AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AGREEMENT is entered into as of December 16, 1996, among JEFFREY
L. ELDER (the "Employee"), HEALTH SYSTEMS INTERNATIONAL, INC., a Delaware
corporation (the "Company") and FOUNDATION HEALTH CORPORATION, a Delaware
WHEREAS, FHC, the Company and the Employee entered into an Employment
Agreement dated October 1, 1996 (the "Existing Agreement"), which the parties
desire to amend and restate hereby;
WHEREAS, FHC and the Employee entered into an Employment Agreement,
dated April 22, 1994, as amended (the "Prior Agreement"), which was superseded
by the Existing Agreement; and
WHEREAS, each of the Company and FHC has determined that it is in its
best interest and the best interests of its stockholders to retain the services
of the Employee; and
WHEREAS, the Employee desires to perform services for the Company on
the terms set forth in this Agreement; and
WHEREAS, the Company and FHC have entered into an Agreement and Plan
of Merger, dated October 1, 1996 (such agreement, and as it may be amended from
time to time, the "Merger Agreement"), pursuant to which a wholly-owned
subsidiary of the Company will be merged with and into FHC (the "Merger"); and
NOW THEREFORE, the Company agrees to employ Employee and the Employee
agrees to perform services for the Company on the terms hereinbelow set forth.
1. Term of Employment.
(a) Term. The Company agrees to employ the Employee and the
Employee agrees to be employed by the Company for a period of two years
commencing as of the date of consummation of the Merger (the "Merger Date")
(such two-year period, the "Term").
(b) Early Termination. Subject to Section 5, the Company may
terminate the Employee's employment by giving the Employee 30 days advance
notice in writing. The Employee may terminate his employment by giving the
Company 30 days advance notice in writing. The Employee's employment shall
terminate automatically in the event of his death. Any waiver of notice shall
be valid only if it is made in writing and expressly refers to the applicable
(c) Termination of Agreement. This Agreement shall terminate when
all obligations of the parties hereunder have been satisfied.
2. Position and Duties.
(a) Position. The Company agrees to employ the Employee as its
Senior Vice President--Chief Financial Officer during the Term.
(b) Obligations. During the Term, the Employee shall devote his
full business efforts and time to the Company and its subsidiaries and shall
not render services to any other person or entity without prior written consent
of the Board of Directors of the Company (the "Board"). The foregoing,
however, shall not preclude the Employee from engaging in appropriate civic,
charitable or religious activities or from devoting a reasonable amount of time
to private investments that do not interfere or conflict with his
responsibilities to the Company.
The Company shall compensate Employee for the services rendered under
this Agreement as follows:
(a) A base salary (the "Base Compensation") at the annual rate of
$315,000 per year, payable in accordance with the customary payroll practices
of the Company for the payment of officers.
(b) Reimbursement for all reasonable expenses incurred on behalf
of the Company upon submission of appropriate documentation in accordance with
the Company's general policies, as they may be amended from time to time during
(c) In lieu of participation in the FHC Executive Incentive Plan
(and such other management incentive programs adopted by the Board to replace
such Incentive Plan), a bonus of $250,000 if the Employee remains employed by
the Company for six months after the Merger Date, and an additional bonus of
$441,000 if the Employee remains employed by the Company for one full year
after the Merger Date; provided, however, that both bonuses shall be payable if
the Employee's employment is terminated by the Company without Cause (as
defined in Section 5(g) hereof) or by the Employee with Good Reason (as defined
in Section 5(h) hereof). Such amounts shall be paid in a lump sum in cash
within ten (10) business days of the expiration of the six-month and one year
periods or such earlier termination, whichever is applicable.
4. Employee Benefits. During the Term (but without derogation of
any of the Employee's other entitlements under this Agreement):
(a) Employee shall be entitled to full participation, on a basis
commensurate with his position with the Company, in all plans of accident,
medical, health, disability, pension, deferred compensation, savings and
similar benefits which generally are made available to senior executives of the
(b) The Company shall provide Employee with an automobile of his
choice or an automobile allowance, which shall include payment of all
maintenance, insurance and related
expenses, in accordance with FHC's practice applicable to Employee immediately
before the Merger.
(c) Nothing in this Agreement shall limit in any way Employee's
participation in any other benefit plans or arrangements as are from time to
time approved by the Board or the Compensation Committee for senior executives
of the Company.
5. Termination of Employment.
(a) Severance Payment. Upon termination of Employee's employment
during the Term (i) by the Company without Cause or by the Employee for Good
Reason, or (ii) by the Employee for any reason during the period commencing 90
days after and ending 450 days after the Merger Date, the Employee shall
receive a severance payment from the Company (the "Severance Payment"). The
Severance Payment shall be made in a lump sum not more than five business days
following the date of such termination and shall be in an amount determined
under Subsection (b) below.
(b) Amount. The amount of the Severance Payment shall be
$1,847,421, which equals 2.99 times the sum of the Employee's annual rate of
Base Compensation plus the average of the annual bonuses awarded to the
Employee for the three fiscal years of FHC ending in 1994, 1995 and 1996.
(c) Benefits Programs. On the Merger Date, the Employee shall
become fully vested in all awards theretofore granted to him and/or
entitlements under the FHC 1990 Stock Option Plan and the FHC Supplemental
Executive Retirement Plan (the "SERP"). If the Employee notifies the Company
no later than the Merger Date that he elects to receive the SERP Amount (as
defined below), on the later of the Merger Date or two business days after such
notice is given, pursuant to and in full satisfaction of the Company's
obligations to the Employee under the SERP, the Company shall pay to the
Employee in a lump sum in cash $1,374,315 (the "SERP Amount"). The SERP Amount
equals 90% of the actuarial equivalent of the Employee's Retirement Benefit (as
defined in the SERP) as of December 31, 1996, as determined by FHC's
independent actuarial firm, Milliman & Robertson, Inc., using reasonable
assumptions. If the SERP Amount is not paid, the terms of the SERP as in
effect on the Merger Date shall remain in full force and effect; provided,
however, that the actuarial equivalents for purposes of calculating lump sum
payments under the SERP will be based on the 1983 group annuity mortality table
blended 50% male and 50% female, and the average 30 year Treasury yield rate
for the month prior to the month of the lump sum payment.
(d) Benefits Coverage. During the three-year period commencing
upon termination of Employee's employment during the Term by the Company
without Cause, by the Employee for Good Reason or by the Employee for any
reason during the period commencing 90 days after and ending 450 days after the
Merger Date, the Employee (and, where applicable, his dependents) shall be
entitled to continue participation in the basic group insurance plans
maintained by the Company, including (without limitation) life, disability,
health and accident insurance programs, as if he were still an employee of the
Company. The Employee shall also continue with those benefits outlined in
Section 4 hereof. Where applicable, the Employee's
salary for purposes of such plans shall be deemed to be equal to his Base
Compensation. To the extent that the Company finds it impossible to cover the
Employee under its group insurance policies during such three-year period, the
Company shall provide the Employee with the same level of coverage under
individual policies at the same cost to Employee. In addition to the
foregoing, the Company shall provide the Employee and his dependents with
health (including, but not limited to, medical, dental and vision) insurance
coverage for the remainder of his life, which coverage shall be no less
beneficial to the Employee and his dependents than the coverage provided by FHC
in effect immediately prior to the Merger.
(e) No Mitigation. The Employee shall not be required to mitigate
the amount of any payment contemplated by this Agreement (whether by seeking
new employment or in any other manner), nor shall any such payment be reduced
by any earnings that the Employee may receive from any other source.
Furthermore, any amount payable to the Employee pursuant to this Section 5
shall not be in lieu of any benefits to which he is or may be entitled under
the FHC Deferred Compensation Plan and FHC Split Dollar Insurance Plan.
(f) Rabbi Trust. Not later than the Merger Date, the Company
shall make a contribution to a trust, substantially in the form of Exhibit B
hereto (the "Trust"), in an amount equal to the sum of (i) $1,847,421 in
respect of the Severance Payment; and (ii) $691,000 in respect of the
Employee's annual bonus.
(g) Cause. For purposes of this Agreement, "Cause" shall mean (1)
a willful act by the Employee which constitutes gross misconduct or fraud and
which is materially injurious to the Company or (2) conviction of, or a plea of
"guilty" or "no contest" to, a felony. No act or failure to act by the
Employee shall be considered "willful" unless committed without good faith and
without a reasonable belief that the act or omission was in the Company's best
interest. No Cause shall be deemed to exist unless the Board has determined,
by a resolution adopted with the affirmative votes of at least eight of its
members, that Cause exists.
(h) Good Reason. For purposes of this Agreement, "Good Reason"
shall mean that the Employee has incurred a reduction in his Base Compensation
or a substantial reduction in his authority or responsibility (as such
authority and responsibility exists at the beginning of the Term), or has been
notified that his principal place of work will be relocated by a distance of
100 miles or more from FHC's headquarters on the Merger Date (other than a
relocation to San Francisco).
6. Limitation on Payments.
(a) Basic Rule. Any other provision of this Agreement
notwithstanding, the Company shall not be required to make any payment or
transfer any property to, or for the benefit of, the Employee (under this
Agreement or otherwise) that would be nondeductible by the Company by reason of
Section 280G of the Internal Revenue Code of 1986, as amended (the "Code") or
that would subject the Employee to the excise tax described in Section 4999 of
the Code. All mathematical calculations required by this section shall be
performed by the independent auditors retained by the Company most recently
prior to the Merger (the "Auditors"), based on information supplied by the
Company and the Employee, and shall be
binding on the Company and the Employee. All fees and expenses of the Auditors
shall be paid by the Company.
(b) Reductions. If the amount of the aggregate payments or
property transfers to the Employee must be reduced under this section, then the
Employee shall direct in which order the payments or transfers are to be
reduced, but no change in the timing of any payment or transfer shall be made
without the Company's consent. As a result of uncertainty in the application
of Sections 280G and 4999 of the Code at the time of an initial determination
by the Auditors hereunder, it is possible that a payment will have been made by
the Company that should not have been made (an "Overpayment") or that an
additional payment that will not have been made by the Company could have been
made (an "Underpayment"). In the event that the Auditors, based upon the
assertion of a deficiency by the Internal Revenue Service against the Company
or the Employee that the Auditors believe has a high probability of success,
determine that an Overpayment has been made, such Overpayment shall be treated
for all purposes as a loan to the Employee that he shall repay to the Company,
together with interest at the applicable federal rate specified in Section
7872(f)(2) of the Code; provided, however, that no amount shall be payable by
the Employee to the Company if and to the extent that such payment would not
reduce the amount that is nondeductible under Section 280G of the Code or is
subject to an excise tax under Section 4999 of the Code. In the event that the
Auditors determine that an Underpayment has occurred, such Underpayment shall
promptly be paid or transferred by the Company to, or for the benefit of, the
Employee, together with interest at the applicable federal rate specified in
Section 7872(f)(2) of the Code.
7. Pooling-of-Interest Accounting Rules.
Any other provision of this Agreement (including the Exhibits hereto)
shall be invalid to the extent that the specific implementation of that
provision relating to the Employee would preclude the application of
pooling-of-interests accounting treatment to a transaction (including the
Merger) for which such treatment is to be adopted by the Company and which has
been approved by the Board. If the pooling-of-interests accounting rules
require the invalidation of one or more provisions of this Agreement (including
the Exhibits hereto) the Employee shall not be entitled to receive, or shall be
required to return to the Company, whichever is applicable, any compensation
payable or paid pursuant to the provisions of this Agreement (including the
Exhibits hereto) so deemed to be invalid. All determinations regarding the
pooling-of-interests accounting rules for these purposes shall be made by the
(a) Company's Successors. The Company shall require any successor
(whether direct or indirect and whether by purchase, lease, merger,
consolidation, liquidation or otherwise) to all or substantially all of the
Company's business and/or assets and each entity that, directly or indirectly,
becomes a parent corporation of the Company, by an agreement in substance and
form satisfactory to the Employee, to assume this Agreement and to agree
expressly to perform this Agreement in the same manner and to the same extent
as the Company would be required to perform it in the absence of a succession.
The Company's failure to obtain such agreement prior
to the effectiveness of a succession shall be a breach of this Agreement and
shall entitle the Employee to all of the compensation and benefits to which he
would have been entitled hereunder if the Company had involuntarily terminated
his employment immediately after the Merger Date. For all purposes under this
Agreement, the term "Company" shall include any successor to the Company's
business and/or assets and each entity that, directly or indirectly, becomes a
parent corporation of the Company.
(b) Employee's Successors. This Agreement and all rights of the
Employee hereunder shall inure to the benefit of, and be enforceable by, the
Employee's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees.
9. Confidential Information.
During the Term and at all times thereafter, the Employee shall not,
without the prior written consent of the Board, disclose or use for any purpose
(except in the course of his employment under this Agreement and in furtherance
of the business of the Company) confidential information, proprietary data and
customer lists of the Company, except as required by applicable law or legal
process; provided, however, that "confidential information, proprietary data
and customer lists" shall not include any information known generally to the
public or ascertainable from public or published information (other than as a
result of unauthorized disclosure by the Employee) or any information of a type
not otherwise considered confidential by persons engaged in the same business
or a business similar to that conducted by the Company. The Employee agrees to
deliver to the Company at the termination of his employment all memoranda,
notes, plans, records, lists, reports and other documents (and copies thereof)
relating to the business of the Company which he may then possess or have under
10. Mutual Releases.
(a) The Employee hereby releases the Company and FHC, their
affiliates and subsidiaries and their respective officers, directors and
employees, from any and all liabilities and claims other than those arising out
of this Agreement (or any Exhibits hereto) which he may have against any of
them, including, without limitation, claims arising under any plan, program or
policy for employee benefits, out of Employee's termination or retirement or
any discrimination related claims. The provisions of this paragraph shall not
apply to any of the Employee's rights under the terms of this Agreement,
including, without limitation, the plans described and the indemnity referred
to in Section 11(i) hereof.
(b) FHC, the Company, their affiliates and subsidiaries and their
respective officers, directors and employees hereby release the Employee from
any and all liabilities and claims other than those arising out of this
Agreement (or any Exhibits hereto) which FHC, the Company, their affiliates and
subsidiaries and their respective officers, directors and employees may have
against the Employee, including, without limitation, claims arising under any
plan, program or policy for employee benefits, or out of the Employee's
termination or retirement. The provisions of this paragraph shall not apply to
any of FHC's rights under the terms of this Agreement (or any Exhibits hereto).
11. Miscellaneous Provisions.
(a) Notice. Notices and all other communications contemplated by
this Agreement shall be in writing and shall be deemed to have been duly given
when personally delivered or when mailed by U.S. registered mail, return
receipt requested and postage prepaid. In the case of the Employee, mailed
notices shall be addressed to him at the home address which he most recently
communicated to the Company in writing. In the case of the Company, mailed
notices shall be addressed to its corporate headquarters, and all notices shall
be directed to the attention of its Secretary.
(b) Waiver. No provision of this Agreement shall be modified,
waived or discharged unless the modification, waiver or discharge is agreed to
in writing and signed by the Employee and by an authorized officer of the
Company (other than the Employee). No waiver by either party of any breach of,
or of compliance with, any condition or provision of this Agreement by the
other party shall be considered a waiver of any other condition or provision or
of the same condition or provision at another time.
(c) Whole Agreement. No agreements, representations or
understandings (whether oral or written and whether express or implied) which
are not expressly set forth in this Agreement have been made or entered into by
either party with respect to the subject matter hereof. This Agreement
supersedes the Existing Agreement and the Prior Agreement. The Company, FHC
and the Employee acknowledge and agree that subsequent to the Merger there
would be deemed to be "Good Reason" under the Prior Agreement in the absence of
this Agreement, and that the obligations of the Company hereunder are, in part,
in consideration for the Employee not terminating his employment for "Good
Reason" under the Prior Agreement immediately upon the Merger.
(d) No Setoff; Withholding Taxes. There shall be no right of
setoff or counterclaim with respect to any claim, debt or obligation against
payments to the Employee under this Agreement. All payments made under this
Agreement shall be subject to reduction to reflect taxes required to be
withheld by law.
(e) Choice of Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
(f) Severability. The invalidity or unenforceability of any
provision or provisions of this Agreement shall not affect the validity or
enforceability of any other provision thereof, which shall remain in full force
(g) Arbitration. In the event of any controversy or claim between
the Company or any of its affiliates and the Employee arising out of or
relating to this Agreement, or the breach thereof, the Employee may retain
counsel of choice at the expense of the Company. If either party delivers to
the other party a written demand for arbitration of a controversy or claim then
such demand shall be submitted to binding arbitration. The binding arbitration
shall be administered by the American Arbitration Association under its
Commercial Arbitration Rules. The arbitration shall take place in Sacramento,
California. Each of the Company and the
Employee shall appoint one person to act as an arbitrator, and a third
arbitrator shall be chosen by the first two arbitrators (such three
arbitrators, the "Panel"). The Panel shall have no authority to award punitive
damages against the Company or the Employee. The arbitrator shall have no
authority to add to, alter, amend or refuse to enforce any portion of the
disputed agreements. The Company and the Employee each waive any right to a
jury trial or to petition for stay in any action or proceeding of any kind
arising out of or relating to this Agreement. The Company shall pay all fees,
expenses and costs, including reasonable attorney, consulting, accounting and
other fees, of the Employee relating to any controversy or claim as between
them in good faith.
(h) No Assignment. The rights of any person to payments or
benefits under this Agreement shall not be made subject to option or
assignment, either by voluntary or involuntary assignment or by operation of
law, including (without limitation) bankruptcy, garnishment, attachment or
other creditor's process, and any action in violation of this Subsection (h)
shall be void.
(i) Indemnification. The Employee is not required to pay for
expenditures associated with obtaining, enforcing or defending any rights or
benefits under this Agreement or any other plan or arrangement maintained by
the Company or its affiliates under which the Employee is or may be entitled to
receive compensation or benefits. Consequently the Company shall indemnify and
hold harmless the Employee for all such expenditures and pay them as they
12. Effective Date. This Agreement shall be effective beginning
on the Merger Date.
IN WITNESS WHEREOF, each of the parties has executed this Agreement,
in the case of the Company and FHC by their duly authorized officer, as of the
day and year first above written.
Jeffrey L. Elder
HEALTH SYSTEMS INTERNATIONAL, INC.
FOUNDATION HEALTH CORPORATION