiaries, and either (A) enforcement proceedings shall have been commenced by any creditor upon such judgment or order or (B) there shall be any period of 60 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal, statutory bond or otherwise, shall not be in effect; or (v) Any non-monetary judgment or order shall be rendered against the Guarantor or any of its Subsidiaries that has a Material Adverse Effect, and either (A) enforcement proceedings shall have been commenced by any Person upon such judgment or order or (B) there shall be any period of 60 consecutive days during which a stay of enforcement of such judgment or order by reason of a pending appeal or otherwise, shall not be in effect; or (vi) [Intentionally Omitted] (vii) Any ERISA Event with respect to a Plan shall have occurred and, 30 days after notice thereof shall have been given to the Guarantor by the Agent, (A) such ERISA Event shall still exist and (B) the sum (determined as of the date of occurrence of such ERISA Event) of the Insufficiency of such Plan and the Insufficiency of any and all other Plans with respect to which an ERISA Event shall have occurred and then exist (or in the case of a Plan with respect to which an ERISA Event described in clause (iii) through (vi) of the definition of ERISA Event shall have occurred and then exist, the liability related thereto) is equal to or greater than 5% of the Guarantor's Consolidated Net Worth; or (viii) The Guarantor or any ERISA Affiliate shall have been notified by the sponsor of a Multiemployer Plan that has incurred Withdrawal Liability to such Multiemployer Plan in an amount that, when aggregated with all other amounts required to be paid to Multiemployer Plans by the Guarantor and its ERISA Affiliates as Withdrawal Liability (determined as of the date of such notification), exceeds 5% of the Guarantor's Consolidated Net Worth; or (ix) The Guarantor or any ERISA Affiliate shall have been notified by the sponsor of a Multiemployer Plan that such Multiemployer Plan is in reorganization or is being terminated, within the meaning of Title IV of ERISA, if as a result of such reorganization or termination the aggregate annual contributions of the Guarantor and its ERISA Affiliates to all Multiemployer Plans that are then in reorganization or being terminated have been or will be increased over the amounts contributed to such Multiemployer Plans for the respective plan year of each such Multiemployer Plan immediately preceding the plan year in which the reorganization or termination occurs by an amount exceeding 5% of the Guarantor's Consolidated Net Worth; or (x) Any proceeding shall be instituted against the Guarantor or any of its Subsidiaries which is likely (taking into account the probability of an adverse determination and the exhaustion of all appeals) to have a Material Adverse Effect; or (xi) A Change of Control shall have occurred; or (xii) An HMO Event which, if unremedied, is reasonably likely to have a Material Adverse Effect shall have occurred and remain unremedied for thirty days after the occurrence thereof (or such lesser period of time, if any, as the HMO Regulator administering the HMO Regulations shall have imposed for the cure of such HMO Event; it being understood that if the Guarantor reaches a written agreement with such HMO Regulator during such thirty-day (or shorter) period which cures (or provides a means for the cure of) such HMO Event to such HMO Regulator's satisfaction, then no Event of Default shall exist under this subsection (xii)); or (xiii) Any Existing Credit Agreement Event of Default; or (xiv) Any Lease Event of Default. (b) REMEDIES. Upon the occurrence of an Event of Default, then, and in any such event, the Owner Trustee may by notice to the Guarantor declare its obligations under the Operative Agreements to be terminated, whereupon the same shall forthwith terminate, and the Owner Trustee shall have the right to exercise its remedies in accordance with Article XVII of the Lease and the Owner Trustee may, without the necessity of further action, call upon the Guarantor for prompt payment and/or performance. The Guarantor agrees that, as between the Guarantor, on the one hand, and the Owner Trustee, on the other hand, the FHMS Obligations may be declared to be forthwith due and payable as provided in the Lease (and shall be deemed to have become automatically due and payable in the circumstances provided in the Lease) for purposes of Section 2.01 hereof, notwithstanding any stay, injunction or other prohibition preventing such declaration (or such FHMS Obligations from becoming automatically due and payable) as against any other Person and that, in the event of such declaration (or such FHMS Obligations being deemed to have become automatically due and payable), such FHMS Obligations (whether or not due and payable by any other Person) shall forthwith become due and payable by the Guarantor for purposes of said Section 2.01. 2.06 NO SUBROGATION; NO RECOURSE AGAINST OWNER TRUSTEE. Notwithstanding the satisfaction by the Guarantor of any liability of the Guarantor hereunder, the Guarantor shall not have any right of subrogation, contribution, reimbursement or indemnity whatsoever or any right of recourse to or with respect to the assets or property of FHMS or to any Property. In connection with the foregoing, the Guarantor expressly waives any and all rights of subrogation to the Owner Trustee against FHMS, and the Guarantor hereby waives any rights to enforce any remedy which the Owner Trustee may have against FHMS and any right to participate in any Property. Further, the Guarantor shall have no right of recourse against the Owner Trustee by reason of any action that the Owner Trustee may take or omit to take under the provisions of this Guaranty Agreement or under the provisions of any of the Operative Agreements. 2.07 CONTINUING GUARANTEE. The guarantee in this Section 2 is a continuing guarantee, and shall apply to all FHMS Obligations whenever arising. ARTICLE III [INTENTIONALLY OMITTED] ARTICLE IV REPRESENTATIONS, WARRANTIES AND COVENANTS Reference is made to the representations and warranties contained in Article IV of the Existing Credit Agreement (hereinafter referred to as the "Incorporated Representations and Warranties") and the covenants contained in Article V of the Existing Credit Agreement (hereinafter referred to as the "Incorporated Covenants"). The Guarantor agrees with the Owner Trustee that the Incorporated Representations and Warranties and the Incorporated Covenants (and all other relevant provisions of the Existing Credit Agreement related thereto) are hereby incorporated by reference into this Guaranty Agreement to the same extent and with the same effect as if set forth fully herein, including without limitation any and all waivers, amendments, modifications or replacements of the Existing Credit Agreement or any term or provision of the Incorporated Representations and Warranties and the Incorporated Covenants occurring subsequent to the date of this Guaranty Agreement and the Guarantor further agrees that the Incorporated Representations and Warranties shall be deemed to be restated and made as of the date hereof and as of the date of each Requisition. In the event a waiver is granted under the Existing Credit Agreement or an amendment or modification is executed with respect to the Existing Credit Agreement, and such waiver, amendment and/or modification affects the Incorporated Representations and Warranties or the Incorporated Covenants, then such waiver, amendment or modification shall automatically be effective with respect to the Incorporated Representations and Warranties and the Incorporated Covenants as incorporated by reference into this Guaranty Agreement without further action. If any Lender is not a lender under the Existing Credit Agreement, Guarantor shall deliver to such Lender a copy of the waiver, amendment or modification affecting the Incorporated Representations or Warranties or the Incorporated Covenants. In the event of any replacement of the Existing Credit Agreement with a similar credit facility (the "New Facility") then, if each of the Lenders are lenders under the New Facility, the representations, warranties and covenants contained in the New Facility which correspond to the representations, warranties and covenants contained in Article IV and Article V of the Existing Credit Agreement shall automatically become Incorporated Representations and Warranties and the Incorporated Covenants hereunder without further action. If one or more of the Lenders is not a lender under the New Facility, (i) the Guarantor shall deliver, or cause to be delivered, a copy of the executed New Facility to each of the Lenders on or prior to the effective date thereof and the Majority Lenders shall elect whether (i) the representations, warranties and covenants contained in the New Facility which correspond to the representations, warranties and covenants contained in Article IV and Article V of the Existing Credit Agreement shall become the Incorporated Representations and Warranties and the Incorporated Covenants hereunder or (ii) the representations, warranties and covenants contained in Article IV and Article V of the Existing Credit Agreement immediately prior to such termination (as such may have been amended, modified, supplemented, restated and/or replaced from time to time prior to the termination of the Existing Credit Agreement) shall continue to be the Incorporated Representations and Warranties and the Incorporated Covenants hereunder. If the Existing Credit Agreement is terminated and not replaced, then the representations, warranties and covenants contained in Article IV and Article V of the Existing Credit Agreement immediately prior to such termination (as such may have been amended, modified, supplemented, restated and/or replaced from time to time prior to such termination) shall continue to be the Incorporated Representations and Warranties and the Incorporated Covenants hereunder. ARTICLE V MISCELLANEOUS 5.01 NOTICES. All notices, demands, requests, consents, approvals and other communications hereunder shall be in writing and delivered personally or by a nationally recognized overnight courier service or mailed (by ministered or certified mail, return receipt requested, postage prepaid), addressed to the respective parties, as follows: if to the Guarantor: Foundation Health Corporation 3400 Data Drive Rancho Cordova, California 95670 Attn: Chief Financial Officer Telephone: (916) 631-5000 Telecopy: (916) 631-5335 if to the Owner Trustee: First Security Bank of Utah, N.A. 79 South Main Street Salt Lake City, Utah 84111 Attn: Val T. Orton Telephone: (801) 246-5300 Telecopy: (801) 246-5053 or such additional parties and/or other address as such party may hereafter designate, and shall be effective upon receipt or refusal thereof. 5.02 BENEFIT OF AGREEMENT. This Guaranty Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective successors of the parties hereto and the assignees of the Owner Trustee (which assignees include the Agent and the Lenders pursuant to the terms of the Security Agreement). The Guarantor shall not assign and transfer any of its rights or obligations hereunder without the prior written consent of the Owner Trustee. 5.03 NO WAIVER; REMEDIES CUMULATIVE. No failure or delay on the part of the Owner Trustee in exercising any right, power or privilege hereunder or under any other Guarantor Document and no course of dealing between the Guarantor and the Owner Trustee shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or under any other Guarantor Document preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder or thereunder. The rights and remedies provided herein are cumulative and not exclusive of any rights or remedies which the Owner Trustee would otherwise have. No notice to or demand on the Guarantor in any case shall entitle the Guarantor to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of the Owner Trustee to any other or further action in any circumstances without notice or demand. 5.04 PAYMENT OF EXPENSES, ETC. The Guarantor agrees to: (a) pay all reasonable out-of-pocket costs and expenses of the Owner Trustee, the Agent, the Lenders and the Holders in connection with any amendment, waiver or consent relating to this Guaranty Agreement or any of the Guarantor Documents which was requested by either the Guarantor or the Lessee, and, in addition, pay all such costs and expenses related to any such amendments, waivers or consents resulting from or related to any work- out, renegotiation or restructure relating to the performance by the Guarantor under this Guaranty Agreement and all such costs and expenses of the Owner Trustee, the Agent, the Lenders and the Holders in connection with enforcement of the Guarantor Documents (including, without limitation, the reasonable fees and disbursements of counsel for the Owner Trustee, the Agent, the Lenders and the Holders); and (b) pay and hold harmless the Owner Trustee, the Agent, the Lenders and the Holders from and against any and all present and future stamp and other similar taxes with respect to the foregoing matters and hold harmless the Owner Trustee, the Agent, the Lenders and the Holders from and against any and all liabilities with respect to or resulting from any delay or omission to pay such taxes. 5.05 AMENDMENTS, WAIVERS AND CONSENTS. Neither Guarantor Document nor any of the terms thereof may be amended, changed, waived, discharged or terminated unless such amendment, change, waiver, discharge or termination is approved or consented to in writing by the Owner Trustee. Any such amendment, change, waiver, discharge or termination shall be effective only in the specific instance and for the specific purpose for which given. 5.06 COUNTERPARTS. This Guaranty Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be an original, but all of which shall constitute one and the same instrument. It shall not be necessary in making proof of this Guaranty Agreement to produce or account for more than one such counterpart. 5.07 HEADINGS. The headings of the sections and subsections hereof are provided for convenience only and shall not in any way affect the meaning or construction of any provision of this Guaranty Agreement. 5.08 GOVERNING LAW. THIS GUARANTY AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA. 5.09 SEVERABILITY. If any provision of any of the Guarantor Documents is determined to be illegal, invalid or unenforceable, such provision shall be fully severable and the remaining provisions shall remain in full force and effect and shall be construed without giving effect to the illegal, invalid or unenforceable provisions. 5.10 ENTIRETY. This Guaranty Agreement together with the other Guarantor Documents represent the entire agreement of the parties hereto and thereto, and supersedes all prior agreements and understandings, oral or written, if any, including any commitment letters or correspondence relating to the Guarantor Documents or the transactions contemplated herein and therein. IN WITNESS WHEREOF, the Guarantor has caused a counterpart of this Guaranty Agreement to be duly executed under seal and delivered as of the date first above written. FOUNDATION HEALTH CORPORATION By: ---------------------------------------------- Name: -------------------------------------------- Title: ------------------------------------------- Accepted: FIRST SECURITY BANK OF UTAH, N.A., not individually but solely as Owner Trustee under the FH Trust 1995-1 By: --------------------------- Name: ------------------------- Title: ------------------------ EX-10.99 4 EXHIBIT 10.99 AMENDED AND RESTATED DEFERRED-COMPENSATION PLAN OF FOUNDATION HEALTH CORPORATION SECTION 1. ESTABLISHMENT AND PURPOSE. The Plan was adopted by the Board on June 6, 1991 and was most recently amended and restated effective April 25, 1995. The Plan is intended to provide Eligible Participants with an opportunity to defer payment of a portion of their salaries, directors' fees and consulting fees and of any bonus awards they receive under the Company's bonus program. Deferred amounts will be credited with interest. In addition, the Plan provides for matching contributions by the Company for Designated Eligible Employees. SECTION 2. DEFINITIONS. (a) "ACCOUNT" means a bookkeeping account established pursuant to Section 6(a) for Compensation that is subject to an Eligible Participant's deferral election and for any matching contributions by the Company for Designated Eligible Employees. (b) "BASE SALARY" means the annual compensation, excluding bonuses, commissions, overtime, relocation expenses, automobile allowances, incentive payments, non-monetary awards, directors fees and other fees, paid to an Eligible Employee for employment services rendered to the Company or a subsidiary of the Company, before reduction for compensation deferred pursuant to all qualified, non-qualified and Code Section 125 plans of the Company. (c) "BENEFICIARY" means the person or persons designated by the Eligible Participant or by the Plan under Section 9(b) to receive payment of the Eligible Participant's Account in the event of his or her death. (d) "BOARD" means the Board of Directors of the Company, as constituted from time to time. (e) "CODE" means the Internal Revenue Code of 1986, as amended from time to time. (f) "COMMITTEE" means the Compensation and Organizational Committee of the Board, as constituted from time to time. (g) "COMPANY" means Foundation Health Corporation, a Delaware corporation. (h) "COMPENSATION" means the sum of (i) the amount paid by the Company or a subsidiary of the Company to an Eligible Employee as a bonus award under the Company's bonus program, (ii) the amount of the Eligible Employee's Base Salary and (iii) in the case of an Eligible Board Member, the amount of his or her director's fees and consulting fees from the Company (including, without limitation, annual retainers and meeting fees, but not including expense reimbursements). (i) "DESIGNATED ELIGIBLE EMPLOYEE" means an Eligible Employee who is entitled to a matching contribution from the Company. (j) "DEDUCTION LIMITATION" means the following described limitation on the annual benefit that may be distributed pursuant to the provisions of this Plan. Except as otherwise provided, this limitation shall be applied to all distributions under this Plan. If the Company determines in good faith prior to a Change of Control that there is a reasonable likelihood that any compensation paid to an Eligible Participant for a taxable year of the Company would not be deductible by the Company solely by reason of the limitation under Code Section 162(m), then to the extent deemed necessary by the Company to ensure that the entire amount of any distribution to the Eligible Participant pursuant to this Plan prior to the Change of Control is deductible, the Company may defer all or any portion of a distribution under this Plan. The amounts so deferred shall be distributed to the Eligible Participant or his or her Beneficiary (in the event of the Eligible Participant's death) at the earliest possible date, as determined by the company in good faith, on which the deductibility of compensation paid or payable to the Eligible Participant for the taxable year of the Company during which the distribution is made will not be limited by Section 162(m), or if earlier, the effective date of a Change of Control. (k) "ELECTION PERIOD" means (i) the month of December of each Year and (ii) in the case of a new or rehired Eligible Employee or a newly elected Eligible Board Member, the 30-day period commencing on the date when he or she becomes an Eligible Participant. (l) "ELIGIBLE BOARD MEMBER" means a member of the Board. (m) "ELIGIBLE EMPLOYEE" means an employee of the Company or a subsidiary of the Company who is eligible to participate in the Plan under Section 3. (n) "ELIGIBLE PARTICIPANT" means an Eligible Board Member or an Eligible Employee. (o) "401(K) PLAN" means the Foundation Health Corporation Profit Sharing and 401(k) Plan, as amended from time to time. (p) "PLAN" means this Amended and Restated Deferred-Compensation Plan of Foundation Health Corporation, as amended from time to time. (q) "TOTAL DISABILITY" means that the Eligible Participant is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted, or can be expected to last, for a continuous period of not less than six months. (r) "TRUST" means the trust established pursuant to that certain Trust Agreement, dated as of July 1, 1994, between the Company and the trustee named therein, as amended from time to time. (s) "UNFORESEEABLE FINANCIAL EMERGENCY" means an unanticipated emergency that is caused by an event beyond the control of an Eligible Participant that would result in severe financial hardship to the Eligible Participant resulting from (i) a sudden and unexpected illness or accident of the Eligible Participant or a dependent of the Eligible Participant, (ii) loss of the Eligible Participant's property due to casualty or (iii) such other extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Eligible Participant, all as determined in the sole discretion of the Committee. (t) "YEAR" means a calendar year. SECTION 3. ELIGIBILITY. Any member of the Board shall be eligible to participate in the Plan and shall be deemed to be an Eligible Board Member. A common-law employee of the Company, or of any of its direct or indirect subsidiaries, shall be eligible to participate in the Plan as an Eligible Employee if: (a) His or her total annualized Base Salary from the Company or a subsidiary for the calendar year in which the deferral election is made will not be less than $75,000 and, commencing with the 1996 calendar year, shall not be less than $120,000; or (b) He or she has expressly been designated as an Eligible Employee by the Committee. Furthermore, no individual shall participate if his or her participation would cause the Plan to fail to be a plan that is maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees, within the meaning of sections 201(2), 301(a)(3) and 401(1) of ERISA. SECTION 4. ELECTION TO PARTICIPATE IN PLAN. (a) An Eligible Participant may elect to participate in the Plan by filing a written election of deferral of Compensation with the Company during any Election Period. Such election shall apply to all Compensation to be paid in payroll periods commencing after the close of such Election Period. The election shall specify the percentage of the Eligible Participant's Compensation to which it applies, separately as respect to Base Salary and bonus, which may be any whole percentage between 1% and 90% of such Base Salary and bonus (so long as the amount of Base Salary and bonus not deferred is sufficient to fund the Eligible Participant's tax and employee benefit obligations). An Eligible Participant may change his or her deferral percentage (or reduce it to zero) by filing a new deferral election with the Company during any Election Period. The change shall be effective with respect to all Compensation to be paid in payroll periods commencing after the close of such Election Period. (b) All deferral elections under this Section 4 shall be made on the form(s) prescribed for this purpose by the Company. SECTION 5. MATCHING CONTRIBUTIONS. (a) The Company shall credit the Account of each participating Designated Eligible Employee with a matching contribution, as of the end of each calendar month to which an election to participate under Section 4(a) applies. A Designated Eligible Employee shall be an Eligible Employee whose Base Salary for the calendar year in which the deferral election is made will not be less than $100,000 and, commencing with the 1996 calendar year, shall not be less than $120,000. The amount of the matching contribution under this Plan shall be equal to the amount of Compensation deferred by the Designated Eligible Employee under Section 4 of this Plan for the calendar month, but only to the extent that such amount does not exceed 10% of the Designated Eligible Employee's Compensation for such month. Notwithstanding the preceding sentence, in no event will the aggregate matching contributions for the Year exceed 10% of the Designated Eligible Employee's Compensation for the Year. (b) Subsection (a) above notwithstanding, matching contributions credited under this Plan (and the interest credited thereon under Section 7(a)) shall be distributed to the Designated Eligible Employee under Section 8 only to the extent that such matching contributions (and interest) would be vested under the 401(k) Plan's vesting schedule. The balance, if any, of such matching contributions (and interest) shall be forfeited upon the termination of the Eligible Employee's employment. In the event that the Designated Eligible Employee is reemployed by the Company or one of its subsidiaries, the amount so forfeited shall be restored to his or her Account to the extent that such amount would be restored under the 401(k) Plan. SECTION 6. ESTABLISHMENT OF ACCOUNTS. (a) The Company shall establish an Account for each Eligible Participant who has duly filed a deferral election with respect to his or her Compensation. An Eligible Participant shall have only one Account. (b) An Eligible Participant's Account shall be credited with an amount equal to that percentage of each Compensation payment which would have been payable currently to the Eligible Participant but for the terms of the deferral election. Deferred Compensation shall be credited to the Eligible Participant's Account as soon as reasonably practicable after the applicable payment date. The Company's matching contributions under Section 5 to Designated Eligible Participants shall also be credited to the Accounts of the appropriate Designated Eligible Participants. SECTION 7. TREATMENT OF ACCOUNTS DURING DEFERRAL PERIOD. (a) Interest shall be credited on the ending balance in each Account as of the close of each calendar month. The interest shall become a part of the Account and shall be paid at the same time or times as the balance of the Account. The interest for each month during the deferral period shall be at a rate equal to (i) for the period prior to May 1, 1994, the weighted average of the reference rates announced from time to time during such month by Citibank N.A. plus 1/4 of 1% and (ii) for the period beginning July 1, 1994, 140% of Moody's Seasoned Corporate Bond Rate as of the last day of the month. The interest shall be compounded monthly. (b) As soon as reasonably practicable after the close of each calendar quarter (and after such other dates as the Committee may determine), the Company shall prepare and deliver to each Eligible Participant who has an Account a written statement showing the amount credited to such Account as of the applicable date. SECTION 8. FORM AND TIME OF PAYMENT OF ACCOUNTS. (a) Payment of an Account shall be made in such increments and commencing at such time as the Eligible Participant shall specify in writing on his or her deferral election form. The amount of any installment to be paid from an Account, unless otherwise permitted, shall be determined by dividing the balance remaining in such Account by the number of installments then remaining to be distributed from such Account. (b) Participants designated by the Chief Financial Officer of the Company from time to time shall have the ability to elect payment of an Account other than the standard payments (described in subsection (a) above), which permissible Account payments shall include payment in a lump sum or in monthly, quarterly or annual installments over such period of years (not exceeding 20 years) as specified in the election form. (c) Prior to the time of payment specified by the Eligible Participant on his or her deferral election form, the Eligible Participant may elect to change the terms of payment of his or her Account, provided that such change does not accelerate payments from such Account under any circumstances. Any such change shall be in writing and shall be effective upon receipt by the Company. (d) In the event of the Eligible Participant's Total Disability, the Committee may determine in its sole discretion that payment of the Eligible Participant's Account shall be made in a different form or at an earlier date than the time or times specified on his or her deferral election form. (e) In the event of an Eligible Participant's Unforeseeable Emergency, subject to the prior approval of the Committee, the Eligible Participant may elect to receive a distribution of the portion of his or her Account (up to 100%) that is necessary to meet the Eligible Participant's emergency need. (f) Subject to the prior approval of the Committee, an Eligible Participant may elect to receive a lump sum distribution from the Plan of 90% of his or her Account, at any time and for any reason; provided, however, that the remaining 10% of the Eligible Participant's Account shall be irrevocably forfeited. After making a withdrawal under this Section 8(f), the Eligible Participant shall cease participating, shall never be eligible to resume participation in the Plan and shall not be entitled to any further benefits under the Plan. SECTION 9. EFFECT OF DEATH OF PARTICIPANT. (a) Upon the death of an Eligible Participant, the amount (if any) remaining in his or her Account shall be distributed to his or her Beneficiary. The distribution(s) shall be made at the time when the distribution(s) to the Eligible Participant would have been made, unless the Committee determines in its sole discretion that payment(s) shall be made at an earlier date. (b) Upon commencement of participation, each Eligible Participant shall, by filing the prescribed form with the Company, name a person or persons as the Beneficiary who will receive any distribution payable under the Plan in the event of the Eligible Participant's death. If the Eligible Participant has not named a Beneficiary or if none of the named Beneficiaries is living when any payment is to be made, then (i) the spouse of the deceased Eligible Participant shall be the Beneficiary or (ii) if the Eligible Participant has no spouse living at the time of such payment, the then living children of the deceased Eligible Participant shall be the Beneficiaries in equal shares or (iii) if the Eligible Participant has neither spouse nor children living at the time of such payment, the estate of the Eligible Participant shall be the Beneficiary. The Eligible Participant may change the designation of a Beneficiary from time to time in accordance with procedures established by the Company. Any designation of a Beneficiary (or an amendment or revocation thereof) shall be effective only if it is made in writing on the prescribed form and is received by the Company prior to the Eligible Participant's death. SECTION 10. WITHHOLDING TAXES. All distributions under the Plan shall be subject to reduction to reflect any withholding tax obligations imposed by law. The Company shall withhold from the Eligible Participants Base Salary or bonus, as applicable, any FICA or other employment tax obligations as they become due. SECTION 11. PARTICIPANT'S RIGHTS UNSECURED. The interest under the Plan of any participating Eligible Participant, and such Eligible Participant's right to receive a distribution from his or her Account, shall be an unsecured claim against the general assets of the Company. The Accounts shall be unfunded bookkeeping entries only. No Eligible Participant shall have an interest in or claim against any specific asset of the Company pursuant to the Plan. SECTION 12. NONASSIGNABILITY OF INTERESTS. The interest and property rights of an Eligible Participant under the Plan shall not be subject to option nor be assignable either by voluntary or involuntary assignment or by operation of law, including (without limitation) bankruptcy, garnishment, attachment or other creditor's process, and any act in violation of this Section 12 shall be void. SECTION 13. LIMITATION OF RIGHTS. (a) Nothing in the Plan shall be construed to give any Eligible Employee any right to be granted a bonus award. (b) Neither the Plan nor the deferral of any Compensation, nor any other action taken pursuant to the Plan, shall constitute or be evidence of any agreement or understanding, express or implied, that the Company or any subsidiary of the Company will employ an Eligible Employee for any period of time, in any position or at any particular rate of compensation. The Company and its subsidiaries reserve the right to terminate an Eligible Employee's employment at any time and for any reason, with or without cause, except as otherwise expressly provided in a written employment agreement. SECTION 14. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the Committee. The Committee shall have full power, authority and discretion to administer and interpret the Plan, to establish procedures for administering the Plan, to prescribe forms and to take any and all necessary actions in connection with the Plan. The Committee's interpretation and construction of the Plan shall be conclusive and binding on all persons. For purposes of the Plan, "Change of Control" shall have the meaning set forth in the agreement governing the Trust. SECTION 15. AMENDMENT OR TERMINATION OF THE PLAN. The Committee may amend, suspend or terminate the Plan at any time, with the vote of 80% of the participants entitled to benefits hereunder, and expressly reserves the right to change the interest rate set forth in Section 7(a) on a prospective basis. In the event of a termination, the Accounts of Eligible Participants shall be paid at such time and in such form as shall be determined pursuant to Section 8, unless the Committee prescribes an earlier time or different form for the payment of such Accounts. SECTION 16. TRUST (a) The Company shall establish the Trust, and the Company shall transfer over to the Trust each year such assets as are necessary to provide for the Company's future liabilities created with respect to the Plan for such year, in accordance with the provisions of the Trust. (b) The provisions of the Plan shall govern the rights of a Eligible Participant to receive distributions pursuant to the Plan. The provisions of the Trust shall govern the rights of the Company, Eligible Participants and the creditors of the Company to the assets transferred to the Trust. The Company shall at all times remain liable to carry out its obligations under the Plan. The Company's obligations under the Plan may be satisfied with Trust assets distributed pursuant to the terms of the Trust, and any such distribution shall reduce the Company's obligations under this Plan. SECTION 17. LIMITATION ON PAYMENTS. (a) Any other provision of the Plan notwithstanding, the Company shall not be required to make any payment or transfer any property to, or for the benefit of, the Eligible Participants (under this Plan or otherwise) that would be nondeductible by the Company by reason of section 280G of the Code or that would subject the Eligible Participants to the excise tax described in section 4999 of the Code. All calculations required by this section shall be performed by the Company's independent auditors selected by the Board of Directors prior to a Change of Control ("Auditors"), based on information supplied by the Company and the Eligible Participants and shall be binding on the Company and the Eligible Participants. All fees and expenses of the Auditors to determine such amounts shall be paid by the Company. (b) If the amount of the aggregate payments or property transfers to an Eligible Participant must be reduced under this section, then such Eligible Participant 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 will not have been made by the Company that 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 Eligible Participants 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 Eligible Participant 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 Eligible Participant 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 Eligible Participant, together with interest at the applicable federal rate specified in section 7872(f)(2) of the Code. SECTION 18. CHOICE OF LAW AND CLAIMS PROCEDURE. (a) The validity, interpretation, construction and performance of the Plan shall be governed by the Employee Retirement Income Security Act of 1974 and, to the extent they are not preempted, by the laws of the State of California. (b) In accordance with the regulations of the U.S. Secretary of Labor, the Committee shall (i) provide adequate notice in writing to any Eligible 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 Eligible Participant or Beneficiary, and (ii) afford a reasonable opportunity to any Eligible Participant or Beneficiary whose claim for benefits has been denied for a full and fair review by the Board of the decision denying the claim. SECTION 19. MISCELLANEOUS (a) The interest in the benefits hereunder of a spouse of a Eligible Participant who has predeceased the Eligible Participant shall automatically pass to the Eligible Participant and shall not be transferable by such spouse in any manner, including but not limited to such spouse's will, nor shall such interest pass under the laws of intestate succession. (b) The Committee is authorized to make any payments directed by court order in any action in which the Plan or the Committee has been named as party. (c) The Company is aware that upon the occurrence of a Change of Control, the Board (which might then be composed of new members) or a stockholder of the Company, or of any successor corporation might then cause or attempt to cause the Company or such successor to refuse to comply with its obligations under the Plan and might cause or attempt to cause the Company to institute, or may institute, litigation seeking to deny Participants the benefits intended under the Plan. In these circumstances, the purpose of the Plan could be frustrated. Accordingly, if, following a Change of Control, it should appear to any Eligible Participant that the Company has failed to comply with any of its obligations under the Plan or any agreement thereunder 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, diminish or to recover from any Eligible Participant the benefits intended to be provided hereunder, then the Company irrevocably authorizes such Eligible Participant to retain counsel of his or her choice at the expense of the Company to represent such Eligible Participant in connection with the initiation or defense of any litigation or other legal action, whether by or against the Company or any director, officer, stockholder or other person affiliated with the Company or any successor thereto in any jurisdiction. SECTION 20. EXECUTION. To record the adoption of the amended and restated Plan by the Committee, effective April 25, 1995, the Company has caused its duly authorized officer to affix the corporate name hereto. FOUNDATION HEALTH CORPORATION By --------------------------------- Daniel D. Crowley, Chairman, President and Chief Executive Officer EX-10.100 5 EXHIBIT 10.100 FOUNDATION HEALTH CORPORATION SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (As Amended and Restated Effective April 25, 1995) SECTION 1. INTRODUCTION. The Foundation Health Corporation Supplemental Executive Retirement Plan was established effective July 1, 1994, and it was amended and restated effective April 25, 1995. The purpose of the Plan is to supplement retirement benefits provided to designated executives of the Company. The Plan is intended to be an unfunded plan maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees, as described in section 401(a)(1) of ERISA. SECTION 2. DEFINITIONS. (a) "BASE SALARY" shall mean the annual compensation, excluding bonuses, commissions, overtime, relocation expenses, automobile allowances, incentive payments, non-monetary awards, directors fees and other fees, paid to a Participant for employment services rendered to the Company or a subsidiary, before reduction for compensation deferred pursuant to all qualified, non- qualified and Code Section 125 plans of the Company. (b) "BENEFICIARY" shall mean the person or persons designated by a Participant to receive payment of benefits under the Plan in the event of his or her death. If more than one Beneficiary is named, the Participant may specify the sequence (i.e., primary or contingent) and/or proportion in which payments shall be made to each Beneficiary. If a Participant is married, he or she may not designate a primary Beneficiary other than his or her spouse without the written consent of his or her spouse witnessed by a notary. (c) "CODE" shall mean the Internal Revenue Code of 1986, as amended from time to time. (d) "COMMITTEE" shall mean the Compensation and Organizational Committee of the Board of Directors of the Company, as constituted from time to time. (e) "COMPANY" shall mean Foundation Health Corporation, a Delaware corporation. (f) "DEDUCTION LIMITATION" shall mean the following described limitation on the annual benefit that may be distributed pursuant to the provisions of this Plan. Except as otherwise provided, this limitation shall be applied to all distributions under this Plan. If the Company determines in good faith prior to a Change of Control that there is a reasonable likelihood that any compensation paid to a Participant for a taxable year of the Company would not be deductible by the Company solely by reason of the limitation under Code Section 162(m), then to the extent deemed necessary by the Company to ensure that the entire amount of any distribution to the Participant pursuant to this Plan prior to the Change of Control is deductible, the Company may defer all or any portion of a distribution under this Plan. The amounts so deferred shall be distributed to the Participant or his or her Beneficiary (in the event of the Participant's death) at the earliest possible date, as determined by the Company in good faith, on which the deductibility of compensation paid or payable to the Participant for the taxable year of the Company during which the distribution is made will not be limited by Section 162(m), or if earlier, the effective date of a Change of Control. (g) "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time. (h) "FINAL BASE SALARY" shall mean the Participant's highest Base Salary in effect during the five calendar years prior to termination of employment with the Company. If the Participant has less than five complete calendar year(s) of employment with the Company, then the Participant's Final Base Salary shall be the highest of his or her Base Salary in his or her complete calendar year(s) of employment. (i) "HOUR OF SERVICE" means each hour for which an individual is directly or indirectly paid or entitled to payment for the performance of duties for the Company or a subsidiary of the Company; provided, however, that service with a subsidiary that was acquired by the Company shall be disregarded to the extent such service was performed prior to the date of such acquisition. For purposes of determining a Participant's vested percentage under Section 4, a Participant shall be credited with 190 Hours of Service for each month in which a Participant is totally and permanently disabled and not engaged in any employment. (j) "PARTICIPANT" means an executive of the Company listed in Appendix A, as amended from time to time. (k) "PLAN" means this Foundation Health Corporation Supplemental Executive Retirement Plan, as amended from time to time. (l) "PLAN BENEFIT" means the annual Plan Benefit specified in Section 5. (m) "RETIREMENT BENEFIT" means a Normal Retirement Benefit under Section 7(a) or an Early Retirement Benefit under Section 7(b). (n) "TRUST" shall mean the trust established pursuant to that certain Trust Agreement, dated as of July 1, 1994, between the Company and the trustee named therein, as amended from time to time. (o) "YEAR OF SERVICE" means a calendar year after 1988 in which an individual completes 1,000 Hours of Service. SECTION 3. PARTICIPATION. All executives of the Company designated in Appendix A shall participate in the Plan; provided, however, that no executive shall participate until he or she elects to receive his or her Retirement Benefit in the form of either (i) annuity payments under either Subsection 7(c)(i) or 7(c)(ii), as applicable or (ii) a lump sum distribution under Subsection 7(c)(iii). Furthermore, no executive shall participate if his or her participation would cause the Plan to fail to be a plan that is maintained primarily for the purpose of providing deferred compensation for 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. SECTION 4. VESTING. A Participant's vested percentage shall be determined in accordance with the following schedule:
YEARS OF SERVICE VESTED PERCENTAGE ---------------- ----------------- less than 5 0% 5 50% 6 60% 7 70% 8 80% 9 90% 10 or more 100%
SECTION 5. AMOUNT OF PLAN BENEFITS. A Participant's annual Plan Benefit shall be equal to the Participant's Final Base Salary multiplied by (i) the Participant's vested percentage and (ii) 70% (as adjusted for distributions prior to age 60 in accordance with Section 7(b)). SECTION 6. PRE-RETIREMENT SURVIVOR BENEFITS. If a married Participant dies prior to the termination of his or her employment with the Company and its subsidiaries, the Participant's surviving spouse shall receive monthly payments from the Company for life, commencing on the date of the Participant's death, equal to 66-2/3 of the monthly Retirement Benefit that the Participant would have received had the Participant terminated employment on the date of his or her death and commenced a Retirement Benefit on the later of (i) the date of the Participant's death and (ii) the date the Participant would have attained age 55. In addition, if the surviving spouse dies before 180 of such monthly payments have been made, the Participant's contingent Beneficiary shall receive the balance of the 180 payments. If an unmarried Participant dies prior to the termination of his or her employment with the Company and its subsidiaries, his or her Beneficiary shall receive 180 monthly payments from the Company, commencing on the date of the Participant's death, equal to 66-2/3 of the monthly Retirement Benefit that the Participant would have received had the Participant terminated employment on the date of his or her death and commenced a Retirement Benefit on the later of (i) the date of the Participant's death and (ii) the date the Participant would have attained age 55. SECTION 7. DISTRIBUTIONS OF PLAN BENEFITS FOLLOWING TERMINATION OF EMPLOYMENT. (a) NORMAL RETIREMENT. A Participant's monthly "Normal Retirement Benefit" is equal to his or her Plan Benefit divided by 12. A Participant who terminates employment with the Company and its subsidiaries on or after attaining age 60 and completing at least 5 Years of Service shall receive a Normal Retirement Benefit commencing as soon as practicable following termination of employment, in the form specified under Paragraph (c) below. (b) EARLY RETIREMENT. A Participant's monthly "Early Retirement Benefit" is equal to his or her Plan Benefit, calculated by reducing the 70% factor set forth in Section 5 by two percentage points for each year that distribution commences before the Participant has attained age 60, divided by 12. A Participant who terminates employment with the Company and its subsidiaries prior to attaining age 60 and after completing at least 5 Years of Service shall receive an Early Retirement Benefit commencing as soon as practicable following the later of the date the Participant attains age 55 or the date of the Participant's termination of employment, in the form specified under Paragraph (c) below. (c) FORMS OF DISTRIBUTION. 1. ANNUITY PAYMENTS TO UNMARRIED PARTICIPANTS. A Participant who is unmarried on the date as of which payment of his or her Retirement Benefit is to commence and who has elected annuity payments pursuant to Section 3 shall receive his or her Retirement Benefit in the form of a 15 year certain and life annuity under which the Participant shall receive monthly pay- ments from the Company equal to the Participant's Retirement Benefit for his or her life and, if the Participant dies before receiving 180 payments, the Participant's Beneficiary shall receive the balance of the 180 payments. 2. ANNUITY PAYMENTS TO MARRIED PARTICIPANTS. A Participant who is married on the date as of which payment of his or her Retirement Benefit is to commence and who has elected annuity payments pursuant to Section 3 shall receive his or her Retirement Benefit in the form of a 15 year certain joint and survivor annuity under which (A) the Participant shall receive monthly payments from the Company equal to the Participant's Retirement Benefit for his or her life, (B) if the Participant dies before receiving 180 payments and is not survived by his or her spouse, the Participant's Beneficiary shall receive monthly payments from the Company equal to 66-2/3 of the Participant's Retirement Benefit for the balance of the 180 payments, (C) if the Participant dies and is survived by his or her spouse, the Participant's surviving spouse shall receive monthly payments from the Company equal to 66-2/3 of the Participant's Retirement Benefit for his or her life and (D) if the Participant dies and is survived by his or her spouse, and if the surviving spouse dies before 180 payments have been made to the Participant and/or to the surviving spouse, the Participant's contingent Beneficiary shall receive monthly payments from the Company equal to 66-2/3 of the Participant's Retirement Benefit for the balance of the 180 payments. 3. LUMP SUM DISTRIBUTION. A Participant who has elected a lump sum distribution pursuant to Section 3 shall receive a single lump sum payment in cash equal to the actuarial equivalent of his or her Retirement Benefit (calculated as if such Participant were unmarried). If a lump sum distribution is elected, no benefits shall be payable from the Plan upon the Participant's death (other than a payment of the lump sum distribution to the Benefi- ciary of the Participant in the event that the Participant dies after electing a lump sum and before receiving payment). 4. CHANGE OF DISTRIBUTION OPTION. Subject to the prior approval of the Committee, a Participant may change the election of the form of distribution made pursuant to Section 3 at any time prior to the commencement of his or her Retirement Benefit under the Plan; however, in no event may such change of election be made less than one-year prior to commencement of benefits. SECTION 8. LUMP SUM WITHDRAWALS. A Participant (who has completed at least 5 Years of Service) who has not yet terminated employment with the Company and its subsidiaries, or a Participant who has terminated employment with the Company and its subsidiaries and elected to receive annuity payments pursuant to Section 3, may elect to receive a lump sum distribution from the Plan at any time and for any reason. The amount of the Participant's lump sum distribution shall be equal to 90% of the actuarial equivalent of his or her Retirement Benefit (determined as if the Participant were unmarried, and actuarially reduced to take into account any prior distributions of the Participant's Retirement Benefit under the Plan); provided, however, that the remaining 10% of the Participant's Retirement Benefit shall be irrevocably forfeited. After making a withdrawal under this Section 8, the Participant shall cease participating, shall never be eligible to resume participation in the Plan and shall receive no further benefits under the Plan. SECTION 9. WITHHOLDING TAXES. All distributions under the Plan shall be subject to reduction to reflect any withholding tax obligations imposed by law. As the Participant becomes vested in his Retirement Benefits, the Company shall pay on his behalf any FICA or other employment tax obligations then becoming due; provided, further the Company shall pay to the Participant additional compensation in the year in which such payments are made to equal the Participant's federal, state and local tax liability, if any, as a result of the payment of such FICA or other tax obligations at the highest marginal federal and state tax rate. SECTION 10. PARTICIPANT'S RIGHTS UNSECURED. The interest under the Plan of any Participant, surviving spouse or Beneficiary shall be an unsecured claim against the general assets of the Company. No Participant, surviving spouse or Beneficiary shall have an interest in or claim against any specific asset of the Company pursuant to the Plan. SECTION 11. NONASSIGNABILITY OF INTERESTS. The interest and property rights of a Participant, surviving spouse or Beneficiary under the Plan shall not be subject to option nor be assignable either by voluntary or involuntary assignment or by operation of law, including (without limitation) bankruptcy, garnishment, attachment or other creditor's process, and any act in violation of this Section 11 shall be void. SECTION 12. LIMITATION OF RIGHTS. Neither the Plan nor any other action taken pursuant to the Plan shall constitute or be evidence of any agreement or understanding, express or implied, that the Company or any subsidiary of the Company will employ a Participant for any period of time, in any position or at any particular rate of compensation. The Company and its subsidiaries reserve the right to terminate a Participant's employment at any time and for any reason, except as otherwise expressly provided in a written employment agreement. SECTION 13. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the Committee. The Committee shall have full power, authority and discretion to administer and interpret the Plan, to establish procedures for administering the Plan, to prescribe forms and to take any and all necessary actions in connection with the Plan. The Committee's interpretation and construction of the Plan shall be conclusive and binding on all persons. Determinations of actuarial equivalence shall be made by an actuary employed by a nationally recognized actuarial firm selected either (i) prior to a Change of Control by the Company or (ii) after a Change of Control by the Board of Directors of the Company as constituted immediately prior to the Change of Control. For purposes of the Plan, "Change of Control" shall have the meaning set forth in the agreement governing the Trust. Determinations of actuarial equivalence shall be made using an interest rate no greater than the Moody's AAA Bond Rate and using a mortality table no less favorable than the UP-1984 mortality table. SECTION 14. AMENDMENT OR TERMINATION OF THE PLAN. The Committee may amend, suspend or terminate the Plan at any time, but only with the vote of 80% of the Participants entitled to benefits hereunder; provided that no amendment, suspension or termination shall reduce an individual's benefits under the Plan that were earned as of the date immediately prior to such amendment, suspension or termination. SECTION 15. TRUST. (a) ESTABLISHMENT OF THE TRUST. The Company shall establish the Trust, and the Company shall transfer over to the Trust each year such assets as are necessary to provide for the Company's future liabilities created with respect to the Plan for such year, in accordance with the provisions of the Trust. (b) INTERRELATIONSHIP OF THE PLAN AND THE TRUST. The provisions of the Plan shall govern the rights of a Participant or Beneficiary to receive distributions pursuant to the Plan. The provisions of the Trust shall govern the rights of the Company, Participants, Beneficiaries and the creditors of the Company to the assets in the Trust. The Company shall at all times remain liable to carry out its obligations under the Plan. The Company's obligations under the Plan may be satisfied with Trust assets distributed pursuant to the terms of the Trust, and any such distribution shall reduce the Company's obligations under this Plan. SECTION 16. CHANGE OF CONTROL. If during the term of this Agreement, a Change of Control occurs with respect to the Company, the vested percentage determined under Section 4 shall be 100% for all Participants who have completed the minimum vesting requirement of at least 5 Years of Service as of the date of the Change of Control. SECTION 17. LIMITATION ON PAYMENTS. (a) BASIC RULE. Any other provision of the Plan notwithstanding, the Company shall not be required to make any payment or transfer any property to, or for the benefit of, the Participants (under this Plan or otherwise) that would be nondeductible by the Company by reason of section 280G of the Code or that would subject the Participants to the excise tax described in section 4999 of the Code. All calculations required by this section shall be performed by the Company's independent auditors selected by the Board of Directors prior to a Change of Control ("Auditors"), based on information supplied by the Company and the Participants and shall be binding on the Company and the Participants. All fees and expenses of the Auditors to determine such amounts shall be paid by the Company. (b) REDUCTIONS. If the amount of the aggregate payments or property transfers to the Participant must be reduced under this section, then the Participant 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 will not have been made by the Company that 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 Participants 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 Participant 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 Participant 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 Participant, together with interest at the applicable federal rate specified in section 7872(f)(2) of the Code. SECTION 18. CHOICE OF LAW AND CLAIMS PROCEDURE; MISCELLANEOUS. (a) The validity, interpretation, construction and performance of the Plan shall be governed by ERISA and, to the extent they are not preempted, by the laws of the State of California (without regard to their choice-of-law provision). (b) In accordance with the regulations of the U.S. Secretary of Labor, the Committee shall 1. provide adequate notice in writing to any Participant, surviving spouse 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, surviving spouse or Beneficiary, and 2. afford a reasonable opportunity to any Participant, surviving spouse or Beneficiary whose claim for benefits has been denied for a full and fair review by the Committee of the decision denying the claim. SECTION 19. MISCELLANEOUS (a) The interest in the benefits hereunder of a spouse of a Participant who has predeceased the Participant shall automatically pass to the Participant and shall not be transferable by such spouse in any manner, including but not limited to such spouse's will, nor shall such interest pass under the laws of intestate succession. (b) The Committee is authorized to make any payments directed by court order in any action in which the Plan or the Committee has been named as party. (c) The Company is aware that upon the occurrence of a Change of Control, the Board (which might then be composed of new members) or a stockholder of the Company, or of any successor corporation might then cause or attempt to cause the Company or such successor to refuse to comply with its obligations under the Plan and might cause or attempt to cause the Company to institute, or may institute, litigation seeking to deny Participants the benefits intended under the Plan. In these circumstances, the purpose of the Plan could be frustrated. Accordingly, if, following a Change of Control, it should appear to any Participant that the Company has failed to comply with any of its obligations under the Plan or any agreement thereunder 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, 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 any director, officer, stockholder or other person affiliated with the Company or any successor thereto in any jurisdiction. SECTION 20. EXECUTION. To record the adoption of the Amended and Restated Plan by the Committee, effective as of the date set forth above, the Company has caused its duly authorized officer to affix the corporate name hereto. FOUNDATION HEALTH CORPORATION By : ----------------------------------------------- Daniel D. Crowley Chairman, President and Chief Executive Officer APPENDIX A PLAN PARTICIPANTS Kirk A. Benson - July 1, 1994 Daniel D. Crowley - July 1, 1994 Jeffrey L. Elder - July 1, 1994 Allen J. Marabito - July 1, 1994 Danny O. Smithson - July 1, 1994 Cynthia Suzuki - July 1, 1994 Steven D. Tough - July 1, 1994 Edward J. Munno - November 1, 1994 Henry R. Loubet - January 9, 1995 EX-10.101 6 EXHIBIT 10.101 FOUNDATION HEALTH CORPORATION EXECUTIVE RETIREE MEDICAL PLAN (As amended and restated effective April 25, 1995) SECTION 1. INTRODUCTION. Foundation Health Corporation (the "Company") established the Foundation Health Corporation Executive Retiree Medical Plan (the "Plan") for the purpose of providing certain individuals with medical benefit coverage following termination of their employment with the Company effective July 1, 1994. The Plan was amended and restated effective April 25, 1995. The Plan is intended to be an unfunded or insured plan maintained primarily for the purpose of providing welfare benefits for a select group of management or highly compensated employees, as described in Department of Labor regulations section 2520.104-24. SECTION 2. DEFINITIONS. 2.1. "COMMITTEE" means the Compensation and Organizational Committee of the Board of Directors of the Company, as constituted from time to time. 2.2. "COMPANY" means Foundation Health Corporation, a Delaware corporation. 2.3 "DEPENDENT" means for a participant: (i) his or her legal spouse; (ii) any unmarried child under the age of 19 years (or unmarried child under the age of 24 years if full-time student) and any other unmarried child a participant claims as a dependent for Internal Revenue Service purposes; or (iii) any child who is incapable of self-support because of mental or physical disability. 2.4. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. 2.5. "PLAN" means this Foundation Health Corporation Executive Retiree Medical Plan, as amended from time. SECTION 3. ELIGIBILITY AND PARTICIPATION. Each person listed in Appendix A shall become a participant in this Plan on the date his or her Retirement Benefit commences under the Foundation Health Corporation Supplemental Executive Retirement Plan provided the participant has attained the age of 55. An individual who becomes a participant in the Plan shall remain a participant until his or her death or voluntary election not to participate. SECTION 4. PLAN BENEFITS. A participant and his or her Dependents shall be entitled to coverage under the group medical plan available to the Company's active executives on the same terms and conditions as such coverage is available to active executives and their Dependents. If a participant resides outside the service area of the Company's group medical plan, the participant and his or her Dependents shall receive medical benefit coverage under a medical plan or health insurance policy that provides benefits that are reasonably comparable to the benefits under the Company's group medical plan; provided that if no such coverage is reasonably available (whether due to geography or the physical condition of the participant or his or her Dependents), then the Company shall reimburse the participant for any expenses that would have been covered under the Company's group medical plan. SECTION 5. AMENDMENT AND TERMINATION. The Plan may be amended or terminated by the Company, but only with the vote of 80% of all participants entitled to benefits hereunder; provided that no amendment, suspension or termination shall reduce a participant's benefits under the Plan that were earned as of the date immediately prior to such amendment, suspension or termination. SECTION 6. MISCELLANEOUS PROVISIONS. 6.1. PLAN ADMINISTRATION. The Plan shall be administered by the Committee. The Committee shall have full power, authority and discretion to administer and interpret the Plan, to establish procedures for administering the Plan, to prescribe forms and to take any and all necessary actions in connection with the Plan. The Committee's interpretation and construction of the Plan shall be conclusive and binding on all persons. 6.2. NO EMPLOYMENT CONTRACT. Nothing in this Plan shall be construed to limit in any way the right of the Company or its subsidiaries to terminate an employee's employment at any time for any reason whatsoever. 6.3. NON-ALIENATION OF BENEFITS. No benefit payable under this Plan may be assigned, pledged, mortgaged, or hypothecated, or shall be subject to legal process or attachment for the payment of claims of any creditor of a Participant or his or her Dependents. 6.4. PARTICIPANT'S RIGHTS UNSECURED. The interest under the Plan of any participant or Dependent shall be an unsecured claim against the general assets of the Company. No Participant or Dependent shall have an interest in or claim against any specific asset of the Company pursuant to the Plan. 6.5. CHOICE OF LAW. The validity, interpretation, construction and performance of the Plan shall be governed by ERISA and, to the extent they are not preempted, by the laws of the State of California (without regard to their choice-of-law provisions). 6.6. CLAIMS PROCEDURE. In accordance with the regulations of the U.S. Secretary of Labor, the Committee shall (1) provide adequate notice in writing to any participant or Dependent 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 Dependent, and (2) afford a reasonable opportunity to any participant or Dependent whose claim for benefits has been denied for a full and fair review by the Committee of the decision denying the claim. SECTION 7. EXECUTION. To record the adoption of the amended and restated Plan by the Committee, effective as of the date set forth above, the Company has caused its duly authorized officer to affix the corporate name hereto. FOUNDATION HEALTH CORPORATION By _____________________________ Daniel D. Crowley Chairman, CEO and President APPENDIX A PLAN PARTICIPANTS Kirk A. Benson Daniel D. Crowley Jeffrey L. Elder Henry R. Loubet Allen J. Marabito Edward J. Munno Danny O. Smithson Cynthia Suzuki Steven D. Tough EX-10.102 7 EXHIBIT 10.102 1990 STOCK OPTION PLAN OF FOUNDATION HEALTH CORPORATION (AS AMENDED AND RESTATED EFFECTIVE APRIL 20, 1994) SECTION I. ESTABLISHMENT AND PURPOSE. The Plan was established in 1990, and it was most recently amended and restated effective April 20, 1994. The Plan offers selected employees, consultants and advisors and the non-employee directors of the Company an opportunity to acquire a proprietary interest in the success of the Company, or to increase such interest, by exercising Options to purchase Shares of the Company's Common Stock. Options granted under the Plan may include Nonstatutory Options as well as ISOs intended to qualify under section 422 of the Code. The Plan also offers the non-employee directors of the Company an opportunity to receive their directors' fees in the form of Shares of the Company's Common Stock. SECTION II. DEFINITIONS A. "BOARD OF DIRECTORS" shall mean the Board of Directors of the Company, as constituted from time to time. A. "CHANGE IN CONTROL" means the occurrence of either of the following events: 1. A change in the composition of the Board of Directors, as a result of which fewer than one half of the incumbent directors are directors who either: a. Had been directors of the Company 24 months prior to such change; or a. Were elected, or nominated for election, to the Board of Directors 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 1. Any "person" (as such term is used in sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) by the acquisition or aggregation of securities is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing 20% 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 - 1 - any securities of the Company. For purposes of this Subsection (B)(2), the term "person" shall not include an employee benefit plan maintained by the Company. A. "CODE" shall mean the Internal Revenue Code of 1986, as amended. A. "COMMITTEE" shall be the Compensation and Organization Committee of the Board of Directors of the Company, as described in Section III(A). A. "COMPANY" shall mean Foundation Health Corporation, a Delaware corporation. A. "DIRECTOR" shall mean any individual who is not a common-law employee of the Company or of a Subsidiary and who is duly elected and serving the Company as a member of the Board of Directors. A. "EMPLOYEE" shall mean 1. An individual who is a common-law employee of the Company or of a Subsidiary; and 1. An independent contractor who performs services for the Company or a Subsidiary as an advisor or consultant and who is not a Director. Service as an independent contractor shall be considered employment for all purposes of the Plan, except as provided in Section IV(A). A. "EXERCISE PRICE" shall mean the amount for which one Share may be purchased upon exercise of an Option, as specified in the applicable Stock Option Agreement. A. "FAIR MARKET VALUE" shall mean the market price of Stock, determined by the Committee as follows: 1. If the Stock was traded over-the-counter on the date in question but was not classified as a national market issue, then the Fair Market Value shall be equal to the mean between the last reported representative bid and asked prices quoted by the NASDAQ system for such date; 1. If the Stock was traded over-the-counter on the date in question and was classified as a national market issue, then the Fair Market Value shall be equal to the last transaction price quoted by the NASDAQ system for such date; 1. If the Stock was traded on a stock exchange on the date in question, then the Fair Market Value shall be equal to the closing price reported by the applicable composite-transactions report for such date; and 1. If none of the foregoing provisions is applicable, then the Fair Market - 2 - Value shall be determined by the Committee in good faith on such basis as it deems appropriate. In all cases, the determination of Fair Market Value by the Committee shall be conclusive and binding on all persons. A. "ISO" shall mean an employee incentive stock option described in section 422 of the Code. A. "NONSTATUTORY OPTION" shall mean a stock option not described in section 422 or 423(b) of the Code. A. "OPTION" shall mean an ISO or Nonstatutory Option granted under the Plan and entitling the holder to purchase Shares. A. "OPTIONEE" shall mean an individual who holds an Option. A. "PLAN" shall mean this 1990 Stock Option Plan of Foundation Health Corporation, as amended from time to time. A. "SERVICE" shall mean service as an Employee or Director including a Director of any Subsidiary of the Company. A. "SHARE" shall mean one share of Stock, as adjusted in accordance with Section IX (if applicable). A. "STOCK" shall mean the Common Stock of the Company. A. "STOCK OPTION AGREEMENT" shall mean the agreement between the Company and an Optionee which contains the terms, conditions and restrictions pertaining to his or her Option. A. "SUBSIDIARY" shall mean any corporation, if the Company and/or one or more other Subsidiaries own not less than 50 percent of the total combined voting power of all classes of outstanding stock of such corporation. A corporation that attains the status of a Subsidiary on a date after the adoption of the Plan shall be considered a Subsidiary commencing as of such date. A. "TOTAL AND PERMANENT DISABILITY" shall mean that the Optionee is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted, or can be expected to last, for a continuous period of not less than 12 months. - 3 - SECTION III. ADMINISTRATION. A. COMMITTEE MEMBERSHIP. The Plan shall be administered by the Committee, which shall consist of three or more members of the Board of Directors. The members of the Committee shall be appointed by the Board of Directors. If no Committee has been appointed, the entire Board of Directors shall constitute the Committee. A. DISINTERESTED DIRECTORS. Subsection (A) above notwithstanding, if the Company is subject to section 16 of the Securities Exchange Act of 1934, as amended, the Committee shall consist only of disinterested directors. A member of the Board of Directors shall be deemed to be "disinterested" only if he or she satisfies such requirements as the Securities and Exchange Commission may establish for disinterested administrators acting under plans intended to qualify for exemption under Rule 16b-3 (or its successor) under such Act. A. COMMITTEE PROCEDURES. The Board of Directors shall designate one of the members of the Committee as chairperson. The Committee may hold meetings at such times and places as it shall determine. The acts of a majority of the Committee members present at meetings at which a quorum exists, or acts reduced to or approved in writing by all Committee members, shall be valid acts of the Committee. A. COMMITTEE RESPONSIBILITIES. Subject to the provisions of the Plan, the Committee shall have full authority and discretion to take the following actions: 1. To interpret the Plan and to apply its provisions; 1. To adopt, amend or rescind rules, procedures and forms relating to the Plan; 1. To authorize any person to execute, on behalf of the Company, any instrument required to carry out the purposes of the Plan; 1. Except with respect to Optionees who are Directors, to determine when Options are to be granted under the Plan; 1. Except with respect to Optionees who are Directors, to select the Optionees; 1. Except with respect to Optionees who are Directors, to determine the number of Shares to be made subject to each Option; 1. Except with respect to Optionees who are Directors, to prescribe the terms and conditions of each Option, to determine whether such Option is to be classified as an ISO or as a Nonstatutory Option, and to specify the provisions of the Stock Option Agreement relating to such Option; - 4 - 1. To amend any outstanding Stock Option Agreement, subject to applicable legal restrictions and to the consent of the Optionee who entered into such agreement; 1. To prescribe the consideration for the grant of each Option under the Plan and to determine the sufficiency of such consideration; and 1. To take any other actions deemed necessary or advisable for the administration of the Plan. All decisions, interpretations and other actions of the Committee shall be final and binding on all Optionees and all persons deriving their rights from an Optionee. No member of the Committee shall be liable for any action that he or she has taken or has failed to take in good faith with respect to the Plan or any Option. SECTION IV. ELIGIBILITY. A. EMPLOYEES. Only Employees (including, without limitation, independent contractors who are not Directors) shall be eligible for designation as Optionees by the Committee. In addition, only Employees who are common-law employees of the Company or of a Subsidiary shall be eligible for the grant of ISOs. 1. TEN-PERCENT STOCKHOLDERS. An Employee who owns more than 10 percent of the total combined voting power of all classes of outstanding stock of the Company or any of its Subsidiaries shall not be eligible for designation as an Optionee for an ISO unless (i) the Exercise Price is at least 110 percent of the Fair Market Value of a Share on the date of grant and (ii) the ISO by its terms is not exercisable after the expiration of five years from the date of grant. 1. ATTRIBUTION RULES. For purposes of Subsection (A)(1) above, in determining stock ownership, an Employee shall be deemed to own the stock owned, directly or indirectly, by or for his or her brothers, sisters, spouse, ancestors and lineal descendants. Stock owned, directly or indirectly, by or for a corporation, partnership, estate or trust shall be deemed to be owned proportionately by or for its stockholders, partners or beneficiaries. Stock with respect to which such Employee holds an option shall not be counted. 1. OUTSTANDING STOCK. For purposes of Subsection (A)(1) above, "outstanding stock" shall include all stock actually issued and outstanding immediately after the grant. "Outstanding stock" shall not include treasury shares or shares authorized for issuance under outstanding options held by the Employee or by any other person. A. DIRECTORS. Directors of the Company shall be eligible for participation in the Plan as set forth in Sections VI(B) and VIII. - 5 - SECTION V. STOCK SUBJECT TO PLAN. A. BASIC LIMITATION. Shares offered under the Plan shall be authorized but unissued Shares or treasury Shares. The aggregate number of Shares which may be issued under the Plan upon exercise of Options shall not exceed 5,525,000 Shares, subject to adjustment pursuant to Section IX. Commencing with July 1, 1994, the Committee shall not grant options to any one individual covering a number of shares in excess of 1,000,000 (the "Allocation limit"), subject to adjustment pursuant to Section IX. The number of Shares which are subject to Options outstanding at any time under the Plan shall not exceed the number of Shares which then remain available for issuance under the Plan. The Company, during the term of the Plan, shall at all times reserve and keep available sufficient Shares to satisfy the requirements of the Plan. A. ADDITIONAL SHARES. In the event that any outstanding Option for any reason expires or is canceled or otherwise terminated, the Shares allocable to the unexercised portion of such Option shall again be available for the purposes of the Plan. A. ADJUSTMENT OF ALLOCATION LIMIT. If, as a result of subsequent regulations or other interpretive guidance, the Committee determines that (i) the inclusion of the Allocation Limit is not required in order for option grants to qualify as performance-based compensation under the provisions of Section 162(m) of the Code, or (ii) option grants can qualify as performance-based compensation even if the Allocation Limit was made less restrictive, the Committee will be entitled to amend the Plan accordingly (including amendments to adjust or eliminate altogether the Allocation Limit). SECTION VI. TERMS AND CONDITIONS OF OPTIONS. A. EMPLOYEES. 1. STOCK OPTION AGREEMENT. Each grant of an Option under the Plan shall be evidenced by a Stock Option Agreement between the Optionee and the Company. Such Option shall be subject to all applicable terms and conditions of the Plan and may be subject to any other terms and conditions which are not inconsistent with the Plan and which the Committee deems appropriate for inclusion in a Stock Option Agreement. The provisions of the various Stock Option Agreements entered into under the Plan need not be identical. 1. NUMBER OF SHARES. Each Stock Option Agreement shall specify the number of shares that are subject to the Option and shall provide for the adjustment of such number in accordance with Section IX. The Stock Option Agreement shall also specify whether the Option is an ISO or a Nonstatutory Option. 1. EXERCISE PRICE. Each Stock Option Agreement shall specify the Exercise Price. The Exercise Price shall not be less than 100 percent of the Fair Market Value of a Share on the date of grant, except as otherwise provided in Section IV (A)(1). - 6 - Subject to the preceding sentence, the Exercise Price under any Option shall be determined by the Committee at its sole discretion. The Exercise Price shall be payable in a form described in Section VII. 1. EXERCISABILITY AND TERM. Each Stock Option Agreement shall specify the date when all or any installment of the Option is to become exercisable. The vesting of any Option shall be determined by the Committee at its sole discretion. A Stock Option Agreement may provide for accelerated exercisability in the event of the Optionee's death, Total and Permanent Disability or retirement or other events. The Stock Option Agreement shall also specify the term of the Option. The term shall not exceed 10 years from the date of grant, except as otherwise provided in Section IV(A)(1). Subject to the preceding sentence, the Committee at its sole discretion shall determine when an Option is to expire. 1. EFFECT OF CHANGE IN CONTROL. The Committee may determine, at the time of granting an Option or thereafter, that such Option shall become fully exercisable as to all Shares subject to such Option in the event that a Change in Control occurs with respect to the Company. If the Committee finds that there is a reasonable possibility that, within the succeeding six months, a Change in Control will occur with respect to the Company, then the Committee may determine that any or all outstanding Options shall become fully exercisable as to all Shares subject to such Options. A. DIRECTORS. 1. STOCK OPTION AGREEMENTS. A Nonstatutory Option to purchase Shares shall be granted to each Director then in office on April 22, 1993. In the case of a Director who is not a Director on April 22, 1993, the grant of an option to such Director under this Subsection (B)(1) shall occur on the date such Director takes office. Each grant of an Option under the Plan shall be evidenced by a Stock Option Agreement between the Optionee and the Company. Such Option shall be subject to all applicable terms and conditions of the Plan and to stockholder approval of this provision. The provisions of the various Stock Option Agreements entered into under the Plan need not be identical. 1. NUMBER OF SHARES. Each Stock Option Agreement shall specify the number of Shares that are subject to the Option and shall provide for the adjustment of such number in accordance with Section IX. The number of Shares that are subject to each Option under Subsection (B)(1) shall be 25,000. 1. EXERCISE PRICE. Each Stock Option Agreement shall specify the Exercise Price. The Exercise Price shall be 100 percent of the Fair Market Value of a Share on the date of grant. The Exercise Price shall be payable in cash or Common Stock. 1. EXERCISABILITY AND TERM. Each Stock Option Agreement shall specify that the Option is to become exercisable in accordance with the following schedule: - 7 - Anniversary of Percentage of Date of Grant Shares Exercisable ------------- ------------------ First 20% Second 40% Third 60% Fourth 80% Fifth 100% The Stock Option Agreement shall specify the term of the Option which shall be 10 years from the date of grant, unless earlier terminated as set forth herein. 1. AMENDMENTS. The foregoing provisions of this Subsection (B) shall not be amended more than once every six months, unless required by the Code or the regulations thereunder. A. WITHHOLDING TAXES. As a condition to the exercise of an Option, the Optionee shall make such arrangements as the Committee may require for the satisfaction of any federal, state, local or foreign withholding tax obligations that may arise in connection with such exercise. The Optionee shall also make such arrangements as the Committee may require for the satisfaction of any federal, state, local or foreign withholding tax obligations that may arise in connection with the disposition of Shares acquired by exercising an Option. The Committee may permit the Optionee to satisfy all or part of his or her withholding or income tax obligations by having the Company withhold a portion of any Shares that otherwise would be issued to him or her or by surrendering a portion of any Shares that previously were issued to him or her. Such Shares shall be valued at their Fair Market Value on the date when taxes otherwise would be withheld in cash. Any payment of taxes by assigning Shares to the Company may be subject to restrictions, including any restrictions required by rules of the Securities and Exchange Commission. A. NONTRANSFERABILITY. No Option shall be transferable by the Optionee other than by will, by a beneficiary designation executed by the Optionee and delivered to the Company or by the laws of descent and distribution. An Option may be exercised during the lifetime of the Optionee only by him or her or by his or her guardian or legal representative. No Option or interest therein may be transferred, assigned, pledged or hypothecated by the Optionee during his or her lifetime, whether by operation of law or otherwise, or be made subject to execution, attachment or similar process. A. TERMINATION OF SERVICE (EXCEPT BY DEATH). If an Optionee's Service terminates for any reason other than his or her death, then his or her Option(s) shall expire on the earliest of the following occasions: 1. The expiration date determined pursuant to Subsection (A)(4) or (B)(4) above; - 8 - 1. The date 90 days after the termination of his or her Service for any reason other than Total and Permanent Disability; or 1. The date 12 months after the termination of his or her Service by reason of Total and Permanent Disability. The Optionee may exercise all or part of his or her Option(s) at any time before the expiration of such Option(s) under the preceding sentence, but only to the extent that such Option(s) had become exercisable before his or her Service terminated or became exercisable as a result of the termination. The balance of such Option(s) shall lapse when the Optionee's Service terminates unless otherwise specified in the applicable Stock Option Agreement. In the event that the Optionee dies after the termination of his or her Service but before the expiration of his or her Option(s), all or part of such Option(s) may be exercised (prior to expiration) by the executors or administrators of the Optionee's estate or by any person who has acquired such Option(s) directly from him or her by bequest, beneficiary designation or inheritance, but only to the extent that such Option(s) had become exercisable before his or her Service terminated or became exercisable as a result of the termination. A. LEAVES OF ABSENCE. For purposes of Subsection E above, Service shall be deemed to continue while the Optionee is on military leave, sick leave or other bona fide leave of absence (as determined by the Committee). The foregoing notwithstanding, in the case of an ISO granted to an Employee under the Plan, Service shall not be deemed to continue beyond the first 90 days of such leave, unless the Optionee's reemployment rights are guaranteed by statute or by contract. A. DEATH OF OPTIONEE. If an Optionee dies while he or she is in Service, then his or her Option(s) shall expire on the earlier of the following dates: 1. The expiration date determined pursuant to Subsection (A)(4) or (B)(4) above; or 1. The date 12 months after his or her death. All or part of the Optionee's Option(s) may be exercised at any time before the expiration of such Option(s) under the preceding sentence by the executors or administrators of his or her estate or by any person who has acquired such Option(s) directly from him or her by bequest, beneficiary designation or inheritance, but only to the extent that such Option(s) had become exercisable before his or her death or became exercisable as a result of his or her death. The balance of such Option(s) shall lapse when the Optionee dies. A. NO RIGHTS AS A STOCKHOLDER. An Optionee, or a transferee of an Optionee, shall have no rights as a stockholder with respect to any Shares covered by his or her Option until the date of the issuance of a stock certificate for such Shares. No adjustments shall be made, except as provided in Section IX. - 9 - A. MODIFICATION, EXTENSION AND ASSUMPTION OF OPTIONS. Within the limitations of the Plan, the Committee may modify, extend or assume outstanding Options or may accept the cancellation of outstanding Options (whether granted by the Company or another issuer) in return for the grant of new Options for the same or a different number of Shares and at the same or a different price. The foregoing notwithstanding, no modification of an Option shall, without the consent of the Optionee, impair his or her rights or increase his or her obligations under such Option. A. RESTRICTIONS ON TRANSFER OF SHARES. Any Shares issued upon exercise of an Option shall be subject to such special forfeiture conditions, rights of repurchase, rights of first refusal and other transfer restrictions as the Committee may determine. Such restrictions shall be set forth in the applicable Stock Option Agreement and shall apply in addition to any general restrictions that may apply to all holders of Shares. SECTION VII. PAYMENT FOR SHARES. A. GENERAL RULE. The entire Exercise Price of Shares issued under the Plan shall be payable in lawful money of the United States of America at the time when such Shares are purchased, except as follows: 1. In the case of an ISO granted under the Plan to an Employee, payment shall be made only pursuant to the express provisions of the applicable Stock Option Agreement. However, the Committee (at its sole discretion) may specify in the Stock Option Agreement that payment may be made in one or more of the forms described in Subsections (B), (C), (D) and (E) below. 1. In the case of a Nonstatutory Option granted under the Plan to an Employee, the Committee (at its sole discretion) may accept payment in one or more of the forms described in Subsections (B), (C), (D) and (E) below. 1. In the case of a Nonstatutory Option granted under the Plan to a Director, payment may be made in one or both of the forms described in Subsections (B) and (D) below. A. SURRENDER OF STOCK. To the extent that this Subsection (B) is applicable and to the extent that applicable law permits, payment may be made all or in part with Shares which have already been owned by the Optionee or his or her representative for more than six months and which are surrendered to the Company in good form for transfer. Such Shares shall be valued at their Fair Market Value on the date when the new Shares are purchased under the Plan. A. PROMISSORY NOTE. To the extent that this Subsection (C) is applicable, a portion of the Exercise Price of Shares issued under the Plan may be payable by a full-recourse - 10 - promissory note; provided that (i) the par value of such Shares must be paid in lawful money of the United States of America at the time when such Shares are purchased, (ii) the Shares are security for payment of the principal amount of the promissory note and interest thereon and (iii) the interest rate payable under the terms of the promissory note shall not be less than the minimum rate (if any) required to avoid the imputation of additional interest under the Code. Subject to the foregoing, the Committee (at its sole discretion) shall specify the term, interest rate, amortization requirements (if any) and other provisions of such note. A. EXERCISE/SALE. To the extent that this Subsection (D) is applicable, payment may be made by the delivery (on a form prescribed by the Company) of an irrevocable direction to a securities broker approved by the Company to sell Shares and to deliver all or part of the sales proceeds to the Company in payment of all or part of the Exercise Price and any withholding taxes. A. EXERCISE/PLEDGE. To the extent that this Subsection (E) is applicable, payment may be made by the delivery (on a form prescribed by the Company) of an irrevocable direction to pledge Shares to a securities broker or lender approved by the Company, as security for a loan, and to deliver all or part of the loan proceeds to the Company in payment of all or part of the Exercise Price and any withholding taxes. SECTION VIII. PAYMENT OF DIRECTOR'S FEES IN STOCK. A. ELECTION. A Director may elect to receive his or her director's fees from the Company in the form of Shares to be issued under the Plan. Such an election may be made with respect to: 1. All director's fees, including (without limitation) annual retainer fees, meeting fees and fees paid to committee chairpersons, but not including expense reimbursements and consulting fees; or 1. Annual retainer payments only. An election under this Section VIII shall be filed with the Company on the prescribed form. The election shall apply only to fees payable at least six months after such form has been received by the Company. The election may be amended or canceled by filing a new form with the Company, but the new form shall apply only to fees payable at least six months after it has been received by the Company. The number of Shares to be issued shall be determined by dividing the amount of the fee by the Fair Market Value of one Share on the date when such fee otherwise would be paid in cash. A. WITHHOLDING TAXES. The Director shall satisfy all of his or her federal, state or local withholding tax obligations (if any) by having the Company withhold a portion of the Shares that otherwise would be issued to him or her. Such Shares shall be valued at their Fair Market Value on the date when taxes otherwise would be withheld in cash. The - 11 - payment of taxes by assigning Shares to the Company shall be subject to any restrictions required by rules of the Securities and Exchange Commission. SECTION IX. ADJUSTMENT OF SHARES. A. GENERAL. In the event of a subdivision of the outstanding Stock, a declaration of a dividend payable in Shares, a declaration of a dividend payable in a form other than Shares in an amount that has a material effect on the value of Shares, a combination or consolidation of the outstanding Stock (by reclassification or otherwise) into a lesser number of Shares, a recapitalization or a similar occurrence, the Committee shall make appropriate adjustments in one or more of (i) the number of Shares available for future grants under Section V, (ii) the number of Shares covered by each outstanding Option or (iii) the Exercise Price under each outstanding Option. A. MERGER; CONSOLIDATION. In the event that the Company is a party to a merger or consolidation, outstanding Options shall be subject to the agreement of merger or consolidation. Such agreement shall provide (i) for the assumption of outstanding Options by the surviving corporation or its parent, (ii) for their continuation by the Company, if the Company is a surviving corporation, (iii) for payment of a cash settlement equal to the difference between the amount to be paid for one Share under such agreement and the Exercise Price or (iv) for the acceleration of their exercisability followed by the cancellation of Options not exercised, in all cases other than clause (iii) without the Optionees' consent. (The Optionees' consent shall be required for a cash settlement.) Any cancellation shall not occur earlier than 30 days after such acceleration is effective and Optionees have been notified of such acceleration. In the case of Options that have been outstanding for less than 12 months, a cancellation need not be preceded by an acceleration. A. RESERVATION OF RIGHTS. Except as provided in this Section IX, an Optionee shall have no rights by reason of (i) any subdivision or consolidation of shares of stock of any class, (ii) the payment of any dividend or (iii) any other increase or decrease in the number of shares of stock of any class. Any issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or Exercise Price of Shares subject to an Option. The grant of an Option pursuant to the Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure, to merge or consolidate or to dissolve, liquidate, sell or transfer all or any part of its business or assets. - 12 - SECTION X. SECURITIES LAWS. Shares shall not be issued under the Plan unless the issuance and delivery of such Shares complies with (or is exempt from) all applicable requirements of law, including (without limitation) the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder, state securities laws and regulations, and the regulations of any stock exchange on which the Company's securities may then be listed. SECTION XI. NO RIGHTS TO SERVICE. No provision of the Plan, nor any Option granted under the Plan, shall be construed to give any person any right to become, to be treated as, or to remain an Employee or Director of the Company, as the case may be. The Company and its Subsidiaries reserve the right to terminate any person's Service at any time and for any reason. SECTION XII. DURATION AND AMENDMENTS. A. TERM OF THE PLAN. The Plan, as amended and restated, is effective as of April 20, 1994, subject to stockholder approval. The Plan shall terminate automatically on March 31, 2000 and may be terminated on any earlier date pursuant to Subsection (B) below. A. RIGHT TO AMEND OR TERMINATE THE PLAN. The Committee may amend, suspend or terminate the Plan at any time and for any reason; provided, however, that any amendment of the Plan which increases the number of Shares available for issuance under the Plan (except as provided in Section IX), or which materially changes the class of persons who are eligible for the grant of ISOs, shall be subject to the approval of the Company's stockholders. Stockholder approval shall not be required for any other amendment of the Plan, except to the extent required by applicable law. A. EFFECT OF AMENDMENT OR TERMINATION. No Shares shall be issued under the Plan after the termination thereof, except upon exercise of an Option granted prior to such termination. The termination of the Plan, or any amendment thereof, shall not affect any Share previously issued or any Option previously granted under the Plan. SECTION XIII. EXECUTION. To record the amendment and restatement of the Plan by the Board of Directors on April 20, 1994, the Company has caused its authorized officer to execute the same. FOUNDATION HEALTH CORPORATION By: /s/Daniel D. Crowley --------------------- President and Chief Executive Officer EX-10.103 8 EXHIBIT 10.103 FOUNDATION HEALTH CORPORATION PROFIT SHARING AND 401(K) PLAN (Amended and Restated Effective January 1, 1994) Plan Number: 001 EIN: 68-0014772 TABLE OF CONTENTS PAGE ARTICLE 1 INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE 2 DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . 1 2.1 Accounts . . . . . . . . . . . . . . . . . . . . . . . . . 1 2.2 Account Balance . . . . . . . . . . . . . . . . . . . . . 2 2.3 Actual Deferral Percentage . . . . . . . . . . . . . . . . 2 2.4 Adjustment Factor . . . . . . . . . . . . . . . . . . . . . 2 2.5 Administrator . . . . . . . . . . . . . . . . . . . . . . . 2 2.6 Affiliated Group . . . . . . . . . . . . . . . . . . . . . 2 2.7 After-Tax Contributions . . . . . . . . . . . . . . . . . . 2 2.8 After-Tax Contribution Account . . . . . . . . . . . . . . 2 2.9 After-Tax Contribution Election . . . . . . . . . . . . . 3 2.10 Annuity Starting Date . . . . . . . . . . . . . . . . . . . 3 2.11 Average Actual Deferral Percentage . . . . . . . . . . . . 3 2.12 Average Contribution Percentage . . . . . . . . . . . . . . 3 2.13 Beneficiary . . . . . . . . . . . . . . . . . . . . . . . . 3 2.14 Board of Directors . . . . . . . . . . . . . . . . . . . . 3 2.15 Code . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.16 Company . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.17 Compensation . . . . . . . . . . . . . . . . . . . . . . . 3 2.18 Contribution Percentage . . . . . . . . . . . . . . . . . . 4 2.19 Deferral Election . . . . . . . . . . . . . . . . . . . . . 4 2.20 Deferred Salary Account . . . . . . . . . . . . . . . . . . 4 2.21 Deferred Salary Contribution . . . . . . . . . . . . . . . 4 2.22 Disability Retirement Date . . . . . . . . . . . . . . . . 4 2.23 Disabled . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.24 Early Retirement Date . . . . . . . . . . . . . . . . . . . 4 2.25 Effective Date . . . . . . . . . . . . . . . . . . . . . . 5 2.26 Employee . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.27 Employer . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.28 Employer Account . . . . . . . . . . . . . . . . . . . . . 5 2.29 Employer Contributions . . . . . . . . . . . . . . . . . . 6 2.30 Employment Commencement Date . . . . . . . . . . . . . . . 6 2.31 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.32 Family Member . . . . . . . . . . . . . . . . . . . . . . . 6 2.33 FHC Stock . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.34 FHC Stock Fund . . . . . . . . . . . . . . . . . . . . . . 6 2.35 Highly Compensated Employee . . . . . . . . . . . . . . . . 6 2.36 Hour of Service . . . . . . . . . . . . . . . . . . . . . . 8 2.37 Investment Funds . . . . . . . . . . . . . . . . . . . . . 7 2.38 Leased Employee . . . . . . . . . . . . . . . . . . . . . . 8 2.39 Leave of Absence . . . . . . . . . . . . . . . . . . . . . 8 2.40 Married Participant . . . . . . . . . . . . . . . . . . . . 8 2.41 Matching Rate . . . . . . . . . . . . . . . . . . . . . . . 8 2.42 Nonhighly Compensated Employee . . . . . . . . . . . . . . 8 2.43 Normal Retirement Age . . . . . . . . . . . . . . . . . . . 8 2.44 Normal Retirement Date . . . . . . . . . . . . . . . . . . 9 2.45 One-Year Period of Severance . . . . . . . . . . . . . . . 9 2.46 Participant . . . . . . . . . . . . . . . . . . . . . . . . 9 2.47 Participation Commencement Date . . . . . . . . . . . . . . 9 2.48 Period of Service . . . . . . . . . . . . . . . . . . . . . 9 2.49 Period of Severance . . . . . . . . . . . . . . . . . . . . 9 2.50 Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 2.51 Plan Year . . . . . . . . . . . . . . . . . . . . . . . . . 9 2.52 Postponed Retirement Date . . . . . . . . . . . . . . . . . 9 2.53 Prior Plan . . . . . . . . . . . . . . . . . . . . . . . . 9 2.54 Qualified Joint and Survivor Annuity . . . . . . . . . . . 10 2.55 Qualified Matching Contribution and Qualified Nonelective Contribution . . . . . . . . . . . . . . . . . . . . . . 10 2.56 Reemployment Commencement Date . . . . . . . . . . . . . . 10 2.57 Retirement Date . . . . . . . . . . . . . . . . . . . . . . 10 2.58 Rollover Account . . . . . . . . . . . . . . . . . . . . . 10 2.59 Rollover Contribution . . . . . . . . . . . . . . . . . . . 10 2.60 Severance From Service Date . . . . . . . . . . . . . . . . 10 2.61 Spouse or Surviving Spouse . . . . . . . . . . . . . . . . 11 2.62 Top-Paid Group . . . . . . . . . . . . . . . . . . . . . . 11 2.63 Total Compensation . . . . . . . . . . . . . . . . . . . . 11 2.64 Total Compensation Plus Deferrals . . . . . . . . . . . . . 12 2.65 Trust Agreement . . . . . . . . . . . . . . . . . . . . . . 12 2.66 Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . 12 2.67 Trust Fund . . . . . . . . . . . . . . . . . . . . . . . . 12 2.68 Valuation Date . . . . . . . . . . . . . . . . . . . . . . 12 2.69 Year of Service . . . . . . . . . . . . . . . . . . . . . . 12 ARTICLE 3 PARTICIPATION . . . . . . . . . . . . . . . . . . . . . . . 12 3.1 Plan Entry Date . . . . . . . . . . . . . . . . . . . . . . 12 3.2 Rehired Employee . . . . . . . . . . . . . . . . . . . . . 13 3.3 Loss of Participant Status . . . . . . . . . . . . . . . . 13 3.4 Suspension of Participation . . . . . . . . . . . . . . . . 13 ARTICLE 4 DEFERRED SALARY CONTRIBUTIONS AND AFTER-TAX CONTRIBUTIONS . 14 4.1 Deferred Salary Contributions . . . . . . . . . . . . . . . 14 4.2 Deferral Election . . . . . . . . . . . . . . . . . . . . . 15 4.3 Suspension of, or Change in, Deferral Election . . . . . . 15 4.4 Deferral Percentage Limitation . . . . . . . . . . . . . . 15 4.5 Special Rules on Deferral Percentage Limitation . . . . . . 16 4.6 Adjustment of Deferrals . . . . . . . . . . . . . . . . . . 17 4.7 After-Tax Contributions . . . . . . . . . . . . . . . . . . 17 4.8 After-Tax Contribution Election . . . . . . . . . . . . . . 17 4.9 . . Suspension of, or Change in, After-Tax Contributions18 ARTICLE 5 EMPLOYER CONTRIBUTIONS . . . . . . . . . . . . . . . . . . 18 5.1 Employer Discretionary Contributions . . . . . . . . . . . 18 5.2 Employer Matching Contributions (Effective Until 9/30/94) . 19 5.2 Employer Matching Contributions (Effective 10/1/94) . . . . 19 5.3 Percentage Limitation on Employer Matching Contributions and After-Tax Contributions . . . . . . . . . . . . . . . . . . 20 5.4 Special Rules for Contribution Percentage Limit Testing . . 21 5.5 Overall Limitation on Annual Additions . . . . . . . . . . 21 5.6 Special Rules . . . . . . . . . . . . . . . . . . . . . . . 22 5.7 Definitions . . . . . . . . . . . . . . . . . . . . . . . . 24 5.8 Reversion of Employer Contributions . . . . . . . . . . . . 25 5.9 Timing of Employer Contributions . . . . . . . . . . . . . 25 ARTICLE 6 PARTICIPANTS' ACCOUNTS . . . . . . . . . . . . . . . . . . 25 6.1 Separate Accounts . . . . . . . . . . . . . . . . . . . . . 25 6.2 Valuation of Funds . . . . . . . . . . . . . . . . . . . . 26 6.3 Investment of Contributions . . . . . . . . . . . . . . . . 26 6.4 Change of Investment Election . . . . . . . . . . . . . . . 27 6.5 Restrictions on Investment Elections of Certain Participants 27 6.6 Statements . . . . . . . . . . . . . . . . . . . . . . . . 27 ARTICLE 7 INVESTMENT OF FUNDS . . . . . . . . . . . . . . . . . . . . 27 7.1 Trust Agreement . . . . . . . . . . . . . . . . . . . . . . 27 7.2 Trust Fund . . . . . . . . . . . . . . . . . . . . . . . . 28 7.3 Independent Qualified Public Accountant . . . . . . . . . . 28 ARTICLE 8 BENEFIT ELECTION AND BENEFICIARY DESIGNATION PROCEDURES . . 29 8.1 Elections as to Form of Distribution . . . . . . . . . . . 29 8.2 Information on Form of Distribution . . . . . . . . . . . . 30 8.3 Designation of Beneficiary for Death Benefit . . . . . . . 30 8.4 Information on Death Benefits . . . . . . . . . . . . . . . 32 ARTICLE 9 DISTRIBUTION OF BENEFITS . . . . . . . . . . . . . . . . . 32 9.1 Time of Distribution: General Rule . . . . . . . . . . . . 32 9.2 Earliest Time of Distribution . . . . . . . . . . . . . . . 33 9.3 Latest Time of Distribution . . . . . . . . . . . . . . . . 33 9.4 Normal Form of Benefit . . . . . . . . . . . . . . . . . . 33 9.5 Optional Forms of Benefit . . . . . . . . . . . . . . . . . 34 9.6 Qualified Pre-Retirement Survivor Annuity . . . . . . . . . 34 9.7 Small Benefits: Immediate Lump Sum . . . . . . . . . . . . 35 9.8 Investment of Account Balance of Terminated Participant . . 35 9.9 Required Distributions . . . . . . . . . . . . . . . . . . 35 9.10 Direct Rollovers . . . . . . . . . . . . . . . . . . . . . 36 ARTICLE 10 VESTING, RETIREMENT, AND TERMINATION OF EMPLOYMENT . . . . 37 10.1 Vesting in Deferred Salary, After-Tax and Rollover Contributions 37 10.2 Vesting in Employer Account . . . . . . . . . . . . . . . . 37 10.3 Vesting After Prior Distributions . . . . . . . . . . . . . 38 10.4 Forfeitures . . . . . . . . . . . . . . . . . . . . . . . . 38 ARTICLE 11 WITHDRAWALS . . . . . . . . . . . . . . . . . . . . . . . 39 11.1 Hardship Withdrawals . . . . . . . . . . . . . . . . . . . 39 11.2 Withdrawal of After-Tax Contributions . . . . . . . . . . . 41 11.3 Loans to Participants . . . . . . . . . . . . . . . . . . . 41 ARTICLE 12 DISTRIBUTION OF EXCESS DEFERRALS, EXCESS CONTRIBUTIONS AND EXCESS AGGREGATE CONTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . . 44 12.1 Distribution of Excess Deferrals . . . . . . . . . . . . . 44 12.2 Distribution of Excess Aggregate Contributions . . . . . . 46 ARTICLE 13 ADMINISTRATION OF THE PLAN . . . . . . . . . . . . . . . . 48 13.1 Plan Administrator . . . . . . . . . . . . . . . . . . . . 48 13.2 Selection of Committee . . . . . . . . . . . . . . . . . . 48 13.3 Powers of the Administrator . . . . . . . . . . . . . . . . 49 13.4 Selection and Replacement of Trustee . . . . . . . . . . . 50 13.5 Selection of Other Professional Counselors . . . . . . . . 50 13.6 Reliance on Professional Counselors . . . . . . . . . . . . 51 13.7 Plan Claim Procedures . . . . . . . . . . . . . . . . . . . 51 13.8 Source of Payment of Expenses . . . . . . . . . . . . . . . 52 13.9 Compensation of the Administrator . . . . . . . . . . . . . 53 13.10 Fiduciary Liability Insurance . . . . . . . . . . . . . . 53 ARTICLE 14 AMENDMENT OR TERMINATION . . . . . . . . . . . . . . . . . 53 14.1 Right to Amend . . . . . . . . . . . . . . . . . . . . . . 53 14.2 Right to Discontinue Plan . . . . . . . . . . . . . . . . . 54 14.3 Obligations Upon Merger, Consolidation or Transfer . . . . 54 14.4 Obligations Upon Termination, Partial Termination or Discontinuance . . . . . . . . . . . . . . . . . . . . . . 54 14.5 Continued Funding After Plan Termination . . . . . . . . . 55 14.6 Distribution Upon Sale of Assets . . . . . . . . . . . . . 55 ARTICLE 15 GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . 55 15.1 No Implied Employment Contract . . . . . . . . . . . . . . 55 15.2 Benefits Not Assignable . . . . . . . . . . . . . . . . . . 56 15.3 Facility of Payment . . . . . . . . . . . . . . . . . . . . 56 15.4 Source of Benefits . . . . . . . . . . . . . . . . . . . . 56 15.5 Lost Participants or Beneficiaries . . . . . . . . . . . . 56 15.6 Service in Several Fiduciary Capacities . . . . . . . . . . 57 15.7 Construction of Plan . . . . . . . . . . . . . . . . . . . 57 15.8 Governing Law . . . . . . . . . . . . . . . . . . . . . . . 57 15.9 Intent to Comply With Legal Requirements . . . . . . . . . 57 15.10 Annuity Contracts . . . . . . . . . . . . . . . . . . . . 57 15.11 Voting Rights . . . . . . . . . . . . . . . . . . . . . . 58 15.12 Other Instructions by Participants . . . . . . . . . . . . 58 ARTICLE 16 ROLLOVER CONTRIBUTIONS AND TRANSFERS . . . . . . . . . . . 59 16.1 Transfers From Other Plans . . . . . . . . . . . . . . . . 59 16.2 Rollover of Funds From Conduit Individual Retirement Account (IRA) . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 16.3 Mistaken Rollover . . . . . . . . . . . . . . . . . . . . . 60 ARTICLE 17 TOP-HEAVY PROVISIONS . . . . . . . . . . . . . . . . . . . 61 17.1 Top-Heavy Plan Defined . . . . . . . . . . . . . . . . . . 61 17.2 Other Definitions . . . . . . . . . . . . . . . . . . . . . 62 17.3 Top-Heavy Vesting . . . . . . . . . . . . . . . . . . . . . 63 17.4 Top-Heavy Contributions . . . . . . . . . . . . . . . . . . 64 17.5 Adjustment to Limitation on Annual Additions . . . . . . . 64 FOUNDATION HEALTH CORPORATION PROFIT SHARING AND 401(k) PLAN (Amended and Restated Effective January 1, 1994) ARTICLE 1 INTRODUCTION The Plan was most recently amended and restated, generally effective January 1, 1994, to read as set forth herein. The Plan was originally adopted effective April 1, 1989 as an amendment, restatement and continuation of the CPI Profit Sharing Plan sponsored by International Central Bank and Trust Corporation. The purpose of the Plan is to provide participating employees with retirement benefits by affording them the opportunity to elect to have a portion of their salary paid directly into the Plan on their behalf by the Company and the other Employers. This Plan is intended to qualify as a profit sharing plan under Section 401(a) of the Code and contains a cash or deferred arrangement intended to qualify under Section 401(k) of the Code. The Trust Agreement entered into in connection with this Plan shall continue in full force and effect pursuant to the applicable provisions of the Plan and is incorporated by reference and made part of this Plan. The Plan is subject to amendment or termination at any time pursuant to Article 14, including (without limitation) amendments to meet regulations and rules issued by the Secretary of the Treasury or his delegate or the Secretary of Labor. Certain capitalized terms used in the text of the Plan are defined in Article 2 in alphabetical order. ARTICLE 2 DEFINITIONS The following words and phrases as used herein shall have the following meanings and the masculine and feminine gender shall be deemed to include the others, unless a different meaning is plainly required by the context: 2.1 "Accounts" means the accounts that are maintained for a Participant (or former Participant) under the Plan, including the Deferred Salary Account, the Rollover Account, the After-Tax Contribution Account and the Employer Account. 2.2 "Account Balance" means the sum of the amounts credited to a Participant's (or former Participant's) Accounts, including interest and earnings as of any date. 2.3 "Actual Deferral Percentage" means the ratio (expressed as a percentage) of the Deferred Salary Contributions made on behalf of the Participant for the Plan Year to the Participant's Compensation for the Plan Year. 2.4 "Adjustment Factor" means the cost of living adjustment factor prescribed by the Secretary of the Treasury under Section 415(d) of the Code for years beginning after December 31, 1987, as applied to such items and in such manner as the Secretary shall provide. 2.5 "Administrator" means the individual or committee described in Article 13 which is responsible for the administration of the Plan. 2.6 "Affiliated Group" means a group of one or more chains of corporations connected through stock ownership with the Company, if: (A) Stock possessing at least 80% of the total combined voting power of all classes of stock entitled to vote or at least 80% of the total value of shares of all classes of stock of each of the corporations, except the Company, is owned by one or more of the other corporations; and (B) The Company owns stock possessing at least 80% of the total combined voting power of all classes of stock entitled to vote or at least 80% of the total value of shares of all classes of stock of at least one of the other corporations excluding, in computing such voting power or value, stock owned directly by such other corporations. In addition, the term 'Affiliated Group' includes any other entity that the Company has designated in writing as a member of the Affiliated Group for purposes of the Plan. An entity shall be considered a member of the Affiliated Group only with respect to periods for which such designation is in effect or during which the relationship described in Paragraphs (A) and (B) above exists. 2.7 "After-Tax Contributions" means any amounts contributed to the Plan by the Participant pursuant to Section 4.7. 2.8 "After-Tax Contribution Account" means the Account described in Section 4.7. 2.9 "After-Tax Contribution Election" means the election made by a Participant pursuant to Article 4.8. 2.10 "Annuity Starting Date" means the first day of the first period for which an amount is payable as an annuity or, in the case of a benefit not payable as an annuity, the first day on which all events have occurred which entitle the Participant to such benefit. 2.11 "Average Actual Deferral Percentage" means the average (expressed as a percentage) of the Actual Deferral Percentages of the Participants in a group. 2.12 "Average Contribution Percentage" means the average (expressed as a percentage) of the Contribution Percentages of the Participants in a group. 2.13 "Beneficiary" means the person, persons or entity designated in writing by the Participant (or by the Plan) pursuant to Article 8. 2.14 "Board of Directors" means the Board of Directors of the Company, as constituted from time to time. 2.15 "Code" means the Internal Revenue Code of 1986, as amended from time to time. 2.16 "Company" means Foundation Health Corporation. 2.17 "Compensation" means the total compensation received from the Employer for personal services rendered by a Participant during the Plan Year, including base salary, bonuses, commissions, overtime, shift differentials and amounts contributed to the Plan as Deferred Salary Contributions and After-Tax Contributions. By way of illustration, but not by way of limitation, amounts not included in the definition of Compensation include relocation bonuses, author incentives, auto allowances or referral bonuses, income realized as a result of participation in any stock option, stock purchase or similar arrangement maintained by the Employer and tuition or other reimbursements. The foregoing provision notwithstanding, for purposes of determining a Participant's Actual Deferral Percentage used in performing the average deferral percentage nondiscrimination test described in Section 4.4 (and Section 401(k)(3) of the Code) and his or her Contribution Percentage used in performing the average contribution percentage nondiscrimination test described in Section 5.3 (and Section 401(m)(2) of the Code), Compensation means the total compensation paid to the Participant by the Employer, other than compensation in the form of qualified or previously qualified deferred compensation, that is currently includable in the gross income of the Participant for income tax purposes. Compensation for a Plan Year shall not exceed $150,000 (or such other amount as may be adopted by the Commissioner of Internal Revenue under Section 401(a)(17) of the Code). For purposes of the preceding sentence, Compensation of an individual who is one of the 10 most highly compensated Highly Compensated Employees or a five-percent owner shall be deemed to include the Compensation of such individual's spouse and any descendants under age 19. If such aggregated Compensation exceeds the Code Section 401(a)(17) limit, then the Compensation taken into account under the Plan for the individuals in each family aggregation group shall be reduced to meet such limit, and the reduced amount of Compensation taken into account be allocated among such individuals in proportion to Compensation (without regard to family aggregation). 2.18 "Contribution Percentage" means the ratio (expressed as a percentage) of the Employer Matching Contributions and After-Tax Contributions made under the Plan on behalf of the Participant for the Plan Year to the Participant's Compensation for the Plan Year. 2.19 "Deferral Election" means the portion of the enrollment application on which a Participant authorizes and elects the percentage of his Compensation to be withheld by the Employer and contributed on behalf of the Participant to his Deferred Salary Account. 2.20 "Deferred Salary Account" means the Account described in Section 4.1. 2.21 "Deferred Salary Contribution" means the amount withheld from the Compensation of a Participant and contributed by the Employer on behalf of a Participant pursuant to Section 4.1. 2.22 "Disability Retirement Date" means a Participant's Retirement Date, which shall be the first of any month following a Participant's termination of employment after becoming Disabled. 2.23 "Disabled" mean a physical or mental condition which totally and permanently prevents a Participant from engaging in any substantial gainful employment, provided the Participant is eligible for, and is receiving, disability benefits under the Social Security Act. 2.24 "Early Retirement Date" means a Participant's Retirement Date, which shall be the first of any month coincident with or following termination of employment and attainment of his 55th birthday. 2.25 "Effective Date" means April 1, 1989. 2.26 "Employee" means any employee of an Affiliated Group member except the following: (A) Any employee who is included in a unit of employees covered by an agreement that the Secretary of Labor finds to be a collective bargaining agreement between employee representative and an Employer if there is evidence that retirement benefits were the subject of good faith bargaining between the employee representative and the Employer; and (B) Any person who is an independent contractor; and (C) Any employee who is a nonresident alien who receives no earned income (within the meaning of Section 911(d)(2) of the Code) from the Employer which constitutes income from sources within the United States; and (D) Any other group of individuals that the Company has designated in writing as ineligible for Employee status. Notwithstanding the foregoing, the term 'Employee' shall also include Leased Employees; provided, however, if such Leased Employees constitute less than twenty (20) percent of the Affiliated Group's Nonhighly Compensated Workforce, then the term 'Employee' shall not include such Leased Employees as are covered by a safe harbor plan under Code Section 414(n)(5). 2.27 "Employer" means the Company and each other member of the Affiliated Group which has been designated as an Employer by the Company and which has elected to contribute to the Plan. In addition, a particular division or separate operating unit of a member of the Affiliated Group may be designated as a separate Employer from the Affiliated Group member of which it is a part, including the ability to make separate elections as to the amount of Employer Contributions. A member of the Affiliated Group and/or a division or separate operating unit of an existing Employer may be designated as a separate Employer as of the first day of any calendar month only if the designation is made before such date. 2.28 "Employer Account" means the account into which Employer Contributions made on behalf of a Participant pursuant to Article 5, and earnings on those contributions, shall be credited. 2.29 "Employer Contributions" means "Employer Discretionary Contributions" and/or "Employer Matching Contributions" contributed on behalf of a Participant as described in Article 5. 2.30 "Employment Commencement Date" means the date on which an Employee first performs an Hour of Service for an Affiliated Group member. 2.31 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. 2.32 "Family Member" means the spouse, lineal ascendants and descendants of the Employee and the spouse of such lineal ascendants and descendants. 2.33 "FHC Stock" means the common stock, $0.01 par value, of the Company. 2.34 "FHC Stock Fund" means a part of the Trust Fund, as described in Section 7.2. The FHC Stock Fund shall be invested and reinvested exclusively in FHC Stock, except that, pending investment in FHC Stock, amounts designated for investment in the FHC Stock Fund may be invested temporarily in interest-bearing short-term investment instruments selected by the Trustee. 2.35 "Highly Compensated Employee" for any Plan Year means: (A) Any active Employee who was a five percent (5%) owner at any time during the look-back year or the determination year; (B) Any active Employee who, during the look-back year: (1) Received Total Compensation Plus Deferrals of more than $75,000 (or such larger amount as may be adopted by the Commissioner of Internal Revenue to reflect a cost-of-living adjustment); (2) Received Total Compensation Plus Deferrals of more than $50,000 (or such larger amount as may be adopted by the Commissioner of Internal Revenue to reflect a cost-of-living adjustment) and was a member of the Top-Paid Group; or (3) Was an officer of a member of the Affiliated Group and received Total Compensation Plus Deferrals of more than fifty percent (50%) of the dollar limitation in effect under Section 415(b)(1)(A) of the Code; and (C) Any active Employee who, during the determination year: (1) Met one of the three requirements set forth in Paragraph (B) above; and (2) Was one of the 100 Employees who received the highest Total Compensation Plus Deferrals from the Affiliated Group. If no officer has satisfied the Total Compensation Plus Deferrals requirement of Subparagraph (B)(3) above during a determination year or a look- back year (as the case may be), then the highest paid officer for such year shall be treated as a Highly Compensated Employee. If an Employee is, during a determination year or a look-back year, a Family Member of a five percent (5%) owner who is an active or former Employee or of a Highly Compensated Employee who is one of the 10 most Highly Compensated Employees ranked on the basis of Total Compensation Plus Deferrals paid during such year, then the Family Member and the five percent (5%) owner or top-10 Highly Compensation Employee shall be aggregated. In that event, the Family Member and the five percent (5%) owner or top-10 Highly Compensated Employee shall be treated as a single Employee receiving the compensation and Plan contributions of the Family Member and the five percent (5%) owner or top-10 Highly Compensated Employee. For purposes of this Section 2.35, the determination year shall be the Plan Year. The look-back year shall be the 12-month period immediately preceding the determination year. The term 'Highly Compensated Employee' shall also include a former Employee who separated from service (or was deemed to have separated from service) prior to the determination year, performs no service for any member of the Affiliated Group during the determination year, and was a Highly Compensated Employee as an active Employee for either the separation year or any determination year ending on or after the Employee's 55th birthday. The determination of who is a Highly Compensated Employee, including the determinations of the number and identity of Employees in the Top-Paid Group, the top 100 Employees, the number of Employees treated as officers and the Total Compensation Plus Deferrals that is considered, shall be made in accordance with Section 414(q) of the Code and the regulations thereunder. 2.36 "Hour of Service" means each hour for which an Employee is directly or indirectly paid or entitled to payment for the performance of duties for an Affiliated Group member. 2.37 "Investment Funds" means, to the extent applicable, one or more of the FHC Stock Fund and the other investment funds offered under the Plan. 2.38 "Leased Employee" means an individual (i) who does not have a common- law employment relationship with a member of the Affiliated Group, (ii) who has provided services to a member or members of the Affiliated Group of a type performed by individuals who are common-law employees of members of the Affiliated Group, on a substantially full-time basis for a period of at least one year and (iii) who provides services to a member or members of the Affiliated Group pursuant to an agreement between a member or members of the Affiliated Group and another individual. 2.39 "Leave of Absence" means an absence authorized by the Employer under its standard personnel practices as applied in an uniform and non-discriminatory manner to all persons similarly situated, provided the Employee resumes service with the Employer within the period specified in the authorization for the Leave of Absence. For purposes of determining an Employee's Severance From Service Date, a Leave of Absence shall not exceed a period of twelve (12) consecutive months. Service in the Armed Forces of the United States of America shall constitute an authorized leave of absence provided (i) the Employee leaves the employ of the Employer to enter the service of the Armed Forces of the United States of America through the operation of a compulsory military service law or pursuant to leave granted by the Employer, and (ii) the Employee returns to the employ of the Employer within the period provided by law for the protection of his re- employment rights. 2.40 "Married Participant" means a Participant who is lawfully married on the date benefits are elected or become payable under the Plan. 2.41 "Matching Rate" is defined in Paragraph (A) of Section 5.2. 2.42 "Nonhighly Compensated Employee" shall mean an Employee who is neither a Highly Compensated Employee nor a Family Member. 2.43 "Normal Retirement Age" means age 65. 2.44 "Normal Retirement Date" means the first day of the month coincident with or next following a Participant's attainment of Normal Retirement Age. 2.45 "One-Year Period of Severance" means a twelve (12) consecutive month period beginning on a Severance From Service Date and ending on the first anniversary of such date, provided the Employee has not performed an Hour of Service for an Affiliated Group member during such period. 2.46 "Participant" means an Employee who becomes a Participant pursuant to Article 3 and who continues to be entitled to any benefits under the Plan. 2.47 "Participation Commencement Date" means the date on which an Employee first becomes a Participant, which shall be the first day of January, April, July or October. 2.48 "Period of Service" means a period of service commencing on an Employee's Employment Commencement Date or Reemployment Commencement Date, whichever is applicable, and ending on his Severance From Service Date. All Periods of Service shall be aggregated. If an Employee severs from service by reason of a quit, discharge, or retirement and the Employee then performs an Hour of Service within twelve (12) months of the Severance From Service Date, then such Period of Severance shall be taken into account for purposes of eligibility and vesting. 2.49 "Period of Severance" means the period of time commencing on an Employee's Severance From Service Date and ending on the date on which the Employee again performs an Hour of Service for an Affiliated Group member. 2.50 "Plan" means this Foundation Health Corporation Profit Sharing and 401(k) Plan, as amended and restated from time to time. 2.51 "Plan Year" means the calendar year. 2.52 "Postponed Retirement Date" means a Participant's Retirement Date, which shall be the first of any month coincident with or next following his termination of employment after his Normal Retirement Date. 2.53 "Prior Plan" means the CPI Profit Sharing Plan, as in effect immediately prior to the Effective Date. 2.54 "Qualified Joint and Survivor Annuity" (or "QJSA") means an annuity payable for the life of the Participant with a survivor annuity for the life of the Surviving Spouse which is equal to at least 50%, but no more than 100%, of the annuity payable during the joint lives of the Participant and Spouse that can be purchased with the Participant's Account Balance. 2.55 "Qualified Matching Contribution" and "Qualified Nonelective Contribution" means an Employer Contribution described in Section 5.1(D) which is subject to the nonforfeitability and distribution limitations of Treasury Regulation Section 1.401(k)-1(c) and (d). 2.56 "Reemployment Commencement Date" means the first day following a Period of Severance on which an Employee performs an Hour of Service for an Employer. 2.57 "Retirement Date" means a Participant's date of actual retirement which shall be his Normal Retirement Date, Early Retirement Date, Postponed Retirement Date or Disability Retirement Date, whichever is applicable. 2.58 "Rollover Account" means the Account described in Article 16. 2.59 "Rollover Contribution" means the contributions received by the Plan from a Participant pursuant to Article 16 and maintained in the Rollover Account. 2.60 "Severance From Service Date" means the earlier of: (A) The date on which an Employee quits, retires, is discharged, or dies; or (B) (1) The first anniversary of the first day of a period in which an Employee remains absent from service (with or without pay) with the Affiliated Group member for any reason other than quit, retirement, discharge or death, such as vacation, holiday, sickness, disability, Leave of Absence or lay- off; or (2) The second anniversary of the first day of a period in which an Employee remains absent from service (with or without pay) with an Affiliated Group member by reason of pregnancy, the birth of the Employee's child, the placement of a child with the Employee in connection with the adoption of such child by such Employee, or the need to care for such Employee's child during the period immediately following such child's birth or placement. A Participant shall receive credit under the Plan for an absence from service under the foregoing paragraph on account of pregnancy, the birth of the Employee's child, child placement or child care, effective on or after January 1, 1985, provided, however, that the Participant shall not be so credited unless such Employee furnishes the Administrator such timely information as the Administrator may require to establish that the absence from employment is for such reasons. 2.61 "Spouse" or "Surviving Spouse" means a Participant's current spouse or surviving spouse, provided, however, that a former spouse will be treated as a Spouse or Surviving Spouse to the extent provided under a qualified domestic relations order as described in Section 414(p) of the Code and procedures adopted by the Company. 2.62 "Top-Paid Group" for any Plan Year means the top 20% (in terms of Total Compensation Plus Deferrals) of all Employees of the Affiliated Group, excluding the following: (A) Any Employee covered by a collective bargaining agreement who is not eligible to become a Participant; (B) Any Employee who is a nonresident alien with respect to the United States who receives no income from a source within the United States from a member of the Affiliated Group; (C) Any Employee who has not completed a six-month Period of Service at the end of the Plan Year; (D) Any Employee who normally works less than 17 hours per week; (E) Any Employee who normally works not more than six months during a year; and (F) Any Employee who has not attained the age of 21 at the end of the Plan Year. 2.63 "Total Compensation" means "wages" as defined in Section 3401(a) of the Code for purposes of income tax withholding at the source, but determined without regard to any rules that limit the remuneration included in "wages" based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in Section 3401(a)(2) of the Code). Total Compensation shall be subject to the $150,000 limit described in Section 2.17. 2.64 "Total Compensation Plus Deferrals" means Total Compensation as defined in the preceding Section 2.63, but modified: (A) To include all amounts deferred but not refunded under a cafeteria plan, as such term is defined in Section 125(c) of the Code, or under a plan, including this Plan, qualified under Section 401(k) of the Code; and (B) To include Total Compensation for each Plan Year in excess of the $150,000 limit described in Section 2.17 above. 2.65 "Trust Agreement" means the trust agreement between the Company and the Trustee, established for the purpose of funding benefits under the Plan, or any successor trust agreement or agreements. 2.66 "Trustee" means the trustee acting as such pursuant to the Trust Agreement, or any successor or successors. 2.67 "Trust Fund" means all such money or other property which is held by the Trustee, pursuant to the terms of the Agreement. 2.68 "Valuation Date" means the last business day of each month. 2.69 "Year of Service" means a Period of Service equal to three hundred sixty-five (365) days of service included in a Period of Service. ARTICLE 3 PARTICIPATION 3.1 PLAN ENTRY DATE (A) An Employee other than a Leased Employee, who was a Participant in the Prior Plan immediately prior to the Effective Date shall become a Participant in the Plan on the Effective Date. (B) An Employee other than a Leased Employee not described in subsection (A) shall become a Participant in the Plan on the first Participation Commencement Date following the date on which he performs an Hour of Service for an Employer; provided, however that if such Participation Commencement Date shall occur within a period during which the Employee is absent from service for any reason other than a quit, discharge or retirement, then such Employee shall become a Participant retroactively as of such Participation Commencement Date on the date he subsequently performs an Hour of Service for an Employer. The foregoing notwithstanding, an Employer which has become an Affiliated Group member as the result of a merger, acquisition, consolidation or similar transaction with the Company, may designate the Participation Commencement Date as of which any of its Employees, other than Leased Employees, shall first commence participation in the Plan. 3.2 REHIRED EMPLOYEE A Participant whose participation ceased because of a separation from service and who again becomes an Employee shall become eligible to participate on his Reemployment Commencement Date. Deferred Salary Contributions and/or After-Tax Contributions shall be made on behalf of such Participant as soon as administratively practicable after the Participant records the appropriate elections with the Administrator. 3.3 LOSS OF PARTICIPANT STATUS An Employee who becomes a Participant shall continue to be a Participant in the Plan until his entire plan benefit has been distributed, whether or not he continues to make Deferred Salary Contributions or After-Tax Contributions. 3.4 SUSPENSION OF PARTICIPATION A Participant who ceases to be an Employee but remains an employee of an Employer shall be a "suspended participant" and shall have his participation suspended. A suspended participant shall not be entitled to make After-Tax Contributions to the Plan, to have Deferred Salary Contributions made on his behalf to the Plan, or to receive an allocation of Employer Contributions. During the period of suspension, the suspended participant's service shall continue to be considered for Plan vesting purposes and investment earnings shall continue to accrue with respect to the suspended participant's Account. The suspension shall be removed and a suspended participant shall again become eligible to participate and elect to make Deferred Salary Contributions and/or After-Tax Contributions when he again becomes an Employee by completing a new Deferral Election and After-Tax Contribution Election. ARTICLE 4 DEFERRED SALARY CONTRIBUTIONS AND AFTER-TAX CONTRIBUTIONS 4.1 DEFERRED SALARY CONTRIBUTIONS (A) Subject to the limitations established by this Article and Article 5, each Participant who is not a Highly Compensated Employee may elect to have his Employer contribute from two percent (2%) to ten percent (10%) of the Participant's Compensation directly into the Plan instead of paying such amount to the Participant. Contributions made in this manner shall be called Deferred Salary Contributions. Subject to the limitations established by this Article and Article 5, each Participant who is a Highly Compensated Employee may elect to have his or her Employer contribute from two percent (2%) to six percent (6%) of such Participant's Compensation directly into the Plan instead of paying such amount to the Participant. A Participant's Deferred Salary Contributions shall be credited to his Deferred Salary Account. (B) All Deferred Salary Contributions shall be forwarded by the Employer to the Trustee as soon as administratively practicable after the contributions have been withheld. In no event shall Deferred Salary Contributions be forwarded to the Trustee later than ninety (90) days from the date on which such amounts were withheld and would have otherwise been payable to the Participant as Compensation. (C) Notwithstanding the foregoing, no Participant's Deferred Salary Contributions during any Plan Year (not including any Deferred Salary Contributions distributed to any Participant for the Plan Year ending with such calendar year pursuant to Section 12.1), together with any other elective deferrals (within the meaning of Section 402(g)(3) of the Code) under all plans, contracts or arrangements of the Affiliated Group, shall exceed $9,240 (or such larger amount as may be provided on account of cost-of-living adjustments pursuant to Sections 402(g)(5) and 415(d) of the Code. The limitation set by this paragraph (C) applies on an individual basis to all elective deferrals made by each Participant during a year under this or any other qualified plan. (D) It shall be the responsibility of each Participant to coordinate his or her salary deferrals as needed to meet this limit in connection with any other plan or plans. The Company will not take account of deferrals made to any other plan and, except as required by law, no deferrals made under this Plan will be returned because the Participant's deferrals under another plan caused his total deferrals for a year to exceed the limit set forth in subsection (C), above. 4.2 DEFERRAL ELECTION Each Participant may deliver to the Administrator a Deferral Election in accordance with procedures prescribed by the Administrator, directing his Employer to reduce his Compensation within the limits set forth in Section 4.1. Such election shall become effective as of the date agreed upon between the Administrator and the Participant, provided that such date shall be subsequent to receipt of the Deferral Election by the Administrator. 4.3 SUSPENSION OF, OR CHANGE IN, DEFERRAL ELECTION (A) SUSPENSION. A Participant may elect to suspend all Deferred Salary Contributions at any time by giving notice to the Administrator in a manner prescribed for that purpose by the Administrator. Any such election shall be effective as soon as administratively practicable following the date such notice is received by the Administrator. By giving the Administrator such advance notice as may be prescribed by the Administrator, a Participant who has suspended all Deferred Salary Contributions may resume such contributions as of the first day of the calendar quarter next following receipt of such notice by the Administrator. (B) CHANGE OF DEFERRAL PERCENTAGE. A Participant may elect to change the amount of his Deferred Salary Contribution on any January 1, April 1, July 1 or October 1, provided the Participant gives such prior notice to the Administrator as may be required by the Administrator in accordance with procedures established by the Administrator. The new deferral amount shall become effective as of the January 1, April 1, July 1 or October 1 following the expiration of the notice period with respect to contributions made subsequent to that January 1, April 1, July 1 or October 1. 4.4 DEFERRAL PERCENTAGE LIMITATION Subject to the special rules of Section 4.5 and at such intervals as it shall deem proper, the Administrator shall review each Participant's Deferral Election in order to determine that the Deferred Salary Contributions with respect to all Participants satisfy one of the following tests: (A) The Average Actual Deferral Percentage for Participants who are Highly Compensated Employees for the Plan Year shall not exceed the Average Actual Deferral Percentage for Participants who are Nonhighly Compensated Employees for the Plan Year multiplied by 1.25; or (B) The Average Actual Deferral Percentage for Participants who are Highly Compensated Employees for the Plan Year shall not exceed the Average Actual Deferral Percentage for Participants who are Nonhighly Compensated Employees for the Plan Year multiplied by 2, provided that the Average Actual Deferral Percentage for Participants who are Highly Compensated Employees does not exceed the Average Actual Deferral Percentage for Participants who are Nonhighly Compensated Employees by more than 2 percentage points. Notwithstanding the foregoing, the limit set forth in this subsection (B) shall be adjusted in accordance with Treasury Regulation Section 1.401(m)-2 to avoid duplicate use of the limit for any Highly Compensated Employee. 4.5 SPECIAL RULES ON DEFERRAL PERCENTAGE LIMITATION (A) For purposes of this Article, the Actual Deferral Percentage for any Participant who is a Highly Compensated Employee for the Plan Year and who is eligible to have Deferred Salary Contributions allocated to his account under two or more plans or arrangements described in Section 401(k) of the Code that are maintained by the Employer or an affiliated Employer shall be determined as if all such Deferred Salary Contributions were made under a single arrangement. (B) For purposes of determining the Actual Deferral Percentage of an Employee who is a Highly Compensated Employee to the extent provided in Code Section 414(q)(6)(A), the Deferred Salary Contributions and Compensation of such Employee shall include the Deferred Salary Contributions and Compensation of Family Members; and such Family Members shall be disregarded in determining the Average Actual Deferral Percentage for Participants who are Nonhighly Compensated Employees. (C) The determination and treatment of the Deferred Salary Contributions and Actual Deferral Percentage of any Participant shall satisfy such other requirements as may be prescribed by the Secretary of the Treasury. (D) In the event that this Plan is aggregated with one or more other plans in order to satisfy the requirements of Code Sections 401(a), 401(k) or 410(b), then all such aggregated plans, including the Plan, shall be treated as a single plan for all purposes under all such Code Sections (except for purposes of the average benefit percentage provisions in Code Section 410(b)(2)(A)(ii). 4.6 ADJUSTMENT OF DEFERRALS In the event the Administrator determines that one of the tests set forth in Section 4.4 is not satisfied at the time of its review hereunder, it may require that one or more Participants adjust their Deferral Election for the next and subsequent payroll periods, in order that the test set forth in Section 4.4(A) or (B) is thereafter satisfied. In addition, Article 12 shall apply if, at the end of the Plan Year, a test in Section 4.4(A) or (B) above is not satisfied. 4.7 AFTER-TAX CONTRIBUTIONS (A) Subject to the limitations set forth in Sections 5.3 and 5.5, each Participant who is not a Highly Compensated Employee may contribute from two percent (2%) to ten percent (10%) of the Participant's Compensation to the Plan as After-Tax Contributions. A Participant's After-Tax Contributions shall be credited to his After-Tax Contributions Account. Subject to the limitations set forth in Sections 5.3 and 5.5, each Participant who is a Highly Compensated Employee may contribute from two percent (2%) to six percent (6%) of such Participant's Compensation to the Plan as After-Tax Contributions. (B) All After-Tax Contributions shall be forwarded by the Employer to the Trustee as soon as administratively practicable but in no even later than ninety (90) days from the date on which such amounts were withheld and would have otherwise been payable to the Participant as Compensation. 4.8 AFTER-TAX CONTRIBUTION ELECTION Each Participant may make an After-Tax Contribution Election in accordance with procedures prescribed by the Administrator directing his Employer to withhold After-Tax Contributions from the Participant's Compensation within the limits set forth in Section 4.7(A). Such election shall become effective as of a date agreed upon between the Administrator and the Participant, provided that such date shall be subsequent to the receipt of the election by the Administrator. 4.9 SUSPENSION OF, OR CHANGE IN, AFTER-TAX CONTRIBUTIONS (A) A Participant may elect to suspend After-Tax Contributions at any time by giving notice to the Administrator in accordance with the procedures established for that purpose by the Administrator. Any such election shall be effective as soon as administratively practicable following the date such notice is received by the Administrator. By giving the Administrator such advance notice as the Administrator may require, a Participant who has suspended all After-Tax Contributions may resume After-Tax Contributions as of the first day of the calendar quarter next following receipt of such notice by the Administrator. (B) A Participant may elect to change the amount of his After-Tax Contributions on any January 1, April 1, July 1, or October 1, provided the Participant gives such advance notice as the Administrator may require in accordance with procedures established by the Administrator. The new contribution amount shall become effective as of the January 1, April 1, July 1, or October 1 following the expiration of the notice period with respect to contributions made subsequent to that January 1, April 1, July 1, or October 1. ARTICLE 5 EMPLOYER CONTRIBUTIONS 5.1 EMPLOYER DISCRETIONARY CONTRIBUTIONS (A) Employer Discretionary Contributions, if any, for each Plan Year shall be made in such amounts (or under such formula) as each Employer shall determine annually in its discretion; provided, however, that such Employer Discretionary Contributions shall not be made for any Plan Year in amounts which cannot be allocated to any Participant's Account by reason of the limitation described in Sections 5.5 and 5.6. (B) All Employer Discretionary Contributions shall be invested in accordance with the provisions of Article 6 and shall be made in cash or FHC Stock or a combination of cash and FHC Stock. (C) Subject to the limitations otherwise contained in this Article, Employer Discretionary Contributions made pursuant to this Section shall be allocated to the Employer Account of each Participant who is an Employee of the Employer on the last business day of the Plan Year. A Participant who has a Severance From Service Date during the Plan Year because of death or retirement on a Retirement Date shall be deemed to be an Employee on the last business day of the Plan Year. If Employer Discretionary Contributions are made in FHC Stock, FHC Stock shall be valued at the last-transaction price on the New York Stock Exchange (or such other national securities exchange on which the Company's stock is primarily trading) and reported by The Wall Street Journal with respect to the date as of which Employer Discretionary Contributions are allocated to Employer Accounts under this Section. If the Valuation Date falls on other than a trading day, FHC Stock shall be valued as of the most recent trading day preceding the Valuation Date. (D) Employer Discretionary Contributions made pursuant to this Section shall be allocated in the manner designated by the Employer at the time such contribution is made; provided, however, that such manner of allocation does not discriminate in favor of Participants who are Highly Compensated Employees. It is the intention of the Company and the other Employers that Employer Discretionary Contributions be allocated either (i) to all Participants of the Employer in the proportion that the Compensation of each such Participant for the Plan Year bears to the total Compensation of all of such Participants for such Plan Year, or (ii) as Qualified Nonelective Contributions or Qualified Matching Contributions to be allocated only to certain Nonhighly Compensated Employees as designated by the Employer for the purpose of ensuring that the Plan satisfies the deferral percentage and contribution percentage limitations described in Sections 4.4 and 5.3. If no allocation method is specified at the time of contribution, Qualified Nonelective Contributions and Qualified Matching Contributions will be allocated to Nonhighly Compensated Employees based upon Compensation in accordance with Section 5.1(D)(i) above. 5.2 EMPLOYER MATCHING CONTRIBUTIONS (A) For each calendar month, each Employer may make an Employer Matching Contribution to the Plan. The amount of an Employer's Matching Contribution for a calendar month shall be equal to: (1) The Employer's Matching Rate multiplied by the aggregate of the Deferred Salary Contributions and/or After-Tax Contributions (as limited by Section 5.3) made for such month by all Participants employed by the Employer during such month; less (2) Any forfeiture from Employer Accounts attributable to former Employees of the Employer. Monthly Deferred Salary Contributions and/or After-Tax Contributions on behalf of each Participant in excess of 6% of his or her Compensation for such month shall be disregarded. For purposes of this Paragraph (A) of this Section 5.2, the 'Matching Rate' means a percentage from 0% to 100%, as determined by each Employer for a Plan Year or for the balance of a Plan Year. An Employer's Matching Rate shall remain in effect until changed by the Employer to another permissible rate. 5.3 PERCENTAGE LIMITATION ON EMPLOYER MATCHING CONTRIBUTIONS AND AFTER-TAX CONTRIBUTIONS At such intervals as it shall deem proper, the Administrator shall review the Employer Matching Contributions made for Participants in order to determine that such Employer Matching Contributions and After-Tax Contributions, with respect to all Participants, satisfy one of the following tests: (A) The Average Contribution Percentage for Participants who are Highly Compensated Employees for the Plan Year shall not exceed the Average Contribution Percentage for Participants who are Nonhighly Compensated Employees for the Plan Year multiplied by 1.25; or (B) The Average Contribution Percentage for Participants who are Highly Compensated Employees for the Plan Year shall not exceed the Average Contribution Percentage for Participants who are Nonhighly Compensated Employees for the Plan Year multiplied by 2, provided that the Average Contribution Percentage for Participants who are Highly Compensated Employees does not exceed the Average Contribution Percentage for Participants who are Nonhighly Compensated Employees by more than 2 percentage points. Notwithstanding the foregoing, the limit set forth in this subsection (B) shall be adjusted in accordance with Treasury Regulation Section 1.401(m)-2 to avoid duplicate use of the limit for any Highly Compensated Employee. 5.4 SPECIAL RULES FOR CONTRIBUTION PERCENTAGE LIMIT TESTING (A) For purposes of this Article, the Contribution Percentage for any Participant who is a Highly Compensated Employee for the Plan Year and who is eligible to make After-Tax Contributions or to receive Employer Matching Contributions allocated to his Account under two or more plans described in Section 401(a) of the Code that are maintained by the Employer shall be determined as if all such After-Tax Contributions and Employer Matching Contributions were made under a single plan. (B) In the event that this Plan satisfies the requirements of Section 410(b) of the Code only if aggregated with one or more other plans, or if one or more other plans satisfy the requirements of Section 410(b) of the Code only if aggregated with this Plan, then this Article shall be applied by determining the Contribution Percentages of Participants as if all such plans were a single plan. (C) For purposes of determining the Contribution Percentage of a Participant who is a Highly Compensated Employee, After-Tax Contributions, Employer Matching Contributions and Compensation of such Participant shall include the After-Tax Contributions, Employer Matching Contribution and Compensation of Family Members, and such Family Members shall be disregarded in determining the Contribution Percentage for Participants who are Nonhighly Compensated Employees. (D) The determination and treatment of the Contribution Percentage of any Participant shall satisfy such other requirements as may be prescribed by the Secretary of the Treasury. 5.5 OVERALL LIMITATION ON ANNUAL ADDITIONS Any other provision of this Plan notwithstanding, in no event shall the Annual Additions allocated to a Participant for any Limitation Year exceed the lesser of: (A) Twenty-five percent (25%) of the Participant's Total Compensation for the Limitation Year; or (B) Thirty thousand dollars ($30,000) (or, if greater, 1/4 of the amount in effect under Section 415(b)(1)(A) of the Code for such Limitation Year.) The compensation limitation referred to in Paragraph (A) shall not apply to: (1) Any contribution for medical benefits (within the meaning of Section (A)(f)(2) of the Code) after separation from service which is otherwise treated as an Annual Addition, or (2) Any amount otherwise treated as an Annual Addition under Section 415(l)(1) of the Code. If a Participant's Annual Additions would exceed the foregoing limitation, then such Annual Additions shall be reduced in the order in which they are listed in Section 5.7(a). If a Participant's Annual Additions would exceed the foregoing limitation as a result of a reasonable error in estimating a Participant's Total Compensation or under other limited facts and circumstances which the Commissioner of Internal Revenue finds justifies this method of allocation, the excess amount shall be withheld or taken from a Participant's Account and held in a suspense account to be used to reduce future contributions for the Participant (or, if the Participant ceases to be an Employee, for remaining active Participants) in succeeding Limitation Years, as necessary. 5.6 SPECIAL RULES (A) PARTICIPATION IN OTHER DEFINED CONTRIBUTION PLAN. The limitation of Section 5.5 and 5.6 with respect to any Participant who at any time has participated in any other qualified defined contribution plan (as defined in Section 3(34) of ERISA and Section 414(i) of the Code) maintained by the Company shall apply as if the total contributions allocated under all such defined contribution plans in which the Participant has participated were allocated under one plan. (B) PARTICIPATION IN THIS PLAN AND A DEFINED BENEFIT PLAN. If a Participant has at any time been a participant in a qualified defined benefit plan (as defined in Section 3(35) of ERISA and Section 414(j) of the Code) and that is not part of a floor-offset arrangement (as defined in Section 414(k) of the Code) maintained by the Company, the sum of the Participant's Defined Benefit Plan Fraction and Defined Contribution Plan Fraction for any year shall not exceed one (1). In the event said sum of the Defined Benefit Plan Fraction and the Defined Contribution Plan Fraction would otherwise exceed 1.0 for any Plan Year, the projected annual retirement income benefit under the Company-sponsored defined benefit plan shall be limited, to the extent necessary, to reduce said Defined Benefit Plan Fraction so that the sum of the two fractions hereunder does not exceed the foregoing 1.0 limitation. For purposes of the foregoing paragraph only: (1) The "Defined Benefit Plan Fraction" for any Limitation Year is a fraction, the numerator of which is the Participant's projected annual retirement income benefit under all defined benefit plans, maintained by the Company determined as of the end of the Limitation Year, and the denominator of which is the lesser of: (a) The product of 1.25 multiplied by the dollar limitation in effect under Code Section 415(b)(1)(A) for the Limitation Year; or (b) The product of 1.4 multiplied by one hundred percent (100%) of the Participant's average Total Compensation for the three (3) consecutive calendar years during which his Total Compensation was the highest. (2) The "Defined Contribution Plan Fraction" for any Limitation Year is a fraction, the numerator of which is the sum of the Annual Additions to the accounts of the Participant in all defined contribution plans maintained by the Company (as of the end of the Limitation Year) for the Limitation Year and all preceding Limitation Years, and the denominator of which is the sum of the lesser of the following amounts, determined for such Limitation Year and for each prior Limitation Year of service with the Company: (a) The product of 1.25 multiplied by $30,000 (as adjusted pursuant to Section 415(d)(1)(B)); or (b) The product of 1.4 multiplied by twenty-five percent (25%) of the Participant's Total Compensation for such Limitation Year. (C) ADJUSTMENT OF LIMITATION FOR YEARS OF SERVICE OR PARTICIPATION (1) In the case of a Participant who has completed less than ten years of participation in any Company-sponsored defined benefit plans, the limitation set forth in Section 5.6(B)(1)(a) shall be adjusted by multiplying such amount by a fraction, the numerator of which is the Participant's number of years (or part thereof) of participation in Company-sponsored defined benefit plans and the denominator of which is ten. (2) If a Participant has completed less than ten years of service with the Company, the limitation set forth in Section 5.6(B)(1)(b) shall be adjusted by multiplying such amount by a fraction, the numerator of which is the Participant's number of years of service (or part thereof) and the denominator of which is ten. 5.7 DEFINITIONS For purposes of Sections 5.5 and 5.6, the following definitions shall apply: (A) "Annual Addition" shall mean the amount allocated to a Participant's Account during the Limitation Year that constitutes: (1) Deferred Salary Contributions, (2) After-Tax Contributions, (3) Employer Contributions, (4) voluntary contributions (if any) (5) forfeitures, and (6) amounts described in Section 415(l)(1) and 419A(d)(2) of the Code. Rollover Contributions shall not be included in Annual Additions. (B) "Company" shall include any other employer or employers (whether or not incorporated) which together with the Employers adopting the Plan are under common control as members of the same controlled group of corporations or affiliated service group as determined under Sections 414(b), (c) or (m) of the Code, as modified by Section 415(h), but only for the period during which such relationship exits. (C) "Limitation Year" shall mean the Plan Year. 5.8 REVERSION OF EMPLOYER CONTRIBUTIONS Except as provided in the following paragraphs (A), (B), and (C), the assets of the Plan shall never inure to the benefit of any Employer, and shall be held for the exclusive purposes of providing benefits to Participants and/or their Beneficiaries, and for defraying the expenses of administering the Plan. (A) In the case of an Employer Contribution which is made by virtue of a mistake of fact, such contribution shall be returned to the Employer within one (1) year after the payment of the contribution. (B) Employer Contributions are conditioned upon the deductibility of the contribution under Section 404 of the Code, or any successor provision thereto and to the extent the deduction of such Employer Contribution is disallowed such Employer Contribution (to the extent disallowed), shall be returned to the Employer within one (1) year after such disallowance of the deduction. 5.9 TIMING OF EMPLOYER CONTRIBUTIONS The Employer shall forward Employer Discretionary Contributions and Employer Matching Contributions to the Trustee for investment in the Trust Fund at such times as the Employer shall determine, but not later than the time prescribed by law for filing the Employer's Federal income tax return for the Plan Year plus extensions. ARTICLE 6 PARTICIPANTS' ACCOUNTS 6.1 SEPARATE ACCOUNTS The Administrator shall maintain or cause to be maintained separate Accounts for each Participant which shall consist of his Deferred Salary Account, After-Tax Contributions Account, Rollover Account and Employer Account. To the extent necessary or appropriate, the Administrator may also maintain, or cause to be maintained, on behalf of each Participant, a separate accounting as to Employer Discretionary Contributions and Employer Matching Contributions contributed to the Employer Account, the earnings and losses thereon and expenses attributable thereto. 6.2 VALUATION OF FUNDS There shall be determined as of each Valuation Date, but prior to crediting of contributions made by each Employer and Employee since the preceding Valuation Date, the fair market value of all assets of each of the Investment Funds maintained pursuant to Article 7. The fair market value of FHC Stock shall be the last transaction price on the New York Stock Exchange and reported by The Wall Street Journal with respect to the Valuation Date. If the Valuation Date falls on other than a trading day, FHC Stock shall be valued as of the most recent trading day preceding the Valuation Date. Such valuation shall be determined in accordance with the principles of Section 3(26) of ERISA and shall give effect to brokerage fees, transfer taxes, contributions, earnings, gains and losses, forfeitures, expenses, disbursements, and all other transactions during the valuation period since the preceding Valuation Date. In making such determinations and in crediting net appreciation or depreciation to the Participant's Accounts, the Administrator may employ such accounting methods as the Administrator may deem appropriate in order to fairly reflect the fair market values of the Investment Funds and each Participant's Account. For this purpose the Administrator may rely upon information provided by the Trustee, the investment manager, or other persons believed by the Administrator to be competent. 6.3 INVESTMENT OF CONTRIBUTIONS A Participant shall make an investment election which shall cover his Deferred Salary Contributions, After-Tax Contributions, Rollover Contributions and Employer Contributions. The investment election shall be made in such minimum percentages as may be established by the Company from time to time to be invested in one or more of the Investment Funds available under the Plan. Any investment election made by a Participant shall be a continuing direction until changed in accordance with procedures established by the Company. Each Participant is solely responsible for the selection of his investment options. The Trustee, the Administrator, the Employer and the officers, supervisors and other employees of the Employer are not empowered to advise a Participant as to the manner in which his Account shall be invested. The fact that an Investment Fund is available to a Participant for investment under the Plan shall not be construed as a recommendation for investment in that Investment Fund. In the event no election is made by a Participant, amounts subject to his election will be invested by the Administrator in a money market fund or such other offered fund which shall provide the most safety for purposes of the protection of principal. 6.4 CHANGE OF INVESTMENT ELECTION A Participant may change his investment directions as to his Account Balances among and between the Investment Funds offered under the Plan in accordance with procedures established by the Company from time to time. 6.5 RESTRICTIONS ON INVESTMENT ELECTIONS OF CERTAIN PARTICIPANTS Any investment elections relating to FHC Stock that are made by Participants who are officers, directors or ten percent shareholders of the Company for purposes of Section 16(b) of the Securities Exchange Act of 1934 shall be subject to such restrictions as the Company may establish to enable such Participants and the Plan to comply with, or qualify for an exemption from, the restrictions of Section 16(b) of the Securities Exchange Act of 1934. 6.6 STATEMENTS At least once annually the Administrator shall cause to be furnished to each Participant a statement showing the status of his Accounts as of the most recent Valuation Date and containing such other information as the Administrator shall determine. ARTICLE 7 INVESTMENT OF FUNDS 7.1 TRUST AGREEMENT (A) The Company shall enter into a Trust Agreement which shall be a part of the Plan. All contributions made pursuant to the provisions of the Plan shall be paid into the Investment Funds maintained pursuant to the Plan and the Trust Agreement. All such payments and increments thereon shall be held and disbursed in accordance with the provisions of the Plan and Trust Agreement, as each shall be applicable under the circumstances. No person shall have any interest in, or right to, any part of the funds so held in the Trust Fund, except as expressly provided in the Plan or Trust Agreement. (B) The Trustee shall have the exclusive authority and discretion to invest, manage and control the assets of the Plan, except to the extent that Participants have been given authority to direct the investment of their Accounts pursuant to Article 6 and Sections 15.11 and 15.12 and to the extent the Company has allocated the authority to manage Plan assets to one or more investment managers (within the meaning of Section 3(38) of ERISA). Any investment manager appointed by the Company shall have the exclusive authority to manage, including the power to direct the acquisition and disposition of, the Plan assets assigned to it by the Company. The Trustee may invest funds received in a temporary investment fund, or any other fund selected by the Trustee, until such time as he is directed to invest such funds by the investment manager(s), if any. (C) From time to time, the Company shall estimate the Plan benefits and administrative expenses to be paid out of the Trust Fund during the period for which the estimate is made and shall estimate the contributions to be made to the Plan during such period by Participants and by participating Employers. The Company shall inform the Trustee of the estimated cash needs of the Plan for each period with respect to which such estimates are made. Such estimates shall be made on an annual, quarterly, monthly or other basis, as the Company shall determine. 7.2 TRUST FUND The Trust Fund shall be comprised of one or more Investment Funds, as determined from time to time by the Company, including (without limitation), the FHC Stock Fund. Such Investment Funds may be evidenced by appropriate bookkeeping entries or by a physical segregation of assets. At its discretion, and in a nondiscriminatory manner, the Company may change or eliminate one or more of the Investment Funds offered under the Plan. 7.3 INDEPENDENT QUALIFIED PUBLIC ACCOUNTANT The Company shall engage an independent qualified public accountant to conduct such examinations and to render such opinions as may be required by Section 103(a)(3) of ERISA. The Company in its discretion may remove and discharge the person so engaged, but in such case it shall first appoint a successor independent qualified public accountant to perform such examinations and render such opinions. ARTICLE 8 BENEFIT ELECTION AND BENEFICIARY DESIGNATION PROCEDURES 8.1 ELECTIONS AS TO FORM OF DISTRIBUTION (A) The Participant's election of an optional form of distribution under Section 9.2 shall be made on the prescribed form and filed with the Administrator. Such election may be made only during an election period consisting of the 90 consecutive days ending on the Participant's Annuity Starting Date. A Participant may revoke any election of an optional form of distribution (without the consent of the Administrator) at any time prior to the end of such election period. If the Participant, having revoked a prior election, does not make another election within such election period, then his or her Account Balance shall be distributed in the form specified in Section 9.1. (B) Any election involving a waiver of the Qualified Joint and Survivor Annuity form of benefit shall not take effect unless the Participant's Spouse consents in writing to the election during such election period. The Spouse's consent shall (i) acknowledge the effect of the Participant's election, (ii) designate a form of benefits or a Beneficiary which may not be changed without spousal consent (or the consent of the Spouse must expressly permit designations by the Participant without further requirement of consent by the Spouse), and (iii) shall be witnessed by a notary public or, if permitted by the Company, by a representative of the Plan. Any consent under this Section shall be valid only with respect to the Spouse who signs the consent. An election made by a Participant and consented to by the Spouse may be revoked by the Participant, in writing, without the consent of the Spouse, anytime prior to the Participant's Annuity Starting Date. Any new election must comply with the requirements of this Section. The Spouse's consent shall not be required if the Participant (a) establishes to the Company's satisfaction that the Spouse's consent cannot be obtained because the Spouse cannot be located or because of other reasons deemed acceptable under applicable regulations and (b) agrees in writing that if the Company is compelled by a court of competent jurisdiction or other authority to pay all or any portion of the Participant's Account Balance to or on behalf of such Spouse, the Participant will indemnify the Company by paying to the Company, upon written demand, an amount equal to such payment, together with reasonable attorneys' fees and expenses. 8.2 INFORMATION ON FORM OF DISTRIBUTION (A) NOTICE OF DISTRIBUTION. The Administrator shall provide each Participant eligible to receive benefits under the Plan a general notice of distribution no less than thirty (30) and no more than ninety (90) days before the Participant's Annuity Starting Date. The notice must be in writing and contain an explanation of the eligibility requirements for, the material features of, and sufficient additional information to explain the relative values of, the optional forms of benefit available under the Plan. If the Participant is married at the time he receives the general notice, the notice shall also include a description in non-technical language of the Qualified Joint and Survivor Annuity, the circumstances in which it will be provided unless a contrary election is made, the availability of an election not to receive benefits in the form of the Qualified Joint and Survivor Annuity, the ability to revoke the election and the financial effect of an election (or revocation of an election) not to receive benefits in the form of the Joint and Survivor Annuity and the rights of the Participant's Spouse with respect to the Joint and Survivor Annuity. (B) ELECTION OF OPTIONAL BENEFIT FORM. Upon receipt of the general notice of distribution, a Participant may elect to receive his benefits in an optional form. The election shall be made only during an election period consisting of the 90 consecutive days ending on the Participant's Annuity Starting Date, or, if the Participant makes a timely request for additional information, at least sixty (60) days following the date such specific information is furnished to the Participant. Benefit payments shall be delayed if necessary to provide the full election period. Any election made under this paragraph may be revoked in writing during the election period, and after the election has been revoked, another election may be made during the election period. 8.3 DESIGNATION OF BENEFICIARY FOR DEATH BENEFIT (A) Each Participant may, at or after the time he becomes a Participant, designate one or more persons as a Beneficiary upon death. If more than one Beneficiary is named, the Participant may specify the sequence and/or proportion in which payments shall be made to each Beneficiary. The designation shall be made on the form and in a manner prescribed by the Administrator and shall become effective when filed with the Administrator. A Participant may, from time to time, change his Beneficiary by filing a new designation form with the Administrator. Any designation or change in designation shall be effective only if the Participant designates his current Spouse as the Beneficiary, or, if the Participant designates someone other than the Spouse, such Spouse consents in writing to the designation in a manner consistent with the spousal consent rules described in Section 8.1. Prior to the death of the Participant, no designated Beneficiary shall acquire any interest in any Participant's Account Balance and no designation shall be effective unless the Administrator receives such designation before the Participant's death. (B) Should the Participant designate a person other than (or in addition to) his Spouse as Beneficiary and not obtain the Spouse's consent to such designation, then any benefits payable under the Plan upon the Participant's death shall be paid to the Surviving Spouse unless the Surviving Spouse then consents to such other or additional designation in a manner consistent with Section 8.1. (C) Should the Participant die without having any effectively- designated surviving Beneficiary and if there is no surviving Spouse, then the Beneficiary shall be the Participant's then living children, if any, in equal shares. If the Participant has neither Spouse nor children living at the time payment is to be made, then the estate of the Participant shall be the Beneficiary. (D) If there is doubt as to the right of any Beneficiary to receive any amount, the Trustee, on instructions of the Administrator, may retain such amount until the rights thereto are determined, or it may pay such amount into any court of appropriate jurisdiction, in either of which events neither the Plan, Employer, Administrator or Trustee shall be under any other liability to any person in respect of such amount. (E) The death of any individual Beneficiary prior to the death of the Participant shall void the designation as to such Beneficiary, but in the event of the death of any Beneficiary, subsequent to the death of the Participant, the right to receive amounts included in the designation shall (unless the Participant shall otherwise have instructed the Administrator in writing) pass under such Beneficiary's will, or by the laws of descent and distribution applicable to such Beneficiary. (F) The marriage of a Participant shall void the designation of a Benefi- ciary, and any death benefits shall be subject to distribution in accordance with the provisions of Section 9.6. If the Participant shall again become an unmarried Participant, through divorce or death of a Spouse, the Participant shall again be entitled to make a Beneficiary designation pursuant to this Section. 8.4 INFORMATION ON DEATH BENEFITS The Administrator shall provide to each Married Participant a written expla- nation of the Qualified Pre-Retirement Survivor Annuity described in Section 9.6 comparable to the information on distribution options described in Section 8.2. Such explanation shall be provided within whichever of the following periods ends last: (A) The three-year period beginning with the first day of the Plan Year in which the Participant attains age 32; (B) The three-year period beginning with the first day of the first Plan Year for which the individual is a Participant; or (C) In the case of a Participant who ceases to be an Employee before attaining age 35, the two-year period beginning one year before the Participant ceases to be an Employee and ending one year after the Participant ceases to be an Employee provided, however, that if the individual again becomes an Employee, the explanation shall be provided in accordance with subsection (A) or (B), above. ARTICLE 9 DISTRIBUTION OF BENEFITS 9.1 TIME OF DISTRIBUTION: GENERAL RULE Subject to Sections 9.2 and 9.3, a Participant's vested Account Balance shall be distributed to him or her on or about the date that he or she has elected. Within the 60-day period commencing 90 days before the Annuity Starting Date, the Company shall provide to each Participant the written explanation of his or her distribution options (including his or her right to defer receipt of the distribution) described in Article 8. The distribution election shall be made in writing on the prescribed form, which shall be signed by the Participant and filed with the Company after he or she has received such explanation. Where applicable, the distribution election form shall include the written consent of the Participant to the distribution of his or her Plan Benefit before he or she attains age 65. 9.2 EARLIEST TIME OF DISTRIBUTION Except as required by Section 9.3, a Participant's vested Account Balance shall not be distributed to him or her prior to the later of: (A) The date when the Participant ceases to be an Employee; or (B) The date when the Company receives a completed distribution election form (as described in Section 9.1). 9.3 LATEST TIME OF DISTRIBUTION If a Participant's Severance From Service Date occurs prior to his Normal Retirement Date, he may elect to receive his vested Account Balance at any time following his Severance From Service Date but no later than sixty days following his attainment of the Normal Retirement Age under the Plan. If an Employee continues to provides services for an Employer beyond Normal Retirement Age, he may elect to defer the receipt of his vested Account Balance beyond his Normal Retirement Date, but in no event shall such a Participant's vested Account Balance be distributed to him or her after the April 1 next following the close of the calendar year in which the Participant attains age 70 (whether or not the Participant ceased to be an Employee). If a Participant's vested Account Balance is (or at the time of any prior distribution was) greater than $3,500, but such Participant (and the Spouse if the Participant is a Married Participant) fails to consent to a distribution, the Participant's Account Balance shall be retained in the Plan until distributed pursuant to this Article no later than sixty (60) days following the Participant's attainment of his Normal Retirement Age under the Plan. If the Participant fails to file a timely distribution election form, Article 15.5 (relating to unlocated Plan Participants) may apply. 9.4 NORMAL FORM OF BENEFIT Subject to Article 8 and Section 9.4, and unless a Participant has elected an alternate method of distribution pursuant to Section 9.2, distributions of a Participant's vested Account Balance shall be made in the form of an annuity to be purchased from an insurance company in accordance with specifications contained in the Participant's retirement or distribution request. In the case of a Married Participant the annuity shall be in the form of a fifty percent (50%) Qualified Joint and Survivor Annuity. The amount used to purchase such annuity shall be the Participant's vested Account Balance as of the most recent practicable Valuation Date preceding his Annuity Starting Date. 9.5 OPTIONAL FORMS OF BENEFIT In lieu of the method of payment described in Section 9.1, a Participant may (subject to the election procedures described in Article 8) elect, by written notice delivered to the Administrator and signed by the Participant prior to the date on which benefit payments would commence, to have his vested Account Balance distributed in one of the optional forms described in this Section. (A) Lump Sum Option: The Participant's vested Account Balance shall be determined as of the most recent practicable Valuation Date preceding the date the Participant's distribution is to be made in the form of a single lump sum in cash. (B) Installment Option: The Participant's vested Account Balance shall be distributed to the Participant in cash payments in quarterly, semiannual or annual installments of substantially nonincreasing designated amounts over a period of years certain. If a Participant elects the installment option, during the installment period, the remaining Account Balance shall be credited with a share of gains, losses, income and expenses of the Trust Fund in accordance with Articles 6 and 7, and the investment election procedure described in Section 6.3 shall remain available to Participants receiving installment distributions. 9.6 QUALIFIED PRE-RETIREMENT SURVIVOR ANNUITY If a Participant dies prior to the commencement of payment of benefits under the Plan, the Surviving Spouse shall receive a survivor annuity for the life of the Surviving Spouse that can be purchased with the Participant's Account Balance unless the Participant waives the Qualified Pre-Retirement Survivor Annuity, with spousal consent. The Surviving Spouse may elect to receive a single lump sum payment equal to the Participant's Account Balance in lieu of the survivor annuity. A Participant may waive the Qualified Pre- Retirement Survivor Annuity with spousal consent on or after the first day of the Plan Year in which the Participant attains age 35. A Participant may waive the Qualified Pre-Retirement Survivor Annuity prior to age 35, with spousal consent, provided that the Participant has received the information set forth in Section 8.4 prior to his waiver, and provided further that such waiver shall become invalid upon the beginning of the Plan Year in which the Participant's 35th birthday occurs. If there is no new waiver after such date, the Participant's Surviving Spouse must receive the Qualified Pre-Retirement Survivor Annuity upon the Participant's death. Any Qualified Pre-Retirement Survivor Annuity payable hereunder shall be provided by purchasing an annuity from a duly licensed insurance company. Upon purchase of such annuity in accordance with the terms of the Plan and transfer to the Participant or his Surviving Spouse, the Plan and the Trust Fund shall be discharged of all liability for benefits payable under the Plan, and the Participant and/or Surviving Spouse shall look solely to the insurance company for the payment of benefits. Except as provided in Section 9.7, the distribution of a Participant's vested Account Balance to his or her Surviving Spouse pursuant to this Section 9.6 may be made prior to the date that the Participant attained or would have attained his or her Normal Retirement Age only if such Surviving Spouse consents to such distribution in writing not more than 90 days before the Annuity Starting Date. 9.7 SMALL BENEFITS: IMMEDIATE LUMP SUM If a Participant's vested Account Balance (determined as of the Valuation Date coincident with or next following the date of termination of employment) is not greater than $3,500, and such vested Account Balance was not greater than $3,500 at the time of any prior distribution, then it will be paid to the Participant in a single lump sum in cash as soon as administratively practicable. In the event that a Participant who receives a distribution pursuant to this subsection, which is less than one hundred percent (100%) of the value of his Account Balance again becomes an Employee prior to incurring five (5) consecutive One-Year Periods of Severance, as described in Section 10.3, any forfeited amount shall be restored, as provided in Section 10.3. 9.8 INVESTMENT OF ACCOUNT BALANCE OF TERMINATED PARTICIPANT In the event a Participant's employment with the Employer is terminated and the Participant elects to leave his Account Balance in the Plan, such Account Balance shall continue to be invested pursuant to the provisions of the Plan. In the event any investment alternative ceases to be offered as an investment alternative under the Plan, the portion of the Participant's Account Balance invested in such discontinued investment fund shall be liquidated and reinvested in a money market fund or such other offered fund which shall provide the most safety for purposes of the protection of principal. 9.9 REQUIRED DISTRIBUTIONS In the event that a Participant dies after distribution of his or her Plan benefit has begun, then his or her remaining benefit shall be distributed at least as rapidly as under the distribution method in use at his or her death. In the event that a Participant dies before any distribution of his or her Plan benefit has begun, then distribution of any death benefit under the Plan must be made (A) to a Beneficiary who is not the Participant's Surviving Spouse, over the Beneficiary's life or life expectancy, beginning not later than one year after the Participant's death; (B) to the Participant's Surviving Spouse, over the Surviving Spouse's life or life expectancy, beginning not later than the later of one year after the Participant's death or the date that the Participant attained or would have attained age 70; or (C) in all other cases, within five years after the Participant's death. All distributions under the Plan shall be made in accordance with the Income Tax Regulations under Section 401(a)(9) of the Code, including Income Tax Regulations Section 1.401(a)(9)-2 or its successor. Such regulations are incorporated in the Plan by reference and shall override any inconsistent provisions of the Plan. 9.10 DIRECT ROLLOVERS (i) THE DIRECT ROLLOVER OPTION. Notwithstanding any provision of the Plan to the contrary that would otherwise limit a Distributee's election under this Section 9.10, effective January 1, 1993, a Distributee may elect, at the time and in the manner prescribed by the Administrator, to have any portion of an Eligible Rollover Distribution paid directly to an Eligible Retirement Plan specified by the Distributee in a Direct Rollover. (ii) DEFINITION OF ELIGIBLE ROLLOVER DISTRIBUTION. An Eligible Rollover Distribution is any distribution of all or any portion of the balance to the credit of the Distributee, except that an Eligible Rollover Distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the Distributee or the joint lives (or joint life expectancies) of the Distributee and the Distributee's designated beneficiary, or for a specified period of 10 years or more; any distribution to the extent such distribution is required under Section 401(a)(9) of the Code; and the portion of any distribution that is not includable in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities). (iii) DEFINITION OF ELIGIBLE RETIREMENT PLAN. An Eligible Retirement Plan is an individual retirement account described in Section 408(a) of the Code, an individual retirement annuity described in Section 408(b) of the Code, an annuity plan described in Section 403(a) of the Code, or a qualified trust described in Section 401(a) of the Code, that accepts the Distributee's Eligible Rollover Distribution. However, in the case of an Eligible Rollover Distribution to the surviving spouse, an Eligible Retirement Plan is an individual retirement account or individual retirement annuity. (iv) DEFINITION OF DISTRIBUTEE. A Distributee includes an Employee or former Employee. In addition, the Employee's or former Employee's surviving spouse or former spouse who is the Alternate Payee under a QDRO are Distributees with regard to the interest of the spouse or former spouse. (v) DEFINITION OF DIRECT ROLLOVER. A Direct Rollover is a payment by the Plan to the Eligible Retirement Plan specified by the Distributee. ARTICLE 10 VESTING, RETIREMENT, AND TERMINATION OF EMPLOYMENT 10.1 VESTING IN DEFERRED SALARY, AFTER-TAX AND ROLLOVER CONTRIBUTIONS A Participant shall at all times have a one hundred percent (100%) vested and nonforfeitable interest in the value of his Deferred Salary Account, After-Tax Contributions Account and Rollover Account, if any. 10.2 VESTING IN EMPLOYER ACCOUNT (A) A Participant shall at all times have a one hundred percent (100%) vested and nonforfeitable interest in the value of his Employer Contributions (and earnings thereon) made prior to the Effective Date. (B) A Participant shall have a one hundred percent (100%) vested and nonforfeitable interest in the value of all funds credited to his Employer Account at his Normal Retirement Age or if the Participant's employment is terminated due to death, becoming Disabled or retirement on a Normal, Early or Postponed Retirement Date. (C) A Participant whose employment is terminated prior to his Retirement Date (and for any reason other than death, becoming Disabled or termination on an Early, Normal or Postponed Retirement Date) shall have a vested and nonforfeitable right to any Employer Contributions (and earnings thereon) in his Employer Account in accordance with the following schedule: YEARS OF SERVICE PERCENTAGE VESTED ---------------- ----------------- less than 1 0% 1 but less than 2 33-1/3% 2 but less than 3 66-2/3% 3 or more 100% For all new Participants of the Plan whose employment commences on or after January 1, 1995, a Participant shall have a vested and nonforfeitable right to any Employer Contributions (and earnings thereon) in his Employer Account in accordance with the following schedule: YEARS OF SERVICE PERCENTAGE VESTED ---------------- ----------------- less than 1 0% 1 but less than 2 20% 2 but less than 3 40% 3 but less than 4 60% 4 but less than 5 80% 5 or more 100% 10.3 VESTING AFTER PRIOR DISTRIBUTIONS Section 10.2 shall be applied as set forth in this Section 10.3 in the case of any Participant who received one or more prior withdrawals or distributions from his Employer Account, who thereafter has not incurred five (5) consecutive One-Year Periods of Severance and who is not yet 100% vested in the Employer Account. The vested portion of such Participant's Employer Account shall be determined in two steps. First, the Participant's vested percentage under Section 10.2 shall be applied to the sum of (a) the value of the Employer Account plus (b) the aggregate amount of the Participant's prior withdrawals or distributions from such Account. Then, the aggregate amount of the Participant's prior withdrawals or distributions from such Account shall be subtracted. 10.4 FORFEITURES (A) If a Participant's employment is terminated, any portion of his Account Balance in which the Participant does not have a nonforfeitable interest shall be provisionally forfeited as of his Severance From Service Date. (B) If a Participant who has had a provisional forfeiture shall again become an Employee prior to incurring five (5) consecutive One-Year Periods of Severance, the Employer shall reinstate (as of the Participant's Reemployment Commencement Date) the dollar amount of his Account Balance forfeited, unadjusted for any gains or losses which occurred during said Periods of Severance. If such Participant received a distribution upon termination, reinstatement of the prior forfeited amount will be provided automatically without requiring repayment of the amount of any prior distribution. Thereafter, Section 10.3 may be applicable to the determination of the vested portion of the Participant's Employer Account. (C) If the Participant is not rehired before incurring five (5) consecutive One-Year Periods of Severance, the amount of his provisional forfeiture shall be forfeited permanently. (D) Any provisional forfeitures resulting from the operation of this Section shall be held until the last business day of the Plan Year and shall be used first to reinstate prior forfeitures pursuant to paragraph (B). Any amounts remaining after such reinstatement shall be used, as of the last business day of the Plan Year, to reduce Employer Contributions which are due or may become due under the Plan. To the extent the available forfeitures are insufficient to fully reinstate Participants' previously nonvested amounts, the Employer will make an additional contribution to the Plan sufficient to fully reinstate such amounts. ARTICLE 11 WITHDRAWALS 11.1 HARDSHIP WITHDRAWALS (A) The Administrator shall direct the Trustee to make a distribution to a Participant in accordance with this Section in the event of a Participant's Hardship and request for withdrawal. For purposes of this Section, a distribution will be on account of Hardship only if the distribution: (1) Is made on account of an immediate and heavy financial need of the Participant; and (2) Is necessary to satisfy such immediate and heavy financial need and does not exceed the amount required to relieve such need and is not reasonably available from other resources of the Participant. (B) Immediate and heavy financial needs recognized by the Plan shall include and be limited to: (1) Medical expenses (as described in Section 213(d) of the Code) incurred by the Participant, the Participant's Spouse or any dependent of the Participant (as defined in Section 152 of the Code); (2) Purchase (excluding mortgage payments) of a principal residence for the Participant; (3) Payment of tuition and related educational fees for the next 12 months of post-secondary education for the Participant or the Participant's Spouse, children or dependents; (4) The need to prevent eviction of the Participant from his principal residence or foreclosure on the mortgage of the Participant's principal residence; or (5) Such other immediate and heavy financial needs as determined by the Commissioner of the Internal Revenue Service and announced by publication of revenue rulings, notices and other documents of general applicability. (C) A distribution will be deemed necessary to satisfy the immediate and heavy financial need of the Participant if: (1) The distribution is not in excess of the amount of the immediate and heavy financial need; (2) The Participant has obtained all distributions, other than hardship distributions, and all nontaxable loans currently available under all plans maintained by the Employer; (3) The Plan, and all other plans maintained by the Employer, other than health care plans, provide that the Participant's elective contributions and employee contributions, if any, will be suspended for at least 12 months after receipt of the hardship distribution; and (4) The Plan, and all other plans maintained by the Employer, provide that the Participant may not make elective contributions for the Participant's taxable year immediately following the taxable year of the hardship distribution in excess of the applicable limit under Section 402(g) of the Code for such next taxable year less the amount of such Participant's elective contributions for the taxable year of the Hardship distribution. (D) The Administrator may require the submission of such evidence as it may reasonably deem necessary to confirm the existence of such a Hardship. In the case of a married Participant, a requested Hardship withdrawal shall not be paid unless the Participant's Spouse has consented in writing to the payment of such withdrawal in the form of a lump sum (instead of a Qualified Joint and Survivor Annuity). The Spouse's consent shall be given within the 90-day period preceding payment of the withdrawal. A request for distribution pursuant to this Section shall be approved or denied by written instrument given by the Administrator to the Participant at his address as provided to the Administrator, within sixty (60) days after the date the written request, complete with all evidence with respect thereto requested by the Administrator, is given to the Administrator by the Participant. In the event that such request is approved, the distribution shall be made within thirty (30) days after notice of approval is given by the Administrator to the Participant from such portions of the Participant's Account as he shall designate; provided, however, that under no circumstances may Employer Contributions and earnings thereon, or earnings on the Participant's Deferred Salary Contributions, be distributed pursuant to this Section. 11.2 WITHDRAWAL OF AFTER-TAX CONTRIBUTIONS Upon written request to the Plan Administrator, a Participant may withdraw all or any part of the amount credited to his After-Tax Contributions Account, provided, however, that the Participant may make such withdrawal only once each Plan Year. All such withdrawals shall be made within sixty (60) days of the receipt of the Participant's written request by the Administrator, or as soon thereafter as practicable. 11.3 LOANS TO PARTICIPANTS 11.3.1 AMOUNT OF LOANS. With the Company's prior written consent, a Participant who is an Employee (or who otherwise is a 'party in interest' as defined in Section 3(14) of ERISA) may obtain a cash loan from the Participant's Accounts. The minimum amount of the loan shall be $1,000. Subject to Section 11.3.2, the maximum amount of the loan shall be 50% of the value of the vested portion of the Participant's Accounts. 11.3.2 AGGREGATE LOAN LIMITATION. No loan shall be granted under the Plan if it would cause the aggregate balance of all loans which a Participant thereafter has outstanding under this Plan or under any other qualified plan maintained by any member of the Affiliated Group to exceed $50,000, less the amount by which such aggregate balance has been reduced through repayments during the period of 12 consecutive months ending on the day before a new loan is made. 11.3.3 TERMS OF LOANS. A loan to a Participant shall be made on such terms and conditions as the Company may determine, provided that the loan shall: (a) Be evidenced by a promissory note signed by the Participant and secured by no more than 50% of the value of the vested portion of all of his or her Accounts (regardless of the amount of the loan or the source of the loan funds); (b) Bear interest at a fixed rate equal to the prime interest rate in effect at the New York main office of Citibank, N.A., plus 1% on the last business day of the month immediately preceding the date on which the Company receives the prescribed loan request form; (c) Provide for declining balance amortization over its term with payments at quarterly or more frequent intervals, as determined by the Company; (d) Provide for loan payments of not less than $10 per payment; (e) Provide for loan payments (i) to be withheld whenever possible through periodic payroll deductions from the Participant's compensation from the Company or (ii) to be paid by check or money order whenever payroll withholding is not possible; (f) Provide for repayment in full on or before the earlier of (i) the date when the Participant ceases to be an Employee or (ii) the date five years after the loan is made (or the date 15 years after the loan is made if the loan is used to acquire a dwelling which, within a reasonable period of time, is to be used as the principal residence of the Participant); and (g) Provide that a Participant's Accounts shall not be applied to the satisfaction of the Participant's loan obligations before the Accounts become distributable under Article 9, unless the Company determines that the loan obligations are in default and takes such actions as the Company deems necessary or appropriate to cause the Plan to realize on its security for the loan. Such actions may include (without limitation) an involuntary withdrawal from the Participant's vested Accounts, whether or not the withdrawal would be permitted under Section 11.5 on a voluntary basis; provided that an involuntary withdrawal from vested Company contributions paid within the most recent 24 months or from Deferred Salary Accounts shall be made only to the extent that the requirements of Section 11.5 are met. The Company may take such action as it deems necessary to recover the balance of a loan secured by such Company contributions or by Deferred Salary Accounts. If an involuntary withdrawal from Deferred Salary Accounts or Employer Account occurs, the Participant shall be subject to the consequences described in Article 9. If any involuntary withdrawal occurs, the Participant shall not be permitted to obtain a new loan under the Plan for a period of 12 months, commencing as of the last day of the payroll period in which the involuntary withdrawal occurs. The consent of the Participant's Spouse shall not be required at the time of any action taken by the Company under this Section 11.3.3(g). 11.3.4 COMPANY CONSENT. The Company, based on the borrower's creditworthiness and the criteria set forth in this Section 11.3, may withhold its consent to any loan or may consent only to the borrowing of a part of the amount requested by the Participant. The Company shall act upon requests for loans in a uniform and nondiscriminatory manner, consistent with the requirements of Section 401(a), Section 401(k) and related provisions of the Code and Section 408(b)(1) of ERISA and the regulations thereunder. 11.3.5 RESTRICTIONS ON LOANS. No Participant shall have more than one loan under this Section 11.3 outstanding at the same time. A Participant shall not be permitted to obtain more than one loan under this Section 11.3 in any period of 12 consecutive months. A married Participant shall not be permitted to obtain any loan under this Section 11.3 unless his or her Spouse has consented in writing to the assignment of his or her Accounts as security and to any actions that the Company subsequently may take under Section 11.3.3(g), except to the extent the portion of the Participant's Accounts used as security for the loan does not exceed $3,500. 11.3.6 DISBURSEMENT AND SOURCE OF LOANS. A Participant may request a loan by filing a request with the Company in accordance with procedures established by the Company. A loan shall be disbursed as soon as reasonably practicable after the date on which the Company receives the loan request (subject to the Company's consent). For purposes of this Section 11.3, the value and vested percentage of a Participant's Accounts shall be determined on the last business day of the quarter immediately preceding the date when the Trustee effects the loan transaction or such other more current valuation date that the Company may determine. If a Participant requests and is granted a loan, the amount of the loan shall be transferred from the Participant's Accounts. If more than one Account is available to make a transfer, the transfer shall be made proportionately from each Account, subject to such other ordering rules as the Company may adopt. The promissory note executed by the Participant shall be held by the Trustee or its agent as part of the Trust Fund. 11.3.7 LOAN PAYMENTS AND DEFAULTS. Principal and interest payments on a Participant's loan shall be credited as soon as reasonably practicable to the Participant's Accounts proportionately, subject to the ordering rules, if any, adopted by the Company. Any loss caused by nonpayment or other default on a Participant's loan obligations shall be borne solely by that Participant's Accounts. 11.3.8 LOAN FEES. A Participant who obtains a loan under this Section 11.3 shall be required to pay such fees as the Trustee or its agent may impose in order to defray the cost of administering loans from the Plan. ARTICLE 12 DISTRIBUTION OF EXCESS DEFERRALS, EXCESS CONTRIBUTIONS AND EXCESS AGGREGATE CONTRIBUTIONS 12.1 DISTRIBUTION OF EXCESS CONTRIBUTIONS (A) Notwithstanding any other provision of the Plan, Excess Contributions (as hereinafter defined) and income allocable thereto, including income for periods after the close of the Plan Year to which the Excess Contributions applies, if appropriate, shall be distributed as soon as administratively possible, but in no event later than the last day of each Plan Year, to Participants on whose behalf such Excess Contributions were made for the preceding Plan Year. (B) For purposes of this Section, 'Excess Contributions' for any Plan Year means the aggregate amount of Deferred Salary Contributions of Highly Compensated Employees for any Plan Year (not including any such Deferred Salary Contributions that exceed the $9,240 limit of Section 402(g)(3) of the Code and are distributed to Participants for the calendar year ending with such Plan Year pursuant to Section 4.1(C)) that exceeds the limitations described in Section 4.4. (C) The amount of such Excess Contributions distributable to Highly Compensated Employees shall be determined by reducing the Actual Deferral Percentage of the Highly Compensated Employee with the highest Actual Deferral Percentage to the extent required to (1) Enable the cash or deferred arrangement to satisfy the deferral percentage test limitation described in Section 4.4; or (2) Cause such Highly Compensated Employee's Actual Deferral Percentage to equal the Actual Deferral Percentage of the Highly Compensated Employee with the next highest Actual Deferral Percentage. This process must be repeated until the cash or deferred arrangement satisfies one of the deferral percentage tests described in Section 4.4. Any Excess Contributions of any of the 10 most highly compensated Highly Compensated Employees and any five percent (5%) owner affected by the family aggregation rules described in the definition of the term 'Highly Compensated Employee' in Section 2.35 above shall be allocated among the individuals in each family aggregation group in proportion to the Deferred Salary Contributions taken into account under Section 4.4 for each such individual. Any Excess Aggregate Contributions of any of the 10 most highly compensated Highly Compensated Employees and any five percent (5%) owner affected by the family aggregation rules described in the definition of the term 'Highly Compensated Employee' in Section 2.35 above shall be allocated among the individuals in each family aggregation group in proportion to the After-Tax Contributions and Employer Matching Contributions taken into account under Section 5.3 for each such individual. (D) The income allocable to Excess Contributions shall be determined by multiplying income allocable to the Participant's Deferred Salary Contributions and Employer Contributions for the Plan Year by a fraction, the numerator of which is the Excess Contribution on behalf of the Participant for the preceding Plan Year and the denominator of which is the sum of the Participant's account balances attributable to Deferred Salary Contributions and Employer Contributions on the last day of the preceding Plan Year. Income allocable to Excess Contributions for the Plan Year and for the "gap period" between the end of the Plan Year and the date of distribution shall be determined pursuant to Proposed Regulation Section 1.401(k)-1(f)(4). (E) The Excess Contributions which would otherwise be distributed to the Participant shall be adjusted for income in accordance with regulations and other official pronouncements from the Secretary of the Treasury. (F) Amounts distributed pursuant to this Section shall first be treated as distributions from the Participant's Deferred Salary Account and shall be treated as distributed from the Participant's Employer Contributions only to the extent such Excess Contributions exceed the balance in the Participant's Deferred Salary Account. 12.2 DISTRIBUTION OF EXCESS AGGREGATE CONTRIBUTIONS (A) Excess Aggregate Contributions and income allocable thereto shall be forfeited, pursuant to this Section, if otherwise forfeitable under the terms of this Plan, or if not forfeitable, distributed no later than the last day of each Plan Year to Participants who made After-Tax Contributions for the preceding Plan Year or who received an Employer Matching Contribution for the preceding Plan Year. (B) For purposes of this Section, 'Excess Aggregate Contributions' shall mean the amount described in Section 401(m)(6)(B) of the Code. (C) The Employer shall rank its Highly Compensated Employees by Contribution Percentage in descending order. The Employer shall then reduce the amount of Employer Matching Contributions and After-Tax Contributions taken into account in computing the Contribution Percentage which were made on the behalf of the Highly Compensated Employee with the Highest Contribution Percentage until the following occurs: (1) The Plan satisfies the limitations set forth in Section 5.3; or (2) The Contribution Percentage for such Highly Compensated Employee is reduced to a percentage which equals the Contribution Percentage of the Highly Compensated Employee with the next highest Contribution Percentage. In applying the reduction mechanism set forth in this Section, the After-Tax Contributions made by a Highly Compensated Employee shall be reduced before the Employer Matching Contributions made on behalf of such Highly Compensated Employee are reduced. (D) The income allocable to Excess Aggregate Contributions shall be determined by multiplying the income allocable to the Employer Matching Contributions and After-Tax Contributions for the Plan Year by a fraction, the numerator of which is the Excess Aggregate Contributions made on behalf of the Participant for the preceding Plan Year and the denominator of which is the sum of the Participant's account balance attributable to Employer Matching Contributions and After-Tax Contributions. Income allocable to Excess Aggregate Contributions for the Plan Year and for the "gap period" between the end of the Plan Year and the date of distribution (or forfeiture) shall be determined pursuant to Proposed Regulations Section 1.401(m)-1(e)(3). (E) The Excess Aggregate Contributions to be distributed to a Participant shall be adjusted for income, and, if there is a loss allocable to the Excess Aggregate Contributions, shall in no event be less than the lesser of the Participant's Account Balance under the Plan or the Participant's Employer Matching Contributions and After-Tax Contributions for the Plan Year. (F) Excess Aggregate Contributions shall be distributed from the Participant's After-Tax Contributions Account and forfeited, if otherwise forfeitable under the terms of the Plan (or, if not forfeitable, distributed), from the Participant's Matching Contribution Account in proportion to the Participant's Matching Contributions for the Plan Year. (G) Amounts forfeited by Highly Compensated Employees under this Section shall be: (1) Treated as Annual Additions under Sections 5.6 and 5.7 of the Plan; and (2) Allocated, after all other forfeitures under the Plan, to the same Participants and in the same manner as such other forfeitures of Employer Matching Contributions are allocated to Participants under the Plan; provided, however, that no such forfeitures arising under this Section shall be allocated to the account of any Highly Compensated Employee. ARTICLE 13 ADMINISTRATION OF THE PLAN 13.1 PLAN ADMINISTRATOR Except as to those functions reserved within the Plan to the Board of Directors, there shall be an individual administrator or an administrative committee (hereafter referred to as the Administrator) appointed by the Board of Directors to control and manage the operation and administration of the Plan. The Administrator shall be considered the "named fiduciary" and the "plan administrator" for purposes of ERISA and the Code. The Board of Directors shall have the authority to allocate or delegate among themselves, to the Administrator, or to any other person, any fiduciary responsibility with respect to the Plan. 13.2 SELECTION OF COMMITTEE If the Board of Directors appoints a committee to be the Administrator, then such committee shall consist of not fewer than three nor more than seven members to serve at its pleasure and without compensation for service as such. The committee shall select a secretary (who may, but need not, be a member of the committee) to keep its records or to assist it in the doing of any act or thing to be done or performed by the committee. A majority of the members of the committee at the time in office shall constitute a quorum for the transaction of the business at any meeting. Any determination or action of the committee may be made or taken by a majority of the members present at any meeting thereof, or without a meeting by a resolution or written memorandum concurred in by a majority of the members then in office. No member who is a Participant of this Plan, however, shall vote on any question relating solely to himself. 13.3 POWERS OF THE ADMINISTRATOR The Administrator, subject to the limitations herein contained and to such other restrictions as the Board of Directors may make, shall have the discretionary power and the duty to take all action and to make all decisions necessary or proper to carry out the provisions of Plan. The determination of the Administrator as to any question involving the general administration and interpretation of the Plan shall be final, conclusive and binding. Any discretionary actions to be taken under the Plan by the Administrator with respect to the classification of Employees, Participants, beneficiaries, contributions, or benefits shall be uniform in their nature and applicable to all persons similarly situated. Without limiting the generality of the foregoing, the Administrator shall have the following powers and duties: (A) To require any person to furnish such information as it may request for the purpose of the proper administration of the Plan as a condition of receiving any benefits under the Plan; (B) To make and enforce such rules and regulations and prescribe the use of such forms as it shall deem necessary for the efficient administration of the Plan; (C) To interpret the Plan, and to resolve ambiguities, inconsistencies and omissions, which findings shall be binding, final and conclusive; (D) To decide on questions concerning the Plan and the eligibility of any Employee to participate in the Plan, in accordance with the provisions of the Plan; (E) To determine the amount of benefits which shall be payable to any person in accordance with the provisions of the Plan. The Administrator may require claims for benefits to be filed in writing, on such forms and containing such information as the Board may deem necessary. Adequate notice shall be provided in writing to any Participant or beneficiary thereof whose claim for benefits under the Plan has been wholly or partially denied. The Plan claim review procedure is more particularly described in Section 13.7 of the Plan. Notice of denial of a claim shall be written in a manner calculated to be understood by the Participant or his Beneficiary and shall afford reasonable opportunity to the Participant or his Beneficiary whose claim for benefits has been denied for a full and fair review of the decision denying the claim; (F) To allocate any such powers and duties to or among individual members of any administrative committee serving as the Administrator; (G) To designate persons other than Administrator to carry out any duty or power which would otherwise be a fiduciary responsibility of the Administrator, under the terms of the Plan; and (H) To make such administrative or technical amendments to the Plan as may be necessary or appropriate to carry out the intent of the Board of Directors, including such amendments as may be required to satisfy the requirements of Section 401(a) and Section 401(k) of the Code, and of ERISA and any similar provisions or subsequent revenue or other laws, or the rules and regulations from time to time in effect under any of such laws or to conform with governmental regulations or other policies. 13.4 SELECTION AND REPLACEMENT OF TRUSTEE The Board of Directors shall appoint and they shall retain the power to discharge or replace the Trustee. However, the power to appoint, discharge or replace the Trustee shall not confer any responsibility or authority upon the Board of Directors with respect to the management or control of the assets of the Plan. 13.5 SELECTION OF OTHER PROFESSIONAL COUNSELORS (A) The Administrator may employ a counsel, a qualified public accountant, a qualified actuary, consultant and such clerical, medical and other accounting services as it may require in carrying out the provisions of the Plan or in complying with requirements imposed by ERISA and the Code. (B) The Administrator may appoint an investment manager or managers and delegate investment responsibilities to manage any assets of the Plan, including the power to acquire and dispose of fund assets and to perform such other services as the Administrator shall deem necessary or desirable in connection with the management of Plan assets. Such investment manager or managers shall (i) be registered as an investment advisor under the Investment Advisors Act of 1940; (ii) be a bank, as defined in the Investment Advisors Act of 1940; or (iii) be an insurance company qualified to manage, acquire or dispose of qualified plan assets under the laws of more than one State; and shall acknowledge in writing to the Administrator that he is (or they are) a fiduciary with respect to the Plan. Anything in this Article or elsewhere in the Plan to the contrary notwithstanding, the Trustee shall be relieved of the authority and discretion to manage and solely control the assets of the Plan to the extent that authority to acquire, dispose of, or otherwise manage the assets of the Plan is delegated to one or more investment managers in accordance with this Section. 13.6 RELIANCE ON PROFESSIONAL COUNSELORS To the extent permitted by law, the Administrator and any person to whom it may delegate any duty or power in connection with administering the Plan, the Employer, and the officers and directors thereof, shall be entitled to rely conclusively upon, and shall be fully protected in any action taken or suffered by them in good faith in reliance upon, any counsel, accountant, other specialist, or other person selected by the Administrator, or in reliance upon any tables, valuations, certificates, opinions or reports which shall be furnished by any of them or by the Trustee. Further, to the extent permitted by law, no member of the Administrator, nor the Employer, nor the officers nor directors thereof, shall be liable for any neglect, omission or wrongdoing of the Trustee or any other member of the Administrator. 13.7 PLAN CLAIM PROCEDURE (A) Any claim for a Plan benefit hereunder shall be filed by a Participant or Beneficiary (claimant) of this Plan on the form prescribed for such purpose with the Administrator, or in lieu thereof, by written communication which is made by the claimant or the claimant's authorized representative which is reasonably calculated to bring the claim to the attention of the Administrator. (B) If a claim for a Plan benefit is wholly or partially denied, notice of the decision shall be furnished to the claimant by the Administrator within ninety (90) days after receipt of the claim by the Administrator. (C) Any claimant who is denied a claim for benefit shall be furnished written notice setting forth: (1) The specific reason or reasons for the denial; (2) Specific reference to the pertinent Plan provisions upon which the denial is based; (3) A description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary; and (4) An explanation of the Plan's claim review procedure. (D) In order that a claimant may appeal denial of a claim, a claimant or his duly authorized representative: (1) May request a review by written application to the Administrator not later than sixty (60) days after receipt by the claimant of written notification of denial of a claim; (2) May review pertinent documents; and (3) May submit issues and comments in writing. (E) A decision on review of a denied claim shall be made not later than sixty (60) days after the Plan's receipt of a request for review, unless special circumstances require an extension of time for processing, in which case a decision shall be rendered within a reasonable period of time, but not later than one hundred twenty (120) days after receipt of a request for review. The decision on review shall be in writing and shall include the specific reason(s) for the decision and the specific reference(s) to the pertinent Plan provisions on which the decision is based. 13.8 SOURCE OF PAYMENT OF EXPENSES All expenses prior to the termination of the Plan that shall arise in connection with the administration of the Plan, including but not limited to the compensation of the Trustee, administrative expenses and proper charges and disbursements of the Trustee and compensation and other expenses and charges of any counsel, accountant, specialist or other person who shall be employed by the Administrator in connection with the administration thereof, shall be paid from the Trust Fund to the extent not paid by the Employer. 13.9 COMPENSATION OF THE ADMINISTRATOR The Administrator shall serve without compensation for services as such (other than any compensation the Administrator may receive as an employee of the Employer), but all reasonable expenses incurred in the performance of their duties shall, to the extent not paid by the Employer, be paid from the Trust Fund. Unless otherwise determined by the Company or unless required by any Federal or State law, the Administrator shall not be required to give any bond or other security in any jurisdiction. 13.10 FIDUCIARY LIABILITY INSURANCE The Administrator may, to the extent permitted by law, procure and pay (from assets of the Plan or the Employer) insurance premiums for fiduciary liability insurance covering the Board of Directors, the Administrator and other such Employees of the Employer as the Administrator shall in their discretion determine. To the extent such insurance is not obtained and to the extent permitted by law, the Employer shall indemnify any fiduciary described in the preceding sentence for any loss arising out of any action in connection with the performance (or omission) of any duty imposed by the Plan. ARTICLE 14 AMENDMENT OR TERMINATION 14.1 RIGHT TO AMEND (A) The Board of Directors, a delegate of the Board of Directors or an authorized officer of the Company reserves the right at any time and from time to time and retroactively if deemed necessary or appropriate, to modify or amend, in whole or in part, any or all of the provisions of the Plan. (B) No such modification or amendment, however, shall make it possible for any part of the corpus or income of the Trust Fund to be used for, or diverted to, purposes other than for the exclusive benefit of Participants and their beneficiaries under the Plan prior to the satisfaction of all liabilities with respect to Participants and their Beneficiaries under the Plan, prior to the satisfaction of all liabilities with respect thereto. Moreover, no amendment or modification shall make it possible to deprive any Participant of a previously accrued benefit (including an optional form of benefit), except to the extent permitted by Section 412(c)(8) of the Code. (C) The Administrator may adopt amendments which do not significantly affect the cost of the Plan and which may be necessary or appropriate to qualify or maintain the Plan, any trust and any contract with an insurance carrier which may form a part of the Plan as a plan and trust meeting the requirements of Sections 401(a) and 501(a) of the Code. 14.2 RIGHT TO DISCONTINUE PLAN The Board of Directors reserves the power to discontinue the Plan at any time with respect to any or all Employers. Unless the Plan be sooner terminated, a successor to the business or any portion thereof of an Employer, by whatever form or manner resulting, with the written consent of the Company, may continue the Plan and become a party to the Trust Agreement by executing appropriate supplemental agreements and other documents, and such successor shall, succeed to all applicable rights, powers and duties of such Employer with relation thereto. The employment of any Participant who is continued in the employ of such successor shall not be deemed to have been terminated or severed for any purpose under the Plan. 14.3 OBLIGATIONS UPON MERGER, CONSOLIDATION OR TRANSFER In the event of any merger or consolidation with, or transfer of assets or liabilities to, any other plan, each Participant shall be entitled to receive a benefit if the Plan were to terminate immediately after the merger, consolidation, or transfer, which is not less than the benefit he would have been entitled to receive if the Plan had terminated immediately before the merger, consolidation, or transfer. 14.4 OBLIGATIONS UPON TERMINATION, PARTIAL TERMINATION OR DISCONTINUANCE (A) While each Employer intends to continue the Plan indefinitely, nevertheless it assumes no contractual obligation as to the Plan's continuance, and the Board of Directors may terminate the Plan as to any Employer. In the case of any termination, partial termination or complete discontinuance of contributions, each Participant who is then an Employee and who is affected by the termination, partial termination or complete discontinuance of contributions shall have a one hundred percent (100%) non-forfeitable interest in the Account Balance. (B) At the direction of the Administrator after any such discontinuance, and after payment of, or appropriate reserve for, the expenses of any such discontinuance each Participant's Account Balance shall be paid in cash to each Participant, or, if he is then deceased, to his designated beneficiary, if living, or, if such beneficiary is not living, to such deceased Participant's estate. (C) Notwithstanding the foregoing, a Participant's Account Balance shall not be distributed pursuant to a termination, partial termination or complete discontinuance of contributions if the Employer or an affiliated Employer maintains a successor plan with respect to the Participant. 14.5 CONTINUED FUNDING AFTER PLAN TERMINATION Anything in the Plan to the contrary notwithstanding, no Employer, upon any termination or partial termination of the Plan, shall have any obligation or liability whatsoever to make any further payments for the benefit of Participants (including all or any part of any contributions payable prior to any termination of the Plan), to the Trustee for benefits under the Plan. Neither the Trustee, the Board of Directors, the Administrator, nor any Participant, Employee, nor beneficiary, shall have any right to compel an Employer to make any payment after the termination or partial termination of the Plan. 14.6 DISTRIBUTION UPON SALE OF ASSETS A Participant's Account Balance may be distributed to the Participant as soon as administratively feasible after the sale of substantially all of the assets used by the Employer in the trade or business in which the Participant is employed if the Participant is no longer employed by the Employer or an affiliated Employer who has adopted the Plan and the assets were not sold to a related employer. ARTICLE 15 GENERAL PROVISIONS 15.1 NO IMPLIED EMPLOYMENT CONTRACT This Plan shall not be deemed to constitute a contract between the Employer and any Employee or other person whether or not in the employ of the Employer, nor shall anything herein contained be deemed to give any Employee or other person, whether or not in the employ of the Employer, any right to be retained in the employ of the Employer, or to interfere with the right of the Employer to discharge any Employee at any time and to treat him without any regard to the effect which such treatment might have upon him as a Participant in the Plan. 15.2 BENEFITS NOT ASSIGNABLE Except as may otherwise be provided by law, no distribution or payment under the Plan to any Participant or beneficiary shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, whether voluntary or involuntary, and any attempt to so anticipate, alienate, sell, transfer, assign, pledge, encumber or charge the same shall be void; nor shall any such distribution or payment be in any way liable for or subject to the debts, contracts, liabilities, engagement or torts of any person entitled to such distribution or payment. Notwithstanding the foregoing, the right to a benefit payable with respect to a Participant pursuant to a "qualified domestic relations order" (as defined in Section 414(p) of the Code) may be created, assigned or recognized. The Administrator shall establish reasonable procedures to determine the qualified status of domestic relations orders and to administer distributions under such qualified orders in a manner consistent with Section 414(p) of the Code. 15.3 FACILITY OF PAYMENT If the Administrator determines that any person entitled to payments under the Plan is an infant or incompetent by reason of physical or mental disability, the Administrator may cause all payments thereafter becoming due to such person to be made to any other person for his benefit, without responsibility to follow application of amounts so paid. Payments made pursuant to this provision shall completely discharge the Plan, Administrator and the Trustee. 15.4 SOURCE OF BENEFITS The Trust Fund shall be the sole source of benefits under this Plan, and each Employee, Participant, Beneficiary, or any other person who shall claim the right to any payment or benefit under this Plan shall be entitled to look only to the Trust Fund for payment of benefits. Except as may be otherwise provided by ERISA or other applicable law, the Employer shall have no liability to make or continue from its own funds the payment of any benefit under the Plan. 15.5 LOST PARTICIPANTS OR BENEFICIARIES If the Plan is unable to make payment to any Participant or Beneficiary who is entitled to receive a Plan Benefit, because it cannot ascertain the identity or whereabouts of such Participant or Beneficiary after reasonable efforts have been made to identify or locate such person (including a notice of the payment so due mailed to the last known address of such Participant or Beneficiary as shown on the records of the Employer), such payment and all subsequent payments otherwise due to such Participant or other person shall be forfeited and used to reduce Employer contributions to the Plan twenty-four (24) months after the date such payment first became due; provided, however, that such payment and any subsequent payments shall be reinstated retroactively, without interest, no later than sixty (60) days after the date on which the Participant or Beneficiary is identified or located. 15.6 SERVICE IN SEVERAL FIDUCIARY CAPACITIES Any person, group of persons, or entity, may serve in more than one fiduciary capacity with respect to the Plan. 15.7 CONSTRUCTION OF PLAN Headings to the articles, sections or subsections of the Plan have been supplied for convenience only and are not to be taken as limiting or extending the meanings of any of the provisions of the Plan. 15.8 GOVERNING LAW The provisions of the Plan shall be construed, administered and governed under ERISA and, to the extent not preempted, the laws of the State of California. 15.9 INTENT TO COMPLY WITH LEGAL REQUIREMENTS The Employer intends that the Plan shall be a qualified plan of deferred compensation established for the exclusive benefit of its Employees and their Beneficiaries as provided for in Section 401(a) of the Code or as provided for in any similar provisions of subsequent revenue laws and that the Plan assets held by the Trustee shall be exempt from taxation under Section 501(a) of the Code. 15.10 ANNUITY CONTRACTS Any annuity contract purchased by the Plan and distributed to a Participant shall provide that the benefits under the contract shall be provided in accordance with the applicable consent, present value and other requirements of Section 417(e) of the Code. 15.11 VOTING RIGHTS Before each annual or special meeting of the Company's stockholders, the Company shall cause to be sent to each Participant a copy of the proxy statement being sent to the registered stockholders of the Company. A Participant shall have the right to instruct the Trustee confidentially with respect to the voting of all shares of FHC Stock, whether or not vested, that were allocated to his or her Account on the applicable record date for such meeting. The Company shall conclusively determine the number of the whole and fractional shares of FHC Stock that are subject to each Participant's voting instructions and shall advise the Trustee accordingly. The voting instructions shall be on a form prescribed by the Company and shall be submitted to the Trustee not later than the date specified by the Company. Once received by the Trustee, the voting instructions shall be irrevocable. Under no circumstances shall the Trustee permit the Company or any representative thereof to see any voting instructions given by any Participant to the Trustee. The Trustee shall vote any shares of FHC Stock with respect to which it has not received (prior to the date specified by the Company) voting instructions on the prescribed form from the appropriate Participants, in direct proportion to the shares with respect to which it has received timely voting instructions from Participants. 15.12 OTHER INSTRUCTIONS BY PARTICIPANTS In the event that any person or group of persons makes a tender offer subject to Section 14(d) of the Securities Exchange Act of 1934 to acquire all or part of the outstanding shares of FHC Stock, including the Stock held in the FHC Stock Fund ("Acquisition Offer"), each Participant shall be entitled to direct the Trustee confidentially (on a form to be prescribed by the Company) to tender all or part of those shares of FHC Stock which would then be subject to such Participant's voting instructions under Section 15.11. If the Trustee receives an instruction by the date communicated by the Company to Participants, the Trustee shall tender such shares in accordance with such instruction. Any shares of FHC Stock with respect to which the Trustee does not receive timely instructions shall be tendered or withheld by the Trustee in the same proportion as the shares with respect to which the Trustee has received timely instructions from Participants. The Company shall distribute to each Participant all appropriate materials pertaining to the Acquisition Offer, including the statement of the position of the Company with respect to such offer issued pursuant to Rule 14e-2 under the Securities Exchange Act of 1934, as soon as practicable after such materials are issued; provided, however, that if the Company fails to issue such statement within five business days after the commencement of such offer, the Company shall distribute such materials to each Participant without the statement by the Company and shall separately distribute such statement as soon as practicable after it is issued. The Trustee shall follow the procedures regarding the confidentiality of instructions described in Section 15.11. ARTICLE 16 ROLLOVER CONTRIBUTIONS AND TRANSFERS 16.1 TRANSFERS FROM OTHER PLANS In the event that an individual (A) Becomes an Employee eligible to participate in the Plan, and (B) Was a participant in a plan qualified under Section 401(a) of the Code, the trust of which is exempt from tax under Section 501(a) of the Code, and (C) Received from such trust a "qualified total distribution" (within the meaning of subsection 402(a)(5)(E) of the Code) which qualifies for rollover treatment in accordance with Section 402(a)(5), and (D) such "qualified total distribution" consists of money, then, with the consent of the Company, the eligible Employee may transfer any portion of the distribution, to the extent it exceeds the amount referred to in subsection 402(e)(4)(D)(i) of the Code, to this Plan on or before the sixtieth (60th) day after the day on which he received such distribution, and upon receipt by the Plan, such amount shall be credited to the Rollover Account established under the Plan, pursuant to Article 6. Notwithstanding the foregoing, there may be transferred directly from the trustee of another plan qualified under Section 401(a) of the Code, the trust of which is exempt from tax under Section 501(a) of the Code, to the Trustee, subject to the approval of the Administrator and the Trustee that such transfer will not adversely affect the qualified status of the Plan, all or any of the assets, including voluntary contributions, if any (whether by Trustee, Custodian or otherwise) on behalf of the other plan which is maintained for the benefit of any Employees who are about to become Participants in this Plan. The eligible Employee shall have a one hundred percent (100%) vested and nonforfeitable right to all amounts credited to his Rollover Account as a result of any transfer pursuant to this Section. 16.2 ROLLOVER OF FUNDS FROM CONDUIT INDIVIDUAL RETIREMENT ACCOUNT (IRA) In the event that an individual (A) Becomes an Employee eligible to participate in the Plan, and (B) Shall have established an Individual Retirement Account or Individual Retirement Annuity (hereinafter collectively referred to as "IRA") described in Sections 408(a) and 408(b), respectively, of the Code, which IRA is comprised solely of amounts constituting a rollover contribution of a qualified total distribution from an employer's trust described in Section 401(a) of the Code, which is exempt from tax under Section 501(a) of the Code, or an annuity plan described in Section 403(a) of the Code, and (C) Received from such IRA the entire amount of the account or the entire value of the annuity, including any earnings on such sums, pursuant to Section 408(d)(3)(A)(ii) of the Code, then, with the consent of the Company, the eligible Employee may transfer the entire amount received in such distribution to this Plan (for the benefit of such individual) on or before the sixtieth (60th) day after the day on which he received such payment or distribution, and upon receipt by the Plan, such amount shall be credited to the Rollover Account established hereunder. The Participant shall have a one hundred percent (100%) vested and nonforfeitable right to all amounts credited to his Rollover Account as a result of such IRA rollover. 16.3 MISTAKEN ROLLOVER If it is determined that a Participant's rollover contribution did not qualify under the Code for a tax free rollover, then as soon as reasonably possible the balance in the Participant's Rollover Account shall be: (A) Segregated from all other Plan assets; (B) Treated as a non-qualified trust established by and for the benefit of the Participant; and (C) Distributed to the Participant. Such a mistaken rollover contribution shall be deemed never to have been a part of the Plan and shall not adversely affect the tax qualification of the Plan under the Code. ARTICLE 17 TOP-HEAVY PROVISIONS 17.1 TOP-HEAVY PLAN DEFINED This Article shall apply if the Plan is a "Top-Heavy Plan" as hereinafter provided. The Plan shall be a "Top-Heavy Plan" in a Plan Year if, as of the Determination Date the present value of the cumulative accrued benefits (as calculated below) of all Key Employees exceeds sixty percent (60%) of the present value of the accumulative accrued benefits under the Plan of all Employees and Key Employees, but excluding the value of the accrued benefits of former Key Employees. In determining whether this Plan is a Top-Heavy Plan, all employers that are aggregated under Sections 414(b), (c), (m) and (o) of the Code shall be treated as a single employer. In addition, all plans that are part of the Required Aggregation Group shall be treated as a single plan. The Plan shall apply the special rules of Code Sections 416(g)(4)(A), (B) and (E) to determine which Employees and which benefits are taken into account to determine whether the Plan (or any other plan included in a Required Aggregation Group of which the Plan is a part) is a Top-Heavy Plan. Solely for the purpose of determining if the Plan, or any other plan included in a Required Aggregation Group of which this Plan is a part, is Top- Heavy, the accrued benefit of an Employee other than a Key Employee shall be determined under (A) the method, if any, that uniformly applies for accrual purposes under all plans maintained by the affiliated employers, or (B) if there is no such method, as if such benefit accrued not more rapidly than the slowest accrual rate permitted under the fractional accrual rate of Section 411(b)(1)(C) of the Code. For this purpose, the present value of an Employee's accrued benefit is equal to the sum of (A) and (B) below: (A) The sum of (i) the present value of an Employee's accrued retirement income in each defined benefit plan which is included in the Required Aggregation Group determined as of the most recent valuation date within the twelve (12) month period ending on the Determination Date and as if the Employee had terminated service as of such valuation date and (ii) the aggregate distribution made with respect to such Employee during the five-year period ending on the Determination Date from all defined benefit plans included in the Required Aggregation Group and not reflected in the value of his accrued retirement income as of the most recent valuation date. In determining present value for all plans in the Required Aggregation Group, the actuarial assumptions set forth for this purpose in the Employer's defined benefit plan shall be utilized and the commencement date shall be determined taking any nonproportional subsidy into account; and (B) The sum of (i) the aggregate balance of his accounts in all defined contribution plans which are part of the Required Aggregation Group as of the most recent valuation date within the twelve (12) month period ending on the Determination Date, (ii) any contributions allocated to such an account after the valuation date and on or before the Determination Date, and (iii) the aggregate distributions made with respect to such Employee during the five-year period ending on the Determination Date from all defined contribution plans which are part of the Required Aggregation Group and not reflected in the value of his account(s) as of the most recent valuation date. 17.2 OTHER DEFINITIONS For the purposes of this Article, the following terms shall have the following meanings: (A) "Determination Date" means the last day of the preceding Plan Year except that in the case of the first Plan Year, the term "Determination Date" shall mean the last day of the Plan Year. (B) "Employee" means (i) a current employee or (ii) a former employee who performed services for the Employer during the Plan Year containing the Determination Date or any of the four (4) preceding Plan Years. (C) "Key Employee" means an Employee, a former Employee or the Beneficiary under the Plan of a former Employee who, in the Plan Year containing the Determination Date, or any of the four preceding Plan Years, is: (1) An officer of the Employer having an annual Total Compensation greater than fifty percent (50%) of the amount in effect under Section 415(b)(1)(A) of the Code for any such Plan Year. Not more than fifty (50) Employees or, if lesser, the greater of three (3) Employees or ten percent (10%) of the Employees shall be considered as officers for purposes of this subparagraph. (2) One of the ten (10) Employees owning (or considered as owning within the meaning of Section 318 of the Code) the largest interest in the Employer, which is more than one-half percent (.5%) ownership interest in value, and whose Total Compensation equals or exceeds the maximum dollar limitation under Section 415(c)(1)(A) of the Code as in effect for the calendar year in which the Determination Date falls. (3) A five-percent (5%) owner of the Employer. (4) A one percent (1%) owner of the Employer having an annual Total Compensation from the Employer of more than $150,000. Whether an Employee is a five percent (5%) owner or a one percent (1%) owner shall be determined in accordance with Section 416(i) of the Code. (D) "Non-Key Employee" means an Employee who is not a Key Employee. (E) "Required Aggregation Group" means (1) Each stock bonus, pension, or profit sharing plan of the Employer in which a Key Employee participates and which is intended to qualify under Section 401(a) of the Code; and (2) Each other such stock bonus, pension or profit sharing plan of an Employer which enables any plan in which a Key Employee participates to meet the requirements of Section 401(a)(4) or Section 410 of the Code. 17.3 TOP-HEAVY VESTING (A) If the Plan is a Top-Heavy Plan in a Plan Year, the nonforfeitable percentage of the Account Balance of a Participant for such Plan Year who is credited with an Hour of Service in such Plan Year shall be determined in accordance with the vesting provisions described in Section 10.2 of the Plan. (B) A Participant's nonforfeitable benefit shall not be less than his vested Account Balance determined as of the last day of the last Plan Year in which the Plan was a Top-Heavy Plan. 17.4 TOP-HEAVY CONTRIBUTIONS (A) Solely in the event that any Participant who is a Non-Key Employee is not covered by a defined benefit plan of the Employer which provides the minimum benefit required by Section 416(c)(1) of the Code during a Plan Year in which this Plan is a Top-Heavy Plan, the Employer contributions and forfeitures allocated to each such Non-Key Employee who has not separated from service by the end of the Plan Year shall be equal to not less than the lesser of: (1) Three percent (3%) of such Participant's Total Compensation in the Plan Year, or (2) The greatest allocation, expressed as a percentage of Compensation, made to any Participant who is a Key Employee. (B) The percentage referred to in subparagraph (2) above shall be determined by dividing the contributions and forfeitures allocated to the Key Employee by such Employee's Compensation. The Employer shall make such additional contribution to the Plan as shall be necessary to make the allocation described above. The provisions of this Section apply without regard to contributions or benefits under Social Security or any other Federal or State law. An adjustment may be made to this Section, as permitted under Treasury Regulations, in the event an employee is also entitled to an increased benefit in any other Top-Heavy plan while it is in the Aggregation Group with this Plan. (C) A Non-Key Employee who is otherwise entitled to a minimum contribution under this Section shall not fail to receive the required minimum contribution because the Employee is excluded from participation because the Employee failed to make elective Deferred Salary Contributions under the Plan. 17.5 ADJUSTMENT TO LIMITATION ON ANNUAL ADDITIONS (A) If the Employer also maintains a qualified defined benefit plan (as defined in Section 3(35) ERISA and Section 414(j) of the Code) and which is not part of a floor-offset arrangement (as defined in Section 414(k) of the Code) the denominator of both the Defined Benefit Plan Fraction and Defined Contribution Plan Fraction, as set forth in Section 5.6, for the limitation year ending in such Plan Year will be adjusted by substituting one (1) for one and twenty-five one hundredths (1.25) in each place the figure occurs. (B) The adjustments referred to in paragraph (A) are not required if: (1) the Plan would not be Top-Heavy if ninety percent (90%) were substituted for sixty percent (60%) in Section 17.1, and (2) Section 17.4(A) is adjusted by substituting four percent (4%) for three percent (3%) where the figure occurs. (C) The adjustments referred to in paragraph (A) above do not apply to any Participant as long as no Employer contributions, forfeitures, salary deferrals, or nondeductible voluntary contributions are allocated to such Participant's Accounts and the Participant does not accrue any benefits under any defined benefit plan maintained by the Employer. EXECUTION PAGE The Company has caused this amended and restated Plan to be adopted effective January 1, 1994, by having the Plan executed by its duly authorized officer this 22nd day of December, 1994. FOUNDATION HEALTH CORPORATION BY_________________________________ ITS_________________________________ EX-11.0 9 EXHIBIT 11.O EXHIBIT 11.0 EARNINGS PER SHARE COMPUTATION UTILIZING THE TREASURY STOCK METHOD (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
QUARTER ENDED JUNE 30, YEAR ENDED JUNE 30, ------------------------------ ------------------------------ 1995 1994 1995 1994 -------------- -------------- -------------- -------------- Proceeds upon exercise of options outstanding... $ 46,780 $ 85,792 -------------- -------------- -------------- -------------- Average market price of common stock............ $ 29.45 $ 40.70 -------------- -------------- -------------- -------------- Weighted average common shares outstanding...... 57,115,655 48,090,616 Issued shares -- exercise of options............ 1,863,165 3,377,157 Shares assumed to be repurchased with proceeds from exercise.................................. (1,588,539) (2,108,026) -------------- -------------- -------------- -------------- Weighted average shares outstanding (A)......... 57,390,281 49,359,747 54,780,162 48,688,221 -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- Net income (B).................................. $ 38,774 $ 21,656 $ 49,449 $ 93,641 -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- Earnings per share ((B) divided by (A))......... $ 0.68 $ 0.44 $ 0.90 $ 1.92 -------------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
EX-12.0 10 EXHIBIT 12.0 EXHIBIT 12.0 FOUNDATION HEALTH CORPORATION RATIO OF EARNINGS TO FIXED CHARGES (DOLLARS IN THOUSANDS)
YEAR ENDED JUNE 30, ----------------------------------------------------------- 1991 1992 1993 1994 1995 --------- ----------- ----------- ----------- --------- 1. EARNINGS (a) Income before income taxes................... $ 43,797 $ 91,601 $ 136,999 $ 165,873 $ 78,532 (b) Interest expense, net........................ 11,031 6,035 4,239 12,709 11,555 (c) 1/3 operating rental expense................. 3,007 3,960 4,825 7,081 8,475 --------- ----------- ----------- ----------- --------- Total........................................ $ 57,835 $ 101,596 $ 146,063 $ 185,663 $ 98,562 --------- ----------- ----------- ----------- --------- --------- ----------- ----------- ----------- --------- 2. FIXED CHARGES (a) Interest expense............................. $ 11,031 $ 6,035 $ 4,239 $ 13,446 $ 13,095 (b) 1/3 operating rental expense................. 3,007 3,960 4,825 7,081 8,475 --------- ----------- ----------- ----------- --------- Total........................................ $ 14,038 $ 9,995 $ 9,064 $ 20,527 $ 21,570 --------- ----------- ----------- ----------- --------- --------- ----------- ----------- ----------- --------- Ratio (1 divided by 2):.......................... 4.1 10.2 16.1 9.0 4.6 --------- ----------- ----------- ----------- --------- --------- ----------- ----------- ----------- ---------
EX-13.1 11 EXHIBIT 13.1 EXHIBIT 13.1 REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS Stockholders and Board of Directors Intergroup Healthcare Corporation We have audited the consolidated financial statements of Intergroup Healthcare Corporation as of December 31, 1993 and 1992, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the two years in the period ended December 31, 1993. 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, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Intergroup Healthcare Corporation at December 31, 1993 and 1992, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 1993 in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Tucson, Arizona February 16, 1994, except Note 17 as to which the date is March 18, 1994 EX-13.2 12 EXHIBIT 13.2 EXHIBIT 13.2 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of Thomas-Davis Medical Centers, P.C. Tucson, Arizona We have audited the consolidated balance sheets of Thomas-Davis Medical Centers, P.C. and Subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of operations, cash flows, and changes in shareholders' equity for the years then ended. 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 did not audit the financial statements of Intergroup Healthcare Corporation, a 62.6% owned subsidiary, which statements reflect total assets of $156,394,000 and $135,051,000 as of December 31, 1993 and 1992, respectively, and total revenues of $392,036,000 and $294,759,000, respectively, for the years then ended. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Intergroup Healthcare Corporation, is based solely on the report of the other auditors. 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, based on our audits and the report of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Thomas-Davis Medical Centers, P.C. and Subsidiaries as of December 31, 1993 and 1992, and the results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles. STEVENSON, JONES & HOLMAAS P.C. Tucson, Arizona April 27, 1994 EX-13.3 13 EXHIBIT 13.3 EXHIBIT 13.3 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of CareFlorida Health Systems, Inc. We have audited the consolidated balance sheets of CareFlorida Health Systems, Inc. and Subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the years then ended. 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, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of CareFlorida Health Systems, Inc. and Subsidiaries as of December 31, 1993 and 1992, and the consolidated results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Miami, Florida February 28, 1994 EX-21.0 14 EXHIBIT 21.0 EXHIBIT 21.0 SIGNIFICANT SUBSIDIARIES
JURISDICTION OF NAME INCORPORATION ---------------------------------------------------------------------------------------------- ------------- 1. California Compensation Insurance Company..................................................... California 2. Foundation Health, a California Health Plan................................................... California 3. Foundation Health Federal Services, Inc....................................................... Delaware 4. Intergroup Prepaid Health Services of Arizona, Inc., dba Intergroup of Arizona.................................................................... Arizona
EX-23.1 15 EXHIBIT 23.1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in the: (1) Registration Statement on Form S-8 (No. 33-36847) relating to the Foundation Health Corporation Profit Sharing and 401(k) Plan, (2) Registration Statement on Form S-8 (No. 33-36850) relating to the Foundation Health Corporation 1990 Stock Option Plan, (3) Registration Statement on Form S-8 (No. 33-36849) relating to the Foundation Health Corporation Employee Stock Purchase Plan, (4) Registration Statement on Form S-8 (No. 33-44783) relating to the Non-Qualified Stock Option Plan of Foundation Health Corporation, (5) Registration Statement on Form S-8 (No. 33-48561) relating to the 1992 Nonstatutory Stock Option Plan of Foundation Health Corporation and the Foundation Health Corporation Incentive Common Stock Option Agreement, (6) Registration Statement on Form S-8 (No. 33-53468) relating to the Century MediCorp 1983 Incentive Stock Option Plan and Century MediCorp 1985, 1988, 1989 and 1991 nonstatutory stock option plans, (7) Registration Statement on Form S-8 (No. 33-67062) relating to the 1989 Stock Plan of Business Insurance Corporation, (8) Registration Statement on Form S-3 (No. 33-80512) relating to the 1993 Nonstatutory Stock Option Plan of Foundation Health Corporation, (9) Registration Statement on Form S-8 (No. 33-86568) relating to the Intergroup Healthcare Corporation Stock Option and Incentive Plan and Stock Option Agreement, and (10) Registration Statement on Form S-8 (No. 33-86566) relating to the Foundation Health Corporation 1990 Stock Option Plan (as amended and restated), of our report dated July 25, 1995, appearing in this Annual Report on Form 10-K of Foundation Health Corporation for the year ended June 30, 1995. DELOITTE & TOUCHE LLP Sacramento, California September 26, 1995 EX-23.2 16 EXHIBIT 23.2 EXHIBIT 23.2 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the: (1) Registration Statement on Form S-8 (No. 33-36847) relating to the Foundation Health Corporation Profit Sharing and 401(k) Plan, (2) Registration Statement on Form S-8 (No. 33-36850) relating to the Foundation Health Corporation 1990 Stock Option Plan, (3) Registration Statement on Form S-8 (No. 33-36849) relating to the Foundation Health Corporation Employee Stock Purchase Plan, (4) Registration Statement on Form S-8 (No. 33-44783) relating to the Non-Qualified Stock Option Plan of Foundation Health Corporation, (5) Registration Statement on Form S-8 (No. 33-48561) relating to the 1992 Nonstatutory Stock Option Plan of Foundation Health Corporation and the Foundation Health Corporation Incentive Common Stock Option Agreement, (6) Registration Statement on Form S-8 (No. 33-53468) relating to the Century MediCorp 1983 Incentive Stock Option Plan and Century MediCorp 1985, 1988, 1989 and 1991 nonstatutory stock option plans, (7) Registration Statement on Form S-8 (No. 33-67062) relating to the 1989 Stock Plan of Business Insurance Corporation, (8) Registration Statement on Form S-3 (No. 33-80512) relating to the 1993 Nonstatutory Stock Option Plan of Foundation Health Corporation, (9) Registration Statement on Form S-8 (No. 33-86568) relating to the Intergroup Healthcare Corporation Stock Option and Incentive Plan and Stock Option Agreement, and (10) Registration Statement on Form S-8 (No. 33-86566) relating to the Foundation Health Corporation 1990 Stock Option Plan (as amended and restated), of our report dated February 16, 1994, except Note 17 as to which the date is March 18, 1994, with respect to the consolidated financial statements of Intergroup Healthcare Corporation for the years ended December 31, 1993 and 1992, appearing in this Annual Report on Form 10-K of Foundation Health Corporation for the year ended June 30, 1995. ERNST & YOUNG LLP Tucson, Arizona September 26, 1995 EX-23.3 17 EXHIBIT 23.3 EXHIBIT 23.3 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in the: (1) Registration Statement on Form S-8 (No. 33-36847) relating to the Foundation Health Corporation Profit Sharing and 401(k) Plan; (2) Registration Statement on Form S-8 (No. 33-36850) relating to the Foundation Health Corporation 1990 Stock Option Plan; (3) Registration Statement on Form S-8 (No. 33-36849) relating to the Foundation Health Corporation Employee Stock Purchase Plan; (4) Registration Statement on Form S-8 (No. 33-44783) relating to the Non-Qualified Stock Option Plan of Foundation Health Corporation; (5) Registration Statement on Form S-8 (No. 33-48561) relating to the 1992 Nonstatutory Stock Option Plan of Foundation Health Corporation and the Foundation Health Corporation Incentive Common Stock Option Agreement; (6) Registration Statement on Form S-8 (No. 33-53468) relating to the Century MediCorp 1983 Incentive Stock Option Plan and Century MediCorp 1985, 1988, 1989 and 1991 nonstatutory stock option plans; (7) Registration Statement on Form S-8 (No. 33-67062) relating to the 1989 Stock Plan of Business Insurance Corporation; (8) Registration Statement on Form S-3 (No. 33-80512) relating to the 1993 Nonstatutory Stock Option Plan of Foundation Health Corporation; (9) Registration Statement on Form S-8 (No. 33-86568) relating to the Intergroup Healthcare Corporation Stock Option and Incentive Plan and Stock Option Agreement; and (10) Registration Statement on Form S-8 (No. 33-86566) relating to the Foundation Health Corporation 1990 Stock Option Plan (as amended and restated), of our report dated April 27, 1994, appearing in this Annual Report on Form 10-K of Foundation Health Corporation for the year ended June 30, 1995. STEVENSON, JONES & HOLMAAS, P.C. Tucson, Arizona September 26, 1995 EX-23.4 18 EXHIBIT 23.4 EXHIBIT 23.4 CONSENT OF INDEPENDENT AUDITORS We consent to incorporation by reference in the: (1) Registration Statement on Form S-8 (No. 33-36847) relating to the Foundation Health Corporation Profit Sharing and 401(k) Plan, (2) Registration Statement on Form S-8 (No. 33-36850) relating to the Foundation Health Corporation 1990 Stock Option Plan, (3) Registration Statement on Form S-8 (No. 33-36849) relating to the Foundation Health Corporation Employee Stock Purchase Plan, (4) Registration Statement on Form S-8 (No. 33-44783) relating to the Non-Qualified Stock Option Plan of Foundation Health Corporation, (5) Registration Statement on Form S-8 (No. 33-48561) relating to the 1992 Nonstatutory Stock Option Plan of Foundation Health Corporation and the Foundation Health Corporation Incentive Common Stock Option Agreement, (6) Registration Statement on Form S-8 (No. 33-53468) relating to the Century MediCorp 1983 Incentive Stock Option Plan and Century MediCorp 1985, 1988, 1989 and 1991 nonstatutory stock option plans, (7) Registration Statement on Form S-8 (No. 33-67062) relating to the 1989 Stock Plan of Business Insurance Corporation, (8) Registration Statement on Form S-3 (No. 33-80512) relating to the 1993 Nonstatutory Stock Option Plan of Foundation Health Corporation, (9) Registration Statement on Form S-8 (No. 33-86568) relating to the Intergroup Healthcare Corporation Stock Option and Incentive Plan and Stock Option Agreement, and (10) Registration Statement on Form S-8 (No. 33-86566) relating to the Foundation Health Corporation 1990 Stock Option Plan (as amended and restated), of our report dated February 28, 1994, on our audits of the consolidated financial statements of CareFlorida Health Systems, Inc. as of December 31, 1993 and 1992 and for the years then ended, which report is included in this Annual Report on Form 10-K of Foundation Health Corporation. COOPERS & LYBRAND L.L.P. Miami, Florida September 25, 1995 EX-27 19 EXHIBIT 27
5 The schedule contains summary financial information extracted from Form 10-K filed by Foundation Health Corporation for the year ended June 30, 1995 and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS JUN-30-1995 JUL-01-1994 JUN-30-1995 203,937 591,341 280,071 0 0 0 230,278 0 1,964,207 0 180,054 571 0 0 756,328 1,964,207 2,403,132 2,459,924 0 2,245,015 124,822 0 11,555 78,532 26,821 49,449 0 0 0 49,449 0.90 0 NET PP&E
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