<PAGE> 1
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant To Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-
6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec. 240.14a-11(c) or sec. 240.14a-12
CHOICECARE CORPORATION
(Name of Registrant as Specified in Its Charter)
---------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
Common Shares, without par value
Options to purchase Common Shares
2) Aggregate number of securities to which transaction applies:
Common Shares: 14,852,844
Options: 1,046,532
3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which filing fee is calculated and state how it was
determined): $16.38 per Common Share $6.38 per Common Share
underlying the Options ($16.38 minus the $10 exercise price)
<PAGE> 2
4) Proposed maximum aggregate value of transaction:
$249,966,458.88
5) Total Fee Paid:
$49,993.29
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
<PAGE> 3
CHOICECARE LETTERHEAD
September 15, 1997
To the Shareholders:
Enclosed are a Notice of Special Meeting of Shareholders, a Proxy
Statement and a Proxy for a Special Meeting of Shareholders of ChoiceCare
Corporation (the "Company") which will be held on Friday, October 10, 1997 at
10:00 A.M. at the Grand Baldwin Building, 8th Floor Meeting Room, 655 Eden Park
Drive, Cincinnati, Ohio 45202 (the "Special Meeting").
At the Special Meeting, you will be asked to consider and vote on a
proposal to approve and adopt an Agreement and Plan of Merger (the "Merger
Agreement") pursuant to which a wholly-owned subsidiary of Humana Inc.
("Humana") will be merged with and into the Company, which will thereupon become
a subsidiary of Humana (the "Merger"). The terms of the Merger Agreement provide
that holders of common shares of the Company (the "Common Shares") will receive
$16.38 in cash for each Common Share owned as of the effective date of the
Merger (other than Common Shares held by shareholders, if any, who properly
exercise their dissenters' rights under Ohio law). Details of the proposed
transaction are set forth in the accompanying Proxy Statement, which you should
read carefully.
After careful consideration and with the recommendation of an
independent committee of directors, the Company's Board of Directors (the "Board
of Directors") has determined that the proposed Merger is fair to and in the
best interests of the Company and its shareholders. ACCORDINGLY, THE BOARD OF
DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND RECOMMENDS THAT ALL
SHAREHOLDERS VOTE FOR ITS APPROVAL AND ADOPTION. The ChoiceCare Foundation (the
"Foundation"), which is the record owner of 90.89% of the total outstanding
Common Shares, has contractually agreed that it will vote for the approval and
adoption of the Merger Agreement. The Foundation's vote in favor of the approval
and adoption of the Merger Agreement will be sufficient for approval and
adoption.
All shareholders are invited to attend the Special Meeting in person.
The affirmative vote of a majority of the outstanding Common Shares will be
necessary for approval and adoption of the Merger Agreement.
In order that your shares may be represented at the Special Meeting,
you are urged to promptly complete, sign, date and return the accompanying Proxy
in the enclosed envelope, whether or not you plan to attend the Special Meeting.
If you attend the Special Meeting in person you may, if you wish, vote
personally on all matters brought before the Special Meeting even if you have
previously returned your Proxy.
Sincerely,
/s/ Daniel A. Gregorie
----------------------------
Daniel A. Gregorie, M.D.
Chairman of the Board,
President and Chief Executive Officer
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[CHOICECARE LETTERHEAD]
655 EDEN PARK DRIVE
CINCINNATI, OHIO 45202-6056
(513) 784-5200
SEPTEMBER 15, 1997
-----------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To the Shareholders:
A Special Meeting of Shareholders (the "Special Meeting") of ChoiceCare
Corporation (the "Company") will be held on Friday, October 10, 1997 at 10:00
A.M. at the Grand Baldwin Building, 8th Floor Meeting Room, 655 Eden Park Drive,
Cincinnati, Ohio 45202, for the following purposes:
1. To consider and vote on a proposal to approve and adopt an Agreement
and Plan of Merger (the "Merger Agreement"), among Humana Inc.
("Humana"), HOCC, Inc., a wholly-owned subsidiary of Humana ("Humana
Sub"), the Company, and The ChoiceCare Foundation (the "Foundation")
pursuant to which, among other things, (a) Humana Sub would be merged
with and into the Company (the "Merger"), and (b) each common share of
the Company (a "Common Share") owned as of the effective date of the
Merger would be converted into the right to receive $16.38 in cash
(other than Common Shares held by shareholders, if any, who properly
exercise their dissenters' rights under Ohio law), as described in the
accompanying Proxy Statement.
2. To transact such other business as may properly come before the Special
Meeting or any adjournment thereof.
Notwithstanding shareholder approval of the foregoing Proposal (1), the
Company reserves the right to abandon the Merger at any time prior to the
consummation of the Merger under the terms and conditions set forth in Section 8
of the Merger Agreement.
Shareholders of record at the close of business on September 10, 1997
are entitled to notice of and to vote at the Special Meeting and any
adjournment thereof.
A form of Proxy and a Proxy Statement containing more detailed
information with respect to the matters to be considered at the Special Meeting
accompany this notice.
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT
AND RECOMMENDS THAT YOU VOTE IN FAVOR OF THE APPROVAL AND ADOPTION OF THE MERGER
AGREEMENT.
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PLEASE SIGN, DATE AND MAIL THE ENCLOSED PROXY IN THE ACCOMPANYING
ENVELOPE AT YOUR EARLIEST CONVENIENCE.
DO NOT SEND IN ANY SHARE CERTIFICATES WITH YOUR PROXY.
By Order of the Board of Directors,
Thomas D. Anthony, Esq.
Secretary
IMPORTANT
YOUR PROMPT DATING, SIGNING AND RETURNING OF THE ENCLOSED PROXY IN THE
ENCLOSED ENVELOPE WOULD BE APPRECIATED. IF YOU ATTEND THE MEETING, YOU MAY
NEVERTHELESS VOTE IN PERSON SHOULD YOU DESIRE. THE RETURN OF PROXIES IS
IMPORTANT, REGARDLESS OF THE NUMBER OF SHARES OWNED.
<PAGE> 6
TABLE OF CONTENTS
PAGE
----
SUMMARY ................................................................. 2
The Parties ................................................... 2
Special Meeting of Shareholders .............................. 3
Voting........................................................... 4
The Merger....................................................... 4
THE SPECIAL MEETING ................................................... 7
Matters to Be Considered at the Special Meeting.................. 7
Vote Required.................................................... 7
Proxy Voting Procedures.......................................... 8
Revocability of Proxies ......................................... 8
Record Date; Shares Entitled to Vote; Quorum..................... 8
Solicitation of Proxies.......................................... 9
Miscellaneous.................................................... 9
THE MERGER................................................................ 9
General.......................................................... 9
Background of the Merger......................................... 9
Reasons for the Merger; Recommendation of the
Board of Directors............................................ 14
Opinion of Financial Advisor..................................... 17
Interests of Certain Persons in the Merger....................... 20
Treatment of Stock Options....................................... 29
Humana's Source of Funds......................................... 34
Certain Other Effects of the Merger.............................. 34
Accounting Treatment............................................. 34
Certain Federal Income Tax Consequences.......................... 35
Regulatory Approvals............................................. 35
THE MERGER AGREEMENT...................................................... 37
The Merger....................................................... 37
Exchange of Certificates Representing the Common Shares.......... 38
Representations and Warranties................................... 39
Covenants of the Parties......................................... 40
Conditions to the Obligations of the Parties..................... 44
Termination...................................................... 45
Indemnification.................................................. 46
Expenses......................................................... 47
Amendment and Waiver............................................. 47
DISSENTING SHAREHOLDERS' RIGHTS .......................................... 48
THE COMPANY'S BUSINESS.................................................... 49
General.......................................................... 49
Products......................................................... 50
Provider Arrangements............................................ 53
Market........................................................... 56
Marketing........................................................ 56
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Competition...................................................... 57
Regulation and Recent Legislation................................ 58
Employees........................................................ 65
PROPERTIES................................................................ 65
LEGAL PROCEEDINGS......................................................... 65
MARKET FOR THE COMPANY'S COMMON EQUITY AND
RELATED SHAREHOLDER MATTERS........................................... 66
SELECTED FINANCIAL DATA................................................... 67
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................................... 68
Interim............................................................. 68
Overview......................................................... 68
Results of Operations............................................ 70
Three Months Ended June 30, 1997 Compared to Three Months
Ended June 30, 1996.......................................... 71
Six Months Ended June 30, 1997 Compared to Six Months Ended
June 30, 1996................................................ 73
Financial Condition.............................................. 74
Annual.............................................................. 75
Overview......................................................... 75
Results of Operations............................................ 77
1996 Compared to 1995............................................ 78
1995 Compared to 1994............................................ 81
Financial Condition.............................................. 82
Inflation........................................................ 83
Cautionary Statement............................................. 83
BENEFICIAL OWNERSHIP OF COMMON SHARES BY CERTAIN
HOLDERS, DIRECTORS AND EXECUTIVE OFFICERS.............................. 84
SHAREHOLDER PROPOSALS..................................................... 85
OTHER MATTERS............................................................. 85
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS....................... F-1
ANNUAL CONSOLIDATED FINANCIAL STATEMENTS.................................. F-9
APPENDIX A--AGREEMENT AND PLAN OF MERGER.................................. A-i
APPENDIX B--OPINION OF MORGAN STANLEY & CO. INCORPORATED.................. B-1
APPENDIX C--SECTION 1701.85 OF THE OHIO GENERAL
CORPORATION LAW....................................................... C-1
ii
<PAGE> 8
CHOICECARE CORPORATION
655 Eden Park Drive
Cincinnati, Ohio 45202-6056
PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON OCTOBER 10, 1997
The enclosed Proxy is solicited by the Board of Directors of ChoiceCare
Corporation (the "Company"), 655 Eden Park Drive, Cincinnati, Ohio 45202-6056,
for use in connection with a Special Meeting of Shareholders of the Company to
be held on October 10, 1997 (the "Special Meeting") and at any adjournment
thereof. This Proxy Statement and accompanying Proxy is first being mailed to
shareholders on or about September 15, 1997.
At the Special Meeting, the shareholders of the Company will consider
and vote upon a proposal to approve and adopt an Agreement and Plan of Merger,
dated as of June 3, 1997 (the "Merger Agreement"), among Humana Inc., a Delaware
corporation ("Humana"), HOCC, Inc., an Ohio corporation and a wholly-owned
subsidiary of Humana ("Humana Sub"), the Company, an Ohio corporation, and The
ChoiceCare Foundation, an Ohio nonprofit corporation (the "Foundation"),
pursuant to which Humana Sub would be merged with and into the Company (the
"Merger"). As a result of the Merger, each of the then-outstanding common
shares, without par value, of the Company (the "Common Shares") would be
converted into the right to receive $16.38 in cash (other than Common Shares
held by shareholders, if any, who properly exercise their dissenters' rights
under Ohio law).
The shareholders will also consider and vote upon such other business
as may properly come before the Special Meeting.
The Company's Board of Directors (the "Board of Directors") appointed
an independent committee of directors comprised of the three disinterested
directors who are neither members of the Board of Trustees of the Foundation nor
employees of the Company (the "Company's Independent Committee") to review the
proposed transaction. Based on the unanimous recommendation of the Company's
Independent Committee and its own review and analysis of the transaction, the
Board of Directors has unanimously approved the Merger Agreement as being in the
best interest of the Company and its shareholders and recommends that you vote
FOR the approval and adoption of the Merger Agreement. The Foundation is the
record owner of 13,500,000 Common Shares, or 90.89% of the total outstanding
Common Shares. The Foundation has contractually agreed that it will vote FOR the
approval and adoption of the Merger Agreement. The Foundation's vote in favor of
the approval and adoption of the Merger Agreement will be sufficient for
approval and adoption.
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SUMMARY
The following summary is intended only to highlight certain matters
more fully disclosed elsewhere in this Proxy Statement. The summary is not
intended to be a complete statement of all material features of the Merger and
is qualified in its entirety by reference to the more detailed information set
forth elsewhere in this document, including the attached exhibits and the
documents incorporated herein by reference. Shareholders are urged to read
carefully this Proxy Statement and the appendices attached hereto in their
entirety.
THE PARTIES
The Company
The Company is a holding company for an independent managed health care
company. The shareholders of the Company are its employees, physicians, health
care professionals and the Foundation. It is one of the largest health
maintenance organizations ("HMO") in the Greater Cincinnati area, providing
health coverage to more than 246,000 members in Ohio, Kentucky and Indiana. The
Company provides and administers managed health care products and services with
an emphasis on continually improving health care quality and effectiveness. The
Company's range of managed health care products and services is provided through
its fully-insured HMO plans, a point-of-service ("POS") plan, a managed care
third-party administrative services program for employers' self-funded medical
plans and a Medicare plan. In addition, the Company offers an Ohio Health
Partnership Program Workers' Compensation product under which the Company
administers health care services allowed under Ohio's Workers' Compensation
Program for employees whose employers have selected the Company as their
workers' compensation managed care organization. The Company believes in a
physician-centered approach to health care and believes it has been a leader in
supporting physician group formation and practice management.
The predecessor entity to the Company was founded in 1978 as a
nonprofit HMO known as the Midwest Foundation Independent Physicians Association
(later known as the Tristate Foundation for Health and, presently, The
ChoiceCare Foundation), the members of which were Cincinnati area physicians. It
operated under the name ChoiceCare ("ChoiceCare"). In October 1995, pursuant to
a restructuring (the "Restructuring"), the Company was formed to serve as a
holding company for ChoiceCare assets and liabilities relating to managed care
activities, which were transferred to the Company's wholly-owned subsidiary,
ChoiceCare Health Plans, Inc. ("Health Plans"). On May 9, 1996 the Company's
initial public offering of shares was completed, in which gross proceeds of
approximately $13.5 million were received by the Company in exchange for which
approximately 1,075 physicians, health care professionals and employees of the
Company acquired approximately 9% of the Company's outstanding Common Shares. As
of December 31, 1996, the Company had total assets of nearly $150 million and
1996 operating revenue of approximately $290 million. The Company has
approximately 550 employees. Information about the Company is available on its
web site (http://www.choicecare.com). The Company's main offices are
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located at 655 Eden Park Drive, Cincinnati, Ohio 45202 and its telephone number
is (513) 784-5200.
The Foundation
The Foundation is an independent, nonprofit social welfare organization
dedicated to improving the health of the Greater Cincinnati community. The
Foundation, formerly known as Midwest Foundation Independent Physicians
Association and the Tristate Foundation for Health, was formed as a nonprofit
HMO in 1978 and operated under the name ChoiceCare. As a result of the October
1995 Restructuring in which the Company was formed, the Foundation became the
sole shareholder of the Company. Subsequently, as a result of the initial public
offering by the Company, the Foundation's ownership interest was reduced to
owning 90.89% of the Company's outstanding Common Shares. The main office of the
Foundation is located at One West Fourth Street, Suite 502, Cincinnati, Ohio
45202 and its telephone number is (513) 241-1400.
Humana and Humana Sub
Humana is a public company whose common stock is traded on the New York
Stock Exchange under the symbol HUM. Humana offers managed health care products
that integrate medical management with the delivery of health care services
through a network of providers. This network of providers may share financial
risk or have incentive to deliver quality medical services in a cost-effective
manner. These products are marketed primarily through HMOs and preferred
provider organizations ("PPOs") that encourage or require the use of contracted
hospital inpatient services and pre-authorization of outpatient surgical
procedures. Humana also offers various specialty and administrative service
products including dental, group life, workers' compensation and pharmacy
benefit management services. Humana's principal executive offices are located at
500 West Main Street, Louisville, Kentucky 40202, and its telephone number at
that address is (502) 580-1000. More information about Humana is available on
its web site (http://www.humana.com). Humana Sub is a direct wholly-owned
subsidiary of Humana, formed for the purpose of participating in the Merger and
has conducted no business to date.
SPECIAL MEETING OF SHAREHOLDERS
This Proxy Statement relates to the Special Meeting. At the Special
Meeting, the shareholders will consider and vote upon a proposal to approve and
adopt the Merger Agreement among Humana, Humana Sub, the Company and the
Foundation, pursuant to which Humana Sub would be merged with and into the
Company. The Special Meeting will be held at the Grand Baldwin Building, 8th
Floor Meeting Room, 655 Eden Park Drive, Cincinnati, Ohio 45202, on Friday,
October 10, 1997 at 10:00 A.M.
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VOTING
A majority of the votes attributable to all voting shares must be
represented in person or by proxy at the Special Meeting to establish a quorum
for action at the Special Meeting. Approval and adoption of the Merger Agreement
and any other matter properly coming before the Special Meeting requires the
affirmative vote of a majority of the outstanding Common Shares. An abstention
from voting will be counted for purposes of determining a quorum and will have
the effect of a "no" vote.
At the close of business on September 10, 1997, the record date for the
determination of shareholders entitled to vote at the Special Meeting (the
"Record Date"), there were 14,852,840 Common Shares outstanding. Each Common
Share is entitled to one vote on each matter coming before the Special Meeting
or any adjournment thereof.
As of September 10, 1997, directors and executive officers of the
Company may be deemed beneficial owners of approximately 267,933 Common Shares,
or approximately 1.8% of the then-outstanding Common Shares. In addition, the
Foundation is the record owner of 13,500,000 of the then-outstanding Common
Shares. See "Beneficial Ownership of Common Shares by Certain Holders, Directors
and Executive Officers." Its vote in favor of the approval and adoption of the
Merger Agreement will be sufficient for approval and adoption.
THE MERGER
Conversion of Securities
Upon consummation of the transactions contemplated by the Merger
Agreement, (a) Humana Sub will be merged with and into the Company, and (b) each
issued and outstanding Common Share (other than Common Shares held by
shareholders, if any, who properly exercise their dissenters' rights under Ohio
law) will be converted into the right to receive $16.38 in cash (the "Per Share
Merger Consideration").
Recommendation of the Board of Directors
The Board of Directors believes that the terms of the Merger are fair
to and in the best interests of the Company and its shareholders. The Board of
Directors has unanimously approved the Merger Agreement and unanimously
recommends a vote FOR approval and adoption of the Merger Agreement by the
shareholders. The Company's Independent Committee independently reviewed the
transaction and unanimously recommended that the Board of Directors approve the
transaction. For a discussion of the factors considered by the Board of
Directors in reaching its decision, see "The Merger--Reasons for the Merger;
Recommendation of the Board of Directors."
Opinion of Financial Advisor
The Company retained Morgan Stanley & Co. Incorporated ("Morgan
Stanley") to act as its exclusive financial advisor in connection with a
possible business combination. On June 4, 1997, Morgan Stanley rendered to the
Board of Directors its written opinion (the "Morgan
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Stanley Opinion") that, as of such date and based upon and subject to the
factors and assumptions set forth therein, the consideration for the Merger was
fair to the holders of Common Shares from a financial point of view. The full
text of the Morgan Stanley Opinion, which sets forth the assumptions made,
matters considered, and qualifications and limitations on the review undertaken
by Morgan Stanley, is attached as Appendix B to this Proxy Statement, is
incorporated herein by reference and should be read in its entirety. See "The
Merger--Opinion of Financial Advisor."
Interests of Certain Persons in the Merger
In considering the recommendation of the Board of Directors with
respect to the Merger Agreement and the transactions contemplated thereby,
shareholders should be aware that certain members of the management of the
Company and the Board of Directors have certain interests in the Merger that are
in addition to the interests of shareholders of the Company generally. The
Company's maximum contingent liability under the employment agreements with
Executive Officers and Other Officers is currently estimated (based on 1997
salary levels and targeted incentives) to approximate: (i) $3.2 million in the
event that only retention incentive payments are made; or (ii) $7.3 million in
the event that only change in control payments are made in the event of
termination of the employment of the Executive Officers and Other Officers. See
"The Merger--Interests of Certain Persons in the Merger."
Conditions to the Merger
The obligations of the Company, the Foundation and Humana to consummate
the Merger are subject to the satisfaction of certain conditions, unless waived,
including, among others: (i) all representations and warranties of the parties
set forth in the Merger Agreement must be true and correct in all material
respects; (ii) all parties shall have performed and complied with all covenants,
agreements and conditions required by the Merger Agreement in all material
respects; (iii) no action or proceeding before a court or governmental body
shall be pending or threatened which would prevent the carrying out of the
Merger Agreement, declare unlawful the transactions or cause such transactions
to be rescinded; (iv) all parties shall have complied with all laws and
regulations regarding the Merger and shall have received all necessary
regulatory approvals, licenses, certificates of authority and certifications;
(v) the Company shall have obtained shareholder approval; and (vi) Humana shall
be satisfied that no rule, law, order or regulation is pending or enacted which
would have a material adverse effect on the Merger. The conditions to the
obligations of the Company and the Foundation to consummate the Merger are
subject to waiver by the Company and the Foundation and the conditions to the
obligations of Humana and Humana Sub to effect the Merger are subject to waiver
by Humana. See "The Merger Agreement--Conditions to the Obligations of the
Parties."
Effective Date of the Merger
The effective date of the Merger (the "Effective Date") shall be the
business day on which all the conditions to the obligations of the parties are
fulfilled or satisfied or waived by the party entitled to the benefit of such
conditions, or such other date as the parties agree in writing. On the Effective
Date, the Company and Humana Sub shall file a Certificate of
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Merger with the Secretary of State of Ohio. The Merger shall be effective at the
close of business (the "Effective Time") on the Effective Date.
Exchange of Certificates Representing Common Shares
Upon consummation of the Merger, each holder of a certificate or
certificates representing Common Shares (the "Certificates") outstanding
immediately prior to the Effective Date will, upon the surrender thereof to Star
Bank, N.A. (the "Paying Agent"), be entitled to receive the Per Share Merger
Consideration for each Common Share owned. After the Effective Date, the Paying
Agent will mail a letter of transmittal (the "Letter of Transmittal") with
instructions to all holders of record of Common Shares as of the Effective Date
for use in surrendering their Certificates in exchange for the Per Share Merger
Consideration. CERTIFICATES SHOULD NOT BE SURRENDERED UNTIL THE LETTER OF
TRANSMITTAL AND INSTRUCTIONS ARE RECEIVED. See "The Merger Agreement--Exchange
of Certificates Representing the Common Shares."
Dissenting Shareholders' Rights
Under Ohio law, certain rights with respect to the Merger may be
available to dissenting shareholders. These rights with respect to the Merger
are only available if such holders: (i) neither vote for approval of the Merger
nor consent thereto in writing; and (ii) comply with the other statutory
requirements of the Ohio General Corporation Law (the "OGCL"). See "Dissenting
Shareholders' Rights" and Appendix C to this Proxy Statement.
Certain Federal Income Tax Consequences
The receipt of cash for Common Shares in the Merger or pursuant to the
exercise of dissenters' rights will be a taxable transaction for federal income
tax purposes and may also be a taxable transaction under applicable state,
local, foreign and other laws. See "The Merger--Certain Federal Income Tax
Consequences."
Accounting Treatment
The Merger will be accounted for as a purchase for accounting and
financial reporting purposes. See "The Merger--Accounting Treatment."
Termination
The parties may terminate the Merger Agreement at any time prior to the
Effective Date by mutual written consent, or any party may terminate the Merger
Agreement by delivery of notice of termination in a number of circumstances,
which include, among others: (1) the Merger has not occurred on or before
January 31, 1998; (2) any representation or warranty in the Merger Agreement or
any other instrument delivered in connection therewith becomes materially untrue
and the breach has not been cured within ten business days of notice of the
breach; (3) a failure or refusal to perform in any material respect any
obligation or covenant and such failure or refusal to perform has not been cured
within ten business days of notice of the breach; or (4) any of the conditions
to the obligations of the parties pursuant to the Merger Agreement have not been
satisfied or become impossible to satisfy. In addition, Humana may terminate the
Merger Agreement if the Company delivers to Humana updated disclosure schedules
which materially modify the disclosure schedules attached to the Merger
Agreement
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as of the date of the Merger Agreement. The Company and the Foundation
could have terminated the Merger Agreement: (1) if the Company and the
Foundation had delivered notice of termination to Humana contemporaneously with
their accepting a Third Party Offer (see discussion below); or (2) if, on or
before the expiration of the Window Period (see discussion below), (i) the
Company had received a written notice from Morgan Stanley that the previously
issued opinion of the fairness of the Merger Agreement had been withdrawn, or
(ii) the Foundation had received a written notice from its financial advisor,
Credit Suisse First Boston, that the previously issued opinion on the fairness
of the Merger Agreement had been withdrawn. At the date of this Proxy
Statement, the opportunity for the Company and the Foundation to terminate the
Merger Agreement by accepting a Third Party Offer during the Window Period has
terminated because no such offer was received or accepted (although the rights
to terminate for other reasons remain intact). See "The Merger
Agreement--Termination."
Expenses
If the Foundation and the Company had terminated the Merger Agreement
contemporaneously with accepting a Third Party Offer, the Company would have
paid Humana the following amounts as consideration for terminating the Merger
Agreement: (a) reimbursement of all Humana's reasonable, documented costs and
expenses, but not in excess of $1,000,000; (b) two percent (2%) of the total
consideration provided for in the Third Party Offer; and (c) upon the closing of
a purchase or merger transaction closing on or before June 30, 1999, (1) four
percent (4%) of the total value of such transaction minus (2) the amount paid
pursuant to clause (b) above. See "The Merger Agreement--Expenses."
THE SPECIAL MEETING
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
At the Special Meeting, holders of Common Shares will consider and vote
upon a proposal to approve and adopt the Merger Agreement. Shareholders will
also consider and vote upon such other matters as may properly be brought before
the Special Meeting.
THE BOARD OF DIRECTORS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND
RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE APPROVAL AND ADOPTION OF THE
MERGER AGREEMENT.
VOTE REQUIRED
A majority of votes attributable to all voting shares must be
represented in person or by proxy at the Special Meeting to establish a quorum
for action at the Special Meeting. Approval of the Merger Agreement and any
other matter properly coming before the Special Meeting requires the affirmative
vote of a majority of the outstanding Common Shares. An abstention from voting
will be counted for purposes of determining a quorum and will have the effect of
a
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"no" vote. Each Common Share is entitled to one vote on each matter coming
before the Special Meeting.
PROXY VOTING PROCEDURES
To be effective, properly executed and signed Proxies must be returned
to Star Bank, N.A., the Company's transfer agent and the proxy tabulator, prior
to the Special Meeting. The Common Shares represented by a properly executed and
signed Proxy will be voted in accordance with the instructions thereon. However,
if no instructions are given, the shares represented thereby will be voted in
accordance with the recommendations of the Board of Directors. The Company is
soliciting Proxies by mail and the costs of solicitation will be borne by the
Company.
As of the date of this Proxy Statement, the Board of Directors is not
aware of any other business or matters to be presented for consideration at the
Special Meeting other than as set forth in the Notice of Special Meeting of
Shareholders attached to this Proxy Statement. If, however, any other business
shall come before the Special Meeting or any adjournment or postponement thereof
and be voted upon, the enclosed Proxy shall be deemed to confer discretionary
authority on the proxy committee named to vote the shares represented by such
Proxy as to any such matters. The individuals of the proxy committee, whose
names are set forth on the accompanying Proxy, were named by the Board of
Directors.
REVOCABILITY OF PROXIES
A shareholder giving a Proxy may revoke or change it at any time before
or during the Special Meeting by (i) submitting a later-dated Proxy; (ii) giving
written notice of revocation to Star Bank, N.A., 425 Walnut Street, 6th Floor,
Corporate Trust Operations, Cincinnati, Ohio 45202; or (iii) attending the
Special Meeting and giving notice of such revocation at the Special Meeting. A
revocation made during the Special Meeting will not affect any vote previously
taken.
RECORD DATE; SHARES ENTITLED TO VOTE; QUORUM
At the close of business on September 10, 1997, the Record Date for the
determination of shareholders entitled to vote at the Special Meeting, there
were 14,852,844 Common Shares outstanding. Only holders of record of Common
Shares at the close of business on the Record Date are entitled to receive
notice of and to vote at the Special Meeting. A majority of the outstanding
Common Shares entitled to vote must be represented in person or by proxy at the
Special Meeting in order for a quorum to be present at the Special Meeting.
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SOLICITATION OF PROXIES
The Company will bear the cost of the solicitation of proxies from its
shareholders. Arrangements will be made with brokerage firms, nominees,
fiduciaries and other custodians, for the forwarding of solicitation materials
to the beneficial owners of shares held of record by such persons.
MISCELLANEOUS
Representatives of Arthur Andersen LLP, the Company's independent
public accountants, are expected to be present at the Special Meeting. Such
representatives will be afforded an opportunity to make a statement, if they
desire to do so, and are expected to be available to respond to appropriate
questions.
SHAREHOLDERS SHOULD NOT SEND SHARE CERTIFICATES WITH THEIR PROXY CARDS.
THE MERGER
GENERAL
The Merger Agreement provides for the acquisition of the Company by
Humana, in which a wholly-owned subsidiary of Humana would be merged with and
into the Company and the holders of Common Shares would be entitled to receive
the Per Share Merger Consideration for each outstanding Common Share (other than
Common Shares held by shareholders, if any, who properly exercise their
dissenters' rights under Ohio law). The discussion in this Proxy Statement of
the Merger and the description of the Merger's principal terms are subject to
and qualified in their entirety by reference to the Merger Agreement, a copy of
which is attached to this Proxy Statement as Appendix A and is incorporated
herein by reference. From and after the Effective Time, the Company is sometimes
referred to herein as the "Surviving Corporation."
BACKGROUND OF THE MERGER
Since 1993, most of the Company's major competitors in Southwestern
Ohio have merged or affiliated with other companies, providing the Company's
competitors with greater access to indemnity enrollees who may easily be
transitioned to managed care, as well as access to capital resources, broader
product lines and greater technical resources and expertise. The following chart
lists most of the major competitors of the Company in 1993, and those same
competitors with their affiliates, if any, in 1997:
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1993 MAJOR COMPETITORS 1997 MAJOR COMPETITORS
Aetna Aetna/U.S. Healthcare
CIGNA CIGNA/Healthsource
Community Mutual Ins. Co. (CMIC) CMIC/Anthem
Humana Humana/EMPHESYS
MetLife United/MetraHealth
Prudential Prudential
TakeCare FHP/PacifiCare
University Health Plan Blue Cross/Blue Shield of Ohio
In order to meet this rapidly changing and challenging competitive
environment, the Company also began seeking a strategic alliance. During the
summer of 1995, the Foundation, prior to the Restructuring, nearly reached
agreement for a proposed transaction in which 20% of the ownership of the
Company, after the Restructuring, would have been exchanged for capital, midwest
membership, product and technical resources being made available to the Company
by a national managed care company. However, those negotiations were not
concluded, and that effort to align with a strategic investor partner was
terminated in October 1995.
Effective October 1, 1995, in order to position itself better to access
capital markets, the Foundation, a nonprofit 501(c)(4) entity under the
Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"),
engaged in the Restructuring. Pursuant to the Restructuring, the Company became
the for-profit subsidiary of the Foundation. The Restructuring also required
the final settlement of the litigation initiated against the Foundation in 1987
known as THOMPSON, ET AL. VS. MIDWEST FOUNDATION INDEPENDENT PHYSICIANS
ASSOCIATION (the "THOMSON litigation") via payment to the plaintiffs' class of
$28 million, which was distributed in January 1996. In the Restructuring,
substantially all of the assets and liabilities of the Foundation were
transferred to the Company's subsidiary, Health Plans. The Foundation retained
$28 million to satisfy the liability to the THOMPSON litigation plaintiffs and
$25 million in cash and marketable securities to pursue its community benefit
purpose of improving the health of the community.
Following the Restructuring, the Company offered up to $38 million of
Common Shares to eligible investors (individual physicians or other health care
professionals who had executed a provider agreement with the Company, and
Company employees). The share offering raised gross proceeds of approximately
$13.5 million, but did not provide the Company with sufficient capital to meet
the needs created by increased competition in the marketplace and to finance
further expansion goals of the Company. The share offering closed on May 9, 1996
resulting in ownership of 90.89% of the Common Shares by the Foundation and
9.11% in the aggregate by approximately 1,075 individual investors.
Approximately one month after the closing of the share offering, the
Company's investment banker, Morgan Stanley, indicated that several large
managed care companies continued to be interested in a potential relationship
with the Company. Accordingly, in July
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1996, the Company authorized Morgan Stanley to begin exploring likely candidates
for a strategic alliance. From August 1996 through February 1997, the Company
engaged in active discussions and negotiations with several potential strategic
alliance candidates, including Humana and a particular large, managed care
company ("Entity One"), in an effort to structure a two-step transaction which
would involve the strategic investor acquiring less than 20% of the Company's
ownership in the first step, and then subsequently acquiring the balance of
ownership of the Company several years later. However, mutually agreeable terms
and conditions were never established with any of the companies with which the
Company was negotiating during this timeframe.
On January 10, 1997, Daniel A. Gregorie, M.D., Chairman of the Board of
Directors, President and Chief Executive Officer of the Company, and Thomas D.
Anthony, Esq., Executive Vice President, Chief Legal Officer and Secretary of
the Company, at the request of Humana, began discussions concerning the
potential strategic benefits of some form of an alliance between Humana and the
Company in a meeting with Humana executives, including Gregory H. Wolf,
President and Chief Operating Officer, Karen A. Coughlin, President-Division II,
and George W. Vieth, Jr., Vice President-Development and Planning. Following
that meeting, the parties began exchanging certain financial information in
order to further explore possible affiliation opportunities. On January 24,
1997, Humana representatives and representatives of its investment banker,
Merrill Lynch & Co., Inc., commenced due diligence in Cincinnati.
Over the course of the last weeks of January and the first weeks of
February 1997, Humana and the Company exchanged additional financial and
operational information, evaluated that information, and met with financial
advisors and attorneys, to consider the benefits and consequences of a
combination involving a two-step transaction, as well as a transaction which
would result in the acquisition of 100% of the Common Shares by Humana. On
February 18, 1997, Dr. Gregorie and Mr. Anthony met with Messrs. Wolf and Vieth
at the Cincinnati/Northern Kentucky International Airport to further discuss a
possible combination.
The Ad Hoc Committee of the Board of Directors (the "Ad Hoc Committee")
was composed of Daniel W. Geeding, Ph.D., Donald A. Saelinger, M.D., Donald E.
Hoffman and Chad P. Wick. The Ad Hoc Committee had been meeting regularly since
October 1996, and began meeting biweekly beginning January 17, 1997 to consider
the possible combination. The Ad Hoc Committee was formed as a committee of the
Board of Directors to provide in-depth analysis of any potential transaction.
The Ad Hoc Committee continued meeting through the end of May 1997.
Extensive due diligence was conducted by a team from Humana during
February 26-28, 1997 at the law offices of Frost & Jacobs, general counsel to
the Company. In attendance at the due diligence review were approximately six
senior executives of Humana and their counterparts from the Company.
In early March 1997, Entity One re-initiated discussions with the
Company regarding the potential acquisition of 100% of the Company.
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At a special meeting of the Board of Directors held on March 5, 1997,
the Board of Directors narrowed the field of parties with which the Company was
negotiating to two, including Humana and Entity One, and further discussed a
possible acquisition of the entire ownership interest in the Company. The
consideration of a transaction involving more than a minority interest in the
Company resulted from the uncompleted negotiations which had occurred over the
past several months for a two-step transaction, the advice of Morgan Stanley,
and the expressions of interest in an acquisition of the entire ownership
interest by Humana and Entity One.
Dr. Gregorie and Mr. Anthony met with Humana representatives again on
March 10, 1997 in Louisville where they discussed an acquisition of 100% of the
Common Shares for the Per Share Merger Consideration, as well as other major
deal points. On March 12, 1997, a dinner meeting was held in Cincinnati among
David A. Jones, Chairman of Humana, Mr. Wolf, Mr. Vieth, the members of the Ad
Hoc Committee, and Company executives including Dr. Gregorie, Mr. Anthony, Jane
E. Rollinson, Executive Vice President, Chief Operating Officer and Treasurer,
and Michael J. Barber, M.D., Executive Vice President and Chief Medical Officer.
On March 19, 1997, representatives of Humana including Mr. Wolf, Mr.
Vieth, and others made a presentation to the Board of Directors in which the
plan for the affiliation between the companies was described. Humana
representatives indicated Humana's interest in acquiring 100% of the Common
Shares in order to take advantage of the two companies' respective strengths,
including Humana's national market capability, financial wherewithal, and
technical expertise and resources, and the Company's quality processes and
reputation, large group customer base, market-leading position in Southwestern
Ohio, and growth potential in Ohio. The proposal included an offer of the Per
Share Merger Consideration. At this meeting, Humana representatives presented a
draft definitive merger agreement which Humana would be willing to sign.
Immediately thereafter, Humana's offer was made known to the
Foundation. At that time, the Foundation's Board of Trustees formed an
independent committee of trustees (the "Foundation's Independent Committee") to
evaluate the potential transaction with Humana, comprised of Robert B. Morgan,
President and Chief Executive Officer of Cincinnati Financial Corporation; Jerry
A. Grundhofer, Chairman, President and Chief Executive Officer of Star Bank,
N.A. and Star Bank Corporation; and Don E. Thomas, Director of Hamilton County
Department of Human Services. The Foundation's Independent Committee retained
legal counsel, Bricker & Eckler of Columbus, Ohio, and retained investment
bankers, Credit Suisse First Boston. Credit Suisse First Boston retained legal
counsel, Skadden, Arps, Slate, Meagher & Flom. The Foundation was represented by
its special legal counsel, Dinsmore & Shohl.
In April 1997, the Board of Directors formed the Company's Independent
Committee which was composed of Dr. Geeding, Dr. Saelinger and Mr. Wick. This
committee's purpose
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was to evaluate and approve any potential acquisition and to provide to the
Board of Directors the recommendation of disinterested directors.
Subject to a confidentiality agreement, intensive due diligence was
conducted by Entity One from March 31 through April 2, 1997. On April 7, 1997,
the Chief Executive Officer of Entity One met with the Board of Directors to
discuss a proposed combination. On April 10, 1997, Entity One submitted a letter
of intent offering cash consideration of $250 million for both outstanding
Common Shares and outstanding stock options, subject to a $10 million escrow
payable in "certain events," proposing a local governance structure, requiring
further due diligence, and citing customary terms and provisions to be included
in a definitive agreement. A draft definitive agreement was submitted to the
Company on April 21, 1997.
Negotiations among Humana, the Company and the Foundation began in
earnest during the second week of April 1997 and continued through the third
week of May 1997. During the negotiations, the parties considered provisions
concerning pricing and valuation issues, headquarters location, name of the
company, opportunity to grow Humana's business in Ohio and other issues.
Negotiations with Entity One continued in earnest through April 1997,
up to and including the second week of May 1997, during which time period
telephone calls, letters and memoranda were exchanged concerning various terms
and conditions of the proposed combination as expressed in drafts of the
definitive agreement.
During the negotiations, the Company's Independent Committee met weekly
and was updated by Mr. Anthony, in response to which it provided counsel and
guidance. Similarly, the Foundation's Independent Committee was advised on a
regular basis of the status of the negotiations, and it provided input resulting
from its deliberations, through counsel. Additionally, during the first week of
May 1997, partly in response to a request from the Foundation's Independent
Committee, the Company sought the best offer from Entity One and Humana.
Although there was no change in price, the Company and Entity One did
not reach agreement on several key terms, and the parties ceased negotiations on
May 15, 1997. However, negotiations with Humana continued, and Humana made
several substantial modifications to the non-price provisions of the agreement.
In addition, the Foundation's Independent Committee requested certain changes in
the employment agreements with the Company's executives.
The final negotiations were conducted with Humana through the last week
of May 1997. The Company's Independent Committee met at 4:30 p.m. on Sunday,
June 1, 1997, to review the final agreement proposed by Humana, which included
the Per Share Merger Consideration, the creation of a six member board of
directors for the Surviving Corporation (see discussion below), a special
"window" during which other bids for the acquisition of the Company might be
received, payment of certain fees in the event the Merger Agreement is
terminated under described circumstances, and limited obligations for the
Foundation to
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indemnify Humana. Finding that the proposed transaction was in the best
interests of the shareholders, and that the price appeared to be fair (having
received a fairness opinion from Morgan Stanley on May 31, 1997), the Company's
Independent Committee unanimously recommended approval of the transaction to the
full Board of Directors. The full Board of Directors convened at 6:00 p.m. on
June 1, 1997 and was presented with a detailed review of the entire transaction
by Mr. Anthony and Frost & Jacobs representatives. After considering this
review, the fairness opinion from Morgan Stanley, and the recommendation of the
Company's Independent Committee, the transaction was found to be in the best
interests of the shareholders of the Company, and it was unanimously approved.
At the meetings of the Company's Independent Committee and the full Board of
Directors, Morgan Stanley had delivered its fairness opinion, indicating that
the aggregate consideration of the Merger was fair from a financial point of
view.
On Monday, June 2, 1997, the Foundation's Independent Committee met
with representatives from Credit Suisse First Boston, Brickler & Eckler and
Skadden Arps Slate Meagher & Flom. During its deliberations, the Foundation's
Independent Committee also met with various representatives of the Foundation
and its counsel, Dinsmore & Shohl, as well as representatives of the Company and
its counsel, Frost & Jacobs. Based on advice and commentary from all of these
respective parties, the Foundation's Independent Committee found that the
transaction's price was fair, and that the transaction was in the best interests
of the Foundation. It unanimously recommended approval of the transaction to the
Foundation's Board of Trustees as a whole. At 5:00 p.m. on June 2, 1997, the
entire Board of Trustees of the Foundation met and approved the proposed
transaction with Humana. On June 5, 1997, the Merger Agreement was executed by
Humana, the Foundation, and the Company. Public announcement of the transaction
was made on the same day.
REASONS FOR THE MERGER; RECOMMENDATION OF THE BOARD OF DIRECTORS
As discussed under "Background of the Merger," the Board of Directors
of the Company had engaged Morgan Stanley to proceed with an investigation of
possible investors in/purchasers of the Company. The Company had the opportunity
to evaluate potential acquisition proposals from Humana and other potential
purchasers. In evaluating the Merger Agreement, the Board of Directors
considered (at meetings on May 7, May 29 and June 1 and at previous meetings),
without assigning relative weights to, the following factors: (i) the terms and
conditions of the proposed Merger, including the consideration to be received by
the shareholders of the Company; (ii) the financial condition, results of
operations, business, market position, large group customer expertise, medical
management capability, prospects and strategic objectives of the Company; (iii)
the financial condition, results of operations, business, market position,
prospects, management strength, Medicare risk capability, small group customer
expertise and strategic objectives of Humana; (iv) the opinion of Morgan Stanley
as to the fairness of the Merger from a financial point of view to the
shareholders of the Company; (v) the effects of the Merger upon the community
presence of the Company, including effects upon physician providers, other
providers, members, employers and the healthcare infrastructure of the Greater
Cincinnati area; and (vi) the ability of Humana to
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<PAGE> 22
supply the Company with capital, operational resources and expertise, a broad
range of products and national market service capability.
The Board of Directors placed significant weight on the fairness
opinion of Morgan Stanley. Under the various valuation methods as discussed in
"Opinion of Financial Advisor" below, the highest valuation under any of the
alternative methods that Morgan Stanley determined for the Company was $241
million. The aggregate consideration of the Merger is approximately $243
million, exclusive of payments to be made by the Surviving Corporation upon
termination of Options (as discussed below) under the Stock Incentive Plan (as
discussed below). The Board of Directors believed that the Humana offer
presented a significant value for the shareholders of the Company.
The Board of Directors also considered a number of other factors,
including:
1. The extensive arms-length negotiations between the Company,
Humana, Entity One and others leading to the belief of the Board of Directors
that the Per Share Merger Consideration represented the highest price per share
that could be negotiated;
2. That, following the repeated requests by the Foundation's
Independent Committee and the Company that Humana submit its best and final
proposal, Humana made several significant non-price modifications;
3. The results of the inquiries made by the Company's
management and Morgan Stanley to major companies in the managed health care and
related industries, regarding a possible strategic alliance, business
combination, acquisition or similar transaction with the Company;
4. Certain provisions of the Merger Agreement, including the
parties' representations, warranties and covenants, the conditions to their
respective obligations, the limited indemnification required of the Foundation,
and the limited ability of Humana to terminate the Merger Agreement;
5. The regulatory approvals required to consummate the Merger,
including, among others, attorney general, anti-trust and insurance regulatory
approvals, the favorable prospects for receiving such approval and Humana's
agreements in the Merger Agreement with respect to seeking to obtain such
approval;
6. The business reputation and capabilities of Humana and its
management, and Humana's financial strength, including its ability to finance
the Merger;
7. The fact that, pursuant to the Merger Agreement, the
Company had the right for two weeks following execution of the Merger Agreement
(the "Window Period", as discussed below) to participate in discussions or
negotiations with or furnish information to third parties making an
unsolicited Third Party Offer (as discussed below);
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8. The fact that, pursuant to the Merger Agreement, the Board
of Directors had the right, upon payment to Humana of approximately $10 million
plus certain expenses of Humana, to terminate the Merger Agreement if the Board
of Directors had determined that a Third Party Offer received during the Window
Period in good faith had exceeded the "Total Consideration" (as defined in the
Merger Agreement) by at least $1 million;
9. That the strategic fit between the Company and Humana
offers the opportunity for substantial synergies as well as potential growth in
Ohio;
10. The current and anticipated status of the managed health
care industry in the United States, including increasing competition, limited
pricing flexibility, and anti-managed care initiatives;
11. The likelihood of continued consolidation in the managed
health care sector and the possibility that changes in the industry, depending
on their nature, could be disadvantageous to the Company; and
12. The belief that the combined company would be better able
to respond to the needs of physicians, customers, and enrollees, the increased
competitiveness of the health care industry, and the opportunities that changes
in the health care industry might bring.
The foregoing discussion of information and factors considered and
given weight by the Board of Directors is not intended to be exhaustive. In view
of the variety of factors considered in connection with its evaluation of the
transaction, the Board of Directors did not find it practicable to, and did not,
quantify or otherwise assign relative weights to the specific factors considered
in reaching its determinations and recommendations. In addition, individual
members of the Board of Directors may have given different weights to different
factors.
In addition, the Board of Directors placed significant weight on the
recommendation of the Company's Independent Committee. The Company's Independent
Committee had been evaluating the sale of the Company since April 1997. The
members of the Company's Independent Committee were also on the Ad Hoc Committee
which had been considering a strategic alliance since 1996. The Company's
Independent Committee had received all reports provided by Morgan Stanley, had
been fully informed of all developments in negotiations with each potential
purchaser, had met independently with several purchasers, and had been involved
in the negotiations of certain aspects of the Merger. On June 1, 1997,
immediately prior to the meeting of the Board of Directors at which the Merger
was approved, the Company's Independent Committee determined that the terms of
the Merger were fair and recommended the Merger to the full Board of Directors
for its approval. At the subsequent meeting of the Board of Directors, the Board
of Directors accepted the recommendation of the Company's Independent Committee
and recommends the Merger to the shareholders for their approval.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS OF
THE COMPANY VOTE FOR THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
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OPINION OF FINANCIAL ADVISOR
The Company retained Morgan Stanley to act as its exclusive financial
advisor in connection with a possible business combination. On June 4, 1997,
Morgan Stanley rendered to the Board of Directors the final Morgan Stanley
Opinion that, as of such date and subject to the factors and assumptions set
forth therein, the Per Share Merger Consideration was fair from a financial
point of view to the holders of Common Shares.
The full text of the Morgan Stanley Opinion, which sets forth the
assumptions made, matters considered, and qualifications and limitations on the
review undertaken by Morgan Stanley, is attached as Appendix B to this Proxy
Statement and is incorporated herein by reference. The summary of the Morgan
Stanley Opinion set forth in this Proxy Statement is qualified in its entirety
by reference to the full text of such opinion. Shareholders are urged to read
such opinion in its entirety. The Morgan Stanley Opinion was provided to the
Board of Directors for its information and is directed only to the fairness from
a financial point of view of the Per Share Merger Consideration to the
shareholders of the Company.
In arriving at its opinion, Morgan Stanley, among other things: (i)
reviewed certain publicly available financial statements and other information
of the Company; (ii) reviewed certain internal financial statements and other
financial and operating data concerning the Company prepared by the management
of the Company; (iii) analyzed certain financial projections concerning the
Company prepared by the management of the Company; (iv) discussed the past and
current operations and financial condition and the prospects of the Company with
senior executives of the Company; (v) reviewed and discussed with senior
executives of the Company the strategic objectives of the Merger and the
long-term benefits expected to result from the Merger; (vi) compared the
financial performance of the Company with that of certain other comparable
companies that have publicly-traded securities; (vii) reviewed the financial
terms, to the extent publicly available, of certain comparable acquisition
transactions; (viii) participated in discussions and negotiations among
representatives of the Company, Humana and their financial and legal advisors;
(ix) reviewed the Merger Agreement and certain related documents; and (x)
performed such other analyses and considered such other factors as it deemed
appropriate.
Morgan Stanley assumed and relied upon, without independent
verification, the accuracy and completeness of the information reviewed by it
for the purposes of its opinion. With respect to the financial projections,
Morgan Stanley assumed that they had been reasonably prepared on bases
reflecting the best currently available estimates and judgments of the future
financial performance of the Company. Morgan Stanley did not make any
independent valuation or appraisal of the assets or liabilities of the Company,
nor was it furnished with any such appraisals. The opinion of Morgan Stanley is
necessarily based on economic, market and other conditions in effect on, and the
information made available to it as of, June 4, 1997.
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The following is a brief summary of the material analyses presented by
Morgan Stanley to the Board of Directors in connection with the rendering of the
Morgan Stanley Opinion.
Comparable Companies Trading Analysis
Morgan Stanley reviewed publicly available financial information of
managed care and other companies similar to the Company and compared this
information to corresponding financial information of the Company. Companies
utilized by Morgan Stanley in the analysis included Humana, Coventry
Corporation, Healthsource, Inc., Mid-Atlantic Medical Services, Inc., Physician
Corporation of America, Inc., Physicians Health Services, Inc., RightCHOICE
Managed Care, Inc., United Wisconsin Services, Inc. and WellCare Management
Group (the "Comparable Companies"). Utilizing market information as of April 11,
1997, the latest publicly available 10-Ks and 10-Qs, and estimates of earnings
per share and five-year projected growth rates based on First Call Corporation
("First Call") estimates as of April 11, 1997, Morgan Stanley, for each of the
Comparable Companies, calculated, among other things, (i) aggregated value per
member enrolled, which ranged from $333 to $2,193, with a mean of $1,165 and a
median of $1,038, (ii) price to 1997 earnings ratio, which ranged from 13.7x to
151.7x, with a mean of 58.4x and a median of 34.3x, and (iii) price to estimated
1998 earnings ratio, which ranged from 7.3x to 57.6x, with a mean of 29.7x and a
median of 24.6x.
Based on the foregoing analysis, Morgan Stanley applied multiples
ranging from 18.0x to 23.0x to estimated 1997 net income for the Company, 11.0x
to 16.0x to estimated 1998 net income for the Company, and 15.0x to 20.0x to the
average of estimated 1997 and 1998 net income for the Company. In addition,
Morgan Stanley applied an aggregate value per fully-insured member range of $800
to $1,000 to the Company's fully-insured members enrolled and an aggregate value
per self-insured member range of $80 to $180 to the Company's self-insured
members enrolled. Based on such analysis, Morgan Stanley derived an average
range of implied equity values for the Company of $149 million to $194 million
and a median range of implied equity values for the Company of $131 million to
$172 million.
Precedent Transactions Analysis
Morgan Stanley reviewed certain publicly available information
regarding 17 selected business combinations in the managed care and health
insurance industries announced since July 14, 1992 (the "Comparable
Transactions"). The Comparable Transactions included the following: the
acquisition of Healthsource, Inc. by Cigna Corporation; the acquisition of John
Hancock Mutual Life Insurance Company's Group-Benefits Division by WellPoint
Health Networks, Inc; the acquisition of Foundation Health Corporation by Health
Systems International, Inc.; the acquisition of FHP International by PacifiCare
Health Systems, Inc.; the acquisition of U.S. Healthcare, Inc. by Aetna Life &
Casualty Ltd.; the acquisition of HealthWise of America, Inc. by United
HealthCare Corporation; the acquisition of Massachusetts Mutual Life Insurance
Company (Life and Health Benefits Management Division) by WellPoint Health
Networks Inc.; the acquisition of EMPHESYS Financial Group Inc. by Humana Inc.;
the acquisition of MetraHealth Companies, Inc. by United HealthCare Corporation;
the acquisition of Provident Life Capital Corporation by Healthsource, Inc.; the
acquisition of GenCare Health Systems, Inc. by United HealthCare Corporation;
the acquisition of Intergroup Healthcare Corporation by Foundation Health
Corporation; the
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acquisition of CareFlorida Health Systems, Inc. by Foundation Health
Corporation; the acquisition of TakeCare, Inc. by FHP International; the
acquisition of Ramsay-HMO, Inc. by United HealthCare Corporation; the
acquisition of HMO America, Inc. by United HealthCare Corporation; and the
acquisition of Century Medicorp, Inc. by Foundation Health Corporation. For each
of the Comparable Transactions, Morgan Stanley calculated, among other things,
equity value as a multiple of the next twelve months estimated earnings per
share (using the latest Institutional Broker Estimate System, Inc. or First Call
mean estimates), which ranged from 8.7x to 31.8x and aggregate value as a
multiple of members enrolled which ranged from $105 to $3,349.
Based on the analyses of the aforementioned transactions, Morgan
Stanley applied multiples ranging from 21.6x to 27.6x to estimated 1997 net
income for the Company, 13.2x to 19.2x to estimated 1998 net income for the
Company, and 18.0x to 24.0x to the average of estimated 1997 and 1998 net income
for the Company. In addition, Morgan Stanley applied an aggregate value per
fully-insured member range of $900 to $1,300 to the Company's fully-insured
members enrolled and an aggregate value per self-insured member range of $100 to
$200 to the Company's self-insured members enrolled. Based on such analysis,
Morgan Stanley derived an average range of implied equity values for the Company
of $174 million to $238 million and a median range of implied equity values for
the Company of $158 million to $206 million.
No company utilized in the Comparable Company's Trading Analysis was
identical to the Company. Similarly, no transaction used in the Precedent
Transactions Analysis was identical to the Merger. In evaluating the Comparable
Companies and the Comparable Transactions, Morgan Stanley made judgments and
assumptions with regard to industry performance, general business, economic,
market and financial conditions and other matters, many of which are beyond the
control of the Company. Such judgments and assumptions included the impact of
competition on the business of the Company and the industry generally, industry
growth and the absence of any adverse material change in the financial condition
and the prospects of the Company or the industry or in the financial markets in
general. Mathematical analysis, such as determining the average or median, is
not in itself a meaningful method of utilizing comparable company or transaction
data.
Discounted Cash Flow Analysis
Using a discounted cash flow methodology, Morgan Stanley calculated a
range of present values for the equity value of the Company. Morgan Stanley
prepared such equity value ranges under two separate sets of assumptions, a
management case based on financial projections prepared by management of the
Company and a sensitivity case. The sensitivity case provided for a 1997
medical-expense ratio of 84.5% versus the 81.6% in management's projections, a
1998 medical-expense ratio of 84.0% versus the 82.6% in management's
projections, a 1999 medical-expense ratio of 83.5% versus the 82.6% in
management's projections and a 2000 medical-expense ratio of 83.0% versus the
82.5% in management's projections.
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Using the above assumptions, Morgan Stanley calculated unlevered free
cash flows and terminal values and then discounted such values to derive the
equity value of the Company. Morgan Stanley calculated unlevered free cash flow
as the after-tax operating earnings of the Company (excluding any interest
income or expense), plus depreciation and amortization, plus (or minus) net
changes in non-cash working capital, minus projected capital expenditures.
Terminal value was calculated by applying to projected net income in fiscal 2000
a range of multiples from 12.0x to 15.0x, which represent estimated long-term
net income trading multiples. The unlevered free cash flows and terminal value
were then discounted to the present value using a range of discount rates from
13.0% to 15.0%, representing an estimated range of the weighted cost of capital
of the Company. Based on the analysis and the assumptions set forth above,
Morgan Stanley derived an equity value for the Company ranging from $209 million
to $241 million, or $14.10 per share to $16.20 per share, using the management's
projections and $188 million to $216 million, or $12.66 per share to $14.56 per
share, in the sensitivity case.
In performing its analyses, Morgan Stanley made numerous assumptions
with respect to industry performance, general business, economic, market and
financial conditions and other matters, many of which are beyond the control of
the Company. The analyses performed by Morgan Stanley are not necessarily
indicative of actual values or future results, which may be significantly more
or less favorable than suggested by such analyses.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Board of Directors with
respect to the Merger Agreement and the transactions contemplated thereby,
shareholders should be aware that certain members of the Company's management
and the Board of Directors have certain interests in the Merger that are in
addition to the interests of shareholders of the Company generally. Described
below are certain of such interests in the Merger of the officers and directors
of the Company.
Employment Agreements
SUMMARY OF EMPLOYMENT AGREEMENTS. The Company has employment agreements with
Daniel A. Gregorie, M.D., Jane E. Rollinson, Michael J. Barber, M.D. and Thomas
D. Anthony, Esq., its current executive officers (the "Executive Officers"), and
with all of its other vice presidents (the "Other Officers"), which Other
Officers include Byron J. Smith, who along with the Executive Officers comprised
the five most highly compensated officers in 1996. The material provisions of
the agreements with the Executive Officers and Other Officers, and of certain
stock option and defined compensation plans, are summarized below.
TERM OF AGREEMENTS. Each current employment agreement with an Executive
Officer or Other Officer has a term of three years which commenced on January 1,
1997 and terminates on December 31, 1999. Each such agreement is automatically
renewed for additional three-year terms (or, in Dr. Gregorie's case, additional
one-year terms), unless the applicable Executive
20
<PAGE> 28
Officer or Other Officer gives notice of termination to the Company, or the
Company gives notice of termination to the applicable Executive Officer or Other
Officer, within a certain specified number of days prior to the end of the
then-current term of the agreement.
BASE SALARY, REGULAR INCENTIVES AND FRINGE BENEFITS. Each employment
agreement with an Executive Officer or Other Officer provides a specific annual
amount of base salary, which is reviewable on an annual basis. Further, the base
salary for an Executive Officer for any year cannot be less than his or her base
salary for the immediately preceding year. Under the current employment
agreements, the initial annual base salary is: $395,000 for Dr. Gregorie,
$280,000 for Ms. Rollinson, $234,000 for Dr. Barber, $214,500 for Mr. Anthony
and $160,000 for Mr. Smith.
In addition, each employment agreement with an Executive Officer or
Other Officer provides that annual incentives can be provided under and in
accordance with the Company's Executive Annual Incentive Plan and that stock
options can be granted under the Company's 1996 Long Term Stock Incentive Plan
(the "Stock Incentive Plan") (and also, in the case of an Executive Officer,
long-term incentives can be provided under the Executive Long-Term Incentive
Plan). Dr. Gregorie's agreement requires him to be granted stock options during
1997 and 1998 considered in the aggregate (under the Stock Incentive Plan) for
no less than 342,697 Common Shares and that 200,000 of such options shall be
granted during 1997, except that any such stock option will not be granted prior
to the closing of the transactions contemplated by the Merger Agreement.
Further, each employment agreement with an Executive Officer indicates
that, if a change in control of the Company (as defined below in this summary)
occurs, the overall value of the annual incentives provided to the Executive
Officer under the Executive Annual Incentive Plan for each year which ends after
the change in control generally cannot be reduced below the value of the
incentive targeted for him or her under such plan for the year in which the
change in control occurs (and, if a change in control occurs in 1997, any
previously established incentive for him or her with respect to 1997 under the
Executive Long-Term Incentive Plan cannot be reduced).
Each employment agreement also provides for each Executive Officer or
Other Officer to receive certain fringe benefits, including medical benefits. In
Dr. Gregorie's case only, such fringe benefits include medical coverage for
himself and his family after his termination of employment with the Company
(unless such termination is for cause or his voluntary resignation when such
resignation does not entitle him to a severance payment described in the other
provisions of this summary) until he (or, in the event of his death, until his
spouse) becomes eligible to receive benefits under Medicare or obtains
employment with another employer and is eligible to receive comparable medical
benefits. In addition, in the event of a change in control of the Company (as
defined below in this summary), the value of certain of the fringe benefits
provided to each Executive Officer during his or her employment with the Company
after the change in control may not be reduced.
TERMINATION BENEFITS. In the event an employment agreement with an
Executive Officer or Other Officer terminates for cause, the Executive Officer
or Other Officer is generally only
21
<PAGE> 29
entitled to earned but unpaid salary and any vested fringe benefits to which he
or she is entitled upon such termination.
If an Executive Officer's or Other Officer's employment with the
Company terminates by reason of his or her death or permanent disability, he or
she (or, in the event of his or her death, his or her estate) will generally be
entitled not only to the above-noted amounts and benefits that would be provided
him or her upon termination for cause, but also to a pro rata amount of any
annual incentives (and/or, for an Executive Officer, any long-term incentives)
which have been targeted for his or her benefit for the year of his or her
termination (and, for an Executive Officer, any long-term incentives which have
been earned by him or her in prior years but have not yet been paid). In
addition, in the event his employment terminates by reason of his permanent
disability, Dr. Gregorie's agreement also provides him with a lump sum payment
equal to 200% of his then-current annual base salary.
In the event the employment of an Executive Officer (other than Dr.
Gregorie) or Other Officer is terminated other than for cause (or other than for
the Executive Officer's or Other Officer's death, permanent disability or
voluntary resignation), then, except as is otherwise provided in this summary,
the Executive Officer or Other Officer is generally entitled not only to the
above-noted amounts and benefits that would be provided upon termination by
reason of his or her death or permanent disability but also to bi-weekly
severance payments that are generally equal to his or her base rate of salary in
effect at his or her termination. Such severance payments generally will last
for twelve months after such termination for an Executive Officer and for six
months after such termination for an Other Officer (with such severance payments
continuing to the Other Officer after such initial six month period until he has
obtained other full-time employment, up to a maximum of six additional months).
In contrast, Dr. Gregorie's employment agreement does not specifically
permit the Company to terminate his employment for a reason other than cause
unless such termination occurs at the end of a contract term when timely advance
notice of such termination is given or unless a change in control of the Company
(as defined below in this summary) occurs. However, even in the absence of a
change in control of the Company, the Company may remove Dr. Gregorie from his
current President and Chief Executive Officer positions during a term of his
employment agreement for a reason other than cause. If Dr. Gregorie is removed
from such positions during the term of his agreement for a reason other than
cause or permanent disability (and other than after a change in control), then,
unless Dr. Gregorie exercises an option under his agreement to obtain a
severance payment (as is discussed below in this summary), Dr. Gregorie will
remain employed by the Company as an employee working in a special advisor
capacity, with the same salary, incentives and fringe benefits in effect
immediately prior to such removal, until at least the end of the then-current
term of his agreement.
Further, if Dr. Gregorie's employment is terminated by the Company,
other than for cause (or his death, permanent disability or voluntary
resignation), after all events have occurred to result in a change in control of
the Company (as defined below in this summary) and other than at the end of a
contract term, then, except as is otherwise provided in this summary, Dr.
Gregorie is generally entitled not only to earned but unpaid salary, any
long-term incentives which have
22
<PAGE> 30
been earned by him in prior years but have not yet been paid and any vested
fringe benefits to which he is entitled upon such termination (including the
medical benefits described above in this summary) but also to a lump sum
severance payment from the Company that is equal to 90% of the dollar amount of
Dr. Gregorie's "severance payment items." For purposes of this summary, Dr.
Gregorie's "severance payment items" generally refer to the base salary, the
annual and long-term incentives (not including any retention incentive described
below in this summary), the allocations to his account under his Supplemental
Executive Retirement Plan, the Company contributions allocated to his accounts
under the Company's tax-qualified retirement plans, the perquisite allowances
and the consulting service payments that, but for his termination of employment,
would otherwise be paid, available or provided for him by the Company with
respect to the period beginning after the payment of the applicable severance
payment and ending at the end of the then-current term of his agreement (and
with respect to any consulting service period to which he would otherwise have
been entitled after the end of the then-current term).
Each current employment agreement with an Executive Officer or Other
Officer also provides that, if the Executive Officer's or Other Officer's
employment terminates because of his or her voluntary resignation, then, except
as is otherwise provided in this summary, the Executive Officer or Other Officer
is generally only entitled to earned but unpaid salary and any vested fringe
benefits to which he or she is entitled upon such termination.
However, in the event the employment of an Executive Officer other than
Dr. Gregorie is terminated by reason of the Executive Officer's voluntary
resignation after at least one year has expired after a change in control (as
defined below in this summary) and prior to the end of the contract term in
effect one year after such change in control, then, in addition to being
entitled to his or her earned but unpaid salary and any vested fringe benefits
to which he or she is entitled, such Executive Officer will generally be
entitled to bi-weekly severance payments, equal to his or her base rate of
salary in effect at his or her termination, for twelve months after such
termination.
In addition, in the event Dr. Gregorie's employment with the Company
terminates by reason of his voluntary resignation either after he has been
removed by the Company from his current President and Chief Executive Officer
positions during a term of his agreement for a reason other than cause, or after
at least one year has expired following a change in control (as defined below in
this summary) and prior to the end of the contract term in effect one year after
such change in control, then Dr. Gregorie is entitled to a lump sum severance
payment from the Company that is equal to 90% of the dollar amount of Dr.
Gregorie's severance payment items (as defined above in this summary), as well
as his earned but unpaid salary, any long-term incentives which have been earned
by him in prior years but have not yet been paid and any vested fringe benefits
to which he is entitled upon such termination (including the medical benefits
described above in this summary).
Finally, in the event that Dr. Gregorie's employment with the Company
terminates at the end of any then-current term for any reason other than cause
or his death or permanent disability, and provided that he is not entitled to
any severance payment described in the other provisions of this summary, Dr.
Gregorie's agreement also calls for him to be employed as an independent
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<PAGE> 31
consultant for two years following the last day of such then-current term, for
compensation generally equal to his annual rate of base salary for the last year
in which he was an employee of the Company.
CHANGE IN CONTROL PAYMENTS. Each current employment agreement with an
Executive Officer (but not an Other Officer) provides for a special "change in
control" payment if the Executive Officer's employment terminates, other than
for cause or because of his or her death, permanent disability or voluntary
resignation, within a period which begins six months before, and ends two years
after, a change in control (as defined below in this summary) of the Company.
Any such change in control payment is generally equal to a percentage
(the "Change in Control Percentage") of the sum of the applicable Executive
Officer's then-current annual rate of base salary, the amount established by the
Company for his or her annual incentive for the year in which his or her
termination occurs, the total dollar amount of the allocations to his or her
account under his or her Supplementary Executive Retirement Plan (not including
allocations that reflect interest or earnings) and any perquisite allowances
that, but for his or her termination, would be paid, available or provided for
him or her by the Company for the then-current contract year. The Change in
Control Percentage is: 300% for Dr. Gregorie and 250% for each of Ms. Rollinson,
Dr. Barber and Mr. Anthony.
However, the amount of any Executive Officer's change in control
payment is reduced by the amount of any retention incentive payment to which the
Executive Officer is entitled under the provisions of his or her employment
agreement (as discussed below in this summary) and is also reduced, in Dr.
Gregorie's case, by any lump sum severance payment to which he is entitled in
this situation under the provisions of his agreement (as discussed above in this
summary). In addition, if any Executive Officer other than Dr. Gregorie is
entitled to a change in control payment, then, notwithstanding any provisions of
this summary to the contrary, he or she is also generally entitled to a pro rata
amount of any annual or long-term incentives which have been targeted for his or
her benefit for the year of his or her termination (and any long-term incentives
which have been earned by him or her in prior years but have not yet been paid)
but is not entitled to any other termination or severance payments that relate
to any period after his or her termination of employment and that are based on
his or her base salary or incentives under the Executive Annual Incentive Plan
or Executive Long-Term Incentive Plan. Except as herein noted, any change in
control payment to an Executive Officer is in addition to any other payments to
which he or she is entitled under his or her employment agreement.
For purposes of each current employment agreement with an Executive
Officer or Other Officer, a "change in control" generally refers to: (1) the
election of persons constituting at least 50% (or, for purposes of any Other
Officer, more than 33-1/3%) of the number of directors of the Board of Directors
if such persons were not nominated by the nominating committee of the Company
(or, if so nominated, were not recommended by a majority of the directors in
office prior to being nominated by such nominating committee); (2) any
consolidation or merger of the Company if, within two years after such
consolidation or merger, individuals who were directors of the Company
immediately prior to the consolidation or merger cease to constitute at least
66-2/3% of the directors of the Company or
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<PAGE> 32
its successor by consolidation or merger; (3) any sale, lease, exchange or other
transfer, in one transaction or a series of related transactions (and other than
to a directly or indirectly majority-owned subsidiary of the Company) of all, or
substantially all, of the assets of the Company; (4) the sale, or the execution
of a definitive agreement for the sale, of at least 33-1/3% of the ownership
and/or voting interests in any direct or indirect subsidiary or subsidiaries of
the Company if such subsidiary or subsidiaries before the sale held assets that
constituted all or substantially all of the assets of the Company and its
subsidiaries on a consolidated basis; (5) the sale, or the execution of a
definitive agreement for the sale, of at least 33-1/3% of the ownership and/or
voting interests in the Company to one purchaser, related purchasers or several
purchasers acting directly or indirectly in concert; or (6) the approval by the
shareholders of the Company of any plan or proposal for the liquidation or
dissolution of the Company. Notwithstanding the foregoing, other than for
purposes of determining an Executive Officer's rights to a retention incentive
payment to which he or she may be entitled (under the provisions of his or her
employment agreement that are discussed below in this summary) or to any
severance payment or payments to which he or she may be entitled by reason of
his or her voluntary resignation that occurs at least one year after a change in
control (under the provisions of his or her agreement that are discussed above
in this summary), the mere execution of a definitive agreement for a sale
described in clause (4) or (5) above will not be considered a change in control
with respect to an Executive Officer unless there is a closing of the sale
contemplated by such definitive agreement within one year of the execution of
such agreement.
RETENTION INCENTIVE PAYMENTS. Each current employment agreement with an
Executive Officer or Other Officer also provides the opportunity for a retention
incentive payment in order to provide the Executive Officer or Other Officer
with an incentive to remain employed with the Company after a change in control
(as defined above in this summary) or strategic investor purchase (as defined
below in this summary). Any such retention incentive payment is provided to an
Executive Officer or Other Officer in addition to any other payments or benefits
provided to the Executive Officer or Other Officer under his or her employment
agreement.
For purposes of each current employment agreement with an Executive
Officer or Other Officer, a "strategic investor purchase" generally refers to
the purchase or obtaining by any person, corporation or other organization of
stock possessing less than 33-1/3% of the total combined voting power of all
classes of stock of the Company together with the optional right to purchase in
the future additional stock of the Company which would permit that person,
corporation or other organization to own stock possessing 33-1/3% or more of the
total combined voting power of all classes of stock of the Company.
If a change in control or a strategic investor purchase occurs, a
retention incentive payment will be made to an Executive Officer or Other
Officer if he or she is continuously employed by the Company to the end of his
or her retention incentive period. The "retention incentive period" for any
Executive Officer means the period which begins on the date immediately
following the earlier of a change in control or a strategic investor purchase
(such date referred to herein as the "beginning date") and which ends on the
date which is 21 months after
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<PAGE> 33
the beginning date. The "retention incentive period" for any Other Officer means
the period which begins on the beginning date and which ends on the date which
is three years after the beginning date. The amount of such retention incentive
payment is generally equal to: (1) for Dr. Gregorie, 200% of his annual rate of
base salary in effect on the beginning date, up to a maximum of $800,000; (2)
for Ms. Rollinson, 175% of her annual rate of base salary in effect on the
beginning date, up to a maximum of $500,000; (3) for Dr. Barber or Mr. Anthony,
125% of his annual rate of base salary in effect on the beginning date, up to a
maximum of $375,000; or (4) for any Other Officer, 100% of his annual rate of
base salary in effect on the beginning date, up to a maximum of $200,000.
Further, if, after the earlier of a change in control or a strategic
investor purchase but prior to the end of an Executive Officer's or Other
Officer's retention incentive period, the Executive Officer's or Other Officer's
employment with the Company is terminated for any reason other than cause or his
or her voluntary resignation (or, in the case of an Other Officer, for any
reason other than cause, his or her voluntary resignation or his or her death or
permanent disability), then the Executive Officer or Other Officer will be
entitled to a retention incentive payment which is equal to the same retention
incentive payment that would have applied had he or she been employed by the
Company to the end of his or her retention incentive period.
In addition, if an Other Officer's employment with the Company is
terminated because of his death or permanent disability after the earlier of a
strategic investor purchase or a change in control but prior to the end of his
retention incentive period, or if his employment is terminated for any reason
other than for cause, his death or permanent disability or his voluntary
resignation after a strategic investor purchase but prior to both a change in
control or the end of his retention incentive period, then the Other Officer
will be entitled to a percent of the full retention incentive payment that he
would have received had he been employed to the end of his retention incentive
period (with such percent being 20%, 50% or 100% depending on the period from
the earlier of the strategic investor purchase or change in control to his
termination).
If any retention incentive payment is made to an Executive Officer or
Other Officer under the above-described retention incentive provisions, then,
except as is otherwise noted above, no further retention incentive will be
payable even if a later event occurs which would otherwise require a retention
incentive payment to such Executive Officer or Other Officer.
MISCELLANEOUS PROVISIONS. Each Executive Officer's or Other Officer's
employment agreement has certain non-compete covenants under which he or she
agrees that he or she will generally not compete in certain material ways with
the Company for at least one year after his or her termination of employment
with the Company (or, if he or she becomes entitled to a retention incentive
payment under the provisions described above in this summary, for a period of at
least two years after his or her termination of employment).
Further, each employment agreement with an Executive Officer or Other
Officer provides that, for purposes of any of the above-described provisions of
the agreement, the Executive Officer or Other Officer will generally not be
deemed to have voluntarily resigned from his or her employment with the Company,
and to have been terminated by the Company, if he or she
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<PAGE> 34
resigns at least 120 days after, and no more than 180 days after, the Company
significantly reduces his or her duties (or, in the case of an Executive
Officer, the Company changes the principal party to whom he or she reports to a
person or persons who have lower positions in the Company than the person or
persons to whom he or she currently reports). In such case, for purposes of
determining the Executive Officer's or Other Officer's rights to any severance,
change in control or retention incentive payments under the above-described
provisions of his or her employment agreement, an Executive Officer or Other
Officer is deemed to have had his or her employment terminated by the Company on
the date that the Company took the action described in the immediately preceding
sentence which is applicable to his or her resignation. Any resignation of an
Executive Officer or Other Officer will also not be deemed to be voluntary if
such resignation occurs after the Company requires the Executive Officer or
Other Officer to change his or her principal work location by at least 50 miles
and the Executive Officer or Other Officer refuses to make such move.
Finally, each employment agreement with an Executive Officer (but not
an Other Officer) provides that, if any change in control payment, retention
incentive payment or any other payment by the Company to the Executive Officer
under his or her agreement is subject to a penalty tax as a so-called "excess
parachute payment" under the Internal Revenue Code the Company will "gross up"
the payment so that the net amount of such payment, after taking into
consideration such penalty tax, will leave the Executive Officer with the same
amount as if no such penalty tax applied.
POTENTIAL PAYOUTS. The Company's maximum contingent liability under the
employment agreements described above is currently estimated (based on 1997
salary levels and targeted incentives) to approximate: (i) $3.2 million in the
event that only retention incentive payments are made; or (ii) $7.3 million in
the event that only change in control payments are made in the event of
termination. As set forth in Note 11(a) of the Company's Notes to Consolidated
Financial Statements for the year ended December 31, 1996, the maximum
contingent liability of the previously-existing employment agreements then in
effect was estimated at approximately $3.9 million. Such previously-existing
employment agreements provided for change in control payments in the event that
an Executive Officer (but not an Other Officer) had his or her employment
terminated during a then-current contract term within six months of the change
in control, regardless of whether such termination occurred because of the
resignation of the Executive Officer or the termination of his or her employment
by the Company, or in the event that his or her employment was terminated by the
Company without cause within six months prior to the change in control.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLANS. The Company maintains a Supplemental
Executive Retirement Agreement for Dr. Gregorie, which was first effective as of
January 1, 1994, and was amended and restated to be effective as of January 1,
1997. That agreement provides unfunded deferred compensation credits to Dr.
Gregorie for fiscal year 1994 and for each subsequent year in which Dr. Gregorie
remains an employee of the Company. The Company shall credit to a book account
for fiscal year 1994, and for each subsequent fiscal year through and including
fiscal year 1999, an amount equal to 19% of the total of Dr. Gregorie's actual
base salary for such year and his actual award for such year under the Executive
Annual
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<PAGE> 35
Incentive Plan. For each year subsequent to 1999 in which Dr. Gregorie remains
an employee of the Company, the credit to the book account shall be an amount
equal to 16% of the total of such base salary and incentive award for such year.
If the total amount of the credits to be made to the book account does not equal
certain minimums as of the termination of employment of Dr. Gregorie for any
reason other than cause, the Company is obligated to contribute additional
amounts to the book account in accordance with the terms of the agreement. The
credits to the book account are assumed to be invested in investments chosen by
Dr. Gregorie from among options designated by the Company.
Amounts credited to the book account shall be 100% vested as of
December 31, 1999, but not generally vested prior to that date. Early vesting to
the extent of 100% shall occur only upon termination or non-renewal of Dr.
Gregorie's employment agreement without cause by the Company, Dr. Gregorie's
death or permanent disability while he remains employed by the Company, a change
in control as defined in Dr. Gregorie's employment agreement or Dr. Gregorie's
termination of employment when he is eligible to voluntarily elect to receive a
lump sum severance payment under the provisions of his employment agreement.
The Company shall pay to Dr. Gregorie the vested percentage of the
balance in his book account determined as of the date he terminates employment
with the Company for any reason other than his death, in one lump sum or in up
to ten annual installment payments, as he elects at least one year prior to his
termination of employment. If Dr. Gregorie ceases to be employed by the Company
by reason of his death, the balance will be paid to his beneficiary. If Dr.
Gregorie's employment is terminated for cause, he will forfeit all amounts in
the book account.
The Company also maintains a Supplemental Executive Retirement Plan for
Executive Officers, which was effective January 1, 1997. That plan provides
unfunded deferred compensation credits for Ms. Rollinson, Dr. Barber and Mr.
Anthony. The Company shall credit to a book account for each such Executive
Officer, for each year beginning with 1997 during which he or she remains
employed by the Company, an amount equal to 8% of the total of his or her actual
base salary and his or her actual award under the Executive Annual Incentive
Plan for such year. The credits to such book account are assumed to be invested
in investments chosen by the Executive Officer from among options designated by
the Company.
Amounts credited to the book account of such Executive Officer shall be
100% vested as of such executive's 60th birthday provided he or she remains
employed by the Company on that date. Early vesting to the extent of 100% shall
only occur upon termination of his or her employment by the Company without
cause, his or her death or permanent disability while he or she remains employed
by the Company or the occurrence of a change in control as defined in his or her
employment agreement. The Company shall pay to such Executive Officer the vested
percentage of the balance in his or her book account determined as of the date
he or she terminates employment with the Company for any reason other than
death, in one lump sum or in up to ten annual installment payments, as he or she
elects at least one year prior to his or her termination of employment. If he or
she ceases to be employed by the Company by reason of death, the balance will be
paid to his or her beneficiary. If his or her employment is terminated for
cause, he or she will forfeit all amounts in the book account.
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<PAGE> 36
Stock Incentive Plan
As required by the terms of the Merger Agreement, the Company shall
terminate the Company's Stock Incentive Plan as described below. See "The
Merger--Treatment of Stock Options" and "The Merger Agreement--Covenants of the
Parties."
The following table summarizes grants of options awarded to certain
officers under the Stock Incentive Plan.
OPTION GRANTS
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------------------
NUMBER OF
SECURITIES
UNDERLYING
OPTIONS EXERCISE FINAL VALUE
GRANTED PRICE EXPIRATION OF OPTIONS
NAME (#)(1) ($/SHARE) DATE ($)(2)
-------------------------------------------------- --------------- -------------- -------------- ------------------
<S> <C> <C> <C> <C>
Daniel A. Gregorie, M.D.......................... 375,000 $10.00 6/5/06 $2,392,500
President, Chief Executive Officer and 25,000 10.00 10/2/06 159,500
Chairman of the Board
Jane E. Rollinson................................ 225,000 10.00 6/5/06 1,435,500
Executive Vice President, Chief Operating Officer
and Treasurer
Michael J. Barber, M.D........................... 125,000 10.00 6/5/06 797,500
Executive Vice President and Chief Medical
Officer
Thomas D. Anthony, Esq........................... 40,000 10.00 6/5/06 255,200
Executive Vice President, Chief Legal Officer and 20,000 10.00 12/4/06 127,600
Secretary
Byron J. Smith................................... 30,000 10.00 6/5/06 191,400
Senior Vice President and Chief Information
Officer, ChoiceCare Health Plans, Inc.
- --------------------
<FN>
(1) With the exception of Options granted to Dr. Gregorie, options granted to
the officers become exercisable ratably over the four annual grant date
anniversaries following the grant date, or upon a change in control, as
defined in the Stock Incentive Plan. Dr. Gregorie's options become
exercisable ratably over the three annual grant date anniversaries
following the grant date, or upon a change in control, as defined in the
Stock Incentive Plan.
(2) The value of the Options assumes the Options are terminated with option
holders receiving $6.38 for each Common Share subject to the Options,
representing the difference between the Per Share Merger Consideration and
the exercise price per share of each Option.
</TABLE>
TREATMENT OF STOCK OPTIONS
At September 10, 1997, options (the "Options") to purchase 1,045,797
Common Shares pursuant to the Stock Incentive Plan were outstanding. For
convenience, as used in this discussion and the above table, an "Option" refers
to an option to purchase one Common
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<PAGE> 37
Share pursuant to the Stock Incentive Plan. The Options that are outstanding as
of the date noted immediately above are held by approximately 370 officers and
other employees of the Company. Pursuant to the Merger Agreement, the Company
will not grant any additional options under the Stock Incentive Plan and will
terminate the Stock Incentive Plan immediately prior to the Merger without
prejudice to the holders of the Options.
The Merger Agreement requires the Company to take action prior to the
consummation of the Merger to cause at least 1,000,000 Options to terminate.
Pursuant to such requirement, the Company will enter into agreements with
holders of Options providing for the termination of all Options held by them
immediately after the Effective Time of the Merger so that at least 1,000,000
Options shall be terminated immediately after such Effective Time and offer to
enter into such agreements with all Option holders.
In consideration of the termination of a holder's Options pursuant to
any such agreement, as soon as practicable after the Merger, the Surviving
Corporation (as defined below) will pay the holder cash in the amount of $6.38
multiplied by the number of the holder's Options which are terminated pursuant
to such agreement (and which have not been exercised or terminated prior to the
Effective Time of the Merger under the terms of the Stock Incentive Plan or the
agreement under which the Options were granted), subject to all applicable
withholding tax requirements. Such cash payment represents the difference
between the Per Share Merger Consideration and the $10.00 per share exercise
price of each of the Options.
Option holders who do not enter into agreements with the Company to
terminate their Options will receive the treatment of their Options described
below.
Options not terminated immediately after the Effective Time of the
Merger (by the agreement of their holder with the Company or otherwise under the
terms of the Stock Incentive Plan or the agreement under which the Options were
granted) will, after the Merger, remain outstanding and subject to the terms of
the Stock Incentive Plan and the agreement under which the Options were granted.
Pursuant to the agreements under which Options were granted, one-fourth
of any such holder's originally granted Options generally became exercisable on
the first annual anniversary of the date such Options were granted to him or
her. An additional one-fourth of such Options, if remaining outstanding after
the Merger, will generally become exercisable on each of the second, third and
fourth annual anniversaries of the date such Options were granted to the holder,
unless a change in control (as defined in the Stock Incentive Plan) of the
Company occurs after the Merger. Dr. Gregorie's Options are exercisable in three
annual installments. Upon such a change in control, all Options remaining
outstanding will become immediately exercisable. The Merger by itself will not
constitute a change in control under the terms of the Stock Incentive Plan.
However, a change in control for purposes of the Stock Incentive Plan will
occur, among other events, if the members of the Board of Directors prior to the
Merger cease to constitute a majority of the board of directors of the Surviving
Corporation within two years after the Merger.
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<PAGE> 38
Further, pursuant to the agreements under which Options were granted,
Options remaining outstanding after the Merger will, once exercisable, be
exercisable until the date which is ten years after the date such Options were
granted to the applicable holder (the "Final Expiration Date"), unless such
Options terminate earlier under the terms of the Stock Incentive Plan or the
agreement under which the Options were granted.
Generally, the agreement under which the Options were granted provides
that, upon a holder's termination of employment with the Company prior to the
Final Expiration Date, (1) the holder's Options which are not then exercisable
will then terminate and, except as noted below, (2) the holder's Options which
are then exercisable will terminate on the earlier of the Final Expiration Date
or the 91st day after such termination of employment.
Notwithstanding the foregoing, under the agreement under which the
Options were granted, all of the holder's Options will terminate on his or her
termination of employment if such termination of employment is for "cause" (as
defined in the agreement under which the Options were granted). In addition, the
holder's Options which are exercisable at the time of his or her termination of
employment will, under the agreement under which the Options were granted,
generally remain exercisable until the Final Expiration Date (and will not
terminate at an earlier time) if his or her termination of employment is by
reason of his or her death, disability (as defined in the agreement under which
the Options were granted) or retirement (which is generally defined in the
agreement under which the Options were granted as a termination of employment
after attaining age 65 or both after attaining age 60 and completing 15 years of
employment with the Company and any subsidiary companies of it) or if he or she
dies within 90 days after his or her termination of employment (when such
termination of employment is other than for cause).
Immediately after the Merger, the Surviving Corporation will have 1,000
Common Shares outstanding. Pursuant to the terms of the Stock Incentive Plan and
the agreements under which Options were granted, the Surviving Corporation's
board of directors will take action to adjust the number of shares into which an
Option is exercisable and the per share exercise price thereof solely to take
into account the decrease in the number of Common Shares outstanding as a result
of the Merger. As a result of this adjustment, each previously outstanding
Option, exercisable into one Common Share at an exercise price of $10.00 per
share, will immediately after the Merger be exercisable into 0.000067 of a
Common Share at an exercise price of $149,253.73 per share.
In this regard, the Articles of Incorporation of the Surviving
Corporation will, after the Merger, provide that the Surviving Corporation is
not permitted to issue fractional shares to any person, including a holder of
Options who at any time exercises Options to purchase less than one Common Share
or to purchase a number of Common Shares which is not a whole number. Such
Articles of Incorporation will also provide that, when the Surviving Corporation
would otherwise be obligated to issue a fractional share, the person entitled to
such fractional share will be entitled to receive only the fair value of such
fractional share in cash (with such fair value to be set by the Surviving
Corporation's board of directors each time any person
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<PAGE> 39
becomes entitled to receive in cash the fair value of a fractional share). The
OGCL does not give an Option holder dissenters' rights regarding the Surviving
Corporation's board of directors' determination of this fair value. See
"Dissenting Shareholders' Rights."
The fair value of Common Shares at the time any Options are exercised
will likely differ from the Per Share Merger Consideration, and such difference
may be substantial. The fair value of the Common Shares will depend on, and will
increase or decrease over time based upon, among other factors, the Surviving
Corporation's operations, the Surviving Corporation's competitive environment,
the value of other companies (including Humana) comparable to the Surviving
Corporation and economic conditions generally. This fair value may also be
affected by changes in the Surviving Corporation's capital structure after the
Merger, including dividends paid to Humana. Finally, in determining this fair
value, the Board of Directors may take into account discounts for the lack of
marketability of the Common Shares and to reflect that any Common Shares that
would be issued to Option holders would represent a minority interest in the
Company. THE COMPANY MAKES NO ASSURANCES REGARDING THE FUTURE FAIR VALUE OF
COMMON SHARES OR THE FACTORS THE BOARD OF DIRECTORS OF THE SURVIVING CORPORATION
MAY RELY UPON IN DETERMINING THE FAIR VALUE OF COMMON SHARES.
The Company anticipates that all of the holders of 10,000 or more
Options (representing 959,000 Options) will execute agreements with the Company
providing for the termination of their Options immediately after the Effective
Time of the Merger or otherwise have their Options terminate at or prior to such
time. None of the remaining holders of Options will be entitled, even if their
Options remain outstanding after the Merger, to receive Common Shares upon
exercise of their Options since such Options will (after the adjustments
described above) be exercisable for less than one whole Common Share. Rather,
upon the exercise of their Options, the holders of such Options will be entitled
to receive the fair value of the fractional share into which their Options are
exercisable, as determined by the board of directors of the Surviving
Corporation.
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<PAGE> 40
The following table is intended to illustrate the differences in the
treatment of two persons who hold 500 Options each at the Effective Time of the
Merger, one of whom has executed an agreement with the Company terminating the
Options immediately after such Effective Time and the other of whom retains the
Options after such Effective Time:
<TABLE>
<CAPTION>
- ------------------------------------ -------------------------------------- ----------------------------------------
HOLDER TERMINATING OPTIONS HOLDER RETAINING OPTIONS
- ------------------------------------ -------------------------------------- ----------------------------------------
<S> <C> <C>
Number of Options 500 500
- ------------------------------------ -------------------------------------- ----------------------------------------
Exercise Price $10.00 per share $10.00 per share
- ------------------------------------ -------------------------------------- ----------------------------------------
Final Expiration Date Ten years after original grant date Ten years after original grant date
- ------------------------------------ -------------------------------------- ----------------------------------------
Cash payment as soon as practical $3,190.00 (before payroll None
after the Merger withholding taxes)
- ------------------------------------ -------------------------------------- ----------------------------------------
Number of adjusted Options after Not applicable 0.0335
Merger
- ------------------------------------ -------------------------------------- ----------------------------------------
Adjusted Exercise Price Not applicable $149,253.73 per share
- ------------------------------------ -------------------------------------- ----------------------------------------
Vesting schedule of adjusted Not applicable After adjustments, 0.008375 share
Options exercisable immediately (unless
previously exercised) and 0.008375
share exercisable on the second,
third and fourth annual anniversaries
of the original grant date, unless
a change in control occurs (in
which case earlier vesting will
occur at the time of the change
in control)
- ------------------------------------ -------------------------------------- ----------------------------------------
Termination of adjusted Options Not applicable Earlier of Final Expiration Date or,
in many cases, upon 91 days after
termination of employment with the
Company
- ------------------------------------ -------------------------------------- ----------------------------------------
Adjusted shares received at Not applicable None
exercise
- ------------------------------------ -------------------------------------- ----------------------------------------
Cash received at exercise Not applicable Fair value of shares purchased at
exercise as determined by the
Surviving Corporation's board of
directors
- ------------------------------------ -------------------------------------- ----------------------------------------
</TABLE>
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<PAGE> 41
The discussion set forth above is intended to constitute a summary of
the effects of the Merger on holders of Options. It should be read in
conjunction with the Stock Incentive Plan and the agreement under which the
Options were granted by the Company. EACH OPTION HOLDER SHOULD CONSULT, AND
SHOULD RELY EXCLUSIVELY ON, THE HOLDER'S OWN LEGAL AND FINANCIAL ADVISORS IN
ANALYZING THE EFFECTS OF THE MERGER ON THE HOLDER'S OPTIONS.
HUMANA'S SOURCE OF FUNDS
The aggregate amount of cash required to consummate the Merger,
contribute cash to make payments for Options and pay related fees and expenses
is approximately $252,000,000. Humana expects to obtain the requisite funds to
consummate the Merger through a combination of cash and cash equivalents on hand
and borrowings under a $1.5 billion five year revolving credit facility (the
"Existing Facility") from the Chase Manhattan Bank ("Chase"), which will act as
the sole administrative agent for the Existing Facility. The Existing Facility
contains customary conditions to borrowing, representations and warranties,
covenants and events of default. Amounts under the Existing Facility will
generally be able to be borrowed, repaid and reborrowed from time to time. As of
August 25, 1997, Humana had the entire $1.5 billion of credit available under
the Existing Facility.
Until such funds are needed for the conversion of Common Shares into
the right to receive the Per Share Merger Consideration, the cash in the Payment
Fund may temporarily be invested, as directed by Humana, in obligations of or
guaranteed by the United States of America, with remaining maturities not
exceeding 180 days; in commercial paper obligations receiving the highest rating
from either Moody's Investors Service, Inc. or Standard & Poor's Corporation; or
in certificates of deposit or bankers' acceptances of commercial banks with
capital exceeding $100,000,000, with the net profits or interest earned paid to
Humana.
CERTAIN OTHER EFFECTS OF THE MERGER
If the Merger is consummated, the holders of Common Shares will not
have an opportunity to continue their equity interest in the Company as an
ongoing corporation and, therefore, will not share in future earnings or growth,
if any, of the Company.
ACCOUNTING TREATMENT
The Merger will be accounted for as a "purchase" for accounting and
financial reporting purposes.
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<PAGE> 42
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary provides only a general discussion of certain tax
consequences pursuant to the Internal Revenue Code. The tax treatment of each
shareholder will depend in part upon his or her particular situation.
SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX AND FINANCIAL ADVISORS AS TO THE
FEDERAL, STATE, FOREIGN OR OTHER INCOME TAX CONSEQUENCES OF THE MERGER.
The receipt of cash for Common Shares from the Merger or pursuant to
the exercise of dissenting shareholders' rights will be a taxable transaction
for federal income tax purposes and may also be a taxable transaction under
applicable state, local, foreign or other tax laws. Generally, a shareholder
recognizes gain or loss for federal income tax purposes in such a transaction
equal to the difference between the cash received and that shareholder's
adjusted tax basis for the Common Shares. For federal income tax purposes, such
gain or loss will be a capital gain or loss if the Common Shares are a capital
asset in the hands of the shareholder and will be a long-term capital gain or
loss if the holding period for the Common Shares is greater than one year. With
certain exceptions, capital losses are deductible only against capital gains and
do not offset ordinary income.
The receipt of cash by a shareholder pursuant to the Merger (or the
exercise of dissenting shareholders' rights) may be subject to backup
withholding at the rate of 31% unless the shareholder (i) is a corporation or
falls within certain other exempt categories, or (ii) provides a certified
taxpayer identification number (social security number or employer
identification number) on Form W-9 and otherwise complies with the backup
withholding rules. Backup withholding is not an additional tax, and any amounts
withheld may be credited against the federal income tax liability of the
shareholder subject to the withholding.
Special tax consequences not described herein may be applicable to
particular classes of shareholders. Such classes of shareholders may include
those shareholders who acquired their Common Shares pursuant to the exercise of
Options or otherwise as compensation, tax-exempt organizations, broker-dealers,
or persons who are not citizens or residents of the United States.
REGULATORY APPROVALS
Hart-Scott-Rodino
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"), and the rules promulgated thereunder by the Federal
Trade Commission (the "FTC"), the Merger cannot be consummated until
notifications have been given and certain information has been furnished to the
FTC and the Antitrust Division of the Department of Justice (the "Antitrust
Division") and specified waiting-period requirements have been satisfied. The
Foundation and Humana each filed notification and report forms under the HSR Act
with the FTC and the Antitrust Division on July 3, 1997. The required waiting
period under the HSR Act terminated August 2, 1997. At any time before or after
consummation of the Merger, the Antitrust Division or the FTC could take such
action under the antitrust laws
35
<PAGE> 43
as it deems necessary or desirable in the public interest, including seeking to
enjoin the consummation of the Merger or seeking divestiture of substantial
assets of Humana or the Foundation. At any time before or after the Effective
Date and notwithstanding that the HSR Act waiting period has expired, any state
could take such action under the antitrust laws as it deems necessary or
desirable. Such action could include seeking to enjoin the consummation of the
Merger or seeking divestiture of certain assets by the Foundation or Humana.
Private parties may also seek to take legal action under the antitrust laws
under certain circumstances.
Ohio Attorney General
Under Sections 109.34, 109.35 and 109.99 of the Ohio Revised Code
regarding regulation of charitable trusts, the Merger cannot be consummated
until the Foundation has received the approval of the Attorney General of Ohio.
The statute mandates that a nonprofit health care entity proposing to transfer
20% or more of its assets to a for-profit entity notify and gain the approval of
the Attorney General for the transaction. The Foundation submitted the required
notice of the transaction on June 19, 1997. On July 31, 1997, the Foundation
received notice that the Attorney General has approved the Merger.
In determining whether to approve or disapprove a proposed transaction,
the Attorney General considers the following factors: whether the transaction
will result in a breach of fiduciary duty; whether the nonprofit health care
entity will receive full and fair market value for its charitable or social
welfare assets; whether the proceeds of the transaction will be used consistent
with the nonprofit health care entity's original charitable purpose; and any
other criteria the Attorney General considers necessary to determine whether the
nonprofit health care entity will receive full and fair market value for its
charitable and social welfare assets.
Ohio Department of Insurance
Under Ohio's Insurance Holding Company Systems Act, Ohio Revised Code
Sections 3901.33, et seq. and the regulations promulgated thereunder by the Ohio
Department of Insurance (the "ODI"), the Merger cannot be consummated until (i)
the acquiring party has filed with the Superintendent of Insurance a statement
containing detailed information concerning the transaction; (ii) the acquiring
party has sent the statement to the company to be acquired; (iii) the
acquisition has been approved by the Superintendent of Insurance; and (iv)
certain other requirements are met when the agreement is entered into. Humana
filed with the ODI and delivered the required forms to the Company on July 18,
1997.
The ODI is required to approve the acquisition unless, after a public
hearing, the Superintendent of Insurance finds that any of the following apply:
(a) After the change of control, the company would not be able to
satisfy the requirements for the issuance of a license to
write the line or lines of insurance for which it is presently
licensed;
(b) The effect of the merger or other acquisition of control would
be substantially to lessen competition in insurance in Ohio or
tend to create a monopoly;
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<PAGE> 44
(c) The financial condition of the acquiring party is such as
might jeopardize the financial stability of the company, or
prejudice the interests of its contract holders;
(d) The acquiring party has plans to liquidate the company, sell
its assets, or consolidate or merge it with another company,
or to make any other material change in its business or
corporate structure or management that are unfair and
unreasonable to contract holders of the company and not in the
public interest;
(e) The competence, experience, and integrity of those persons
that would control the operation of the company are such that
it would not be in the interest of contract holders the
company and of the public to permit the merger or other
acquisition of control; or
(f) The acquisition is likely to be hazardous or prejudicial to
the insurance-buying public.
THE MERGER AGREEMENT
The following is a brief summary of certain provisions of the Merger
Agreement, a copy of which is attached as Appendix A to this Proxy Statement and
is incorporated herein by reference. This summary is qualified in its entirety
by reference to the full text of the Merger Agreement.
THE MERGER
Upon the terms and subject to the fulfillment of the conditions set
forth in the Merger Agreement, at the Effective Time, Humana Sub shall be merged
with and into the Company and the separate corporate existence of Humana Sub
shall thereupon cease. The Company shall be the surviving corporation and its
separate corporate existence shall continue unaffected and unimpaired by the
Merger. The Company and all of its subsidiaries are collectively referred to as
the "Acquired Companies" and individually as an "Acquired Company." The Merger
shall be pursuant to the provisions of the OGCL.
The Effective Date of the Merger shall be the business day on which the
last condition to the obligations of the parties (as described below) is
fulfilled or satisfied in accordance with the Merger Agreement or waived by the
party entitled to the benefit of such condition, or such other date as the
parties agree in writing. On the Effective Date, the Company and Humana Sub
shall file a Certificate of Merger and such other documents as may be required
with the Secretary of State of Ohio. The Merger shall be effective at the close
of business on the Effective Date. The Merger shall have the effect set forth in
the OGCL.
At the Effective Time, by virtue of the Merger and without any action
on the part of any shareholder, each of the Common Shares that are held in the
treasury of the Acquired Companies shall be cancelled and no consideration shall
be delivered in exchange therefor. Each Common Share issued and outstanding
immediately prior to the Effective Time (other
37
<PAGE> 45
than shares held by shareholders of the Company, if any, who properly exercise
their dissenters' rights) shall be converted into the right to receive from the
Surviving Corporation cash in the amount of $16.38 per share. All such Common
Shares, when so converted, shall no longer be outstanding and shall
automatically be cancelled and retired and each holder of a Certificate or
Certificates shall cease to have any rights with respect thereto except for the
right to receive the Per Share Merger Consideration.
Each common share, without par value, of Humana Sub that is issued and
outstanding immediately prior to the Effective Time shall be converted into and
become one fully paid and nonassessable share of capital stock of the Surviving
Corporation immediately following the Effective Time.
EXCHANGE OF CERTIFICATES REPRESENTING THE COMMON SHARES
Immediately prior to the Effective Time, Humana shall cause Humana Sub
to deposit in trust with Star Bank, N.A. immediately available funds in an
amount equal to the Per Share Merger Consideration multiplied by the number of
Common Shares issued and outstanding immediately prior to the Effective Time
(the "Merger Consideration").
Promptly after the Effective Time, the Paying Agent shall mail to each
record holder of a Certificate a Letter of Transmittal for use in forwarding the
holder's Certificates and instructions to effect the surrender of the
Certificates in exchange for the Per Share Merger Consideration. Upon surrender
of a Certificate for cancellation to the Paying Agent, together with such Letter
of Transmittal, duly executed and completed in accordance with the instructions
thereto, the holder of such Certificate shall be entitled to receive the Per
Share Merger Consideration. No interest shall be paid or accrued on the Per
Share Merger Consideration due on surrender of the Certificates to the Paying
Agent. SHAREHOLDERS SHOULD NOT SEND IN CERTIFICATES UNTIL THEY RECEIVE A LETTER
OF TRANSMITTAL.
Notwithstanding the foregoing, neither the Paying Agent, Humana, nor
the Surviving Corporation shall be liable to a record holder of a Certificate
for any cash or interest delivered to a public official pursuant to applicable
abandoned property, escheat or similar laws. The Paying Agent shall be
instructed to repay to the Surviving Corporation any portion of the Merger
Consideration (including all interest and other income received by the Paying
Agent on the Merger Consideration) that remains unclaimed by the holders of
Certificates as of the first anniversary of the Effective Date. Thereafter, the
holders of Certificates shall look only to the Surviving Corporation (subject to
the Merger Agreement and abandoned property, escheat and other similar laws) as
general creditors thereof for any Per Share Merger Consideration that may be
payable upon the due surrender of the Certificates held by them.
At the Effective Time, the share transfer books of the Company shall be
closed and no transfer of the Common Shares shall thereafter be made. After the
Effective Time, except as required by Section 1701.85 of the OGCL, the Surviving
Corporation shall cancel any
38
<PAGE> 46
Certificate presented to it and deliver to its holder the Per Share Merger
Consideration or the fair cash value determined in accordance with the
provisions of Section 1701.85 of the OGCL. All cash paid upon the surrender of
Certificates in accordance with the procedure described above shall be deemed to
have been issued in full satisfaction of all rights pertaining to the Common
Shares except as otherwise required by Section 1701.85 of the OGCL.
REPRESENTATIONS AND WARRANTIES
The Company
The Merger Agreement contains various customary representations and
warranties of the parties thereto. The Merger Agreement includes representations
and warranties by the Company relating to the Acquired Companies in respect to,
among other things: (1) due organization, valid existence, standing, corporate
power and authority; (2) the capitalization of the Company, share ownership and
rights; (3) the right, power and authority of the Company to execute the Merger
Agreement and perform its obligations thereunder, and the enforceability of the
Merger Agreement; (4) financial statements; (5) the absence of certain events
and material changes; (6) accounts receivable; (7) brokers' fees with respect to
the Merger; (8) completeness of statements in the Merger Agreement; (9)
condition and sufficiency of the assets to maintain operations; (10) certain
contracts, arrangements and commitments; (11) current compensation of officers
and directors; (12) employee benefits; (13) environmental matters; (14) HMO or
health insurance accreditations; (15) indebtedness to or from the Foundation or
officers and directors of the Acquired Companies; (16) insurance policies
currently in force; (17) investment portfolio matters; (18) organized labor
matters; (19) licenses, permits and franchises; (20) absence of litigation; (21)
minutes and stock books; (22) absence of material changes; (23) proprietary
property; (24) reports and information filed with the Securities and Exchange
Commission; (25) takeover statutes; (26) taxes; and (27) title to properties.
The Foundation
The Merger Agreement includes representations and warranties by the
Foundation relating to, among other things: (1) title to the Common Shares of
the Company owned by the Foundation; (2) due organization, valid existence,
standing, corporate power and authority of the Foundation; (3) share ownership
and rights; (4) the Foundation's right, power and authority to execute the
Merger Agreement and perform its obligations thereunder, and the enforceability
of the Merger Agreement; (5) brokers' fees payable by the Foundation with
respect to the Merger; and (6) absence of litigation.
Humana and Humana Sub
The Merger Agreement includes representations and warranties by Humana
and Humana Sub relating to, among other things: (1) due organization, valid
existence, standing, corporate power and authority of Humana and Humana Sub; (2)
the right, power and authority to execute the Merger Agreement and perform their
obligations thereunder, and the enforceability of the Merger Agreement; (3)
brokers' fees payable with respect to the Merger; and (4) absence of litigation.
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<PAGE> 47
COVENANTS OF THE PARTIES
Operation of the Company Pending the Effective Date
From the date of the Merger Agreement through the Effective Date, the
Company has agreed (and has agreed to cause its subsidiaries), unless Humana
agrees in writing or as otherwise provided in the Merger Agreement, to (a)
continue each of the Acquired Companies' business and operations substantially
in the same manner as theretofore conducted, not undertake any transactions or
enter into any contracts, commitments or arrangements other than (i) in the
ordinary course of business consistent with past practices or (ii) as disclosed
in the Merger Agreement, and to use its reasonable best efforts to preserve each
of the Acquired Companies' present business and organization; (b) refrain from
disposing of or encumbering or agreeing to dispose of or encumber any of the
Acquired Companies' assets other than in the ordinary course of business
consistent with past practices; (c) maintain necessary permits; (d) not permit
any Acquired Company to make any commitment for capital expenditure in excess of
$50,000 in a single transaction or series of related transactions other than
those capital expenditures disclosed in the Merger Agreement; (e) maintain
existing insurance coverage of each Acquired Company; (f) not terminate any
contract or permit (as specified in the Merger Agreement) except in the ordinary
course of business consistent with past practices; (g) not take or omit to take
any action which would cause any of the representations and warranties made in
the Merger Agreement to be untrue or incorrect; (h) not declare or pay any
dividend on, or make any distribution to the holders of Common Shares; (i) not
change any of the Acquired Companies' Articles of Incorporation or Regulations;
(j) maintain each of the Acquired Companies' existence; (k) not authorize for
issue or issue any shares of capital stock or any warrants, agreements or other
rights entitling any person or entity to purchase or acquire any of the shares
of capital stock of any of the Acquired Companies or change or otherwise adjust
the number of shares of capital stock outstanding; (l) not permit the Acquired
Companies to make any investment in any other corporation, association,
partnership, limited liability company or other business organization or enter
into, modify, terminate or waive any right under any material lease, license,
contract or other instrument other than in the ordinary course of business
consistent with past practice or as disclosed in the Merger Agreement; (m)
except in the ordinary course of business consistent with past practices, not
modify or amend any agreement, plan, contract, or arrangement of an Acquired
Company offering health care to its members or subscribers, obtaining health
care services on behalf of its members or subsidiaries, or providing for
re-insurance of health care costs or risks; (n) except in the ordinary course of
business consistent with past practices, not increase the rate or change the
nature of compensation payable to any of the Acquired Companies' officers or
directors or any health care provider; and (o) not incur or agree to incur on
the part of the Acquired Companies any indebtedness for borrowed money or allow
any of their assets to be subjected to any encumbrance, subject to certain
limitations.
Negotiations With Others
The Company and the Foundation have agreed that they shall not, and
shall direct and use their best efforts to cause their officers, directors,
trustees, employees, and authorized
40
<PAGE> 48
agents and representatives of the Foundation and the Acquired Companies not to
(a) initiate, solicit or encourage, directly or indirectly, any inquiries from
potential third party acquirors ("Third Party Acquirors") or the making or
implementation of any proposal or offer with respect to a merger, acquisition,
consolidation or similar transaction involving the purchase of all or any
significant portion of the assets or any equity securities of the Acquired
Companies (an "Acquisition Proposal"); (b) have discussions concerning, engage
in any negotiations concerning, or provide any information which is proprietary
in nature and non-public or confidential to potential Third Party Acquirors
relating to, an Acquisition Proposal; or (c) otherwise facilitate any effort or
attempt to make or implement an Acquisition Proposal. Furthermore, the Company
and the Foundation have agreed, and the Company has agreed to cause the Acquired
Companies, to immediately cease and cause to be terminated any existing
activities, discussions or negotiations with any potential Third Party Acquirors
conducted prior to the date of the Merger Agreement with respect to any of the
foregoing and to take the necessary steps to inform the entities referred to
above of these obligations. The Company and the Foundation have also agreed to
notify Humana immediately if any Acquisition Proposal is received by, any such
information is requested from, or any such negotiations or discussions are
sought to be initiated or continued with a potential Third Party Acquiror and to
promptly provide Humana with copies of any written materials received relating
to an Acquisition Proposal.
Notwithstanding the foregoing, from June 3, 1997 through 4:00 p.m. June
17, 1997 (the "Window Period"), the Board of Directors, and the Trustees of the
Foundation and their officers, directors, trustees, employees and authorized
agents and representatives were permitted to: (1) advise a Third Party Acquiror
that the Company and the Foundation may consider a bona fide proposal in
writing, not subject to any financing condition, to acquire substantially all of
the Common Shares by purchase or merger (the "Third Party Offer") and (2)
furnish information or enter into discussions or negotiations with any entity
desiring to make a Third Party Offer if, and only to the extent that: (a) prior
to or concurrently with entering into discussions or negotiations with such an
entity, the Company provides written notice to Humana; and (b) the Foundation
and the Company keep Humana informed of the status of the discussions or
negotiations. The Company and the Foundation were permitted to accept a Third
Party Offer received during the Window Period provided that: (1) neither the
Company nor the Foundation had breached in any material respect any obligations
related to this matter; (2) either the Company or the Foundation provided Humana
with a copy of the Third Party Offer before the expiration of the Window Period;
(3) the Third Party Offer was accepted prior to 4:00 p.m. on June 23, 1997; (4)
immediately after the date of the Merger Agreement, the Company issued a press
release describing the Merger Agreement, the entity making the Third Party Offer
had been furnished a copy of the Merger Agreement and the Third Party Offer was
made in the form of the Merger Agreement to the extent possible; (5) if the
Third Party Offer was an all-cash offer, it provided Total Consideration that
was at least $1,000,000 greater than the sum of the Merger Consideration, the
maximum cash consideration payable under the Options (as described below) and
the expenses payable to Humana (as described below), or if the Third Party Offer
provided for consideration other than all cash, the Board of Directors had been
furnished with a written opinion of a nationally-recognized investment banking
firm dated on or before June 23, 1997, stating that the Total
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Consideration was at least $1,000,000 greater than the sum of the Merger
Consideration, the maximum cash consideration payable under the Options and the
expenses payable to Humana; (6) the Company and the Foundation contemporaneously
terminated the Merger Agreement; and (7) the Company paid Humana the expenses,
as described below. "Total Consideration" means, with respect to a Third Party
Offer, the total consideration to be paid by the Third Party Acquiror,
including: (1) the consideration for the outstanding Common Shares, (2) all
amounts or consideration payable with respect to the Options and (3) the
assumption or the past or future payment of the expenses payable to Humana as
described below, whether paid by the Company or the Third Party Acquiror. The
opportunity for the Company and the Foundation to terminate the Merger Agreement
by accepting a Third Party Offer has terminated because no such offer was
received or accepted during the Window Period.
Meeting of the Company's Shareholders
The Company shall take all actions necessary to convene a timely
meeting of shareholders to consider and vote on the approval and adoption of the
Merger Agreement and the Merger. The Board of Directors shall recommend approval
of the Merger Agreement and the Merger.
Voting Agreement of Foundation
At any meeting of shareholders of the Company or any action taken
without a meeting, the Foundation has agreed to vote all of the Common Shares
owned or controlled by it (1) in favor of the Merger, the Merger Agreement and
all transactions described in the Merger Agreement and (2) against any proposal
which may materially impair the Company's ability to consummate or materially
reduce benefits to Humana resulting from the Merger. The voting agreement of the
Foundation shall terminate upon termination of the Merger Agreement by the
Foundation and the Company in compliance with its terms.
Required Approvals; Filings
Humana, Humana Sub, the Company and the Foundation have each agreed to
make all filings required by applicable law to be made by them in order to
consummate the Merger. In addition, all parties shall cooperate with each other
with respect to all filings and in obtaining necessary consents.
Non-competition Agreement
The Foundation has agreed that it shall not after the Effective Time
directly or indirectly, in any capacity, own, operate or manage an HMO or
otherwise engage in any health benefit plan business in Indiana, Kentucky or
Ohio for a period of four years, except as the owner of less than 5% of the
outstanding stock of a publicly-traded company.
Governance of the Surviving Corporation
For a period of three years after the Effective Date, Humana has agreed
to vote its shares in the Surviving Corporation for the election of directors so
that after such election, there would be six directors; (1) two directors who
are Trustees of the Foundation, and nominated by the Foundation, (2) two
directors who are senior management members of Humana, and (3) two directors who
are officers of the Surviving Corporation, one of whom
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shall be Daniel A. Gregorie, M.D., if he is then serving as the senior officer,
and one nominated by Dr. Gregorie. If Dr. Gregorie no longer serves as the
senior officer, the two positions to be filled by Dr. Gregorie and his nominee
shall be filled by the senior officer of the Surviving Corporation resident in
Cincinnati and his or her nominee.
Formation of a Task Force
Promptly after the execution of the Merger Agreement, Humana and the
Company have agreed to form a transition task force which shall review and make
recommendations to Humana and the Company concerning transition issues.
Indemnification; Directors and Officers Insurance
From and after the Effective Time, Humana has agreed to, and to cause
the Surviving Corporation to, indemnify and hold harmless all past and present
officers, directors, employees and agents (the "Indemnified Parties") of the
Acquired Companies to the extent they may be indemnified pursuant to the
Articles of Incorporation and Regulations of the Acquired Companies in effect as
of the date of the Merger Agreement for acts and omissions occurring at or prior
to the Effective Time, and to advance reasonable litigation fees and expenses
incurred by the Indemnified Parties in connection with defending any action
arising out of such act or omission. Any Indemnified Party shall promptly notify
Humana and the Surviving Corporation of any claim, action, suit, proceeding or
investigation for which the party may seek indemnification. In the event of any
such claim, action, suit, proceeding or investigation, (1) the Surviving
Corporation shall have the right to assume defense thereof; (2) the Indemnified
Parties shall cooperate in the defense of any such matter; and (3) the Surviving
Corporation shall not be liable for any settlement effected without its prior
written consent. In addition, Humana has agreed to provide, or cause the
Surviving Corporation to provide, for a period of not less than six years after
the Effective Time, to the Acquired Companies' current directors and officers an
insurance and indemnification policy that provides coverage for events occurring
at or prior to the Effective Time that is no less favorable than the policy
maintained by the Company on January 1, 1997. If the Merger occurs, the
covenants contained in the indemnity provisions shall survive the Effective Time
and shall never expire.
Company Stock Options
The Company has agreed under the Merger Agreement that it will
terminate the Stock Incentive Plan immediately prior to the Effective Time of
the Merger without prejudice to the holders of the Options and grant no
additional options or rights under the Stock Incentive Plan. The Company has
also agreed under the Merger Agreement that it will take action to cause at
least 1,000,000 Options to terminate immediately after the Effective Time of the
Merger. Pursuant to such agreement, the Company will enter into agreements with
holders of Options providing for the termination of all Options held by them
immediately after the Effective Time of the Merger so that at least 1,000,000
Options shall be terminated immediately after such Effective Time and offer to
enter into such agreements with all Option holders. In consideration of the
termination of a holder's Options pursuant to any such agreement, as soon as
practicable after the Merger, the Company will pay the holder cash in the amount
of $6.38 multiplied by the number of the holder's Options which are terminated
pursuant to such agreement (and which have not been exercised or terminated
prior to the Effective Time of the Merger under the terms of the
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Stock Incentive Plan or the agreement under which the Options were granted),
subject to all applicable withholding tax requirements. See "The
Merger--Treatment of Stock Options" for a more complete discussion of the effect
the Merger will have on the Options.
CONDITIONS TO THE OBLIGATIONS OF THE PARTIES
Humana and Humana Sub
The obligations of Humana and Humana Sub to consummate the transactions
described in the Merger Agreement are subject to the fulfillment, prior to the
Effective Time, of the following conditions precedent, any of which may be
waived in writing by Humana at any time prior to the Effective Date: (1) all
representations and warranties of the Acquired Companies and the Foundation in
the Merger Agreement shall be true and correct in all material respects on and
as of the Effective Date; (2) the Acquired Companies and the Foundation shall
have performed and complied in all material respects with all of the covenants,
agreements and conditions required by the Merger Agreement to be performed or
complied with by them prior to or at the Effective Date or cured any default,
breach or failure thereof prior to or at the Effective Date; (3) no action or
proceeding before any court or any governmental body shall be pending or
threatened pursuant to which an unfavorable judgment, decree, injunction or
order would reasonably be expected to (a) prevent the carrying out of the Merger
Agreement or any of the transactions contemplated thereby, (b) declare unlawful
the transactions described in the Merger Agreement, (c) cause such transactions
to be rescinded, or (d) adversely affect the right of Humana to own the Common
Shares or operate or control the business, operations or assets of the Acquired
Companies; (4) the Foundation and the Acquired Companies have complied with all
laws and regulations relating to the operations of the Acquired Companies
through the Effective Date and Humana has received all state licenses,
approvals, certificates of authority and certifications necessary for it to
operate the Acquired Companies' businesses; and (5) Humana is satisfied that no
law, rule, order or regulation is pending or enacted which would have a material
adverse effect (as defined in the Merger Agreement) on the Acquired Companies
following the Effective Date.
The Foundation and the Company
The obligations of the Foundation and the Company to consummate the
Merger are subject to the fulfillment, prior to the Effective Time, of the
following conditions precedent, any of which may be waived in writing by the
Foundation and the Company at any time prior to the Effective Date: (1) all
representations and warranties of Humana and Humana Sub in the Merger Agreement
shall be true and correct in all material respects on and as of the Effective
Date; (2) Humana and Humana Sub shall have performed and complied in all
material respects with all of the covenants, agreements and conditions required
by the Merger Agreement to be performed or complied with by them prior to or at
the Effective Date or cured any default, breach or failure thereof prior to or
at the Effective Date; (3) no action or proceeding before any court or any
governmental body shall be pending or threatened pursuant to which an
unfavorable judgment, decree, injunction or order would reasonably be expected
to (a) prevent the carrying out of the Merger Agreement or any of the
transactions contemplated thereby, (b) declare unlawful the transactions
described in the Merger Agreement, or (c) cause such
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transactions to be rescinded; (4) the Merger Agreement and the Merger have been
approved by the holders of a requisite number of Common Shares; and (5) Humana
and Humana Sub have complied with all laws and regulations relating to the
operations of the Acquired Companies through the Effective Date and Humana has
received all state licenses, certificates of authority and certifications
necessary for it to operate the Acquired Companies' businesses. All parties
shall have received all material consents, authority, certifications and
approvals from all governmental bodies required or necessary to consummate the
transactions.
TERMINATION
Terminating Events
The parties may terminate the Merger Agreement at any time prior to the
Effective Date by mutual written consent, or any party may terminate the Merger
Agreement by delivery of notice of termination to the other parties if the
Merger has not occurred (other than through the failure of any party seeking to
terminate this Agreement to comply fully with its obligations under this
Agreement) on or before January 31, 1998, or such other later date as the
parties agree in writing.
Humana may terminate the Merger Agreement by delivery of notice of
termination to the Foundation and the Company, or the Foundation and the Company
may terminate the Merger Agreement by delivery of notice of termination to
Humana, at any time prior to the Effective Date, in the following circumstances:
(1) any representation or warranty in the Merger Agreement or any other
agreement or instrument delivered in connection therewith becomes materially
untrue and the breach has not been cured within ten (10) business days following
the receipt by the breaching party of notice of the breach; (2) a failure or
refusal to perform in any material respect any obligation or covenant to be
performed by another party prior to the Effective Date and the breach has not
been cured within ten (10) business days following the receipt of notice by the
breaching party; or (c) any of the conditions to the obligations of the parties
pursuant to the Merger Agreement has not been satisfied or becomes impossible
(other than through the failure of the party to comply with its obligations
under the Merger Agreement), and the party has not waived such condition on or
before the Effective Date. In addition, Humana may terminate the Merger
Agreement if the Company delivers to Humana updated disclosure schedules which
materially modify the disclosure schedules as of the date of the Merger
Agreement.
The Company or the Foundation could have terminated the Merger
Agreement (1) if the Company or the Foundation had delivered notice of
termination to Humana contemporaneously with their acceptance of a Third Party
Offer or (2) if, on or before the expiration of the Window Period, (i) the
Company had received a written notice from Morgan Stanley that the previously
issued opinion of the fairness of the Merger Agreement had been withdrawn, or
(ii) the Foundation had received a written notice from Credit Suisse First
Boston that the previously issued opinion on the fairness of the Merger
Agreement had been withdrawn.
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Effect of Termination
Each party's right of termination described above is in addition to any
other rights it may have under the Merger Agreement or otherwise, and the
exercise of a right of termination does not constitute an election of remedies.
If the Merger Agreement is terminated pursuant to the aforementioned, all
further obligations of the parties under the Merger Agreement terminate except
for certain rights and obligations which by agreement survive; provided,
however, notwithstanding anything to the contrary contained in the Merger
Agreement, that if the Merger Agreement is terminated by a party because of the
breach of the Merger Agreement by another party or because one or more of the
conditions to the terminating party's obligations under the Merger Agreement is
not satisfied as a result of the other party's failure to comply with its
obligations under the Merger Agreement, the terminating party's right to pursue
all legal remedies shall survive such termination unimpaired.
INDEMNIFICATION
From and after the Effective Time, the Foundation has agreed to
indemnify and hold harmless Humana and the Surviving Corporation and the
respective directors, officers, employees, agents and representatives of Humana
and Humana Sub (each a possible "Indemnitee") from and against the following:
(a) any loss which Indemnitee may incur or suffer and which arises or results
from: (1) any breach of any of the representations and warranties of the
Foundation relating to title to its Common Shares; or (2) any third-party claim
relating to, or any liability of, the Company, the Surviving Corporation or
Humana for certain franchise taxes, interest and penalties thereon and (b) any
and all actions, suits, proceedings, assessments, judgments, writs, decrees,
orders, costs and expenses arising from any such losses as described above.
Humana and Humana Sub shall indemnify and hold harmless the Company
(for periods prior to the Effective Time) and the Foundation (before and after
the Effective Time) and their respective directors, trustees, officers,
employees, agents and representatives (each a possible "Indemnitee") from and
against the following: (a) any and all losses which may be asserted against an
Indemnitee or which any Indemnitee shall incur or suffer and which arise out of
or result from: (1) any material breach of any of the representations and
warranties of Humana or Humana Sub under the Merger Agreement or any disclosure
schedule, or (2) any material default, nonfulfillment or breach of any covenants
on the part of Humana or Humana Sub under the Merger Agreement, and (b) any and
all actions, suits, proceedings, claims, demands, assessments, judgments, writs,
decrees, orders, costs and expenses arising from such loss as described above.
No party providing indemnification (an "Indemnitor") shall be liable
with respect to a third-party claim, unless the Indemnitee shall have delivered
a "Claim Notice" describing in reasonable detail the facts giving rise to the
third-party claim and stating that the Indemnitee seeks indemnification. Upon
receipt of a Claim Notice, an Indemnitor may assume the defense thereof with
counsel reasonably satisfactory to Indemnitee. Indemnitee shall cooperate in
such defense in all reasonable respects and provide access to all information,
records and documents
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relating to a claim. Indemnitee shall have the right to employ separate counsel
in any action or claim and to participate in the defense thereof.
Notwithstanding anything to the contrary contained in the Merger
Agreement, the sole and exclusive remedy available against the Foundation from
and after the Effective Time for any and all claims arising from the Merger
Agreement shall be the indemnification as described above.
EXPENSES
Except as otherwise provided in the Merger Agreement, each party shall
bear its respective expenses incurred in connection with the preparation,
execution and performance of the Merger Agreement. Humana and the Company shall
split the HSR Act filing fee equally. If the Foundation and the Company had
terminated the Merger Agreement contemporaneously with accepting a Third Party
Offer, the Company would have been obligated to pay Humana the following amounts
as consideration for terminating the Merger Agreement: (a) contemporaneously
with such termination, reimbursement of all Humana's reasonable, documented
costs and expenses (including, without limitation, all legal, investment
banking, depository, filing fees and related expenses) but not in excess of
$1,000,000; (b) contemporaneously with such termination, two percent (2%) of the
Total Consideration provided for in the Third Party Offer; and (c) upon the
closing of a purchase or merger transaction involving a material portion of the
assets or stock of the Acquired Companies closing on or before June 30, 1999,
(1) four percent (4%) of the total value of such transaction (provided that any
such transaction having a total value less than $250,000,000 shall be deemed to
have a total value of $250,000,000) minus (2) the amount paid pursuant to clause
(b) above.
AMENDMENT AND WAIVER
The Merger Agreement may be amended, modified, superceded or canceled
only by a written instrument signed by all of the parties, and any of the terms,
provisions and conditions may be waived only by a written instrument signed by
the waiving party. Failure of any party at any time to require performance of
any provision of the Merger Agreement shall not be considered to be a waiver of
any succeeding breach of any provision by any party.
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DISSENTING SHAREHOLDERS' RIGHTS
The following summary of dissenting shareholders' rights does not
purport to be complete and is qualified in its entirety by reference to Section
1701.85 of the OGCL, a copy of which is attached as Exhibit C and is
incorporated herein by reference.
Any shareholder entitled to vote on the Merger Agreement and whose
Common Shares are not voted in favor of the adoption of the Merger Agreement is
entitled, if the Merger is consummated, to be paid the fair cash value of such
Common Shares held of record by him or her on the Record Date. To be entitled to
such payment, such shareholder must serve a written demand upon the Company on
or before the tenth day after the taking of the vote authorizing the Merger and
must otherwise comply with Section 1701.85 of the OGCL. The Company will not
inform the shareholders of the expiration of such ten-day period. Such written
demand must specify the shareholder's name and address, the number of Common
Shares held by him or her on the Record Date and the amount claimed as fair cash
value of his or her Common Shares and shall be mailed or delivered to the
Company at 655 Eden Park Drive, Cincinnati, Ohio 45202-6056, Attention: Thomas
D. Anthony, Esq.
A vote in favor of the adoption of the Merger Agreement constitutes a
waiver of dissenters' rights. A Proxy that is returned signed but unmarked as to
choice with respect to the Merger Agreement will, as indicated thereon, be voted
FOR the adoption of the Merger Agreement and will, therefore, result in a loss
of dissenters' rights. Failure to vote, however, does not constitute a waiver of
dissenters' rights. Voting against or a direction on the accompanying Proxy to
vote against the adoption of the Merger Agreement will not itself constitute a
written demand as required by Section 1701.85.
If the Company sends to the dissenting shareholder, at the address
specified in such dissenting shareholder's demand, a request for the
Certificates representing the Common Shares as to which the dissenting
shareholder seeks relief, the dissenting shareholder must, within 15 days from
the date of the sending of such request, deliver to the Company the Certificates
requested in order that the Company may endorse thereon a legend to the effect
that the demand for the fair cash value of such Common Shares has been made. The
Company will promptly return such endorsed Certificates to the dissenting
shareholder. Such request by the Company is not an admission that the dissenting
shareholder is entitled to relief under Section 1701.85. Failure on the part of
the dissenting shareholder to deliver such Certificates terminates his or her
rights as a dissenting shareholder, which the Company, at its option, may
exercise by written notice sent to the dissenting shareholder within 20 days
after the lapse of the 15-day period above mentioned, unless a court for good
cause shown otherwise directs.
If Common Shares represented by a Certificate on which such a legend
has been endorsed are transferred, each new certificate issued therefor must
bear a similar legend, together with the name of the original dissenting holder
of such Common Shares. A transferee of the Common Shares so endorsed will
acquire only such rights in the Company as the original dissenting holder of
such Common Shares had immediately after the service of a demand for payment of
the fair cash value of such Common Shares.
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If the Company and any dissenting shareholder cannot agree on the fair
cash value of his or her Common Shares, either may, within three months after
service of the demand by the shareholder, file a complaint in the Court of
Common Pleas of Hamilton County, Ohio for a determination of the fair cash value
of his or her Common Shares. If the court determines the shareholder is entitled
to be paid the fair cash value of his or her Common Shares, it may appoint one
or more appraisers to recommend a decision on the amount of the fair cash value.
The court thereupon shall make a finding as to the fair cash value of the Common
Shares and shall render judgment against the Company for the payment of it, with
interest at such rate and from such date as the court considers equitable. Costs
of the proceeding, including reasonable compensation to the appraisers, shall be
assessed or apportioned as the court considers equitable. Fair cash value is the
amount which a willing seller, under no compulsion to sell, would be willing to
accept, and which a willing buyer, under no compulsion to purchase, would be
willing to pay, but in no event in excess of the sum specified in the
shareholder's demand. Fair cash value is determined as of the day prior to that
on which the vote was taken and excludes any appreciation or depreciation
resulting from the proposed Merger.
The right of any shareholder to be paid the fair cash value of his or
her Common Shares will terminate if: (i) for any reason, the Merger does not
become effective; (ii) the dissenting shareholder fails (a) to serve an
appropriate timely written demand upon the Company, (b) to timely surrender his
or her Certificates for an endorsement thereon of a legend to the effect that
demand for the fair cash value of such Common Shares has been made, after an
appropriate request by the Company, or (c) to comply otherwise with Section
1701.85; (iii) the demand is withdrawn by the dissenting shareholder, with the
consent of the Board of Directors; or (iv) the Company and the dissenting
shareholder shall not have come to an agreement as to the fair cash value of the
Common Shares and neither shall have filed a complaint in the Court of Common
Pleas of Hamilton County, Ohio as described above.
THE COMPANY'S BUSINESS
GENERAL
The Company is an Ohio for-profit corporation, which is a
majority-owned subsidiary of the Foundation, an Ohio nonprofit corporation. The
Foundation was organized in 1978 as a nonprofit HMO. The Company was formed in
1995 to serve as a for-profit holding company for the assets and liabilities
relating to the Foundation's managed health care operations. Prior to the
Restructuring described below, the Company had no assets or operations.
Pursuant to the Restructuring, substantially all of the operating
assets and liabilities relating to the Foundation's managed health care
operations were transferred to the Company on October 1, 1995 in exchange for
all of the issued and outstanding common shares of the Company. The Foundation
retained $25 million of cash and marketable securities to pursue its social
welfare objectives. Contemporaneously, the Company transferred the assets and
liabilities of the managed health care operations to its wholly-owned
subsidiary, Health Plans,
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in exchange for all of its issued and outstanding common shares. As a result,
since October 1, 1995, the managed health care operations formerly conducted by
the Foundation have been conducted by Health Plans.
The Company, through Health Plans, is licensed by the States of Ohio
and Indiana and the Commonwealth of Kentucky to provide and administer managed
health care products and services to employer groups, individuals and
government-sponsored beneficiaries primarily in Southwestern Ohio, Southeastern
Indiana and Northern Kentucky (the "Cincinnati Service Area") and the Dayton,
Ohio/Greater Miami Valley area (the "Dayton Service Area"). The Cincinnati and
Dayton Service Areas are collectively referred to as the "Service Area." In
addition, the Company provides claims administration services and medical
management services for self-funded employers.
Health Plans has one of the largest enrollments of any HMO in its
Cincinnati Service Area, serving more than 246,000, including commercial
members, individuals and government-sponsored beneficiaries.
PRODUCTS
The Company provides and administers managed health care products and
services with an emphasis on continually improving health care quality and cost
effectiveness. The Company's range of managed health care products and services
is provided through its prepaid plans, both HMO and POS, and a managed care
third-party administrative services program for employers' self-funded medical
plans. In addition, the Company provides a Medicare risk product and is
certified as a managed care organization by the Ohio Bureau of Workers'
Compensation (the "BWC") under the Health Partnership Program. Prior to
assigning its Medicaid provider agreement with the Ohio Department of Human
Services to another Ohio-based HMO on June 30, 1996, the Company also offered an
ADC/Medicaid plan. Under self-funded plans, employer groups pay the Company a
monthly management services fee, but medical expenses incurred are funded by the
employer groups, whereas prepaid plans are structured to provide health care to
employer groups in exchange for monthly premium payments to the Company. The
Company's prepaid plans are differentiated primarily by network size and
pricing. The pricing policy of each product is driven by historical and
projected medical costs, with consideration also being given to market
positioning and target customer segments. In general, the more tightly managed,
limited network products have lower medical costs and, therefore, lower
premiums.
Health Plans offers the following products:
Primary Access(R)
This HMO product is the Company's largest health care product. With
this product, a member chooses a primary care physician ("PCP") who practices
family medicine, internal medicine, general medicine or pediatrics. The PCP is
responsible for providing routine medical care and for authorizing and
coordinating the care received from specialty care
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physicians, hospitals and other health care providers. Members are referred to
certain specialty care providers for a course of treatment for a specific
timeframe. If a member fails to obtain a referral authorization prior to
consulting certain specialty care providers, he or she may ultimately be
financially responsible for the service. This product offers the largest panel
of providers to members and, accordingly, charges the highest monthly premium in
comparison to the Company's other HMO products. This product is offered to
members in prepaid and self-funded employer plans and to individuals.
Select by ChoiceCare(R)
This HMO product is similar to the Company's Primary Access product,
but members are offered a smaller panel of participating physicians who are
selected based on performance criteria and provide more closely-managed patient
care. Accordingly, the monthly premiums are lower than monthly premiums charged
to members in the Company's Primary Access plan. This product is offered to
members in prepaid and self-funded employer plans.
Co-Choice(R) by ChoiceCare
Members in this POS product choose between the Company's Primary Access
product ("network benefits") or indemnity-type insurance benefits. Network
benefits are available when a member follows the requirements of the Primary
Access product. If a member chooses a non-participating provider (a provider
outside of the network) or does not follow the requirements of the Primary
Access product, the member will receive indemnity-type insurance benefits and
will pay co-insurance and deductibles and will be required to file claim forms.
The Company has contracted with Allianz Life Insurance Company to provide the
indemnity insurance coverage to the employers participating in this plan on an
insured basis. This product is offered to members in prepaid and self-funded
employer plans.
NewHealth(R)
This HMO product is similar to the Company's Primary Access plan and
Select by ChoiceCare but the panel of providers is smaller than either of the
other HMO plans, practices at a limited panel of hospitals, commits to
group-practice development and certain incentive programs, and provides more
closely-managed patient care. Monthly premiums charged to members in this plan
are the lowest monthly premiums of the three HMO plans and the POS product. This
product is offered as the result of an alliance of Bethesda Hospital, Inc., Good
Samaritan Hospital and the Company, and is the first integrated managed health
system to be offered in the Cincinnati Service Area. In this system, the three
alliance members share in the financial risk of the product. This product is
offered to members in prepaid and self-funded employer plans.
Senior Health by ChoiceCare
This HMO Medicare risk product is provided to Medicare-eligible
individuals through a risk contract with the Health Care Financing
Administration ("HCFA"). With this product, a member chooses a PCP group which
practices family medicine, internal medicine, general medicine or pediatrics.
The PCP group is responsible for providing routine medical care and for
authorizing and coordinating the care a member receives from specialty care
physicians, hospitals and other health care providers. The PCP group designates
a primary hospital to
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deliver all inpatient services for the PCP's members. In addition, the PCP
aligns with a specialty group of physicians for each of 12 key specialties. If a
member fails to obtain referral authorization prior to receiving services from
specialty physicians or hospitals, he or she may ultimately be financially
responsible for the service. The Company is paid a monthly per-member amount
from HCFA in return for arranging for the provision of the services offered
under the Medicare product. In February 1997, the Company began enrolling
members for a March 1, 1997 effective date and has approximately 600 Senior
Health members as of June 1997.
Workers' Compensation
This product is offered through a contract between the Company and the
BWC, under which the Company administers health care services allowed under the
state workers' compensation program for those employees whose employers have
selected the Company as their managed care organization ("MCO"). Under the
contract with the BWC, the Company also offers a provider network and furnishes
provider management, but the Company does not insure and is not financially
liable for the payment of provider bills. Such payment continues to be the
responsibility of the BWC. However, the Company, as the MCO, is expected to act
as a pass-through for provider bill submission and reimbursement. An employee
may receive health care services from any BWC-certified health care provider,
but the Company will encourage the employee to seek care from providers with
whom the Company has contracted for workers' compensation services. The Company
pays providers for services after the Company receives compensation from the
BWC. The Company receives an administrative fee for its management of workers'
compensation services and may be eligible to receive bonuses for BWC-established
performance targets. The Company is dependent upon a subcontracting arrangement
with an independent party for access to a workers' compensation information
system, a bill payment system, an electronic interface with the BWC and a
24-hour intake line. During the last quarter of 1996, the Company began
marketing this product to employer groups for a March 1, 1997 effective date and
as of June 1997 enrolled employer groups comprised of approximately 43,000
covered lives.
Dayton/Greater Miami Valley Service Area Expansion
The Company has expanded into six additional counties in the Dayton,
Ohio area, including the counties of Champaign, Clark, Greene, Miami, Montgomery
and Preble, offering products similar to its Primary Access and Co-Choice
products offered in the Cincinnati Service Area. While contract negotiations
continue with certain key providers, the Company anticipates a network of
approximately 15 hospitals and 1,200 physicians and other health care
professionals. The Company began sales to employer groups during the second
quarter of 1997.
Self-Funded Employers
The Company provides managed care administrative services for
self-funded employers, including claims processing, medical resource management
and enrollment services. Depending upon the employer's contract with the
Company, employees in these self-funded plans choose from among the Company's
HMO plans or POS plan and receive the same managed care services as members in
prepaid plans.
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PROVIDER ARRANGEMENTS
The Company's business is dependent, in part, upon its contracts with
participating providers and hospitals. The Company's participating providers are
physicians and other health care professionals who are reimbursed for health
care services provided to members at negotiated rates through contractual
arrangements with the Company. As of June 1997, these providers include
approximately 3,700 participating physicians and other credentialed health care
professionals in the Cincinnati Service Area. See "Dayton/Greater Miami Valley
Service Area Expansion" above. Certain provider contracts contain risk-sharing
provisions which may, in certain situations, cause providers to be at risk for
additional health care expenditures. The Company also has contracts with 22
hospitals in its Cincinnati Service Area. Certain of these contracts are with
risk/reward sharing hospitals and certain are with other non-risk/reward sharing
hospitals. These contracts are for varying terms ranging from one to five years.
Contracts with risk/reward sharing hospitals generally utilize a methodology
that incorporates a combination of case rate and per diem methods of
reimbursement. Contracts with non-risk/reward sharing hospitals generally
utilize discounted fee-for-service reimbursement methods. For those providers
who have agreed to participate in the Medicare and/or managed Workers'
Compensation products, their contracts have been amended to reflect the
requirements of those products. In addition, certain providers have entered
contracts to provide services only under the Workers' Compensation program.
Physicians and Other Health Care Professionals
Under the Company's current HMO plans and POS plan, members select a
PCP who provides or arranges for non-emergency medical care given to that
member. As of June 1997, The Company had contracted with approximately 1,100
PCPs in its Cincinnati Service Area. The Company's PCPs include internists,
family practitioners, pediatricians and general practitioners. Health care
services provided directly by PCPs include periodic physical examinations,
routine immunizations, well-child care, and other preventive health care
services. Health care services provided by obstetrician/gynecologists, that do
not require PCP referrals include well-woman care and maternity care. The
Company believes that the successful operation of its HMO and POS plans is
dependent, in a large part, upon the ability of PCPs, who coordinate the
delivery of care for its members, to accurately determine, with specialists and
other health care professionals when applicable, the nature and extent of
services to be provided to any given member. The Company believes that
physicians and other health care professionals are a critical factor in managing
health care costs because they coordinate the overall health care of members and
assure the appropriate utilization of hospitals, specialists and other health
care professionals.
The Company has a system of incentive arrangements and medical resource
management programs with respect to PCPs and specialty care physicians. The
majority of PCPs are compensated pursuant to discounted fee-for-service
arrangements with certain portions of these fees held back by the Company and
placed in a risk reserve. A small portion of specialty care physicians and other
health care professionals are compensated on a capitated basis. In addition, the
Company has incentive arrangements which pay additional monies and a percentage
of the risk reserve to the physicians and other health care professionals based
on
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measurements of quality, efficiency and patient satisfaction. Risk reserve funds
remaining at year-end, if any, are available for payment to the physicians and
other health care professionals if the total medical expenditures are within
pre-determined ranges. The Company believes that this method of incentive
payment is advantageous to the physician, the Company and the members because
all share in the benefits of managing health care quality and costs.
The Company's ability to expand is dependent, in part, on its ability
to secure cost-effective contracts with additional physicians and health care
professionals or to ensure that existing providers expand capacity to
accommodate new members. Generally, all participating provider contracts have
one-year terms, are renewable annually and may be terminated upon 90 days'
written notice.
Hospitals
The Company has negotiated contracts with 22 hospitals in its
Cincinnati Service Area to provide inpatient and outpatient hospital care,
including inpatient acute care services, ambulatory surgery services, emergency
room services, diagnostic radiology services, radiation oncology services,
nuclear medicine services, outpatient cardiac rehabilitation services and
certain other services. Certain of these contracts are with "core" hospitals,
referred to as risk/reward sharing hospitals, and certain of these contracts are
with other hospitals. All participating hospitals agree to provide services to
members in at least the same time availability as offered to other patients.
Hospitals agree to participate in, and comply with, the utilization review,
quality improvement and risk management programs as designated from time to time
by the Company. The Company completed renegotiation of its hospital contracts
for the risk/reward sharing hospitals effective January 1, 1996. The terms of
these contracts range from two and one-half years to five years.
In addition, these contracts contain risk/reward sharing and incentive
programs. These programs are based on the year-end surplus or deficit in the
Hospital Reimbursement Fund (the "Hospital Fund"). The Company funds the
Hospital Fund monthly from member premiums and draws from the fund, as
necessary, to pay claims for covered inpatient and outpatient hospital services.
If, at year-end, there is a surplus in the Hospital Fund, the Company pays 50%
of the surplus to the risk/reward sharing hospitals. If, however, at year-end,
there is a deficit in the Hospital Fund, the risk/reward sharing hospitals are
responsible for 50% of the deficit. To cover the hospitals' share of potential
deficits in the Hospital Fund, the Company currently withholds five percent of
inpatient claims during the year as a risk reserve. The Company, however, is
able to adjust, on a quarterly basis with 30 days' written notice, the amount of
risk reserves withheld under certain circumstances.
To provide an additional impetus for improvements to each hospital's
quality and efficiency, up to 50% of the remaining balance in each hospital's
risk reserve is used (together with a matching amount paid by the Company and
participating self-funded plans) to fund an incentive program. Although the
total incentive payment available to each hospital is based on year-end results,
the hospital incentive program provides for semi-annual incentive payments (as
long as the Hospital Fund is not operating at a deficit). Incentive payments are
based on certain criteria developed by the Company. In 1996, the Hospital Fund
operated at a deficit,
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and the hospital risk reserves were used to cover such deficit. Consequently, no
hospital incentive payments were paid or accrued to be paid for 1996 as a result
of prepaid membership.
The hospital risk/reward sharing and incentive programs generally apply
only to services rendered to members in HMO plans. If, however, the Company and
the plan sponsor of a self-funded plan mutually agree, the risk/reward sharing
and incentive programs are extended to services rendered to members of the
self-funded plan. In that case, the plan sponsor contributes, with respect to
the services rendered to the members of the self-funded plan, the amounts which
the Company would have been required to contribute if those services had been
provided to members covered under an HMO plan.
The Company has renegotiated its hospital contracts with the
non-risk/reward sharing hospitals in its Cincinnati Service Area to obtain lower
discount rates. These hospitals are generally reimbursed on a discounted
fee-for-service basis.
Medicare Risk Product
In connection with the Medicare risk product, the Company has
contracted with physicians and other health care professionals, hospitals and
ancillary service providers to provide services to Medicare beneficiaries.
Initially, the PCPs, specialty care physicians and ancillary providers are to be
reimbursed according to a discounted fee-for-service arrangement, although the
Company anticipates that the specialty care physicians, and possibly the
ancillary care providers, eventually will be shifted to a capitation program.
The hospitals participating in the Medicare risk product are reimbursed on a
capitated basis (i.e., at 43% of the per member per month ("PMPM") amount paid
to the Company by HCFA). The hospitals and the PCPs (and indirectly, the
specialty care physicians) will eventually participate in an incentive program
that is established for each care team (i.e., the integrated unit that is formed
by a PCP, the particular hospital to which such PCP refers Medicare members and
the specialty care physicians to whom the PCP refers Medicare members). The
Company will withhold a percentage of each hospital's capitation payment in
order to fund the incentive program for each care team. Any surplus or deficit
in each care team's incentive pool will be split as follows: 20%-the Company,
30%-hospital, 50%-PCPs. Physicians will not be put at risk for the first two
years of the contract and their risk will be capped at $3.00 PMPM thereafter;
the Company will assume the physicians' share of any deficit during these first
two years.
Ancillary Services
The Company has negotiated discounted contracts with approximately 180
ancillary service providers for ancillary services such as nursing services,
home health agencies, laboratories, outpatient diagnostic radiological services,
durable medical equipment, ambulance services, pharmacy and occupational,
physical and speech therapy. The contracts for laboratory and outpatient
diagnostic imaging services are on a capitated basis with certain risk-sharing
features, while other contracts include incentives for appropriate utilization
of services. The Company's mental health and chemical dependency services,
diagnostic imaging services and pharmacy benefits are managed by third-party
vendors.
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MARKET
Ohio, Kentucky and Indiana had a population of approximately 21 million
in 1996. With the expansion into the Dayton Service Area, approximately 15%
(approximately 3.15 million) of this population resides in the Company's Service
Area. Within the Service Area, the Company estimates approximately 1.9 million
people are enrolled in managed care plans (HMOs, PPOs and POS plans). The
Company believes there are still opportunities to grow the commercial business
within its Service Area, but also believes there is substantial opportunity in
the Medicare and Workers' Compensation markets as well as contiguous service
areas that are less penetrated with managed care enrollment.
A majority of employers continue to fund their medical benefit plans
through arrangements with commercial insurance carriers or HMOs. However, a
significant portion of employers in the Service Area fund their own medical
benefit plans and retain third-party administrators ("TPAs") to provide various
services including claims administration, processing and payment, member
communications and cost containment. Although a larger number of employers
continue to fund their plans through insurance, self-funded plans are offered
predominantly by larger employer groups. Two types of administrators compete for
the large numbers of eligibles (i.e., employees) in the self-funded market. One
type, the administrative services only ("ASO") administrator, sells services
based on low administrative fees, speed of claims processing and customization,
and offers minimum medical management services. The other type, with which the
Company is closely aligned, includes commercial insurance/HMO carriers that
offer self-funded managed care benefit options. These carriers compete less on
price, and more on value added medical management services and programs. There
are approximately 13 such commercial insurance/HMO carriers, including the
Company, offering self-funded options in the Service Area.
MARKETING
The Company markets its prepaid health plans and third-party
administrative services primarily to employer groups as a replacement for or
alongside traditional fee-for-service indemnity plans or other managed care
plans. The Company generates membership growth through several different sales
channels. Prospective employer groups with less than 100 employees are generally
sold through a network of approximately 250 contracted independent brokers.
Prospective employer groups with more than 100 employees are generally sold by
the Company's sales representatives, but may also be sold by one of the
Company's contracted independent brokers. A solid relationship with consultants
largely present in groups with 500 or more employees is also seen as an
essential component of the sales channel. Also critical is membership growth and
retention from existing accounts which are actively managed by the Company's
account management staff.
During the Company's typical sales cycle for commercial business, the
Company's representatives first make presentations to employer groups. Once the
employer group agreement is executed, the Company directly communicates with
employees. The Company
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uses print, television, radio, newspaper advertising, worksite presentations and
educational sessions to market and educate members and potential members about
its products. Other communications to reinforce the Company's message include a
quarterly magazine, member educational brochures, employer and broker seminars
and physician and office staff newsletters. The Company has received local
awards for its print and media advertising.
Senior Health is primarily marketed directly to individual Medicare
beneficiaries, although some group sales are also expected. Medicare marketing
is extensively regulated by HCFA.
COMPETITION
Managed care companies operate in a highly competitive environment. The
Company believes that the most important competitive factors affecting its
ability to retain and increase membership include comprehensive benefit
packages, the price employers are willing to pay for these benefits, the size
and reputation of its provider networks and customer service quality. While the
competitive pressure is intense from local, regional and national carriers, the
Company believes the future managed care market in the Service Area will largely
be dictated by the importance national carriers place on the Service Area and
the resulting tactics they use to penetrate the market and improve market share.
The Company's competition comes from local or regional managed care companies
such as Anthem, Blue Cross/Blue Shield of Ohio, Health Services Preferred and
Ohio Health Choice Plan. The Company also competes with national carriers such
as United/MetraHealth, PacifiCare/FHP, Aetna/U.S. Healthcare, Humana, Prudential
and CIGNA/Healthsource. Many of these competitors have greater financial
resources and offer a broader range of products and/or benefit packages than the
Company. Additional competitors may also enter the Service Area in the future,
either de novo or by acquiring a current competitor in the Service Area.
Additionally, the hospital systems in the Service Area are positioning
themselves to compete with the Company by directly contracting with employers
and government payors, such as HCFA. Certain of these hospital systems have
already obtained HMO licenses, and others are believed to be considering
obtaining them. Legislative developments may make it easier for these hospital
systems (either directly or through integrated delivery systems, such as
physician hospital organizations or provider services networks) to contract on a
"risk" basis.
The Company also competes with other managed health care companies that
enter into contracts with independent physicians, physician groups and other
providers. Competitive factors influencing a physician's or other provider's
decision to contract with the Company include potential membership (i.e.,
patient) volume, reimbursement rates, timeliness of reimbursement and other
administrative service capabilities. An inability to contract with certain
physician groups or hospitals (with exclusivity or nearly exclusive contracts)
could negatively impact the attractiveness of the Company's provider networks
and its managed care product offerings.
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REGULATION AND RECENT LEGISLATION
Federal Regulation
FEDERAL QUALIFICATION. The Federal Qualification Act of 1973 (the "Act")
fostered the development and growth of HMOs. The Act created a regulatory scheme
under which the federal government certified HMOs which qualified by complying
with stringent operational and organizational requirements (i.e., benefit
offerings, benefit delivery, rating methodology, fiscal stability, quality
assurance programs, etc.) Federal qualification thus served, to some extent, as
a seal of approval, with the result that federally qualified HMOs were perceived
by employers as providing higher quality services. Federal qualification also
had a practical advantage in that employers were required, under certain
circumstances, to offer federally qualified HMOs to their employees.
Additionally, the Act preempted certain types of state laws that were barriers
to the development of HMOs.
In 1988, Congress passed amendments to the Act (the "1988 Amendments")
which, among other things, lessened the specific administrative requirements of
HMOs and ended the mandated employer offering of federally qualified HMOs as of
October 24, 1995. As a result of the 1988 Amendments, HMOs can no longer rely on
the employer mandate, but have gained greater flexibility to position themselves
favorably in the health care coverage market.
The Foundation became federally qualified on March 26, 1985, and
operated as a federally qualified HMO in its Ohio service area until the
transfer of the Foundation's managed care assets to Health Plans on October 1,
1995. Health Plans became federally qualified in the Cincinnati Service Area on
January 24, 1997.
ERISA. The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), applies to most workplace health plans, with the exception of certain
church plans and government plans. Excluded government plans consist of plans
offered by state and federal governments and their political subdivisions, for
their employees and covered dependents. When it applies, ERISA preempts most
state laws related to workplace health plans, except laws regulating the
business of insurance. This creates a dichotomy between insured plans, including
HMO plans, which are subject to state regulation, and self-funded plans, which
are not. Additionally, the courts have held that state court actions for
compensatory damages (e.g., pain and suffering) and for punitive damages (e.g.,
"bad faith") are preempted by ERISA with respect to all health plans governed by
ERISA, including insured plans.
A number of state officials believe that the states should regulate
self-funded plans and have urged Congress to modify or repeal ERISA's broad
preemption. Plaintiff personal injury attorneys, presently barred from
recovering compensatory and punitive damages in connection with benefit claims,
have added their considerable support to these efforts. If ERISA is modified to
permit denied benefits claimants to recover punitive damages and damages for
pain and suffering and mental anguish, the impact on the managed care industry,
and indirectly on those employers who provide their workers with health care
coverage, would be substantial. If
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ERISA is repealed or altered to permit state regulation of self-funded plans,
the effects would be even more far-reaching and difficult to predict.
Unlike traditional state insurance laws and regulations, ERISA does not
mandate specific benefits or the use of specific types of providers. ERISA also
does not require plans to meet minimum capital or reserve requirements or to
comply with any of the financial solvency measures typically required of
insurers and HMOs. Instead, ERISA imposes rules intended to assure that plan
assets are used for the exclusive purposes of providing benefits to participants
and their covered dependents and minimizing expenses associated with plan
administration. These rules impose fiduciary obligations on certain parties,
require plan assets to be held in trust or by an insurer, and ban certain
transactions between plans and interested parties. These rules were written
primarily to apply to retirement funds, and there is little guidance available
with respect to the application of these rules to managed care arrangements. As
a result, it is possible that the Department of Labor, the courts or plan
sponsors may raise questions concerning whether certain managed care
arrangements, or the way in which they are implemented by Health Plans, are
compatible with ERISA's requirements.
MEDICARE-RELATED LEGISLATION. The Company's contract with HCFA, through Health
Plans, subjects the Company to various federal legislation which prohibits
activities that are deemed to be "fraudulent" or "abusive" and that would,
thereby, raise the cost of the Medicare and Medicaid programs. The
Medicare/Medicaid Anti-Kickback Statute prohibits the knowing or willful
solicitation, offer, or payment of any remuneration, whether direct or indirect,
overt or covert, in cash or in kind, in return for: (i) referring an individual
for the furnishing of any item or service; or (ii) purchasing, leasing, ordering
or arranging for or recommending the purchase, lease or order of any item or
service, for which payment may be made, in whole or in part, under Medicare or
Medicaid. The Ethics in Patient Referrals Act of 1989, as amended (the "Stark
Laws"), prohibits a physician from referring patients for "designated health
services" to a facility in which the physician (or a family member of the
physician) has a "financial interest;" and prohibits any person from billing
patients or other third-party payors for designated health services provided
pursuant to prohibited referrals. These prohibitions are very broad,
encompassing many business transactions that are permissible outside of the
health care context; yet, there is very little guidance as to what constitutes
"fraudulent" or "abusive" activity in the context of managed care. There are no
exceptions for de minimis violations of these laws. Courts have reasoned that if
even one purpose of any remuneration is to induce referrals of patients or
services under the Medicare or Medicaid programs, there may be a violation.
The penalties for willful violations of the Medicare/Medicaid
Anti-Kickback Statute and/or the Stark Laws are severe, including criminal
prosecution and fines, civil fines, "treble" damages, and exclusion of offending
providers or suppliers from the Medicare and Medicaid programs.
The Omnibus Budget Reconciliation Act of 1990 prohibits payment of any
incentive to induce a physician to withhold treatment from an individual
Medicare beneficiary. HCFA has promulgated regulations under this law that
govern the use of any HMO physician incentive
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plan ("PIP") for services to Medicare beneficiaries. These regulations do not
prohibit PIPs, but do subject the Company to certain reporting requirements and
to the potential for obtaining stop-loss coverage for physicians if the
Company's PIP puts physicians at substantial financial risk for services which
they do not provide. Failure to abide by these regulations could subject the
Company to civil monetary penalties or exclusion from the Medicare program.
HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT OF 1996. The Health
Insurance Portability and Accountability Act ("HIPAA") was signed into law by
President Clinton on August 26, 1996. This law was intended to make it easier
for individuals to maintain coverage under their current employer's health plan
and to obtain coverage under their next employer's health plan even if their
health status might otherwise make them uninsurable. This law amends ERISA, the
Internal Revenue Code and the Public Health Service Act.
HIPAA's key coverage provisions are its new portability and
nondiscrimination rules. With respect to employment-related group health plans,
these new rules: limit the length of pre-existing condition exclusions; require
health plans to credit prior creditable coverage against any exclusion period;
require health plans to issue (and accept) certificates of prior creditable
coverage; allow certain individuals who have lost other coverage to enroll
outside of their plan's normal open enrollment periods; and prohibit
discrimination based on health status-related factors. These rules affect
self-funded plans and insured plans. The Company, as an HMO, does not use
pre-existing condition exclusions in its HMO products. The Company has never
been allowed to discriminate against individuals based on health status.
Therefore, the primary direct impact of these rules will be that the Company,
like its competitors, will have to bear the expense of preparing certificates of
creditable coverage.
HIPAA also contains a number of reforms aimed specifically at the group
market. These new group market rules: require guaranteed issue in the small
group market; require guaranteed renewability in the small and large group
markets; and require health insurance issuers to disclose certain information to
their customers in the small group market. Previously, the Company could decline
or not renew groups that were not profitable.
HIPAA also creates new rules for the individual market. The new
individual market rules require guaranteed issue for eligible individuals (i.e.,
certain persons with prior coverage) and require guaranteed renewability.
States, however, may avoid guaranteed issue if they provide "acceptable
alternative mechanisms" for guaranteeing that all eligible individuals will have
a choice of coverage. The Company does not participate in the individual market
and will not be directly impacted by these requirements.
To allow the states an opportunity to continue their regulation over
the insurance business, HIPAA creates a complex state-federal enforcement scheme
that allows the states to adopt and enforce their own standards, provided they
do not conflict with HIPAA's minimum requirements.
HIPAA also creates a trial program for "Medical Savings Accounts."
These accounts are similar to Individual Retirement Accounts, except that they
are intended to provide funds
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for health care expenses rather than for retirement expenses. Medical Savings
Accounts may only be established in connection with a qualifying ("high
deductible") health plan. The Company does not currently plan to develop its own
Medical Savings Account product.
MENTAL HEALTH PARITY ACT OF 1996. The Mental Health Parity Act of 1996 prohibits
employment-related health plans and health insurance issuers from adopting
annual or lifetime dollar limits for mental health services that are different
from any similar limits on other medical services, unless extending similar
limits for mental health services would cause a health plan's premiums to
increase by more than 1%. The Company's prepaid products do not contain dollar
limits on mental health services. This legislation will, however, require
changes to the mental health benefits available under the non-network, indemnity
portion of the Co-Choice POS product.
State Insurance Regulation
The Company, through Health Plans, is subject to the HMO laws and
regulations of the States of Ohio and Indiana and the Commonwealth of Kentucky.
OHIO. To obtain a certificate of authority as an HMO, Health Plans was required
to file a detailed description of its proposed plan of operations, provider
network, service area, finances and governance. It remains under a continuing
obligation to file with, and obtain the approval of, the Superintendent of
Insurance for any major modification of its operations, as described in its
application, if the modification affects: the solvency of Health Plans, its
continued provision of health care services, or the manner in which it conducts
its business. Additionally, its evidences of coverage, rates, contracts with
providers, solicitation documents and requests for expansion of approved service
area are subject to review and approval by the Superintendent of Insurance.
Ohio has enacted a Managed Care Uniform Licensure Act ("MCULA"),
replacing its separate laws for HMOs, Dental HMOs and Single Service HMOs. The
new law provides uniform standards for "health insuring corporations," including
"provider sponsored organizations," and clarifies the status of certain "health
delivery networks" and "intermediary organizations" that contract on the basis
of capitation or other risk-based reimbursement arrangements. MCULA provides
that all existing HMOs automatically become health insuring corporations. The
effect of this legislation is that it allows greater competition from provider
organizations.
As an HMO, Health Plans is required to provide unlimited "basic health
care services" to its members. These services include: physician services;
inpatient hospital services; outpatient medical services; worldwide emergency
health care services; diagnostic laboratory services; diagnostic and therapeutic
radiological services; and preventative health care services, including, but not
limited to, voluntary family planning services, infertility services, periodic
physical examinations, prenatal obstetrical care, and "well-child" care. "Basic
health care services" do not include dental care, mental health services or
experimental procedures. Health Plans is permitted to offer supplemental
benefits, such as podiatric care, mental health
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services, substance abuse treatment, home health services, prescription drugs
and physical therapy services.
An HMO may not cancel or refuse to renew the coverage of a member
because of health status or requirements for health care services. Each HMO is
also required to hold an annual open enrollment period, during which individuals
may enroll without regard to their health status or health care requirements.
Health Plans is required by Ohio to maintain a net worth of at least
10% of its liabilities, subject to a minimum net worth of $1.7 million. Health
Plans is also required to maintain a deposit with the Superintendent of
Insurance of $400,000. Health Plans is subject to periodic review and audit by
the ODI. State insurance law governs the types of investments an HMO may make.
INDIANA. To obtain a certificate of authority as an HMO, Health Plans was
required to file a detailed description of its proposed service area, plan of
operations, provider network, financial feasibility plan, and governance, in
addition to filing financial statements. Subject to certain limitations
established by the Commissioner of Insurance, it remains under a continuing
obligation to file with, and obtain the approval of, the Commissioner of
Insurance for any major modification of its operations, as described in its
application. Additionally, its evidences of coverage, rates, contracts with
providers and solicitation documents are subject to review and approval by the
Commissioner of Insurance.
As an HMO, Health Plans is required to provide unlimited "basic health
care services" to its members, when "medically necessary." These services
include: preventive care; inpatient and outpatient hospital and physician care;
diagnostic laboratory care; diagnostic and therapeutic radiological services;
and emergency care. "Basic health care services" do not include: mental health
services; substance abuse treatment; dental services; vision services; and
long-term rehabilitation treatment. An HMO may offer additional health care
services beyond the required "basic health care services." In addition,
mammography screening is a required service, subject to certain age conditions
and frequency limitations.
Indiana has a variety of alternative measures for calculating an HMO's
required minimum net worth. Under the various alternatives, Health Plans is
required to maintain a minimum net worth of approximately $13.7 million at
December 31, 1996. Indiana also has a deposit requirement of $250,000, but this
requirement is satisfied by Health Plans maintaining $400,000 on deposit with
the State of Ohio. Health Plans is subject to periodic review and audit by the
Indiana Department of Insurance. State insurance law governs the types of
investments an HMO may make.
KENTUCKY. Kentucky's HMO law is intended to complement the federal Health
Maintenance Organization Act of 1973, as amended (the "Federal Act"). Kentucky's
HMO code and regulations are not intended to be in conflict with the Federal Act
and the regulations thereunder. It is not clear, however, if the Kentucky HMO
code adopts the requirements of the Federal Act.
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To obtain a certificate of authority as an HMO in Kentucky, Health
Plans was required to file a detailed description of its proposed plan of
operations, provider network, finances and governance. It remains under a
continuing obligation to file with, and obtain the approval of, the Commissioner
of Insurance for any major modification of its operations, as described in its
application. Additionally, its evidences of coverage, rates, advertisements and
solicitation documents are subject to review and approval by the Commissioner of
Insurance.
Kentucky requires every HMO health plan to provide coverage for: a
newly-born child from the moment of birth without positive enrollment; low-dose
mammography screening meeting certain minimum standards; and medically necessary
procedures to correct temporomandibular joint disorders and craniomandibular jaw
disorders, where the HMO contract provides coverage for surgical or non-surgical
treatment of skeletal disorders.
Kentucky requires every group HMO health plan to offer the master
policyholder the option to purchase the following coverages: a specified minimum
treatment for alcoholism; inpatient and outpatient treatment of mental illness,
at least to the same extent and degree as coverage for the treatment of physical
illnesses; routine nursing care for a well newly-born child for up to five days
in a hospital nursery where the group policy provides maternity benefits; a
minimum of 60 days of home health care each year; and long-term health care. The
master policyholder is not required to purchase any of these group coverages.
An HMO may not cancel or refuse to renew the coverage of a member
because of his or her health status or requirements for health care services.
Each HMO is also required to hold an annual open enrollment period, during which
qualified individuals may enroll without regard to their health status or health
care requirements.
Health Plans is required by Kentucky to maintain a net worth of $1.25
million. Kentucky also has a $500,000 deposit requirement, $250,000 of which is
satisfied by the funds Health Plans maintains on deposit with the State of Ohio.
Health Plans is subject to periodic review and audit by the Kentucky Department
of Insurance. State insurance law governs the types of investments an HMO may
make.
Health Care Reform
FEDERAL REFORM. In response to the continued escalation of health care costs,
and in an effort to protect the Medicare trust fund, numerous packages aimed at
reforming the Medicare program have been introduced in Congress. If Medicare
spending persists at its current level, the Medicare trust fund is expected to
be insolvent shortly after the year 2000. Current Republican and Democratic
reform proposals are structured to encourage Medicare-eligible individuals to
join managed care organizations, thereby reducing costs to the Medicare program.
Not all reform proposals, however, would operate in favor of managed care
companies. Certain reforms propose revisions to the current capitation rate
methodology and could result in lower reimbursement amounts for managed care
companies and their participating providers. Other reforms could result in an
increase in competition for the
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<PAGE> 71
limited pool of health care dollars from Medicare beneficiaries. The current
proposals for federal legislation are expected to undergo significant revisions
prior to approval and implementation. The Company cannot predict what effect, if
any, these proposals will have on Health Plans if and when enacted. No assurance
can be given, however, that enactment of any federal and/or state health care
reforms will not have a material adverse effect on Health Plans' business.
MANAGED CARE LEGISLATION. A number of legislative initiatives have been proposed
at the state and federal levels, the effect of which would be to limit certain
arrangements used by managed care organizations to control the cost and to
enhance the quality of the medical care provided to their members. These
legislative initiatives, which include proposals labeled by their proponents as
"any willing provider," "patient protection" and "freedom of choice" acts,
typically attempt to protect specific classes of providers from competition. To
date, Kentucky is the only state in which Health Plans currently operates that
has adopted legislation of this nature affecting HMOs. There is no assurance
that similar managed care initiatives will not be adopted in the other states in
the future.
KENTUCKY. In 1994, Kentucky adopted a health reform act (the "Reform Act") that
has had, and is expected to continue to have, a wide-ranging effect on the
delivery and funding of health care in that state. Among its many provisions,
the Reform Act requires all insurers (including HMOs) to offer only certain
standard plans in an effort to make it easier for purchasers to compare
competing plans. The Reform Act requires insurers and HMOs to offer and issue
the basic health benefit plan on a "guaranteed-issue" basis, which means that no
applicant can be turned down except for nonpayment of premiums, thereby
requiring all carriers to issue coverage to each member of a group and to each
individual who applies, regardless of the individual's health. The Reform Act
further subjects all carriers to a limited "portability" requirement, with the
result that if a member switches plans, the new plan generally may not impose
new pre-existing condition limitations. (These reforms are very similar to those
subsequently required by HIPAA.) Insurers and HMOs must also use a "modified
community rating methodology" to determine premiums for all health benefit plans
issued or renewed to employers with 50 employees or less, individuals, and
participants in the Alliance described below. The Reform Act further establishes
pricing parameters which have the potential of limiting the amount of rate
increase a carrier may be able to implement without completing a rate hearing
process, thereby potentially limiting the opportunity for the carrier to achieve
an appropriate premium. In addition, the Reform Act incorporates an "any willing
provider" provision, which prohibits discrimination against any provider located
within the geographic coverage area of the plan who is willing to meet the
health plan's terms and conditions of participation. The Reform Act also creates
an exclusive, statewide health care coverage purchasing alliance (the
"Alliance") in which all state government employers are required to participate.
Individuals and county and local employers with 50 employees or less are
eligible to participate if they wish. Employees and individuals who obtain their
health coverage through the Alliance are able to choose from any of the carriers
certified by the Alliance as accountable health plans.
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<PAGE> 72
Health Plans was certified as an accountable health plan, but
voluntarily left the Alliance in 1996 rather than agreeing to bring its rates
below the threshold established by the Alliance. Dropping its rates to the level
required by the Alliance would likely have resulted in inadequate premium rates
to Health Plans. Leaving the Alliance resulted in the Company's loss of
approximately 3,200 members during January 1996.
OHIO. Ohio has a number of currently pending legislative proposals, including
"any willing provider" provisions, bills mandating coverage of certain benefits
or benefit levels, and bills regulating HMOs' conduct. One such bill is the
Health Plan Standardization Act, drafted by the Ohio State Medical Association.
This proposed legislation sets forth strict processes to which HMOs must adhere
when dealing with provider contracting and credentialing and performing
utilization review and quality assurance procedures.
INDIANA. The Indiana legislature considered several bills which would have
affected the operations of HMOs. The majority of these bills involved allowing
direct access of members to certain medical specialists, extending mental health
parity and providing state tax credits to businesses which offer mental health
benefits, and mandating specific grievance procedures for member complaints. The
legislature adjourned, however, without passing any significant new restrictions
on managed care.
EMPLOYEES
As of June 1997, the Company had approximately 550 employees, none of
whom are subject to a collective bargaining agreement. The Company believes that
its employee relations are good.
PROPERTIES
As of June 1997, the Company leased approximately 129,000 square feet
of office space in Cincinnati, Ohio, which serves as the Company's corporate
offices, and approximately 5,900 square feet of office space in Dayton, Ohio. In
June 1997, the lease arrangement for the majority of the Company's office
facilities was extended until April 1999.
LEGAL PROCEEDINGS
The Company is routinely involved in litigation matters arising in the
normal course of business. Management believes, based upon the advice of
counsel, that these actions and proceedings and losses, if any, resulting from
the final outcome thereof, will not be material in the aggregate to the
Company's consolidated financial position. See Notes 5 and 11(b) of Notes to
Consolidated Financial Statements for the year ended December 31, 1996.
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<PAGE> 73
MARKET FOR THE COMPANY'S COMMON
EQUITY AND RELATED SHAREHOLDER MATTERS
There is no established public trading market for the Common Shares nor
published quotations related to the Common Shares. Any trades of the Common
Shares are on an individually negotiated basis between eligible investors. To
the Company's knowledge, which is not complete, there have been a limited number
of trades in the Company's Common Shares since May 1996, negotiated among
eligible investors, at approximately $10.00 per share. The Shareholder Agreement
between the Company and the Foundation prohibits the Company from paying
dividends on its Common Shares until after March 15, 2001, unless certain
specific events, as defined in the Shareholder Agreement, occur prior to that
date. To date, no dividends have been paid. See Note 3 of Notes to Consolidated
Financial Statements for the year ended December 31, 1996.
As of September 10, 1997, there were 1,076 shareholders of record of
the Common Shares, consisting of 1,075 eligible investors and the Foundation.
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<PAGE> 74
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA AND OPERATING STATISTICS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Premium revenue $ 276,609 $ 267,127 $ 247,330 $ 246,233 $ 226,819
Management services revenue 13,277 15,124 10,174 3,042 2,206
Other operating revenue 1,941 589 1,562 60 21
--------- --------- --------- --------- ---------
Total operating revenue 291,827 282,840 259,066 249,335 229,046
Investment income (loss), net 5,692 12,385 (464) 5,824 5,134
Settlement expense (1) -- 28,000 -- -- 19,035
Net income (loss) 4,876 (15,353) 13,517 23,385 4,941
Earnings per common share .34
Pro forma earnings per common
share (2) .50
BALANCE SHEET DATA:
Total assets $ 149,788 $ 147,187 $ 128,334 $ 110,921 $ 88,608
Shareholders' equity 50,552 34,529 49,036 35,519 12,134
OPERATING STATISTICS:
Medical-expense ratio (3) 85.2% 85.9% 82.3% 81.2% 82.2%
Members at end of year:
Prepaid
Commercial 198,076 192,596 162,142 155,059 150,111
Medicaid (4) -- 12,138 7,064 6,453 5,252
--------- --------- --------- --------- ---------
198,076 204,734 169,206 161,512 155,363
Self-funded 85,050 88,577 85,916 19,536 18,021
--------- --------- --------- --------- ---------
Total 283,126 293,311 255,122 181,048 173,384
========= ========= ========= ========= =========
- --------------
<FN>
(1) Relates to the settlement of the THOMPSON litigation. See Note 5 of
Notes to Consolidated Financial Statements for the year ended December
31, 1996.
(2) Through September 30, 1995, the Company operated as a social welfare
organization under Section 501(c)(4) of the Internal Revenue Code and,
except for its for-profit subsidiary, accordingly, was not subject to
federal income taxes or certain accounting standards applicable to
for-profit entities. The pro forma earnings per common share is based
upon 13,500 issued and outstanding common shares and the Company's net
income after giving effect to (i) the estimated provision for income
taxes that would have been reported in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
had the Company filed income tax returns as a for-profit corporation;
(ii) the application of Statement of Financial Accounting Standards No.
115, "Accounting for Investments in Certain Debt and Equity Securities"
to the accounting for marketable securities; and (iii) a reduction in
other expenses of $28,000 relating to the settlement of the THOMPSON
litigation. The pro forma tax provision is based on an assumed
effective tax rate of 35.5%. See Note 12(a) of Notes to Consolidated
Financial Statements for the year ended December 31, 1996.
(3) Calculated as total health care services expense as a percentage of
premium revenue, this ratio indicates the percentage of premium
revenues expended on providing total health care services to the
Company's members.
(4) Effective June 30, 1996, the Company assigned its Medicaid provider
agreement with the Ohio Department of Human Services to another health
maintenance organization, and no longer serves Medicaid members. See
Note 4 of Notes to Consolidated Financial Statements for the year ended
December 31, 1996.
</TABLE>
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<PAGE> 75
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTERIM
(In thousands, except member and PMPM data)
OVERVIEW
THREE MONTHS ENDED JUNE 30, 1997
- --------------------------------
During the three months ended June 30, 1997 (the "1997 quarter"), the
Company generated net income of $1,892, as compared to $4,099 for the
corresponding prior year quarter (the "1996 quarter"). Comparisons of the 1997
and 1996 quarterly results were significantly impacted by the following
transactions:
1997 Quarter
------------
- a $1,412 reduction in health care services expense (physician
- $1,212; hospital - $200) recorded, due to revising estimates
of the net amount incurred in connection with the Company's
risk/reward sharing arrangements with providers, a significant
portion of which related to the first quarter of 1997;
- a $788 refinement downward of the Company's estimates of
hospital services expenses which related to periods prior to
the 1997 quarter; and
- $521 of other operating revenue recorded in connection with
processing the run-out of claims for a large self-funded
employer group whose administrative services management
agreement with the Company expired on March 31, 1997.
1996 Quarter
------------
- $4,554 pre-tax gain on the June 30, 1996 assignment of the
Company's Medicaid contract; and
- $540 earned in connection with the risk sharing agreement with
the Company's pharmacy vendor.
An increase in member months and premium rates resulted in the Company
experiencing a 6.9% increase in premium revenue from prepaid commercial products
compared to the 1996 quarter. Management services revenue decreased 16.8%,
reflecting a 42.5% decrease in member months for the Company's self-funded
products, as further discussed below, partially offset by administrative fee
rate increases which took effect during the first half of 1997. The Company also
experienced an improvement in overall health care services expense levels in the
1997 quarter. These trends, as well as a retention rate of approximately 91% for
groups renewing during the first six months of 1997, were achieved in an
increasingly competitive environment within the Company's service area. The
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<PAGE> 76
aforementioned prepaid commercial membership growth, rate increases and improved
health care service expense levels combined with the following partially
offsetting factors to yield $1,766 of operating income for the 1997 quarter, as
compared to an operating loss of $410 for the 1996 quarter:
- loss of premium revenues recognized from the Company's Special
Health Medicaid product upon assignment of the Medicaid
contract -- gross margin of $688 generated during the 1996
quarter;
- decreased self-funded membership, as discussed below;
- continuation of industry-wide health care cost inflation
trends; and
- gross margin contributed by the Company's managed Medicare
("Senior Health") product and revenues from the Workers'
Compensation product, both of which began covering their first
member/covered life in March 1997, more than offset by
approximately $3,090 of administrative expenses related to
such new products and the continuing expansion efforts into
the Dayton, Ohio service area.
It is anticipated that these new products, as well as the
service area expansion, will continue to negatively impact
operating income for the year ending December 31, 1997,
offsetting otherwise anticipated profitable operations for the
Cincinnati Commercial Health Plan.
SIX MONTHS ENDED JUNE 30, 1997
- ------------------------------
During the six months ended June 30, 1997 (the "1997 period"), the
Company generated net income of $1,530, compared to $1,705 in the corresponding
prior year period (the "1996 period"), and operating losses of $190 and $3,954
were reported in each of the respective periods. These comparative results can
primarily be attributed to the year-to-date effects of the factors previously
noted in the discussion of quarterly results.
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<PAGE> 77
RESULTS OF OPERATIONS
The following table sets forth selected operating data, expressed as a
percentage of total operating revenues and/or on a PMPM basis, selected member
data and medical-expense ratios:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Premiums 94.6% 94.6% 94.5% 94.9%
Management services revenue 3.9 4.6 4.6 4.6
Other 1.5 .8 .9 .5
-------- -------- ---------- ----------
Total 100.0 100.0 100.0 100.0
-------- -------- ---------- ----------
OPERATING EXPENSES:
Health care services 78.1 81.8 78.9 83.4
Selling, general and administrative 19.5 18.7 21.2 19.3
-------- -------- ---------- ----------
Total 97.6 100.5 100.1 102.7
-------- -------- ---------- ----------
Operating income (loss) 2.4 (.5) (.1) (2.7)
Investment income, net 1.7 1.3 1.8 1.4
Gain on assignment of Medicaid
contract -- 6.1 -- 3.1
-------- -------- ---------- ----------
Income before income taxes 4.1 6.9 1.7 1.8
Provision for income taxes 1.6 1.4 .6 .7
-------- -------- ---------- ----------
Net income 2.5% 5.5% 1.1% 1.1%
======== ======== ========== ==========
MEDICAL-EXPENSE RATIO* 82.6% 86.5% 83.5% 87.9%
PMPM DATA:
Premium revenue
Commercial $ 119.01 $ 114.39 $ 118.34 $ 114.19
Medicare 381.52 -- 381.52 --
Medicaid -- 138.53 -- 138.97
Management services revenue 19.18 13.26 17.54 13.17
Health care services expense 98.61 100.31 99.00 101.75
Selling, general and
administrative expense 19.63 16.12 20.05 16.47
MEMBER MONTHS:
Prepaid
Commercial 587,421 571,873 1,171,947 1,142,941
Medicare 952 -- 952 --
Medicaid -- 38,684 -- 77,496
-------- -------- ---------- ----------
588,373 610,557 1,172,899 1,220,437
Self-funded 149,192 259,387 381,613 520,992
-------- -------- ---------- ----------
Total 737,565 869,944 1,554,512 1,741,429
======== ======== ========== ==========
<FN>
* Health care services expense as a percentage of premiums.
</TABLE>
70
<PAGE> 78
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1996
Premium Revenue
The 0.7% decrease in premium revenue during the 1997 quarter results
primarily from the assignment of the Company's Special Health Medicaid contract.
Excluding Medicaid premium revenues of $5,359 from the 1996 quarter, premium
revenues for the 1997 quarter increased 7.4% over the same period last year.
This increase is primarily attributable to a 2.7% increase in prepaid commercial
member months and a 4.0% increase in the weighted average PMPM premium for such
products, reflecting a recently improved pricing environment compared to flat or
decreasing pricing during 1996. Additionally, the Company recorded premium
revenues of $363 during the second quarter of 1997 related to its new Senior
Health Medicare product.
Management Services Revenue
The 16.8% decrease in management services revenue from self-funded
employer groups results primarily from the combined effects of the March 31,
1997 expiration of the Company's administrative services management agreement
with a significant employer group and an approximate 22% decrease in the
membership of a large self-funded employer group which, consistent with the July
1996 announcement of its multi-year renewal commitment, opted to offer its
employees, as an additional option, a competitor's managed care plan as of
January 1, 1997. The impact of the loss of self-funded membership was partially
offset by 1997 rate increases, as evidenced by the 44.6% increase in management
services revenue on a PMPM basis.
Other Operating Revenue
The nearly two-fold increase in other operating income is attributable
to 1) the $521 earned during the 1997 quarter for processing the run-out of
claims for the former self-funded employer group referred to above; 2) $113 of
revenue generated in the 1997 quarter by the Company's new Workers' Compensation
product; and 3) $175 earned in connection with the risk sharing agreement with
one of the Company's large self-funded employer groups. The 1996 quarter
included $540 earned in connection with the risk sharing agreement with the
Company's pharmacy vendor versus $189 earned in the 1997 quarter.
Health Care Services Expense
The 5.3% decrease in total health care services expense during the 1997
quarter reflects 1) the assignment of the Medicaid contract, which had higher
PMPM medical expenses relative to commercial membership; 2) a .3% decrease in
physician expenses on a PMPM basis; 3) a 7.1% decrease in hospital expenses on a
PMPM basis; and 4) an 8.2% increase in pharmacy expenses on a PMPM basis,
resulting primarily from continued industry-wide drug cost inflation and
slightly higher utilization levels.
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<PAGE> 79
In addition to the Medicaid contract assignment, the decreases in PMPM physician
and hospital expenses result in large part from the net effects of:
Physician
---------
- increased health care professional services utilization
levels;
- decreased average cost per service resulting from changes in
the mix of service provided; and
- a reduction in the estimated amount incurred in connection
with the Company's risk/reward sharing arrangements with
health care professionals.
Hospital
--------
- increased utilization and decreased cost per service;
- a decrease in hospital service reimbursement rates paid to
certain core hospitals;
- an increase in amounts earned in connection with the Company's
hospital risk/reward sharing arrangements, due to the
hospitals' performance against established cost of hospital
services and quality targets; and
- a refinement downward in the 1997 quarter of the Company's
estimates of hospital claims expense recorded prior to the
quarter.
As a result of the 1.7% decrease in health care services expense on a
PMPM basis, in conjunction with the 3.0% increase in the weighted average PMPM
premium, the Company's medical-expense ratio decreased to 82.6% in the 1997
quarter from 86.5% in the 1996 quarter.
Selling, General and Administrative Expenses
The 3.3% increase in expenses for selling, general and administrative
costs in the 1997 quarter reflects the continued impact of expenses incurred for
investment in new products and geographic expansion, including approximately
$3,090 of expenses incurred in connection with the previously discussed Senior
Health and Workers' Compensation products and expansion into the Dayton Service
Area -- an approximate $2,515 increase in such expenses over the 1996 quarter.
Increased expenses are substantially comprised of 1) advertising and printed
materials, primarily related to the new products and service area expansion; and
2) higher computer software amortization. Partially offsetting these increases
were reductions in 1) compensation, reflecting the net effects of an approximate
4% reduction in employees since the 1996 quarter, salary increases in the normal
course of business and a shift in the relative mix of the Company's workforce;
and 2) a refinement downward of certain expenses estimated in prior periods.
Investment Income
During the 1997 quarter, the Company experienced a 28.3% increase in
investment income compared to the 1996 quarter. This period-over-period increase
can primarily be attributed to an increase in the average outstanding cash, cash
equivalent and investment portfolio balance, due largely to the proceeds from
the May 1, 1996 stock offering and the June 30, 1996 assignment of the Special
Health Medicaid contract and, to a lesser extent, higher short-term interest
rates in 1997.
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<PAGE> 80
Income Tax Expense
Income tax expense has been recorded at the rate applicable to the
Company, currently estimated at an effective tax rate of approximately 38%. This
rate may ultimately be adjusted based upon 1997 full year results.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
With the exception of certain factors noted in the analysis of health
care services expense below, the majority of the factors discussed in the
quarter-to-quarter analysis were also the primary factors contributing to the
results for the 1997 period, as compared to the 1996 period. Accordingly, the
trends between the 1997 and 1996 year-to-date results are consistent in all
material respects with the previously analyzed quarter-to-quarter trends.
Health Care Services Expense
The 6.5% decrease in total health care services expense during the 1997
period reflects 1) the assignment of the Medicaid contract, which had higher
PMPM medical expenses relative to commercial membership; 2) a 1.8% decrease in
physician expenses on a PMPM basis; 3) a 9.2% decrease in hospital expense on a
PMPM basis; and 4) a 12.7% increase in pharmacy expenses on a PMPM basis,
resulting primarily from continued industry-wide drug cost inflation and
slightly higher utilization levels.
In addition to the Medicaid contract assignment, the decreases in PMPM
physician and hospital expenses result in large part from the net effects of:
Physician
---------
- increased health care professional services utilization
levels;
- decreased average cost per service resulting from changes in
the mix of service provided; and
- a reduction in the estimated amount incurred in connection
with the Company's risk/reward sharing arrangements with
health care professionals.
Hospital
--------
- increased utilization and decreased cost per service;
- a decrease in hospital service reimbursement rates paid to
certain core hospitals;
- a year-to-date decrease in amounts earned in connection with
the Company's hospital risk/reward sharing arrangements, due
to the hospitals' performance against established cost of
hospital services and quality targets; and
- a refinement downward in the 1997 period of the Company's
prior years' estimates of hospital claims expense.
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<PAGE> 81
As a result of the 2.7% decrease in health care services expense on a
PMPM basis, in conjunction with the 2.4% increase in the weighted average PMPM
premium, the Company's medical-expense ratio decreased to 83.5% in the 1997
period from 87.9% in the 1996 period.
FINANCIAL CONDITION
Net cash totaling $4,251 was used in operations during the first six
months of 1997, resulting primarily from the net activity in certain of the
Company's balance sheet components since year-end 1996. Most significant were 1)
a $5,480 net decrease in medical costs payable, reflecting the combined impact
of claims payments made since year-end 1996 and the refinement downward in 1997
of the Company's prior years' estimates of hospital claims; 2) a $3,613 decrease
in premiums receivables, due in large part to the timing of receiving payments
of amounts due; and 3) a $3,268 net decrease in provider risk pool liabilities,
reflecting the combined impact of the Company's payment during the 1997 period
of amounts owed under the risk/reward sharing arrangements for 1996 and the
year-to-date accumulation of amounts owed under such arrangements for the
current year. In addition, $4,161 of cash was used by investing activities
during the six-month period, reflecting the net cash impact of investment
portfolio transactions and capital expenditures.
As of June 30, 1997, the Company's investment portfolio was comprised
of debt securities (75.3%), equity-based mutual funds (14.0%) and fixed income
mutual funds (10.7%), all of which are available to meet current obligations and
classified as securities available-for-sale in the accompanying Consolidated
Balance Sheet. Favorable market conditions resulted in unrealized gains on the
investment portfolio totaling $888, net of taxes, as of June 30, 1997 compared
to unrealized losses totaling $21 as of December 31, 1996. Such net unrealized
gains and losses are reflected as a separate component of equity in the
accompanying Consolidated Balance Sheets. The Company believes that its cash and
cash equivalents, investment portfolio and the $15,000 available under its debt
facility will be sufficient to fund its liquidity needs for at least the next
twelve months.
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<PAGE> 82
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ANNUAL
(In thousands, except member and PMPM data)
OVERVIEW
During 1996, the first full year the Company operated as a taxable,
for-profit company, net income of $4,876 was generated, as compared to a $15,353
net loss in 1995 and net income of $13,517 in 1994. See Note 1 of Notes to
Consolidated Financial Statements for the year ended December 31, 1996 regarding
the Company's October 1, 1995 restructuring (the "Restructuring"). Comparisons
of the 1996 and 1995 year-to-year results were significantly impacted by the
following transactions not related to operations:
1996
----
- Recognition of a $4,554 gain on the assignment of the
Company's Medicaid contract with the Ohio Department of Human
Services.
1995
----
- Recording of a $28,000 settlement expense in accordance with
the THOMPSON litigation settlement agreement as a result of
the Restructuring.
- Receipt of a $3,350 payment in connection with the termination
of an agreement with another managed care entity.
Operating in an increasingly competitive environment and following two
years of flat or decreasing premium rates, the Company experienced a $2,473
operating loss during 1996, as compared to a $3,088 operating loss in 1995 and
operating income of $13,981 in 1994. Despite certain factors which contributed
positively to operating results in this competitive environment, most notably 1)
a 5.0% increase in member months for prepaid commercial products; 2) a modest
increase in average premium rates for fully-insured groups renewing during the
year; and 3) an approximate $5,875 decrease in the amount incurred in connection
with the Company's hospital risk/reward sharing arrangements, due to the
hospitals' performance against established cost of hospital services and quality
targets, 1996 operating results reflect the offsetting effects of the following
factors:
- loss of premium revenues recognized from the Company's Special
Health Medicaid product as a result of the June 30, 1996
assignment of the Medicaid contract;
- 6.7% decrease in self-funded membership, resulting largely
from the downsizing activities of two large self-funded
employer groups;
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<PAGE> 83
- increased health care professional services utilization levels
and drug costs compared to 1995; and
- continued industry-wide health care cost inflation trends,
particularly costs of pharmacy benefits.
Finally, results reflect selling, general and administrative
expenditures related to servicing membership growth, developing new products and
expanding into a new geographic market, variations in the Company's net
investment income and the recognition of a tax provision in 1996.
76
<PAGE> 84
RESULTS OF OPERATIONS
The following table sets forth selected operating data, expressed as a
percentage of total operating revenues and/or on a PMPM basis, selected member
data and medical-expense ratios:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
OPERATING REVENUES:
Premiums 94.8% 94.4% 95.5%
Management services revenue 4.5 5.4 3.9
Other .7 .2 .6
---------- ---------- ----------
Total 100.0 100.0 100.0
---------- ---------- ----------
OPERATING EXPENSES:
Health care services 80.7 81.1 78.6
Selling, general and administrative 20.1 20.0 16.0
---------- ---------- ----------
Total 100.8 101.1 94.6
---------- ---------- ----------
Operating income (loss) (.8) (1.1) 5.4
Investment income, net 1.9 4.4 (.2)
Other non-operating income (expense) 1.6 (8.7) --
---------- ---------- ----------
Income (loss) before income taxes 2.7 (5.4) 5.2
Provision for income taxes 1.0 -- --
---------- ---------- ----------
Net income (loss) 1.7% (5.4%) 5.2%
========== ========== ==========
MEDICAL-EXPENSE RATIO* 85.2% 85.9% 82.3%
PMPM DATA:
Premium revenue
Commercial $ 114.46 $ 114.25 $ 123.49
Medicaid 138.97 138.44 140.96
Management services revenue 12.84 13.64 13.16
Health care services expense 98.15 99.08 102.27
Selling, general and administrative expense 17.10 16.49 15.00
MEMBER MONTHS:
Prepaid
Commercial 2,322,619 2,211,676 1,908,301
Medicaid 77,496 104,367 82,753
---------- ---------- ----------
2,400,115 2,316,043 1,991,054
Self-funded 1,033,915 1,108,694 772,826
---------- ---------- ----------
Total 3,434,030 3,424,737 2,763,880
========== ========== ==========
<FN>
* Health care services expense as a percentage of premiums.
</TABLE>
77
<PAGE> 85
1996 COMPARED TO 1995
Premium Revenue
The 3.5% increase in premium revenue during 1996 reflects 1) the June
30, 1996 assignment of the Company's Medicaid contract, on which approximately
$10,770 of premiums were recognized during 1996 prior to assignment, as compared
to approximately $14,450 during 1995; 2) a 5.0% increase in member months for
the Company's prepaid commercial products; and 3) a .2% increase in the weighted
average PMPM premium on prepaid commercial products. The slight increase in
weighted average PMPM premium on prepaid commercial products primarily can be
attributed to the effects of the modest average increase in premium rates on
1996 renewals being substantially offset by the effects of continued migration
of the customer base to the Company's more cost-effective products and benefit
structures.
Management Services Revenue
The 12.2% decrease in management services revenue from self-funded
employer groups results primarily from the combined effects of the 6.7% decrease
in self-funded membership, due largely to the downsizing activities of two large
self-funded employer groups and the net effects of retroactive rate adjustments
with a self-funded employer group negotiated during 1996 and 1995.
In September 1996, the Company was informed by a customer accounting
for approximately 33% of the Company's total self-funded members that the health
care services management agreement between the Company and the customer, which
expires March 31, 1997, would not be renewed. Management services revenue
received from the customer during 1996 and 1995 totaled approximately $3,850 and
$4,400, respectively. Contributions to operating income from the contract have
historically not been material to the Company's total results of operations due
to the operating expenses associated with the administration of the contract and
providing services to the customer's members.
In July 1996, the Company was successful in receiving a commitment for
the renewal of a multi-year contract, which began January 1, 1997, with an
existing customer that accounts for approximately 39% of the Company's total
self-funded members. While the customer opted to also offer another competitor's
managed care plan, the Company retained approximately 78% of its existing
membership base from this customer.
Other Operating Revenue
The increase in other operating revenue reflects increases in the
amounts earned in connection with risk/reward sharing arrangements with two
vendors ($540 related to the Company's pharmacy benefit administrator for the
contract year ended May 1996 and $486 related to the Company's out-of-area
coverage provider) and net increases in revenue from various miscellaneous
sources.
78
<PAGE> 86
Health Care Services Expense
The 2.7% increase in total health care services expense during 1996
reflects 1) a 3.6% increase in prepaid member months, including a 25.7% decrease
in member months related to the Company's former Medicaid product as a result of
the assignment of the contract on June 30, 1996; 2) a 2.1% increase in physician
expenses on a PMPM basis; 3) a 7.1% decrease in hospital expenses on a PMPM
basis; and 4) a 7.8% increase in pharmacy services costs on a PMPM basis,
resulting largely from continued industry-wide drug cost inflation.
The 2.1% increase in PMPM physician expenses reflects the net effects
of:
- increased health care professional services utilization levels
and relatively stable average cost per service; and
- refinement downward of the Company's estimate of physician
claims expense in 1995.
The 7.1% decrease in hospital expenses on a PMPM basis can be
attributed primarily to the net effects of:
- negotiation of more favorable terms in the new hospital
contracts, which contributed to decreased amounts being
incurred in connection with the Company's hospital risk/reward
sharing arrangements, due to the hospitals' performance
against established cost of hospital services and quality
targets;
- decreased utilization, relatively stable average outpatient
cost per service and increased average inpatient cost per
service, reflecting the transition of certain less complex
services to outpatient settings; and
- refinement downward of the Company's prior year's estimate of
hospital claims expense during 1995.
As a result of the .9% decrease in health care services expense on a
PMPM basis outpacing the less than .1% decrease in the overall weighted average
PMPM premium, the Company's medical-expense ratio decreased to 85.2% in 1996
from 85.9% in 1995.
During the last two quarters of 1996, the Company began implementation
of several initiatives designed to decrease health care services expense,
particularly the pharmacy expense component. However, there is no assurance that
the benefits of such efforts will be realized.
Selling, General and Administrative Expenses
The 4.0% increase in expenses for selling, general and administrative
costs in 1996 largely reflects the continued effect of expenses incurred in
connection with infrastructure and new product investments made in order to
raise the standard of service provided to current members, to service
anticipated membership growth and to manage medical cost inflation effectively.
Included are approximately $3,300 of expenses incurred in connection with
developing the Company's Medicare and Workers' Compensation products and
expanding into the Dayton, Ohio market, none of which generated revenues in
1996. Increased expenses are
79
<PAGE> 87
substantially comprised of 1) compensation, reflecting routine salary
adjustments and a 5% net increase in the average number of employees over 1995,
largely to support the aforementioned new initiatives; 2) commissions paid to
sales brokers, as an increased number of smaller employer groups are being sold
through this channel; and 3) depreciation and amortization expense, relating to
additional investments in computer hardware and software and payments related to
the Company's medical group assistance program. These factors were partially
offset by a lower amount of employee incentive compensation recorded in 1996, as
compared to 1995, and the fact that 1995 included approximately $1,600 of
expenses incurred in connection with the Restructuring.
Investment Income
During 1996, the Company experienced a $6,693 decrease in net
investment income as compared to 1995. This decline can primarily be attributed
to 1) a decrease in the average outstanding portfolio balance, due largely to
funding the $28,000 THOMPSON litigation settlement escrow account in October
1995; and 2) a $5,628 decrease in net realized gains on investment sales, as the
Company liquidated a substantial portion of its investment portfolio during 1995
in preparation for the Restructuring and the THOMPSON litigation settlement
payment. As a result of 1995's favorable market conditions, this liquidation
gave rise to significant realized gains in 1995.
Other Non-Operating Income (Expense)
During 1996, the Company recognized a $4,554 gain on the assignment of
its Medicaid contract. See Note 4 of Notes to Consolidated Financial Statements
for the year ended December 31, 1996.
The 1995 results included the $3,350 payment received in connection
with the termination of an agreement with another managed care entity,
representing reimbursement for expenses incurred in 1994 and 1995 for
negotiating and implementing infrastructure changes to provide services under
the agreement, the cost of negotiating termination of the agreement and an
element of compensation for potential lost profits the Company may have realized
under the terms of the agreement.
The 1995 results also included the $28,000 THOMPSON litigation
settlement expense recorded in connection with the Restructuring, which stemmed
from the 1988 settlement of a judgment against the Company.
Income Tax Expense
Income tax expense has been recorded at an effective tax rate of 37.3%
in 1996, compared to no expense in 1995. See Note 9 of Notes to Consolidated
Financial Statements for the year ended December 31, 1996.
80
<PAGE> 88
1995 COMPARED TO 1994
Premium Revenue
The 8.0% increase in premium revenue during 1995 reflects a 16.3%
increase in member months for the Company's prepaid products, offset by a 7.1%
decrease in the weighted average PMPM premium on such products. The decrease in
weighted average PMPM premium on prepaid products can primarily be attributed to
the Company's decision to decrease overall premium rates and the continued
migration of the customer base to the Company's more cost-effective products and
benefit structures.
Management Services Revenue
The 48.7% increase in management services revenue from self-funded
employer groups resulted primarily from the 43.5% increase in self-funded
membership.
Other Operating Revenue
The decrease in other operating revenue reflects a $1,363 decrease in
the amount earned in connection with the risk/reward sharing arrangement with
the Company's out-of-area coverage provider and net increases in revenue from
various miscellaneous sources.
Health Care Services Expense
The 12.7% increase in total health care services expense during 1995
reflects 1) the 16.3% increase in prepaid member months; 2) an 8.7% decrease in
physician expenses on a PMPM basis; 3) a 1.1% increase in hospital expenses on a
PMPM basis; and 4) a 5.2% increase in pharmacy services costs on a PMPM basis.
The 8.7% decrease in PMPM physician expenses resulted in large part from
the net effects of:
- the mix of frequency and cost of service;
- a reduction in the estimated amount incurred in connection
with the Company's risk/reward sharing arrangements with
health care professionals; and
- refinement of the Company's estimate of physician claims
expense.
The 1.1% increase in hospital expenses on a PMPM basis can be attributed
primarily to the net effects of:
- decreased inpatient utilization, offset by increased inpatient
cost per day, increased outpatient utilization and decreased
outpatient cost per service;
- refinement of the Company's estimate of hospital claims
expense;
- a decrease in the level of hospital expenses covered by third
parties; and
- a decrease in expenses incurred in connection with the
Company's hospital risk/reward sharing arrangements, due to
the hospitals' performance against established cost of
hospital services targets.
81
<PAGE> 89
As a result of the 7.1% decrease in the weighted average PMPM premium
outpacing the 3.1% decrease in health care services expense on a PMPM basis, the
Company's medical-expense ratio increased to 85.9% in 1995 from 82.3% in 1994.
Selling, General and Administrative Expenses
The 36.2% increase in expenses for selling, general and administrative
costs in 1995 largely reflects the 23.9% growth in overall member months, the
approximate $1,600 of expenses incurred in connection with the Restructuring and
the effect of expenses incurred in connection with infrastructure and new
product investments made in order to raise the standard of service provided to
current members, to service anticipated membership growth and to manage medical
cost inflation effectively.
Investment Income
During 1995, the Company experienced a $12,385 net gain on its
investment portfolio, compared to a $464 net loss in 1994. This 1995 net gain
reflected the effects of 1) a larger balance of equity securities being held
during 1995; and 2) the aforementioned liquidation of a substantial portion of
the Company's investment portfolio during 1995 in preparation for the
Restructuring and the Thompson litigation settlement payment, which gave rise to
significant realized gains.
Other Non-Operating Income (Expense)
During 1995, the Company recognized the $3,350 and $28,000
non-recurring items discussed in the Overview and the 1996 to 1995 comparative
analysis.
FINANCIAL CONDITION
Reflecting the receipt of net cash proceeds of $12,015 from the May
1996 stock offering and $4,554 from the June 1996 Medicaid contract assignment,
the Company's cash and cash equivalents increased $25,975 during 1996. Of this
total increase, $9,969 was provided by operations, as compared to $10,637 in
1995. This decrease in cash from operations can largely be attributed to the net
effects of the aforementioned decrease in management services revenue and the
overall changes in certain of the Company's balance sheet components. See the
Consolidated Statements of Cash Flows for the years ended December 31, 1996 and
1995.
As of December 31, 1996, the Company maintained an investment portfolio
with a market value of $70,436 which is available to meet current obligations
and is classified as available-for-sale in the accompanying Consolidated Balance
Sheet. The available-for-sale investment portfolio was comprised of debt
securities (79.6%), equity-based mutual funds (11.5%) and fixed income mutual
funds (8.9%) at December 31, 1996. The $17,621 increase in net cash provided by
the Company's investing activities in 1996 reflects the assignment of the
Medicaid contract and the combined net effects of 1) decreased capital
expenditures; 2) the significant level of investment portfolio transactions
during 1995 in preparation for the
82
<PAGE> 90
Restructuring and the THOMPSON litigation settlement payment; and 3) the 1995
funding of such litigation settlement.
Reflecting the Company's ongoing commitment to upgrade its management
information systems, capital expenditures and the portion thereof related to
computer hardware and software totaled $2,851 and $2,341, respectively, during
1996, and $6,298 and $3,866, respectively, during 1995. The Company expects to
make capital expenditures of approximately $1,280 during 1997, with the majority
related to computer hardware and software.
The Company believes that its cash and cash equivalents, investment
portfolio and credit facility will be sufficient to fund its liquidity needs for
at least the next twelve months, including capital expenditures and current
commitments. See Note 11 of Notes to Consolidated Financial Statements for the
year ended December 31, 1996.
INFLATION
While the rate of inflation has remained relatively stable in recent
years, health care costs have been rising at a rate consistent with or above the
consumer price index. There are various means available to the Company to reduce
the negative effects of inflation, including the adjustment of premium rates. In
addition, the effects of inflation on operations are mitigated by the Company's
cost control measures and risk/reward sharing arrangements with various health
care providers. There is no assurance that the Company's efforts to reduce the
impact of inflation will be successful in the future or that future premium rate
adjustments will be commensurate with future health care cost increases
experienced by the Company.
CAUTIONARY STATEMENT
The information set forth above may include "forward-looking"
information, as defined in the Private Securities Litigation Reform Act of 1995.
The CAUTIONARY STATEMENT filed by the Company on November 12, 1996 as part of
its Form 10-Q for the period ended September 30, 1996 is incorporated herein by
reference, and investors are specifically referred to such CAUTIONARY STATEMENT
for a discussion of factors that could affect the Company's operations and
"forward-looking" statements contained herein.
83
<PAGE> 91
BENEFICIAL OWNERSHIP OF COMMON SHARES BY
CERTAIN HOLDERS, DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information, as of September 10, 1997,
with respect to (a) each person known by the Company to be the beneficial owner
of more than 5% of the Common Shares; (b) each current director of the Company;
(c) each of the five most highly compensated officers in 1996; and (d) all
directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1) CLASS
- ------------------------ ------------------------ -----
<S> <C> <C>
The ChoiceCare Foundation 13,500,000 90.89%
One West Fourth Street
Suite 502
Cincinnati, Ohio 45202
Thomas D. Anthony, Esq. 14,000(2) *
Michael J. Barber, M.D. 35,250(2) *
Daniel W. Geeding, Ph.D. -- *
Daniel A. Gregorie, M.D. 137,333(2) *
Donald E. Hoffman -- *
James P. Long, Ph.D. -- *
Janet B. Reid, Ph.D. 2,000(3) *
Jane E. Rollinson 60,250(2) *
Donald A. Saelinger, M.D. 10,000 *
Richard G. Santangelo, M.D. 4,000 *
Michael Schmerler, M.D. 2,000 *
Byron J. Smith 11,500(2) *
Chad P. Wick -- *
*
All directors and executive officers as a 267,933(2) (3) 1.8%
group (13 persons)
- ---------------
<FN>
*Percent of class is less than 1%.
(1) The Securities and Exchange Commission has defined "beneficial owner" of a
security to include any person who has or shares voting power or investment
power with respect to any such security or who has the right to acquire
beneficial ownership of any such security within 60 days. Unless otherwise
indicated, (i) the amounts owned reflect direct beneficial ownership; and
(ii) the person indicated has sole voting and investment power.
(2) Includes Common Shares subject to Options under the Stock Incentive Plan.
The percentages shown in the foregoing table are calculated on the basis
that outstanding shares include Common Shares subject to Options under the
Stock Incentive Plan that are exercisable by directors and executive
officers within 60 days, in addition to the number of shares actually
outstanding. Such amounts are:
Thomas D. Anthony, Esq. 10,000 Jane E. Rollinson 56,250
Michael J. Barber, M.D. 31,250 Byron J. Smith 7,500
Daniel D. Gregorie, M.D. 133,333 All directors and executive
Officers as a group (13 persons)233,333
(3) Includes 2,000 shares to which Dr. Reid disclaims ownership; such shares
are owned by Dr. Reid's spouse.
</TABLE>
84
<PAGE> 92
SHAREHOLDER PROPOSALS
As described in the Company's proxy statement relating to its 1997
Annual Meeting of Shareholders, in order for proposals of shareholders to be
considered for inclusion in the proxy statement for the 1998 Annual Meeting of
Shareholders (if the Merger is not consummated), such proposals must have been
received by the Secretary of the Company by December 31, 1997.
OTHER MATTERS
The Board of Directors has no knowledge of any business to be
presented for consideration at the Special Meeting other than as described in
this Proxy Statement. Should any such other matters properly come before the
Special Meeting or any adjournment thereof, the persons named in the enclosed
Proxy will have discretionary authority to vote such Proxy in accordance with
their best judgment on such other matters and with respect to matters incident
to the conduct of the Special Meeting.
85
<PAGE> 93
CHOICECARE CORPORATION AND SUBSIDIARY
Index To Unaudited Interim Consolidated Financial Statements
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
for the Three Months Ended June 30, 1997 and June 30, 1996..............F-2
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
for the Six Months Ended June 30, 1997 and June 30, 1996................F-3
UNAUDITED CONSOLIDATED BALANCE SHEETS
as of June 30, 1997 and December 31, 1996...............................F-4
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
for the Six Months Ended June 30, 1997 and June 30, 1996................F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................................F-6
F-1
<PAGE> 94
CHOICECARE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
1997 1996
---- ----
<S> <C> <C>
REVENUES:
Premium revenue $ 70,270 $ 70,777
Management services revenue 2,862 3,440
Other operating revenue 1,138 638
-------- --------
Total Operating Revenues 74,270 74,855
-------- --------
EXPENSES:
Health care services
Physician services 27,454 28,573
Hospital services 21,299 23,780
Pharmacy services 9,269 8,891
-------- --------
Total Health Care Services 58,022 61,244
Selling, general and administrative expenses 14,482 14,021
-------- --------
Total Operating Expenses 72,504 75,265
OPERATING INCOME (LOSS) 1,766 (410)
OTHER INCOME (EXPENSE)
Investment income, net 1,287 1,003
Gain on assignment of Medicaid contract -- 4,554
-------- --------
INCOME BEFORE INCOME TAXES 3,053 5,147
PROVISION FOR INCOME TAXES 1,161 1,048
-------- --------
NET INCOME $ 1,892 $ 4,099
======== ========
EARNINGS PER SHARE $ .12 $ .29
======== ========
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 15,262 14,229
======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
F-2
<PAGE> 95
CHOICECARE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1997 1996
---- ----
<S> <C> <C>
REVENUES:
Premium revenue $ 139,049 $ 141,285
Management services revenue 6,694 6,859
Other operating revenue 1,348 761
--------- ---------
Total Operating Revenues 147,091 148,905
--------- ---------
EXPENSES:
Health care services
Physician services 55,423 58,717
Hospital services 42,114 48,297
Pharmacy services 18,575 17,161
--------- ---------
Total Health Care Services 116,112 124,175
Selling, general and administrative expenses 31,169 28,684
--------- ---------
Total Operating Expenses 147,281 152,859
OPERATING LOSS (190) (3,954)
OTHER INCOME (EXPENSE)
Investment income, net 2,659 2,153
Gain on assignment of Medicaid contract -- 4,554
--------- ---------
INCOME BEFORE INCOME TAXES 2,469 2,753
PROVISION FOR INCOME TAXES 939 1,048
--------- ---------
NET INCOME $ 1,530 $ 1,705
========= =========
EARNINGS PER SHARE $ .10 $ .12
========= =========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 15,057 13,865
========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
F-3
<PAGE> 96
CHOICECARE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 30,185 $ 38,597
Securities available-for-sale 75,101 70,436
Premiums receivable 4,202 7,815
Health care receivables 5,618 5,636
Other current assets 11,557 12,489
--------- ---------
Total Current Assets 126,663 134,973
PROPERTY AND EQUIPMENT, net 8,670 9,536
OTHER LONG-TERM ASSETS 6,193 5,279
--------- ---------
Total Assets $ 141,526 $ 149,788
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Medical costs payable $ 42,780 $ 48,260
Accounts payable and other accrued liabilities 13,679 15,043
Amounts due to vendor 5,338 6,200
Unearned premiums 5,480 5,133
Provider risk pool liability 9,036 12,304
--------- ---------
Total Current Liabilities 76,313 86,940
LONG-TERM LIABILITIES 12,222 12,296
--------- ---------
Total Liabilities 88,535 99,236
--------- ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, without par value,
4,000 shares authorized; none issued -- --
Common stock, without par or stated value,
45,000 shares authorized; 14,853 shares
issued and outstanding at June 30, 1997
and December 31, 1996 12,014 12,014
Net unrealized gains (losses) on securities
available-for-sale, net of taxes 888 (21)
Retained earnings 40,089 38,559
--------- ---------
Total Shareholders' Equity 52,991 50,552
--------- ---------
Total Liabilities and Shareholders' Equity $ 141,526 $ 149,788
========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
F-4
<PAGE> 97
CHOICECARE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1997 1996
---- ----
<S> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES $ (4,251) $ (2,298)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of investments 20,352 35,875
Purchases of investments (23,656) (30,763)
Proceeds from assignment of Medicaid contract -- 5,000
Purchases of property and equipment (857) (1,572)
-------- --------
Net cash (used in) provided by investing activities (4,161) 8,540
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock, net -- 12,025
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (8,412) 18,267
CASH AND CASH EQUIVALENTS, beginning of period 38,597 12,622
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 30,185 $ 30,889
======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
F-5
<PAGE> 98
CHOICECARE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
ChoiceCare Corporation (the "Company") is an Ohio for-profit corporation, which
is a majority-owned subsidiary of The ChoiceCare Foundation (the "Foundation"),
an Ohio not-for-profit corporation (formerly named Tristate Foundation for
Health and, prior to that, Midwest Foundation Independent Physicians
Association). The Foundation was organized in 1978 as a not-for-profit health
maintenance organization.
The consolidated financial statements for the interim periods included herein
have been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Although certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, management believes
that the disclosures are adequate to make the information presented not
misleading. Operating results for the interim periods are not necessarily
indicative of results for the full fiscal year. It is suggested that these
consolidated financial statements and notes be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1996.
Certain reclassifications have been made to the 1996 financial statements to
conform with the 1997 presentation.
NOTE 2. ACCOUNTING POLICIES
The consolidated financial statements presented in this report have been
prepared in accordance with the accounting policies described in Note 2 of Notes
to Consolidated Financial Statements included in the aforementioned Annual
Report on Form 10-K and reflect all adjustments consisting solely of normal
recurring adjustments which, in the opinion of management, are necessary for a
fair statement of the results of the interim periods presented. While management
believes that the procedures followed in the preparation of the consolidated
financial statements for the interim periods are reasonable, certain estimated
amounts are dependent upon current facts and other information that may change
subsequently during the fiscal year.
NOTE 3. POTENTIAL MERGER TRANSACTION
The Company entered into a definitive Agreement and Plan of Merger with Humana
Inc. ("Humana"), dated as of June 3, 1997, under which Humana will pay total
consideration of $250,000 in cash for the Company's outstanding common shares
and vested stock options, or $16.38 per outstanding share. Closing of the
transaction is subject to the approval of the Company's shareholders and the
satisfaction of certain conditions, including regulatory
F-6
<PAGE> 99
approval -- see Note 7. In addition, the transaction is subject to termination,
under certain conditions, including if the transaction has not closed on or
before January 31, 1998.
Subject to the successful completion of this transaction, Humana has committed
to reimburse the Company for transaction-related expenses. The June 30, 1997
Consolidated Balance Sheet reflects a receivable from Humana of $665 for
transaction-related expenses.
NOTE 4. PER SHARE DATA
Earnings per share are based on the weighted average number of shares of common
stock outstanding during the periods and the dilutive effect of the assumed
exercise of stock options, if any. In calculating the dilutive effect of the
assumed exercise of stock options, the market value per outstanding common share
was considered to be $16.38 for the period April 1, 1997 to June 30, 1997 in
light of the potential transaction discussed in Note 3.
NOTE 5. LONG TERM STOCK INCENTIVE PLAN
On March 5, 1997, the Company's Board of Directors (the "Board") resolved to
grant, subject to certain conditions, no more than approximately 666 stock
options during 1997 under the terms of the 1996 Long Term Stock Incentive Plan
(the "Stock Incentive Plan"). By resolution dated June 1, 1997, the Board
withdrew the March 5, 1997 resolutions concerning options in view of the
potential transaction discussed in Note 3, the closing of which will be
immediately preceded by the termination of the Stock Incentive Plan without
prejudice to holders of the options.
NOTE 6. COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENTS - The Company currently has in effect employment
agreements with its executive officers and certain of its other officers which
provide for severance or other payments in the event that employment is
terminated for reasons other than for cause. In addition, the agreements also
contain provisions related to a change in control (as defined in the employment
agreements), including lump-sum retention incentive payments that apply if an
applicable executive officer or other officer remains employed for a specified
period of time after a change in control and, in the agreements of executive
officers, lump-sum change in control severance payments in the event of their
termination after a change in control. The maximum contingent liability of the
Company related to such retention incentive payments and change in control
severance payments, pursuant to the employment agreements, is currently
estimated (based on 1997 salary levels and targeted incentives) to approximate
1) $3,200 in the event that only retention incentive payments are made; or 2)
$7,300 in the event that only change in control severance payments are made in
the event of termination.
LITIGATION - The Company is routinely involved in litigation matters arising in
the normal course of business. Management believes, based upon the advice of
counsel, that these actions and proceedings and losses, if any, resulting from
the final outcome thereof, will not be material in the aggregate to the
Company's consolidated financial position.
F-7
<PAGE> 100
NOTE 7. SUBSEQUENT EVENTS
CERTAIN REGULATORY MATTERS REGARDING POTENTIAL MERGER TRANSACTION - On July 31,
1997, the Attorney General of the State of Ohio approved the merger transaction
discussed in Note 3, and, on August 2, 1997, the period of time for antitrust
review of the proposed merger transaction under the federal Hart-Scott-Rodino
procedure expired without objection from the Federal Trade Commission or
Department of Justice.
F-8
<PAGE> 101
CHOICECARE CORPORATION AND SUBSIDIARY
Index To Annual Consolidated Financial Statements
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS.............................. F-10
CONSOLIDATED STATEMENTS OF OPERATIONS for the Years Ended
December 31, 1996, 1995 and 1994.................................... F-11
CONSOLIDATED BALANCE SHEETS as of December 31, 1996 and 1995.......... F-12
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS'
EQUITY for the Years Ended December 31, 1996, 1995 and 1994......... F-13
CONSOLIDATED STATEMENTS OF CASH FLOWS for the Years Ended
December 31, 1996, 1995 and 1994.................................... F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS............................ F-15
F-9
<PAGE> 102
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
ChoiceCare Corporation:
We have audited the accompanying consolidated balance sheets of
CHOICECARE CORPORATION AND SUBSIDIARY (the "Company") as of December 31, 1996
and 1995, and the related consolidated statements of operations, changes in
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1996. 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 financial position of ChoiceCare
Corporation and subsidiary as of December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
As explained in Note 2 to the financial statements, effective October
1, 1995, the Company changed its method of accounting for investments and income
taxes.
ARTHUR ANDERSEN LLP
Cincinnati, Ohio,
February 13, 1997
F-10
<PAGE> 103
CHOICECARE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Premium revenue $ 276,609 $ 267,127 $ 247,330
Management services revenue 13,277 15,124 10,174
Other operating revenue 1,941 589 1,562
--------- --------- ---------
Total Operating Revenue 291,827 282,840 259,066
--------- --------- ---------
EXPENSES:
Health care services
Physician services 110,302 104,264 98,159
Hospital services 90,916 94,446 80,338
Pharmacy services 34,349 30,758 25,126
--------- --------- ---------
Total Health Care Services 235,567 229,468 203,623
Selling, general and administrative expenses 58,733 56,460 41,462
--------- --------- ---------
Total Operating Expenses 294,300 285,928 245,085
OPERATING INCOME (LOSS) (2,473) (3,088) 13,981
OTHER INCOME (EXPENSE):
Investment income (loss), net 5,692 12,385 (464)
Gain on assignment of Medicaid contract 4,554 -- --
Income from agreement termination -- 3,350 --
Settlement expense -- (28,000) --
--------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES 7,773 (15,353) 13,517
PROVISION FOR INCOME TAXES 2,897 -- --
--------- --------- ---------
NET INCOME (LOSS) $ 4,876 $ (15,353) $ 13,517
========= ========= =========
UNAUDITED
PRO FORMA
INFORMATION
(NOTE 12(a))
EARNINGS (LOSS) PER COMMON SHARE $ .34 $ (.74)
========= =========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 14,361 13,500
========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
F-11
<PAGE> 104
CHOICECARE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 38,597 $ 12,622
Cash held in escrow -- 28,000
Securities available-for-sale 70,436 73,009
Premiums receivable 7,815 7,637
Health care receivables 5,636 6,251
Other current assets 12,489 5,545
--------- ---------
Total Current Assets 134,973 133,064
PROPERTY AND EQUIPMENT, net 9,536 10,258
OTHER LONG-TERM ASSETS 5,279 3,865
--------- ---------
Total Assets $ 149,788 $ 147,187
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Medical costs payable $ 48,260 $ 46,754
Accounts payable and other accrued liabilities 15,043 14,829
Amounts due to vendor 6,200 --
Unearned premiums 5,133 4,104
Provider risk pool liability 12,304 15,681
Settlement liability -- 28,000
--------- ---------
Total Current Liabilities 86,940 109,368
LONG-TERM LIABILITIES 12,296 3,290
--------- ---------
Total Liabilities 99,236 112,658
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 11)
SHAREHOLDERS' EQUITY:
Preferred stock, without par value,
4,000 shares authorized; none issued -- --
Common stock, without par or stated value,
45,000 shares authorized; 14,853 shares
issued and outstanding at December 31, 1996
(13,500 at December 31, 1995) 12,014 --
Net unrealized gains (losses) on securities
available-for-sale (21) 846
Retained earnings 38,559 33,683
--------- ---------
Total Shareholders' Equity 50,552 34,529
--------- ---------
Total Liabilities and Shareholders' Equity $ 149,788 $ 147,187
========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
F-12
<PAGE> 105
CHOICECARE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
NUMBER OF COMMON RETAINED
SHARES STOCK OTHER EARNINGS TOTAL
------ ----- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993 13,500 $ -- $ -- $ 35,519 $ 35,519
Net income -- -- -- 13,517 13,517
-------- -------- -------- -------- --------
BALANCE, December 31, 1994 13,500 -- -- 49,036 49,036
Net unrealized gains on
securities available-for-sale -- -- 846 -- 846
Net loss -- -- -- (15,353) (15,353)
-------- -------- -------- -------- --------
BALANCE, December 31, 1995 13,500 -- 846 33,683 34,529
Sale of common stock 1,353 12,015 -- -- 12,015
Purchase of treasury stock -- (1) -- -- (1)
Net unrealized losses on
securities available-for-sale -- -- (867) -- (867)
Net income -- -- -- 4,876 4,876
-------- -------- -------- -------- --------
BALANCE, December 31, 1996 14,853 $ 12,014 $ (21) $ 38,559 $ 50,552
======== ======== ======== ======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
F-13
<PAGE> 106
CHOICECARE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 4,876 $ (15,353) $ 13,517
Adjustments to reconcile net income (loss)
to net cash provided by operating activities--
Loss (gain) on sale of investments (308) (5,936) 3,748
Gain on assignment of Medicaid contract (4,554) -- --
Investment valuation reserve -- -- 2,243
Amortization of investment discounts, net (542) (123) (435)
Depreciation and amortization 3,538 2,382 1,298
Other, net 126 120 70
Change in--
Receivables 437 2,008 (9,289)
Other assets (7,737) (5,821) --
Medical costs payable 1,216 6,050 8,387
Accounts payable and other accrued
liabilities 59 5,444 482
Amounts due to vendor 6,200 -- --
Unearned premiums 1,029 (2,470) 1,490
Provider risk pool liability (3,377) (5,439) (1,171)
Settlement liability -- 28,000 (6,125)
Long-term liabilities 9,006 1,775 833
--------- --------- ---------
Net cash provided by operating activities 9,969 10,637 15,048
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments to escrow -- (28,000) --
Proceeds from sale of investments and
statutory deposits 55,059 224,051 149,096
Purchases of investments and statutory
deposits (53,216) (203,382) (160,994)
Proceeds from assignment of Medicaid contract 5,000 -- --
Purchases of property and equipment (2,851) (6,298) (5,160)
--------- --------- ---------
Net cash provided by (used in)
investing activities 3,992 (13,629) (17,058)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock, net 12,015 -- --
Purchase of treasury stock (1) -- --
--------- --------- ---------
Net cash provided by financing activities 12,014 -- --
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 25,975 (2,992) (2,010)
CASH AND CASH EQUIVALENTS, beginning of year 12,622 15,614 17,624
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of year $ 38,597 $ 12,622 $ 15,614
========= ========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
F-14
<PAGE> 107
CHOICECARE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
NOTE 1. BASIS OF PRESENTATION
ChoiceCare Corporation (the "Company") is an Ohio for-profit corporation, which
is a majority-owned subsidiary of ChoiceCare Foundation (the "Foundation"), an
Ohio not-for-profit corporation (formerly named Tristate Foundation for Health
and Midwest Foundation Independent Physicians Association). The Foundation was
organized in 1978 as a not-for-profit health maintenance organization. The
Company was formed to serve as a for-profit holding company for the assets and
liabilities relating to the Foundation's managed health care operations. Prior
to the Restructuring described below, the Company had no assets or operations.
Pursuant to a Plan of Restructuring (the "Restructuring") adopted by the Board
of Trustees of the Foundation on March 10, 1995 and approved by the Foundation's
member physicians on May 3, 1995, substantially all of the operating assets and
liabilities relating to the Foundation's managed health care operations were
transferred to the Company on October 1, 1995 in exchange for all of the issued
and outstanding common shares of the Company. The Foundation retained $25,000 of
cash and marketable securities to pursue its community benefit objectives.
Contemporaneously, the Company transferred the assets and liabilities of the
managed health care operations to its wholly-owned subsidiary, ChoiceCare Health
Plans, Inc. ("Health Plans;" formerly named Choice Benefits Administrators,
Inc.), in exchange for all of its issued and outstanding common shares. As a
result, since October 1, 1995, the managed health care operations formerly
conducted by the Foundation have been conducted by Health Plans.
These financial statements present the Company's consolidated financial position
as of December 31, 1996 and 1995 and its consolidated results of operations and
cash flows for each of the three years in the period ended December 31, 1996 as
if the Company had been operating as a separate, stand-alone entity for each
year presented. The Restructuring represented a combination of entities under
common control, and, accordingly, the combination was accounted for similar to a
pooling-of-interests. The Company's assets and liabilities have, therefore, been
recorded at the Foundation's historical costs. Assets remaining in the
Foundation, primarily investments and related income, have been excluded from
the accompanying financial statements.
Effective October 1, 1995, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes" and SFAS No. 115,
"Accounting for Investments in Certain Debt and Equity Securities." These
accounting standards were not applicable to the Company while it operated as a
not-for-profit corporation. See Notes 2, 6, and 9 regarding the impact of
adopting these standards and Note 12(a) regarding pro forma information which
gives effect to the impact of these accounting standards.
F-15
<PAGE> 108
The Company operates in the managed health care industry and, through Health
Plans, is licensed by the States of Ohio and Indiana and the Commonwealth of
Kentucky to provide and administer managed health care products and services to
employer groups, individuals and government-sponsored beneficiaries primarily in
Southwestern Ohio, Southeastern Indiana and Northern Kentucky. In addition, the
Company provides claims administrative services and medical management services
for self-funded employers.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) CONSOLIDATION - The consolidated financial statements include the
accounts of the Company and its subsidiary, Health Plans. All
significant intercompany accounts and transactions have been
eliminated.
(b) ESTIMATES - In preparing the consolidated financial statements in
conformity with generally accepted accounting principles, management
has made, where necessary, estimates and judgments based on currently
available information that affect certain of the amounts reflected in
the consolidated financial statements. Actual results could differ from
those estimates.
(c) CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash in
the bank and highly liquid investments with original maturities less
than ninety days. At December 31, 1996, repurchase agreements with
two-day maturities were executed with Fifth Third Bank ($5,800) and
Star Bank, N.A. ($5,850). Each counterparty held collateral with a
market value of approximately 102% of the par amount of the repurchase
agreement.
(d) HEALTH CARE RECEIVABLES - Health care receivables include amounts due
under administrative services contracts with certain employer groups
and contractual arrangements with the Company's reinsurer and pharmacy
benefit administrator.
(e) INVESTMENT SECURITIES - Investment securities consist primarily of U.S.
Treasury bonds and notes, mortgage-backed securities, investment grade
corporate bonds and shares of mutual funds that invest primarily in
equity securities.
Effective October 1, 1995, the Company adopted SFAS No. 115. The
Company's investment securities are classified as available-for-sale
and are reported at fair value in the accompanying Consolidated Balance
Sheets, with the net unrealized appreciation and/or depreciation
reflected as a separate component of shareholders' equity. The effect
of the initial adoption of SFAS No. 115 on shareholders' equity was
immaterial. This statement was not applicable to not-for-profit
corporations.
Prior to October 1, 1995, debt securities were valued at the lower of
amortized cost or market. Equity and other investments were carried at
the lower of aggregate cost or market. Valuation reserves established
to adjust debt and short-term equity securities to market value and
realized gains and losses on the disposition of investments were
recorded as components of investment income.
F-16
<PAGE> 109
The market value of investments is estimated based on published market
prices where available, or dealer quotes. The cost of investments sold
is determined on a specific identification basis.
(f) PROPERTY AND EQUIPMENT - Property and equipment is carried at cost and
is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
---- ----
<S> <C> <C>
Office equipment $ 5,800 $ 5,532
Leasehold improvements 2,367 2,125
Computer hardware 3,640 4,201
Computer software 6,176 4,756
------- -------
17,983 16,614
Accumulated depreciation and amortization (8,447) (6,356)
------- -------
Property and equipment, net $ 9,536 $10,258
======= =======
</TABLE>
Depreciation and amortization are computed using the straight-line
method over estimated useful service lives ranging from three to seven
years.
(g) REVENUE RECOGNITION - Premiums are due monthly and are recognized as
revenue over the period for which the Company is obligated to provide
services to members. Premiums received prior to such period are
recorded as unearned premiums. Management services revenue is
recognized in the period the related services are performed.
(h) HEALTH CARE SERVICES - The Company's health care operations arrange for
comprehensive health care services to be provided to its members
through fee for service, case rate, per diem (per day) and capitation
(a fixed monthly payment) arrangements through contractual
relationships with physicians, hospitals and other ancillary service
providers. To limit its exposure to catastrophic health care services
claims, the Company maintains stop-loss insurance on inpatient hospital
claims.
The Company's health care operations have various programs that provide
incentives to participating medical providers, including certain
hospitals, and the Company's pharmacy benefit administrator through the
use of risk/reward sharing arrangements and other programs. To fund
amounts the participating providers might ultimately owe the Company
under these programs, the Company withholds various percentages of
certain claims payments made to such participating medical services
providers. The ultimate payment to participating health care
professionals of amounts withheld is dependent upon factors such as
their compliance with Company-sponsored programs measuring quality,
commitment and the cost of health care, while ultimate payment to
participating hospitals of amounts withheld is dependent upon their
performance against established cost of hospital services and quality
targets.
F-17
<PAGE> 110
The expenses related to providing health care services, including the
net expenses incurred in connection with the aforementioned risk/reward
sharing and reinsurance arrangements, which are based in part on
estimates, are recorded in the period in which the related services are
rendered, including an estimate for claims incurred but not yet
reported which is actuarially determined based upon historical claims
incurrence patterns, membership levels and medical cost trends of the
Company. Changes in assumptions, as well as changes in actual
experience, could cause these estimates to change significantly in the
near term. Adjustments to prior periods' estimates are reflected in the
current period.
(i) MINIMUM NET WORTH REQUIREMENTS - Health Plans is subject to regulations
in conjunction with its licenses to operate in the States of Ohio and
Indiana and the Commonwealth of Kentucky, resulting in a restriction on
this subsidiary's net assets. Under the most restrictive state
insurance regulation, that of Indiana, Health Plans was required to
maintain a minimum statutory net worth balance of approximately $13,740
at December 31, 1996. Health Plans' statutory net worth at December 31,
1996 was $34,145.
(j) STOCK OPTIONS - The Company utilizes the intrinsic value based method
of accounting prescribed by APB Opinion No. 25, "Accounting for Stock
Issued to Employees" to account for stock options granted during 1996.
As such, no compensation expense was recognized in connection with the
stock options. See Note 10(a) for discussion of the stock options
granted and the disclosures required by SFAS No. 123, "Accounting for
Stock-Based Compensation."
(k) INCOME TAXES - Effective October 1, 1995, the Company commenced
operations as a taxable corporation and adopted the provisions of SFAS
No. 109. This statement requires, in accordance with the liability
method, deferred tax recognition for all temporary differences between
the tax and financial reporting bases of assets and liabilities and
requires adjustment of deferred tax assets and liabilities for enacted
changes in the tax law and rates. The cumulative effect of adoption of
SFAS No. 109 was not material to the Company's consolidated financial
statements, as the Company's net deferred tax assets as of the date of
adoption were fully reserved by a valuation allowance of approximately
$1,200.
The Company had previously operated as a tax exempt organization under
Section 501(c)(4) of the Internal Revenue Code through September 30,
1995. Health Plans has been a for-profit corporation since its
formation and has, therefore, always been subject to income taxes.
Prior to October 1, 1995, Health Plans' income tax provisions were not
material to the Company's consolidated financial statements.
(l) EARNINGS PER SHARE - Earnings (loss) per share are based on the
weighted average number of shares of common stock outstanding during
the periods and the dilutive effect of the assumed exercise of stock
options, if any.
F-18
<PAGE> 111
(m) RECLASSIFICATIONS - Certain reclassifications have been made to the
prior year consolidated financial statements to conform with the
current year presentation.
NOTE 3. STOCK TRANSACTIONS
Pursuant to the Company's stock offering completed on May 1, 1996, 1,353 shares
of common stock were purchased by more than one thousand shareholders. Gross
proceeds from the offering totaled $13,529 and were reduced by $1,514 of
offering-related expenses, which were comprised of underwriting discounts and
commissions ($706) and other expenses incurred in connection with the offering
($808). The $12,015 of net proceeds are reflected within common stock in the
December 31, 1996 Consolidated Balance Sheet. The Foundation was issued 13,500
shares of the Company's common stock as part of the Restructuring. The
Shareholder Agreement between the Company and the Foundation prohibits the
Company from paying dividends on its common stock until after March 15, 2001,
unless the Company (i) has a registered underwritten public offering of common
shares in addition to the offering described above; or (ii) sells at least 5% of
its common shares to one investor. See Note 11(c) for further discussion of the
Shareholder Agreement.
NOTE 4. ASSIGNMENT OF MEDICAID CONTRACT
Effective June 30, 1996, the Company assigned its Medicaid provider agreement
with the Ohio Department of Human Services to a Columbus, Ohio-based health
maintenance organization. Consideration of $5,000 in cash was received,
resulting in a gain of $4,554, after deducting a provision of approximately $446
for expenses related to this transaction. During the years ended December 31,
1996, 1995 and 1994, the Company recognized premium revenues of approximately
$10,770, $14,450 and $11,665, respectively, related to members enrolled in its
Special Health Medicaid product.
NOTE 5. LITIGATION SETTLEMENT
In accordance with the 1988 settlement provisions of a lawsuit filed by a group
of participating and formerly participating physicians against the Company and
certain former officers (the "THOMPSON litigation"), on October 2, 1995, the
Company disbursed $28,000 of its cash and cash equivalents to fund the final
settlement. The amount was held in an escrow account until final disbursement to
the physician group occurred on February 20, 1996. In addition, $500 of
additional plaintiff attorneys' fees and incentive payments to the class
representatives was paid from the earnings on the $28,000 while it was in
escrow.
NOTE 6. INVESTMENTS AND STATUTORY DEPOSITS
The investment portfolio consists primarily of fixed income securities.
Accordingly, the value of the portfolio is subject to interest rate risk. This
risk may arise from changes in the level of market interest rates. If interest
rates increase, the market value of the portfolio may decrease. Also, the
portfolio is subject to reinvestment risk that once a security matures or is
sold, market conditions may dictate that the proceeds be reinvested at lower
interest rates. Changes in the level of interest rates may affect market
interest rates for residential mortgage loans. Accordingly, changes in interest
rates for such loans may affect levels of prepayments of the residential loans
that serve as collateral for the mortgage-backed securities. For example, if
F-19
<PAGE> 112
the rates decrease, the level of prepayments may increase and subject the
prepayment proceeds to the reinvestment risk. For all periods presented, the
Company's mortgage-backed securities are comprised solely of Federal National
Mortgage Association, Government National Mortgage Association and Federal Home
Loan Mortgage Corporation securities.
The following tables summarize the unrealized gains and losses for investment
securities, all of which have been classified as available-for-sale under the
provisions of SFAS No. 115. For debt securities, the cost represents the
acquisition cost adjusted for the amortization of premiums and discounts.
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
DECEMBER 31, 1996
-----------------
<S> <C> <C> <C> <C>
Debt Securities:
U.S. Treasury and Agency $43,354 $ 97 $(224) $43,227
Mortgage-Backed Securities 12,780 11 (209) 12,582
Corporate Obligations 275 1 (2) 274
------- ------- ----- -------
56,409 109 (435) 56,083
Mutual Funds - Equity Securities 14,097 296 (40) 14,353
------- ------- ----- -------
$70,506 $ 405 $(475) $70,436
======= ======= ===== =======
DECEMBER 31, 1995
-----------------
Debt Securities:
U.S. Treasury and Agency $27,623 $ 775 $ -- $28,398
Mortgage-Backed Securities 21,895 317 (1) 22,211
Corporate Obligations 6,317 116 (6) 6,427
Other 3,702 38 (33) 3,707
------- ------- ----- -------
59,537 1,246 (40) 60,743
Mutual Funds - Equity Securities 12,653 17 (404) 12,266
------- ------- ----- -------
$72,190 $1,263 $(444) $73,009
======= ====== ===== =======
</TABLE>
The carrying amount and estimated fair value of debt securities as of December
31, 1996, based on contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
------ -----
<S> <C> <C>
Due after one year through five years $34,921 $34,931
Due after five years through ten years 8,708 8,570
Mortgage-Backed Securities 12,780 12,582
-------- --------
$56,409 $56,083
======= =======
</TABLE>
F-20
<PAGE> 113
The components of investment income (loss), net, consisted of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Interest and dividend income, net of
management fees and expenses $4,842 $ 6,326 $ 5,092
Discount amortization, net 542 123 435
Gross gains on sale of investments 377 6,676 524
Gross losses on sale of investments (69) (740) (4,272)
Lower of cost or market adjustment -- -- (2,243)
------ ------- --------
$5,692 $12,385 $ (464)
====== ======= ========
</TABLE>
In addition to securities classified as current assets, classified in other
long-term assets on the accompanying Consolidated Balance Sheets are mutual fund
investments maintained by the Company in connection with a certain retirement
plan and an investment in a venture capital fund. Such mutual fund investments
had a cost and market value of $591 and $640, respectively, at December 31,
1996, and a cost and market value of $394 at December 31, 1995. At December 31,
1996 and 1995, the Company had invested $1,100 and $600, respectively, in the
venture capital fund, valued at cost in the accompanying Consolidated Balance
Sheets. At December 31, 1996, the Company's remaining commitment to the fund was
$900.
The states in which Health Plans holds an HMO license require varying amounts of
securities to be maintained on deposit for protection of Health Plans' members.
The Company maintained such statutory deposit investments having both an
amortized cost and market value of $755 at December 31, 1996, and a cost and
market value of $761 and $788, respectively, at December 31, 1995.
NOTE 7. CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk consist primarily of investments, commercial premiums receivable and
the amounts due from certain hospitals participating in the Company's
risk/reward sharing arrangement. The Company's investments are managed by
professional investment managers within the guidelines established by management
and the Board of Directors, which as a matter of policy, limit the amounts which
may be invested in any one issuer. Concentrations of credit risk with respect to
commercial premiums receivable are limited due to the large number of employer
groups located primarily in Cincinnati, Ohio, comprising the Company's
membership base. As described in Note 2(h), the Company substantially mitigates
its credit risk related to amounts due from the hospitals by withholding various
percentages of certain claims payments made to the hospitals.
NOTE 8. OTHER LIABILITIES
(a) VENDOR AGREEMENT - During 1996, the Company received $6,200 from one of
its medical management services vendors. This amount represents a
portion of the
F-21
<PAGE> 114
amounts previously paid by the Company to the vendor and an
approximation of the vendor's ChoiceCare-related outstanding claims
liabilities, which the Company may be obligated to satisfy in the event
the vendor were unable to satisfy such claims.
The Company's agreement with the aforementioned vendor to provide
medical management services is currently anticipated to terminate on
June 30, 1997.
(b) DEBT FACILITY - On October 21, 1996, the Company entered into a $15,000
floating rate revolving credit agreement with a commercial bank. The
credit agreement includes, among other things, provisions which limit
total indebtedness, require a negative pledge of assets, require the
maintenance of certain liquidity ratios, and limit the amount of
capital expenditures, capital stock repurchases, asset sales and cash
dividend payments by the Company. There are no borrowings currently
outstanding on the facility.
NOTE 9. INCOME TAXES
At December 31, 1996, net deferred tax assets of $8,708 and $473 were included
in other current assets and other long-term assets, respectively, in the
accompanying Consolidated Balance Sheets; $1,382 and $813, respectively, at
December 31, 1995.
The significant components of the Company's net deferred tax assets are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Compensation and benefits $ 881 $ 508
Provider risk and incentive arrangements 2,674 1,077
Medical costs payable 6,314 1,154
Depreciation 841 685
State and local taxes 411 137
Other 927 224
------- -------
12,048 3,785
Valuation allowance (1,313) (1,313)
------- -------
10,735 2,472
------- -------
Deferred tax liabilities:
Provider risk and incentive arrangements 910 --
Other 644 277
------- -------
1,554 277
------- -------
Net deferred tax assets $ 9,181 $ 2,195
======= =======
</TABLE>
During the three months ended December 31, 1995, the Company estimates that it
utilized all of the net operating loss carryforwards that had been previously
reported in tax returns filed by its for-profit subsidiary, Health Plans
(approximately $3,489).
F-22
<PAGE> 115
The following tables present the summary of the provision for income taxes and
the reconciliation between the actual provision for income taxes and the
provision for income taxes at the U.S. federal statutory rate, respectively:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
---- ----
<S> <C> <C>
Federal:
Current $ 9,317 $ 2,064
Deferred (6,571) (2,064)
------- -------
2,746 --
------- -------
State and local:
Current 566 131
Deferred (415) (131)
------- -------
151 --
------- -------
Provision for income taxes $ 2,897 $ --
======= =========
DECEMBER 31,
1996 1995
---- ----
Provision (benefit) at federal statutory rate $ 2,643 $ (5,220)
Effect of net loss incurred prior to
October 1, 1995 Restructuring (Note 1) -- 5,096
Provision (benefit) for state and local taxes,
net of federal taxes 100 (5)
Valuation allowance -- 117
Other 154 12
------- ----------
Provision for income taxes $ 2,897 $ --
======= ==========
</TABLE>
The Company has requested a private letter ruling from the Internal Revenue
Service related to the establishment of the beginning tax bases of its assets
and liabilities upon conversion to a taxable entity. The current and deferred
tax provisions and the related deferred tax balances described above give no
effect to the possible receipt of a favorable ruling. In addition, long-term
liabilities in the December 31, 1996 Consolidated Balance Sheet include an
approximate $10,400 tax liability which was determined without giving effect to
the possible receipt of a favorable ruling; approximately $1,200 at December 31,
1995. Should a favorable ruling be received, deferred tax assets, net of any
necessary valuation allowance, would be increased and taxes payable recorded as
long-term liabilities would be decreased, the amounts of which would be
significant. Income taxes paid during the year ended December 31, 1996 totaled
$1,637.
NOTE 10. EMPLOYEE BENEFIT PLANS
(a) LONG TERM STOCK INCENTIVE PLAN - Pursuant to the Company's 1996 Long
Term Stock Incentive Plan (the "Stock Incentive Plan"), during 1996,
options to purchase shares of
F-23
<PAGE> 116
the Company's common stock at a price equal to the market value at date
of grant were granted to eligible employees. The options granted have
ten-year terms and become exercisable ratably over either the three or
four annual grant anniversary dates following the date of grant, or
upon a change in control, as defined in the Stock Incentive Plan. The
1996 stock option activity is as follows:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
SHARES ----------------
UNDER EXERCISE REMAINING
OPTION PRICE LIFE (YRS.)
------ ----- -----------
<S> <C> <C> <C>
Outstanding, December 31, 1995 --
Granted ($5.02 weighted-average
fair value per option) 1,177 $10.00
Forfeited (120) 10.00
-----
Outstanding, December 31, 1996
(none exercisable) 1,057 10.00 9.5
=====
</TABLE>
At December 31, 1996, a total of 2,000 shares of the Company's common
stock were available for issuance under the Stock Incentive Plan,
including 943 reserved for future grant.
The following pro forma net income and earnings per share give effect
to the fair value method of accounting for stock options prescribed by
SFAS No. 123 for the year ended December 31, 1996, the first year in
which the Company granted stock options:
Pro forma net income $3,949
Pro forma earnings per share
(primary and fully diluted) $ .28
The fair value of each option on the date of grant was estimated using
the Black-Scholes option-pricing model and the following
weighted-average assumptions: 1) interest rate of 6.98%; 2) expected
life of ten years; and 3) zero dividend yield. A near-zero volatility
assumption has been used due to various restrictions on ownership which
limit the transferability of the stock.
(b) CASH INCENTIVE PLANS - The Company also has annual incentive plans
available to eligible employees and a long-term incentive plan (the
"LTIP") for certain employees, as designated by the Human Resources and
Compensation Committee of the Board of Directors. Although the LTIP was
replaced by the Stock Incentive Plan in 1996, the three-year terms of
the grants made under the LTIP will result in payments being made in
1997 and 1998. Payments made under both the annual incentive plans and
the LTIP are dependent upon the achievement of certain strategic goals
and performance measures. For the years ended December 31, 1996, 1995
and 1994, the Company recorded expenses of $2,619, $3,908 and $2,503,
respectively, relating to these plans.
F-24
<PAGE> 117
(c) EMPLOYEE RETIREMENT PLANS - The Company has a 401(k) savings plan which
is available to substantially all employees, in which the Company
matches contributions up to 3% of an employee's salary. The Company
also has a money purchase pension plan covering substantially all
employees, which provides for annual contributions by the Company equal
to 5% of each employee's salary up to the FICA limit, and 10% of salary
above such limit. Contributions under both plans are made subject to
the limits established in the Internal Revenue Code. For the years
ended December 31, 1996, 1995 and 1994, the Company recorded expenses
of $1,833, $1,421 and $1,259, respectively, relating to its
contributions to these plans.
The Company maintains a supplemental retirement plan (the "SERP") to
provide benefits in excess of amounts permitted under the provisions of
prevailing tax law. As of December 31, 1996, there has been only one
participant in the SERP. For the years ended December 31, 1996, 1995
and 1994, the Company recorded expenses of $120, $111 and $390,
respectively, relating to its contributions to the SERP.
NOTE 11. COMMITMENTS AND CONTINGENCIES
(a) EMPLOYMENT AGREEMENTS - The Company currently has in effect employment
agreements with certain of its executives which provide for severance
payments in the event that employment is terminated for reasons other
than for cause. Payments would include base pay plus incentives for a
period of six months to two years, depending upon the executive. The
employment agreements also contain a non-compete clause in which the
executive may not compete with the Company for a period of one year
after the termination of his or her employment with the Company.
If a change in control (as defined in the employment agreements) is
followed within six months by a resignation or termination (as defined
in the employment agreements) of employment, such agreements provide
for payments to these executives of amounts ranging from one and one
half to three times their base salary plus budgeted incentives. The
maximum contingent liability of the Company pursuant to such agreements
is currently estimated at approximately $3,900.
(b) LITIGATION - The Company is routinely involved in litigation matters
arising in the normal course of business. Management believes, based
upon the advice of counsel, that these actions and proceedings and
losses, if any, resulting from the final outcome thereof, will not be
material in the aggregate to the Company's consolidated financial
position. See Note 5 for additional information related to litigation.
In 1994, the Company entered into an agreement with another managed
care entity to allow such entity to market the Company as its
Cincinnati managed care network and to allow the Company to offer
certain of the entity's products. A dispute arose over the arrangement
and the agreement was terminated in May 1995, resulting in a payment to
the Company of $3,350 as reimbursement for expenses incurred in 1994
and 1995 for
F-25
<PAGE> 118
negotiating and implementing infrastructure changes to provide services
under the agreement, the cost of negotiating termination of the
agreement and an element of compensation for potential lost profits the
Company may have realized under the terms of the agreement. This amount
is reported as other income in the December 31, 1995 Consolidated
Statement of Operations.
(c) COMMON STOCK REDEMPTION - In connection with the Company's offering for
the sale of common shares, the Company entered into a Shareholder
Agreement with the Foundation that grants the Foundation the right to
request redemption of up to $1,000 of its common shares per year for a
ten-year period. Such requested redemptions are subject to the Company
meeting certain financial tests and subject to the approval of the
Company's Board of Directors.
(d) LEASE OBLIGATIONS - The Company leases its office facilities, certain
office equipment and certain computer equipment under operating leases
expiring through the year 2001.
Future minimum lease payments for each of the five years ending
December 31 are as follows:
<TABLE>
<S> <C>
1997 $3,695
1998 2,003
1999 1,181
2000 958
2001 610
------
Total minimum lease payments $8,447
======
</TABLE>
The majority of the Company's office facilities are under a lease
arrangement that expires during February 1998. Currently, the Company
is considering entering into a ten-year lease agreement for a two
hundred thousand square foot stand-alone office facility in Cincinnati,
Ohio. Although terms of the lease are subject to negotiation, annual
lease payments are estimated to be approximately $2,125 per year.
Total rent expense was approximately $3,061, $2,805 and $2,933 in 1996,
1995 and 1994, respectively.
(e) PREFERRED MEDICAL GROUPS - The Company has made commitments of $3,980
in connection with its medical group assistance program, $1,914 of
which has been funded as of December 31, 1996.
NOTE 12. UNAUDITED PRO FORMA INFORMATION
(a) RESTRUCTURING - The pro forma information reflected in the accompanying
Consolidated Statements of Operations is presented solely to give
effect to the estimated provision for income taxes that would have been
reported in accordance with SFAS No. 109 had the Company filed federal,
state and local income tax returns as a for-profit corporation.
F-26
<PAGE> 119
The pro forma tax provision is based on an assumed effective federal,
state and local tax rate of 35.5%. The unaudited pro forma earnings per
share information is based upon 13,500 issued and outstanding common
shares at December 31, 1995.
The following condensed Pro Forma Statement of Operations presents the
Company's pro forma net income and earnings per share after giving
effect to (i) the application of SFAS No. 115 to the accounting for
marketable securities; (ii) a reduction in other expenses of $28,000
relating to the settlement of the THOMPSON litigation; and (iii) the
estimated provision for income taxes that would have been reported in
accordance with SFAS No. 109 had the Company filed income tax returns
as a for-profit corporation for the full twelve-month period.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
AS
HISTORICAL ADJUSTMENTS ADJUSTED
---------- ----------- --------
<S> <C> <C> <C>
Operating revenues $282,840 $ -- $282,840
Operating expenses 285,928 -- 285,928
--------- ------- ----------
Operating loss (3,088) -- (3,088)
Investment income, net 12,385 (2,243) 10,142
Income from agreement termination 3,350 -- 3,350
Settlement expense (28,000) 28,000 --
--------- ------- ----------
Income (loss) before income taxes (15,353) 25,757 10,404
Provision for income taxes -- (3,693) (3,693)
--------- ------- ----------
Net income (loss) $ (15,353) $22,064 $ 6,711
========= ======= ==========
Earnings per share (based upon
13,500 issued and outstanding
common shares) $ .50
==========
</TABLE>
INVESTMENTS
Unaudited pro forma adjustments to net income for the year ended
December 31, 1995 to reflect adoption of SFAS No. 115 decreased pretax
net income by $2,243. This amount represents the lower of cost or
market reserve which, under the Company's previous accounting policy,
had been recorded as a component of investment income and was
subsequently reversed due to the recovery in the investment values in
1995. Under SFAS No. 115, such market value adjustments are recorded to
equity.
LITIGATION SETTLEMENT
As discussed in Note 5, $28,000 was accrued as settlement expense in
1995, when payment of the THOMPSON litigation settlement was evaluated
as probable. The $28,000 settlement expense has been excluded from the
unaudited pro forma information because the amount is unrelated to the
Company's current operations.
F-27
<PAGE> 120
INCOME TAXES
Effective October 1, 1995, the Company is subject to federal, state and
local income taxes on its taxable income.
The following is a summary of components of the pro forma provision for
income taxes in accordance with SFAS No. 109:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
----
<S> <C>
Federal:
Current $2,513
Deferred 850
------
3,363
------
State and local:
Current 160
Deferred 170
------
330
------
Pro forma provision for income taxes $3,693
======
</TABLE>
(B) STOCK OFFERING - Had the shares issued as part of the Company's stock
offering discussed in Note 3 been outstanding from the beginning of the
year ended December 31, 1996, earnings per share for the year would
have been $.33, without giving pro forma effect to earnings on the
proceeds.
F-28
<PAGE> 121
- --------------------------------------------------------------------------------
APPENDIX A
AGREEMENT AND PLAN OF MERGER
AMONG
HUMANA INC.,
HOCC, INC.,
CHOICECARE CORPORATION
AND
THE CHOICECARE FOUNDATION
- --------------------------------------------------------------------------------
June 3, 1997
<PAGE> 122
<TABLE>
<CAPTION>
TABLE OF CONTENTS
SECTION PAGE
<S> <C>
1. The Merger ....................................................................................................1
1.1 Merger of Acquisition Subsidiary into the Company........................................................1
1.2 The Effective Date and Time..............................................................................1
1.3 Charter and Management of the Surviving Corporation......................................................2
1.4 Conversion of Shares.....................................................................................2
1.5 Exchange of Certificates Representing the Company Shares.................................................3
1.6 Dissenting Shareholders..................................................................................3
1.7 Closing of Company Transfer Books........................................................................4
2. Representations and Warranties of the Company..................................................................4
2.1 Organization and Standing of the Company.................................................................4
2.2 Capitalization; Stock Ownership and Rights...............................................................5
2.3 Authority; No Conflict...................................................................................6
2.4 Financial Statements.....................................................................................7
2.5 Absence of Certain Events................................................................................8
2.6 Accounts Receivable......................................................................................9
2.7 Company's Broker Fees....................................................................................9
2.8 Completeness of Statements...............................................................................9
2.9 Condition and Sufficiency of Assets.....................................................................10
2.10 Contracts, Arrangements and Commitments................................................................10
2.11 Current Compensation of Officers and Directors.........................................................11
2.12 Employee Benefits......................................................................................12
2.13 Environmental Matters..................................................................................14
2.14 HMO or Health Insurance Accreditations.................................................................17
2.15 Indebtedness to or from Shareholder, Officers and Directors............................................17
2.16 Insurance..............................................................................................17
2.17 Investment Portfolio...................................................................................18
2.18 Labor Matters..........................................................................................18
2.19 Licenses, Permits and Franchises.......................................................................18
2.20 Litigation.............................................................................................19
2.21 Minutes and Stock Books................................................................................19
2.22 No Material Changes....................................................................................19
2.23 Proprietary Property...................................................................................19
2.24 Securities Reports.....................................................................................21
2.25 Takeover Statutes......................................................................................21
2.26 Taxes..................................................................................................22
2.27 Title to Properties....................................................................................23
3. Representations and Warranties of Shareholder.................................................................23
3.1 Title to the Company Shares............................................................................23
</TABLE>
A-i
<PAGE> 123
<TABLE>
<CAPTION>
TABLE OF CONTENTS
SECTION PAGE
<S> <C>
3.2 Organization and Standing of Shareholder; Corporate Power...............................................23
3.3 Stock Ownership and Rights..............................................................................23
3.4 Authority; No Conflict..................................................................................24
3.5 Shareholder's Broker Fees...............................................................................25
3.6 Litigation..............................................................................................25
4. Representations and Warranties of Humana and Acquisition Subsidiary...........................................25
4.1 Incorporation; Corporate Power..........................................................................25
4.2 Authority; No Conflict..................................................................................25
4.3 Humana's and Acquisition Subsidiary's Broker Fees.......................................................26
4.4 Litigation..............................................................................................26
5. Covenants of the Parties......................................................................................26
5.1 Operation of the Company Pending Effective Date.........................................................26
5.2 Negotiations With Others................................................................................28
5.3 Required Approvals......................................................................................31
5.4 Meeting of the Company's Shareholders...................................................................31
5.5 Voting Agreement of Shareholder.........................................................................32
5.6 Filings; Other Action; Further Actions..................................................................32
5.7 Non-competition Agreement...............................................................................32
5.8 Compliance with Conditions..............................................................................32
5.9 Further Investigation of the Company and Humana.........................................................33
5.10 Governance of the Surviving Corporation................................................................33
5.11 Securities Reports.....................................................................................33
5.12 Formation of Task Force................................................................................33
5.13 Notice of Inaccuracies.................................................................................33
5.14 Taxes..................................................................................................34
5.15 Indemnification; Directors and Officers Insurance......................................................34
5.16 Company Stock Options..................................................................................35
6. Conditions to the Obligations of Humana and Acquisition Subsidiary............................................35
6.1 Representations and Warranties Correct..................................................................35
6.2 Compliance with Covenants...............................................................................36
6.3 No Litigation...........................................................................................36
6.4 Compliance with Laws; Governmental Approvals............................................................36
6.5 No Material Changes.....................................................................................36
7. Conditions to Obligations of Shareholder and the Company......................................................36
7.1 Representations and Warranties Correct..................................................................36
7.2 Compliance with Covenants...............................................................................36
7.3 No Litigation...........................................................................................36
</TABLE>
A-ii
<PAGE> 124
<TABLE>
<CAPTION>
TABLE OF CONTENTS
SECTION PAGE
<S> <C>
7.4 Shareholder Approval....................................................................................37
7.5 Compliance with Laws; Governmental Approvals............................................................37
8. Termination...................................................................................................37
8.1 Termination Events......................................................................................37
8.2 Effect of Termination...................................................................................38
9. Deliveries and Actions Taken at Effective Date................................................................39
9.1 Deliveries by Shareholder and the Company...............................................................39
9.2 Deliveries by Humana and Acquisition Subsidiary.........................................................39
10. Indemnification; Survival of Representations and Warranties..................................................40
10.1 Survival of Representations and Warranties.............................................................40
10.2 Certain Definitions....................................................................................40
10.3 Indemnity by Shareholder...............................................................................41
10.4 Indemnity by Humana and Acquisition Subsidiary.........................................................42
10.5 Notification of Third-Party Claims.....................................................................42
10.6 Defense of Claims......................................................................................42
10.7 Access and Cooperation.................................................................................43
10.8 Assignment of Claims...................................................................................43
10.9 Exclusive Remedy.......................................................................................43
11. Miscellaneous Provisions.....................................................................................43
11.1 Expenses...............................................................................................43
11.2 Notice.................................................................................................44
11.3 Exhibits; Schedules; Entire Agreement..................................................................45
11.4 Amendment; Waiver......................................................................................46
11.5 Binding Effect; Assignment.............................................................................46
11.6 Captions...............................................................................................46
11.7 Severability of Provisions.............................................................................46
11.8 Further Assurances.....................................................................................46
11.9 Confidentiality........................................................................................46
11.10 Consent to Jurisdiction; Governing Law................................................................47
11.11 Publicity; No Disclosure..............................................................................47
11.12 Counterparts..........................................................................................47
11.13 Specific Performance..................................................................................48
</TABLE>
A-iii
<PAGE> 125
<TABLE>
<CAPTION>
EXHIBITS
DESCRIPTION EXHIBIT
<S> <C>
Certificate of Merger.............................................................................................A
Opinion of counsel for the Company................................................................................B
Opinion of counsel for Shareholder................................................................................C
Opinion of counsel for Humana.....................................................................................D
SCHEDULES
DESCRIPTION SCHEDULE
Absence of Certain Events.......................................................................................2.5
Accounts Receivable.............................................................................................2.6
Authority; No Conflict (Company).............................................................................2.3(b)
Authority; No Conflict (Humana and Acquisition Subsidiary)...................................................4.2(b)
Authority; No Conflicts (Shareholder)........................................................................3.4(b)
Capital Outstanding Stock as of Closing Date................................................................ 2.2(c)
Capitalization; Stock Ownership and Rights...................................................................2.2(a)
Certain Accounting Practices....................................................................................2.4
Company's Broker Fees...........................................................................................2.7
Contracts, Arrangements and Commitment......................................................................2.10(a)
Current Compensation of Directors and Officers.............................................................2.11(a)
Employee Benefits.................................... 2.12(a), 2.12(b), 2.12(d), 2.12(e), 2.12(f), 2.12(g), 2.12(h)
Environmental Matters.......................................................................................2.13(a)
Events Since Last Fiscal Year End...............................................................................2.5
HMO or Health Insurance Accreditations.........................................................................2.14
Humana's and Acquisition Subsidiary's Broker Fees...............................................................4.3
Indebtedness to or from Shareholder, Officers and Directors....................................................2.15
Insurance......................................................................................................2.16
Investment Portfolio...........................................................................................2.17
Labor Matters..................................................................................................2.18
Licenses, Permits and Franchises...................................................................2.19(a), 2.19(b)
Litigation.....................................................................................................2.20
Minutes and Stock Books........................................................................................2.21
No Material Changes............................................................................................2.22
Officers of Each Acquired Company............................................................................2.2(e)
Organization and Standing of the Company.....................................................................2.1(a)
Outstanding Contractual Obligations..........................................................................2.2(d)
Proprietary Property.............................................................2.23(a), 2.23(b), 2.23(c), 2.23(d)
Securities Reports.............................................................................................2.24
Shareholder's Broker Fees.......................................................................................3.5
Stock Options Outstanding......................................................................................5.16
Subsidiaries; States Where Each Acquired Company is Qualified............................................... 2.1(b)
Taxes.......................................................................................................2.26(b)
Title to Property; Encumbrances................................................................................2.27
Title to the Company Shares.....................................................................................3.1
</TABLE>
A-iv
<PAGE> 126
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER is made and entered into as of June 3,
1997, by and among (1) HUMANA INC., a Delaware corporation ("Humana"), (2) HOCC,
INC., an Ohio corporation ("Acquisition Subsidiary"), (3) CHOICECARE
CORPORATION, an Ohio corporation (the "Company"), and (4) THE CHOICECARE
FOUNDATION, an Ohio nonprofit corporation, formerly named "Tristate Foundation
for Health" and "Midwest Foundation Independent Physicians Association"
("Shareholder").
RECITALS:
A. The respective Boards of Directors of the Company, Humana and
Acquisition Subsidiary, and the trustees of Shareholder, have approved the
merger of Acquisition Subsidiary into the Company pursuant the terms of this
"Agreement" (as defined in Section 11.3).
B. Shareholder owns 13,500,000 common shares, without par value, of the
Company, representing approximately 90.9% of the issued and outstanding capital
stock of the Company. Shareholder is entering into this Agreement solely for the
purposes of making certain representations, warranties, covenants and
indemnities to Humana and Acquisition Subsidiary all in accordance with the
provisions of this Agreement.
AGREEMENT:
NOW, THEREFORE, the parties hereby agree as follows:
1. THE MERGER.
1.1 MERGER OF ACQUISITION SUBSIDIARY INTO THE COMPANY. Upon the terms and
subject to the fulfillment of the conditions set forth in this Agreement, at the
"Effective Time" (as defined in Section 1.2) Acquisition Subsidiary shall be
merged into the Company (the "Merger") and the separate corporate existence of
Acquisition Subsidiary shall thereupon cease. The Company shall be the surviving
corporation and its separate corporate existence shall continue unaffected and
unimpaired by the Merger. From and after the Effective Time, the Company is
sometimes referred to as the "Surviving Corporation." The Merger shall be
pursuant to the provisions of the Ohio General Corporation Law.
1.2 THE EFFECTIVE DATE AND TIME.
(a) The effective date of the Merger (the "Effective Date") shall
be the business day on which the last condition set forth in Sections 6 and 7 is
fulfilled or satisfied in accordance herewith or waived by the party entitled to
the benefit of such condition or such other date as the parties agree to in
writing.
(b) On the Effective Date, the Company and Acquisition Subsidiary
shall file a Certificate of Merger in the form of Exhibit A and such other
documents that may be required by
A-1
<PAGE> 127
the Ohio General Corporation Law to effect the Merger with the Secretary of
State of Ohio. The Merger shall be effective at the close of business (the
"Effective Time") on the Effective Date. The Merger shall have the effect set
forth in the Ohio General Corporation Law.
1.3 CHARTER AND MANAGEMENT OF THE SURVIVING CORPORATION.
(a) From and after the Effective Time and until further amended in
accordance with applicable Ohio law, the Articles of Incorporation of
Acquisition Subsidiary shall be the Articles of Incorporation of the Surviving
Corporation, and the Regulations of Acquisition Subsidiary shall be the
Regulations of the Surviving Corporation.
(b) At the Effective Time, the Board of Directors of the Surviving
Corporation shall consist of those persons who are the directors of Acquisition
Subsidiary immediately before the Effective Time, with each such person
continuing to serve as a director of the Surviving Corporation in accordance
with the provisions of Surviving Corporation's Articles of Incorporation and
Regulations and applicable Ohio law. Immediately after the Effective Time,
Humana shall and/or shall cause Surviving Corporation to, comply in full with
the provisions of Section 5.10 of this Agreement. From and after the Effective
Time, the officers of the Surviving Corporation shall consist of those persons
who are the officers of the Company immediately before the Effective Time, with
each such person continuing to serve as an officer of the Surviving Corporation
in accordance with the provisions of the Surviving Corporation's Articles of
Incorporation and Regulations and applicable Ohio law.
1.4 CONVERSION OF SHARES.
(a) At the Effective Time, by virtue of the Merger and without any
action on the part of any shareholder of the Company:
(1) Each of the Company's common shares, without par value,
(the "Company Shares") that are held in the treasury of the Company or by
any "Subsidiary" (as defined in Section 2.1(a)) shall be canceled and no
consideration shall be delivered in exchange therefor.
(2) Each Company Share issued and outstanding immediately
prior to the Effective Time (other than shares to be canceled pursuant to
Section 1.4(a)(1) and other than Company Shares held by "Dissenting
Shareholders" (as defined in Section 1.6)) shall be converted into the
right to receive from the Surviving Corporation cash in the amount of
$16.38 per share (the "Per Share Merger Consideration"). All such Company
Shares, when so converted, shall no longer be outstanding and shall
automatically be canceled and retired and each holder of a certificate or
certificates ("Certificates") representing any such Company Shares shall
cease to have any rights with respect thereto except for the right to
receive the Per Share Merger Consideration.
(3) Each common share, without par value, of Acquisition
Subsidiary that is issued and outstanding immediately prior to the
Effective Time shall be converted into and become
A-2
<PAGE> 128
one fully paid and nonassessable share of capital stock of the Surviving
Corporation immediately following the Effective Time.
1.5 EXCHANGE OF CERTIFICATES REPRESENTING THE COMPANY SHARES.
(a) Immediately prior to the Effective Time, Humana shall cause
Acquisition Subsidiary to deposit in trust with Star Bank, N.A. ("Paying Agent")
immediately available funds in an amount equal to the Per Share Merger
Consideration multiplied by the number of Company Shares issued and outstanding
immediately prior to the Effective Time (the "Merger Consideration").
(b) Promptly after the Effective Time, the Surviving Corporation
shall cause the Paying Agent to mail to each record holder of a Certificate (1)
a letter of transmittal specifying that delivery shall be effected, and risk of
loss and title to the Certificates shall pass, only upon delivery of the
Certificates to the Paying Agent and shall be in such form and have such other
provisions as Humana, the Company, the Surviving Corporation and the Paying
Agent may reasonably specify, and (2) instructions to effect the surrender of
the Certificates in exchange for the Per Share Merger Consideration. Upon
surrender of a Certificate for cancellation to the Paying Agent by a holder of a
Certificate, together with such letter of transmittal, duly executed and
completed in accordance with the instructions thereto, the holder of such
Certificate shall be entitled to receive in exchange therefor the amount of cash
into which the number of Company Shares represented by such Certificate shall
have been converted in accordance with the provisions of Section 1.4(a)(2). No
interest shall be paid or accrued on the Per Share Merger Consideration due on
surrender of the Certificates to the Paying Agent.
(c) Notwithstanding the foregoing, neither the Paying Agent,
Humana nor the Surviving Corporation shall be liable to a record holder of a
Certificate for any cash or interest delivered to a public official pursuant to
applicable abandoned property, escheat or similar laws. The Paying Agent shall
be instructed to repay to the Surviving Corporation any portion of the Merger
Consideration (including all interest and other income received by the Paying
Agent on the Merger Consideration) that remains unclaimed by the holders of
Certificates as of the first anniversary of the Effective Date. Thereafter, the
holders of Certificates shall look only to the Surviving Corporation (subject to
the terms of this Agreement, abandoned property, escheat and other similar laws)
as general creditors thereof for any Per Share Merger Consideration that may be
payable upon the due surrender of the Certificates held by them.
1.6 DISSENTING SHAREHOLDERS. Notwithstanding any provision of this
Agreement to the contrary, if required by the Ohio General Corporation Law and
only to the extent required thereby, the Company Shares held by holders who have
exercised their rights to receive the fair cash value for the Company Shares in
accordance with the provisions of Section 1701.85 of the Ohio General
Corporation Law (a "Dissenting Shareholder") shall not be exchangeable for the
right to receive the Per Share Merger Consideration. Each Dissenting Shareholder
shall be entitled to receive payment of the fair cash value per Company Share
for which the Dissenting Shareholder seeks relief unless such Dissenting
Shareholder fails to perfect his or her right to
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receive the fair cash value per Company Share or otherwise loses his or her
right to receive the fair cash value of the Company Shares for which such
Dissenting Shareholder seeks relief. If, after the Effective Time, any such
Dissenting Shareholder fails to perfect or withdraws or otherwise loses such
right to receive the fair cash value of the Company Shares held by him or her,
the Certificates representing such Company Shares shall thereafter be treated as
if they had been converted into the right to receive the Per Share Merger
Consideration, without any interest thereon. The Surviving Corporation shall not
make any payment for any demand for the fair cash value of such Company Shares
or offer to settle or settle any such demands without the prior written consent
of Humana, except as required by law or court order.
1.7 CLOSING OF COMPANY TRANSFER BOOKS. At the Effective Time, the share
transfer books of the Company shall be closed and no transfer of Company Shares
shall thereafter be made. After the Effective Time, except as required by
Section 1701.85 of the Ohio General Corporation Law, the Surviving Corporation
shall cancel any Certificate presented to it and deliver to its holder the Per
Share Merger Consideration or the fair cash value determined in accordance with
the provisions of Section 1701.85 of the Ohio General Corporation Law. All cash
paid upon the surrender of Certificates in accordance with the provisions of
this Section 1 shall be deemed to have been issued in full satisfaction of all
rights pertaining to the Company Shares except as otherwise required by Section
1701.85 of the Ohio General Corporation Law.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and
warrants to Humana and Acquisition Subsidiary as follows:
2.1 ORGANIZATION AND STANDING OF THE COMPANY.
(a) The Company is duly organized, validly existing and in good
standing under the laws of the State of Ohio. Set forth on Schedule 2.1(a) is a
listing of all corporations, part nerships, limited liability companies,
business trusts and other business entities in which the Company owns, directly
or indirectly, more than fifty percent (50%) of the equity interests
(collectively, the "Subsidiaries") and the type and amount of each investment of
equity or debt in each Subsidiary. Also set forth on Schedule 2.1(a) is the
ownership structure of each Subsidiary. Except as disclosed on Schedule 2.1(a)
or described in Section 2.17, the Company owns, directly or indirectly, no
interest or investment (whether equity or debt) in any corporation, partnership,
limited liability company, business trust or other business entity. Each of the
Subsidiaries is duly organized, validly existing and in good standing under the
laws of the State of Ohio. The Company and all of the Subsidiaries, including
specifically the business operated by ChoiceCare Health Plans, Inc. which, for
purposes of this Agreement shall be deemed to include the operations of
Shareholder as predecessor of ChoiceCare Health Plans, Inc. during the period
prior to October 1, 1995, are collectively referred to as the "Acquired
Companies" and individually as an "Acquired Company."
(b) Each of the Acquired Companies has, and at all times has had,
full corporate power and authority to own and lease its properties as such
properties are now owned and leased and to conduct its business as and where its
business has been, and is now being, conducted. Schedule 2.1(b) sets forth the
jurisdictions in which each Acquired Company is qualified to do business as
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a foreign corporation; and such jurisdictions represent all of the jurisdictions
in which the failure of an Acquired Company to so qualify would have a "Material
Adverse Effect" (as defined in Section 2.1(c)).
(c) For purposes of this Agreement, "Material Adverse Effect"
means any event or events that would be reasonably expected to have a material
and adverse effect on the business, assets, properties, liabilities, condition
(financial or otherwise) or results of operations of the Acquired Companies,
taken as a whole.
2.2 CAPITALIZATION; STOCK OWNERSHIP AND RIGHTS.
(a) The authorized capital stock of the Company consists of (1)
45,000,000 Company Shares and (2) 4,000,000 preferred shares, without par value
(the "Preferred Shares"). As of the date of this Agreement, (A) there are issued
and outstanding 14,852,844 Company Shares and no Preferred Shares, and (B) 1,000
Company Shares and no Preferred Shares are held by the Company in its treasury.
All of the Company Shares issued and outstanding are validly issued, fully paid
and nonassessable and not subject to pre-emptive rights. To the "Company's
Knowledge" (as defined in Section 2.2(e)), none of the Company Shares has been
issued in violation of any federal, state or other law pertaining to the
issuance of securities, or in violation of any rights, pre-emptive or otherwise,
of any present or past shareholder of the Company. Except as disclosed in this
Agreement including, without limitation, Schedules 2.2(a) and 5.16, there are
no, nor are there any arrangements not yet fully performed which would result in
any, outstanding options, warrants, agreements or other rights entitling any
person or entity to purchase or acquire any of the shares of capital stock of
any of the Acquired Companies (whether unissued, treasury or issued and
outstanding).
(b) Other than the "Options" (as defined in Section 5.16(b)),
there are no outstanding stock options or stock bonus agreements or contractual
or other obligations outstanding which commit or obligate the Acquired Companies
to issue additional Company Shares or other equity interests in any of the
Acquired Companies. Schedule 5.16 sets forth a true and complete list of all
holders of Options held by each person listed in such Schedule, the exercise
price of each option and the date of grant of each such option.
(c) All of the equity interests in each of the Subsidiaries as set
forth on Schedule 2.1(a) are duly authorized, validly issued, fully-paid and
non-assessable, and are held of record and beneficially owned as set forth on
Schedule 2.1(a). Each holder depicted on Schedule 2.1(a) has good and marketable
title to all shares of each of the Subsidiaries depicted as owned by such holder
on Schedule 2.1(a) free and clear of all liens, pledges, encumbrances, proxies
and charges of any nature whatsoever. None of the shares of any Subsidiary held
by any Acquired Company is subject to any proxy, voting trust, stock
restriction, stock purchase or stock redemption agreement or the like other than
(1) restrictions on transfer under applicable state and federal securities laws
and (2) those restrictions described on Schedule 2.2(c). None of the interests
held by the Company in any of its Subsidiaries has been issued in violation of
any federal, state or other law pertaining to the issuance of securities, or in
violation of any rights, pre-emptive or otherwise, of any other investor in the
Subsidiary.
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(d) Except as set forth on Schedule 2.2(d), there are no
outstanding contractual obligations of any of the Acquired Companies to
repurchase, redeem or otherwise acquire any outstanding shares of capital stock
or other ownership interest in any of the Acquired Companies other than the
Company.
(e) For purposes of this Agreement, "Company's Knowledge" means
information, facts or events which any presently serving officer of any Acquired
Company actually knows or which any presently serving officer of any Acquired
Company reasonably should know in connection with his or her performance of his
or her duties as an officer of an Acquired Company. The presently serving
officers of each Acquired Company are listed on Schedule 2.2(e).
2.3 AUTHORITY; NO CONFLICT.
(a) The Board of Directors of the Company has approved this
Agreement and the consummation of the transactions subject to the terms of this
Agreement. This Agreement constitutes the valid and binding obligation of the
Company, enforceable against it in accordance with its terms subject to approval
of the Company's shareholders. The Company has the right, power, authority and
capacity to execute and deliver this Agreement and, subject to approval of the
Merger by the Company's shareholders, to perform its obligations under this
Agreement.
(b) Except as set forth on Schedule 2.3(b), neither the execution
and delivery of this Agreement by the Company nor the consummation or
performance by the Company of any of the transactions described in this
Agreement shall, directly or indirectly (with or without notice or lapse of
time):
(1) Contravene, conflict with, or result in a violation of any
provision of the articles of incorporation or regulations of any of the
Acquired Companies, or any resolution adopted by the board of directors of
any Acquired Company;
(2) Contravene, conflict with, or result in a violation of, or
give any federal, state, local, municipal, or other government authority or
body exercising, or entitled to exercise, any administrative, executive,
judicial, legislative, police, regulatory, or taxing authority or power of
any nature (a "Governmental Body"), or other person the right to challenge
any of the transactions described in this Agreement or to exercise any
remedy or obtain any relief under, any law, rule, ordinance or regulation
to which any Acquired Company or Shareholder, or any of the assets owned or
used by any Acquired Company, may be subject which, in any such case, would
result in a Material Adverse Effect;
(3) Contravene, conflict with, or result in a violation of any
of the terms or requirements of, or give any Governmental Body the right to
revoke, withdraw, suspend, cancel, terminate, or modify, any governmental
authorization that is held by any Acquired Company or that otherwise
relates to the business of, or any of the assets owned or used by, any
Acquired Company which, in any such case, would result in a Material
Adverse Effect;
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(4) Contravene, conflict with, or result in a violation or
breach of any provision of, or give any person the right to declare a
default or exercise any remedy under, or to accelerate the maturity or
performance of, or to cancel, terminate, or modify, any agreement or
contract (1) to which any of the Acquired Companies is a party, (2) which
is referenced on any Schedule to this Agreement and (3) which, in any such
case, would result in a Material Adverse Effect; or
(5) Result in the imposition or creation of any security
interest, equity, pledge, mortgage, lien, charge or encumbrance
("Encumbrances") on or with respect to any of the assets owned or used by
any Acquired Company which, in any such case, would result in a Material
Adverse Effect.
(c) Except as set forth on Schedule 2.3(b) and except for any
approvals under the HartScott-Rodino Antitrust Improvements Act of 1976 or any
successor law, and regulations and rules issued pursuant to that Act or any
successor law (the "HSR Act"), none of the Acquired Companies is, or shall be,
required to give any notice to or obtain any consent from any person in
connection with the execution and delivery of this Agreement or the consummation
or performance of any of the transactions described in this Agreement which, if
not given or obtained, would result in a Material Adverse Effect.
(d) Subject to the provisions of Section 2.13(a), each of the
Acquired Companies has complied, and is in compliance, with all laws,
regulations, rules and orders applicable to it, its operations and the ownership
or use of its assets, except where the failure to comply would not result in a
Material Adverse Effect. To the Company's Knowledge, there are no facts or
circumstances which may constitute or result in any noncompliance.
2.4 FINANCIAL STATEMENTS. The Company has previously delivered to Humana
and Acquisition Subsidiary the Company's Annual Report on Form 10-K for the year
ending December 31, 1996, and its Registration Statement on Form S-1, dated
April 1, 1996, Registration number 33-99624, as amended (the "Registration
Statement"), which contains consolidated financial statements of the Company and
its predecessor for the years ended December 31, 1995 and 1994, which financial
statements have been audited by Arthur Andersen LLP, independent auditors of the
Company ("Accountants"). Such financial statements are referred to collectively
as the "Year-End Financials." The Company has also previously delivered to
Humana and Acquisition Subsidiary the Company's quarterly report on Form 10-Q
for the three-month period ending March 31, 1997, which contains interim
unaudited financial statements relating to the operations of the Company for the
three-month period ended March 31, 1997 (the "Stub Period Financials"). The
Year-End Financials and the Stub Period Financials are collectively referred to
as the "Financial Statements" and the balance sheet dated March 31, 1997,
included in the Stub Period Financials is referred to as the "Acquisition
Balance Sheet." The Year-End Financial Statements have been prepared from the
books and records of the Company in conformity with generally accepted
accounting principles applied on a consistent basis and present fairly, in all
material respects, the financial position of the Company at the respective dates
of the balance sheets included therein and the results of operations and changes
in financial position of the Company for the respective periods covered thereby.
The Stub Period Financials
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have been prepared from the books and records of the Company in accordance with
the accounting policies described on Schedule 2.4 and reflect all adjustments
consisting solely of normal recurring adjustments which, in the opinion of
management of the Company, are necessary for a fair statement of the results of
the interim periods presented. While management of the Company believes that the
procedures followed in the preparation of the Stub Period Financials are
reasonable, certain estimated amounts are dependent upon current facts and other
information that may change subsequently during the fiscal year. The Financial
Statements comply in all material respects with the requirements of the
Securities Exchange Act of 1934, as amended, and the regulations promulgated
thereunder, in effect at the time of filing.
2.5 ABSENCE OF CERTAIN EVENTS. Since the date of the most recent Year-End
Financials, each of the Acquired Companies has, except as set forth on Schedule
2.5, operated its businesses only in the ordinary course consistent with its
past practices and none of the Acquired Companies has:
(a) Experienced any event, occurrence or condition or series of
events, occurrences or conditions which, individually or in the aggregate, has
resulted or would result in a Material Adverse Effect;
(b) Entered into or committed to any transaction that,
individually or in the aggregate, has resulted or would result in a Material
Adverse Effect;
(c) Changed any of its significant accounting methods, principles
or practices;
(d) Amended any of its Articles of Incorporation, Regulations or
other charter documents;
(e) Revalued any of its assets, including write-offs of accounts
receivable, other than in the ordinary course of such Acquired Company's
business consistent with past practices;
(f) Incurred or agreed to incur any indebtedness for borrowed
money or allowed any of its assets to be subjected to an Encumbrance which has
resulted or would result in a Material Adverse Effect;
(g) Declared, set aside or paid any dividend or other distribution
on any shares of capital stock of any of the Acquired Companies, or repurchased,
redeemed, or otherwise acquired any outstanding shares of capital stock or other
securities of, or other ownership interest in, any of the Acquired Companies;
(h) Terminated or amended or suffered the termination, expiration
or amendment of (1) any lease, contract, commitment or other agreement which is
necessary or related to its operations, where the termination, expiration or
amendment of any such lease, contract, commitment or other agreement has
resulted or would result in a Material Adverse Effect, or (2) any permit,
license, certificate of authority, concession, authorization, franchise or
similar right granted to or held by it, any of which are necessary or related to
its operations, where the termination, expiration or amendment of any such
permit, license, certificate of authority,
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concession, authorization, franchise or similar right has resulted or would
result in a Material Adverse Effect;
(i) Adopted, modified or amended any incentive bonus plan, or any
plan, contract or arrangement providing for employee insurance, bonuses,
pension, profit sharing, stock purchase, compensation arrangement, deferred
compensation or other employee benefits;
(j) Except in the ordinary course of business consistent with past
practices, amended or modified any agreement, contract, arrangement or plan
under which any of the Acquired Companies (1) provide health care to its members
or subscribers, (2) obtain health care on behalf of its members or subscribers,
or (3) re-insure risks applicable to health care services;
(k) Entered into any agreement or commitment (whether or not in
writing) to do any of the above;
And each of the Acquired Companies has:
(l) Continued its operations in the ordinary course consistent
with its past practices and maintained its operations, assets, books of account,
records and files in substantially the same manner as heretofore, except as
would not result in a Material Adverse Effect; and
(m) Used its reasonable best efforts to preserve its business.
2.6 ACCOUNTS RECEIVABLE. Except as set forth on Schedule 2.6, the accounts
receivable reflected on the Acquisition Balance Sheet and the accounts
receivable acquired or generated since the date of the Acquisition Balance Sheet
in all material respects (a) are reflected as to amount in accordance with the
terms of the applicable group contract, (b) arise in the ordinary course of
business of the Acquired Companies consistent with past practices, (c) are
legally enforceable according to their terms, (d) to the Company's Knowledge,
are not subject to any right, counterclaim or set-off by the other party, and
(e) to the Company's Knowledge are collectible in full (net of the allowance for
doubtful accounts for the Acquired Companies) consistent with past experience.
2.7 COMPANY'S BROKER FEES. Except as disclosed on Schedule 2.7, all
negotiations relative to this Agreement and the transactions described in this
Agreement have been conducted by the Acquired Companies directly with Humana in
such manner so as not to give rise to any valid claim against Humana,
Acquisition Subsidiary, the Acquired Companies or Shareholder for a finder's
fee, investment banking fees, brokerage commission or other like payment.
2.8 COMPLETENESS OF STATEMENTS. To the Company's Knowledge, no
representation, warranty or covenant of any of the Acquired Companies or
Shareholder in this Agreement contains any untrue statement of a material fact,
any misstatement of a material fact or omits to state a material fact necessary
to make the statements not misleading.
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2.9 CONDITION AND SUFFICIENCY OF ASSETS. To the Company's Knowledge, the
fixed assets of each of the Acquired Companies are, in the aggregate, sufficient
to maintain operations consistent with past practices, and are adequate for the
uses to which they are being put.
2.10 CONTRACTS, ARRANGEMENTS AND COMMITMENTS.
(a) Except as set forth on Schedule 2.10(a), none of the Acquired
Companies is a party to, or subject to, any of the following, whether written or
oral, and which involves a commitment which is not terminable within ninety (90)
days (without penalty, termination fee or any other cost) or which involves an
amount in excess of $50,000:
(1) Any management or employment contract or any contract,
arrangement or commitment with any director, officer, employee, agent,
shareholder or representative of any of the Acquired Companies;
(2) Any contract, arrangement or commitment with any physician
provider of health care;
(3) Any contract, arrangement or commitment with any hospital;
(4) Any contract, arrangement or commitment with any ancillary
provider or any other third party provider of health care services;
(5) Any contract, arrangement or commitment with a broker or
managing general agent;
(6) Any contract, arrangement or commitment with a labor union or
association or other employee group;
(7) Any contract, arrangement or commitment containing covenants
by it not to compete in any line of business with any person or entity
or restricting the clients or customers from whom or the area in which
it may solicit or conduct its business;
(8) Any licensing agreement or similar contract;
(9) Any contract, arrangement or commitment for capital
expenditures in excess of $50,000 as to any one item or in excess of
$1,000,000, in the aggregate;
(10) Any contract, arrangement, commitment or pledge for civic or
charitable contributions;
(11) Any agreement creating an Encumbrance against any of assets
of any of the Acquired Companies;
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(12) Any contract, arrangement or commitment relating to borrowed
money or creating or providing for long-term debt or continuing credit
for borrowed money or any guaranty or suretyship obligation with
respect thereto or any power of attorney;
(13) Any employer or group member contract which is experiencing
a medical loss ratio in excess of one hundred percent (100%) of
premium;
(14) Any contract, arrangement or commitment in which any of the
Acquired Companies has covenanted to keep any information confidential
other than agreements regarding the confidentiality of medical records
as required by law;
(15) Any material contract, arrangement or commitment not made in
the ordinary course of business consistent with past practices; or
(16) Any lease or option to lease any real or personal property
to or from any party.
(b) The Company has made available to Humana a complete copy of
each agreement, contract or document listed on Schedule 2.10(a) (the
"Contracts"). To the Company's Knowledge, (1) no party to a Contract is in
default under the terms of such Contract, and (2) no event has occurred which,
with notice or the passage of time, or both, would constitute a default under
any Contract. To the Company's Knowledge, the Acquired Companies have not
received any notice of termination, cancellation or intent not to renew any of
the Contracts from any other party thereto.
(c) The Company has delivered to Humana a true and correct list of
the fifty largest employer groups from which the Acquired Companies have members
dated as of April 15, 1997. As of April 30, 1997, the Acquired Companies had
246,525 members.
2.11 CURRENT COMPENSATION OF OFFICERS AND DIRECTORS.
(a) Set forth on Schedule 2.11(a) is a complete list of directors
and officers of each of the Acquired Companies on the date of this Agreement
along with the amount of the current annual salaries and the total compensation
paid or due for services to each director or officer for 1996, and complete
descriptions of any commitments to such officers and directors regarding
compensation payable thereafter. There has been no change in the salaries or
compensation paid officers and directors of any of the Acquired Companies since
the date of the Acquisition Balance Sheet, except as set forth on Schedule
2.11(a).
(b) Except as set forth on Schedules 2.12(h) and 5.16, neither the
execution and delivery of this Agreement nor the consummation of the
transactions in accordance with the terms of this Agreement shall (1) result in
any payment (whether severance pay, unemployment compensation or otherwise)
becoming due from any of the Acquired Companies to any employee, director or
officer or former employee, director or officer of any of the Acquired
Companies, (2) increase any benefits otherwise payable to any employee, director
or officer or former employee,
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director or officer of any of the Acquired Companies, or (3) result in the
acceleration of the time of payment or vesting of any such benefits.
2.12 EMPLOYEE BENEFITS.
(a) Except as set forth on Schedule 2.12(a), the Acquired
Companies do not maintain or contribute to any bonus, deferred compensation,
incentive compensation, stock purchase, stock option, stock appreciation, fringe
benefit, cafeteria, employment, consulting, severance or termination pay,
hospitalization or other medical, life or other insurance, supplemental
unemployment benefits, profit-sharing, pension or retirement plan, program,
agreement or arrangement, any other "employee benefit pension plan," "employee
welfare benefit plan," or a "multi employer plan" (within the meaning of
Sections 3(2), 3(1) and 3(37), respectively, of the Employee Retirement Income
Security Act of 1974, as amended, and the rules and regulations promulgated
thereunder ("ERISA")), or any other employee benefit plan, program, agreement or
arrangement whatsoever, whether written or unwritten, for the benefit of any
employee, former employee, officer, director, agent or representative of the
Acquired Companies (collectively, the "Employee Benefit Plans").
(b) Except as provided on Schedule 2.12(b), with respect to each
Employee Benefit Plan, the Acquired Companies have heretofore furnished to
Humana true and complete copies of each of the following documents and Humana
acknowledges receipt of each of the following documents:
(1) A copy of the Employee Benefit Plan (including all
amendments thereto), if any;
(2) A copy of the most recent annual report (Form 5500
series), if required under ERISA or the Internal Revenue Code of 1986,
as amended (the "Code"), with respect to each such Employee Benefit
Plan;
(3) A copy of the most recent Summary Plan Description, if
required under ERISA, with respect to each such Employee Benefit Plan;
(4) If the Employee Benefit Plan is funded through a trust or
any third party funding vehicle, a copy of the trust or other funding
agreement (including all amendments thereto) and the latest financial
statements thereof, if any; and
(5) The most recent determination letter received by the
Acquired Companies or Shareholder from the Internal Revenue Service
with respect to each Employee Benefit Plan that is intended to be
qualified under Section 401(a) of the Code.
(c) Except as provided on Schedule 2.12(a), to the Company's
Knowledge no representation has been made to participants or beneficiaries with
respect to benefits under any of the Employee Benefit Plans that would entitle
them to benefits greater than or in addition to the benefits provided by the
actual terms of such plans.
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(d) To the Company's Knowledge, each of the Employee Benefit Plans
is, and has been, operated and administered in all material respects, including
reporting and disclosure requirements, in accordance with the requirements of
all applicable law, and all material reports required by any appropriate
governmental agency with respect to each such plan have been timely filed,
except as identified on Schedule 2.12(d). Except as set forth on Schedule
2.12(d), to the Company's Knowledge, the Acquired Companies have fulfilled their
obligations under the minimum funding standards of ERISA and the Code with
respect to each Employee Benefit Plan subject to those standards and with
respect to each other plan maintained by the Acquired Companies (to the extent
such obligations require contributions or other actions on or prior to the date
of this Agreement) and no Employee Benefit Plan has incurred any "accumulated
funding deficiency" (whether or not waived) as defined in Section 412 of the
Code nor applied for a waiver of the minimum funding standards of ERISA or the
Code. To the Company's Knowledge, all bonding required under ERISA with respect
to each of the Employee Benefit Plans has been obtained and is in full force and
effect. To the Company's Knowledge, the Acquired Companies are not liable for
any contributions or excise taxes required to have been paid and still unpaid
under any of the Employee Benefit Plans as of the date of this Agreement, except
as identified on Schedule 2.12(d). The Acquired Companies have not been required
to pay, or incurred, any withdrawal liability within the meaning of Section 4021
of ERISA to any multi-employer plan. The Acquired Companies have not engaged in
any transaction with a principal purpose of evading liability under Title IV of
ERISA or incurred any liability under Sections 4062, 4063 or 4064 of ERISA.
Except as set forth on Schedule 2.12(d), to the Company's Knowledge, the
Acquired Companies have performed all material obligations required to be
performed by them under, and are not in material default under, or in material
violation of, and have no knowledge of any material default or material
violation by any party to, any Employee Benefit Plan.
(e) Except as disclosed on Schedule 2.12(e), each of the Employee
Benefit Plans intended to be "qualified" within the meaning of Section 401(a) of
the Code has received a favorable determination letter from the Internal Revenue
Service to that effect, which letter covers the requirements of the Tax Reform
Act of 1986 and the regulations thereunder, and to the Company's Knowledge no
amendment to any such plan, or failure to amend any such plan, after such
determination, adversely affects its qualified status as of the date of this
Agreement (disregarding any amendments which may be required to be effective as
to such plan under any law or regulation as of or prior to the date of this
Agreement but which are not yet required to have been made to such plan by the
date of this Agreement). To the Company's Knowledge, no Employee Benefit Plan
covers any individual other than an employee or former employee, officer or
director of the Acquired Companies and their beneficiaries and dependents, as
applicable. To the Company's Knowledge, the Acquired Companies are not obligated
to provide benefits in respect of current or prior employment to any individual
other than pursuant to one or more of the Employee Benefit Plans. Except as
disclosed on Schedule 2.12(e), the Acquired Companies have not made, nor intend
to make, any commitments to establish any new plan, program, agreement or
arrangement that would, if in existence on the date of this Agreement, be an
Employee Benefit Plan.
(f) Except as set forth on Schedule 2.12(f), to the Company's
Knowledge, no Employee Benefit Plan provides benefits including, without
limitation, death or medical benefits (whether
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or not insured), with respect to current or former employees, officers or
directors of the Acquired Companies for periods extending beyond their
retirement or other termination of service (other than (1) coverage mandated by
applicable law, (2) short term extensions of coverage (for example, for six
months or less following a disability or other termination), (3) death benefits
or retirement benefits under any "employee benefit pension plan" as that term is
defined in Section 3(2) of ERISA); (4) severance pay or (5) non-ERISA deferred
compensation.
(g) Except as set forth on Schedule 2.12(g), to the Company's
Knowledge: there have been no "prohibited transactions" (within the meaning of
Section 406 of ERISA or Section 4975 of the Code) not otherwise exempt under
ERISA or the Code with respect to any Employee Benefit Plan; the Acquired
Companies have not incurred any liability for any excise tax arising under
Section 4972 or 4980B of the Code and no fact or event exists, including the
transaction contemplated hereby, that could give rise to any such liability;
there are no pending, or threatened claims (other than routine claims for
benefits) by, on behalf of, or against any Employee Benefit Plan; and no
litigation, investigation or administrative or other proceeding has occurred or
is threatened involving any Employee Benefit Plan.
(h) Except as provided on Schedule 2.12(h), to the Company's
Knowledge, the consummation of the transactions contemplated by this Agreement
shall not, except pursuant to the Employee Benefit Plans set forth on Schedule
2.12(h) or as expressly provided in this Agreement, (1) entitle any current or
former employee or officer of the Acquired Companies to severance pay,
unemployment compensation or any other similar payments, or (2) accelerate the
time of payment or vesting or increase the amount of compensation due any such
employee or officer.
(i) To the Company's Knowledge, each group health plan (as defined
in Section 4980B(g)(2) of the Code) maintained by the Acquired Companies has
been administered in material compliance with the continuation coverage and
notice requirements of Title I, Subtitle B, Part 6 of ERISA and Section 4980B of
the Code (and the regulations thereunder).
(j) For purposes of this Section 2.12, any reference to the
Acquired Companies shall be deemed to refer also to any entity which is under
common control or affiliated with the Acquired Companies within the meaning of
Section 4001(a)(14) of ERISA and Section 414(b), (c), (m) and (o) of the Code.
2.13 ENVIRONMENTAL MATTERS.
Except as disclosed on Schedule 2.13(a) and except as disclosed in
the reports identified in Section 2.13(f):
(a) To the Company's Knowledge, each of the Acquired Companies (1)
is, and at all times has been, in compliance with and (2) is not in violation of
or liable under, any applicable "Environmental Law" (as defined in Section
2.13(h)) which, in either case, would result in a Material Adverse Effect. None
of the Acquired Companies has received any actual or threatened order, notice,
other written communication or, to the Company's Knowledge, other oral
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communication from (1) any governmental body or private citizen acting in the
public interest, or (2) the current or prior owner or operator of any facilities
owned or leased by the Acquired Companies, of any actual or potential violation
or failure to comply with any Environmental Law, or of any actual or threatened
obligation to undertake or bear the cost of any "Environmental Liabilities" (as
defined in Section 2.13(g)) with respect to any of the facilities or any other
properties or assets (whether real, personal or mixed) owned or leased by any of
the Acquired Companies or with respect to any property or facility at or to
which "Hazardous Materials" (as defined in Section 2.13(j)) were generated,
manufactured, refined, transferred, imported, used or processed by any of the
Acquired Companies, or from which Hazardous Materials have been transported,
treated, stored, handled, transferred, disposed, recycled or received by any of
the Acquired Companies.
(b) To the Company's Knowledge, there are no pending or threatened
claims, Encumbrances, or other legal restrictions, resulting from any
Environmental Liabilities or arising under or pursuant to any Environmental Law,
related to or affecting any of the facilities or any other properties and assets
(whether real, personal or mixed) owned or leased by any of the Acquired
Companies.
(c) To the Company's Knowledge, the Acquired Companies have not
received any citation, directive, inquiry, notice, order, summons, warning or
other communication that relates to "Hazardous Activity" (as defined in Section
2.13(i)), Hazardous Materials, or any alleged, actual or potential violation or
failure to comply with any Environmental Law, or of any alleged, actual or
potential obligation to undertake or bear the cost of any Environmental
Liabilities with respect to any of the facilities or any other properties or
assets (whether real, personal or mixed) owned or leased by any of the Acquired
Companies.
(d) With the exception of Hazardous Materials on, in or under the
facilities in material compliance with applicable Environmental Laws used by
Acquired Companies in the ordinary course of business, to the Company's
Knowledge there are no Hazardous Materials present on or in the environment at
levels requiring "Cleanup" (as defined in Section 2.13(g)(3)) or reporting by
the Acquired Companies under applicable Environmental Laws at the facilities
owned or leased by the Acquired Companies, including any Hazardous Materials
contained in barrels, above or underground storage tanks, landfills, land
deposits, dumps, equipment (whether moveable or fixed) or other containers,
either temporary or permanent, and deposited or located in land, water, sumps,
or any other part of the facilities, or incorporated into any structure therein
or thereon. To the Company's Knowledge, the Acquired Companies have not
permitted or conducted any Hazardous Activity with respect to the facilities or
any other properties or assets (whether real, personal, or mixed) owned or
leased by any of the Acquired Companies which would result in a Material Adverse
Effect.
(e) To the Company's Knowledge, there has been no release or
threat of release, of any Hazardous Materials in violation of Environmental Laws
at levels requiring Cleanup or reporting by the Acquired Companies under
applicable Environmental Laws at or from the facilities owned or leased by any
of the Acquired Companies whether by any of the Acquired Companies, or any other
person.
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(f) The Acquired Companies have delivered to Humana complete
copies and results of any written reports or studies possessed or performed by,
or on behalf of, the Acquired Companies pertaining to Hazardous Materials or
Hazardous Activities in, on or under the facilities, or concerning compliance by
any of the Acquired Companies with Environmental Laws.
(g) For purposes of this Section 2.13, the term "Environmental
Liabilities" means any cost, damages, expense, liability, obligation or other
responsibility arising from or under Environmental Law and consisting of or
relating to:
(1) Any environmental matters or conditions (including on-site
or off-site contamination, and regulation of chemical substances or
products);
(2) Fines, penalties, judgments, awards, settlements, legal or
administrative proceedings, damages, losses, claims, demands and
responses, investigative, remedial, or inspection costs and expenses
arising under Environmental Law;
(3) Financial responsibility under Environmental Law for
cleanup costs or corrective action, including any investigation,
cleanup, removal, containment or other remediation or response actions
required by applicable Environmental Law ("Cleanup") and for any
natural resource damages; or
(4) Any other compliance, corrective, investigative or
remedial measures required under Environmental Law.
(h) For purposes of this Section 2.13, the term "Environmental
Law" means any legal requirement applicable to the Acquired Companies that
requires or relates to:
(1) Advising appropriate authorities, employees and the public
of intended or actual releases of pollutants or hazardous substances or
materials, violations of discharge limits, or other prohibitions and of
the commencements of activities, such as resource extraction or
construction, that could have significant impact on the environment;
(2) Preventing or reducing to acceptable levels the release of
Hazardous Materials into the environment;
(3) Reducing the quantities, preventing the release, or
minimizing the hazardous characteristics of wastes that are generated;
(4) Protecting resources, species or ecological amenities;
(5) Cleaning up pollutants that have been released, preventing
the threat of release, or paying the costs of such clean up or
prevention; or
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(6) Making responsible parties pay private parties, or groups
of them, for damages done to their health or the environment, or
permitting self-appointed representatives of the public interest to
recover for injuries done to public assets.
(i) For purposes of this Section 2.13, the term "Hazardous
Activity" means the distribution, generation, handling, importing, management,
manufacturing, processing, production, refinement, release, storage, transfer,
transportation, treatment or use of Hazardous Materials in, on, under, about or
from the facilities owned or leased by the Acquired Companies or any part
thereof into the environment, but does not include activities performed by the
Acquired Companies in the ordinary course of business in material compliance
with Environmental Laws.
(j) For purposes of this Section 2.13, the term "Hazardous
Materials" means any waste or other substance that is listed, defined,
designated, or classified as, or otherwise determined to be, hazardous,
radioactive, or toxic or a pollutant or a contaminant under or pursuant to any
Environmental Law, including any admixture or solution thereof, and specifically
including petroleum and all derivatives thereof or synthetic substitutes
therefor and asbestos or asbestos-containing materials.
2.14 HMO OR HEALTH INSURANCE ACCREDITATIONS. Schedule 2.14 sets forth the
current certification status by the National Committee of Quality Assurance of
the Acquired Companies which operate as health maintenance organizations. Since
January 1, 1992, none of the Acquired Companies has been denied or failed to
obtain any accreditation by any health maintenance organization or insurance
accreditation agency from whom such Acquired Company sought accreditation.
2.15 INDEBTEDNESS TO OR FROM SHAREHOLDER, OFFICERS AND DIRECTORS. Except as
set forth on Schedule 2.15, neither (1) Shareholder nor (2) any of the directors
or officers of any of the Acquired Companies, or any family member of any of
them, is now indebted to any of the Acquired Companies, except for travel
expense advances and other advances or payments of business expenses and
perquisites in the ordinary course of business consistent with their past
practices, nor is any of the Acquired Companies indebted or obligated to any
officer or director of the Acquired Companies for payment other than the payment
of salary, wages and other employee benefits for services performed, expense
reimbursement or payments of business expenses and perquisites in the ordinary
course of business consistent with their past practices.
2.16 INSURANCE. Included on Schedule 2.16 is a complete listing of all
insurance policies currently in force, including all errors and omissions
insurance policies, insuring any of the Acquired Companies, and bonds issued
concerning any of the Acquired Companies, describing the coverage insured
against and the amount thereof, the insurance carrier, the policy number and the
premium payments. Except as disclosed on Schedule 2.16, each of the Acquired
Companies does not and has not maintained any self-insurance programs. Schedule
2.16 further includes, to the extent currently available to any of the Acquired
Companies and to Company's Knowledge a statement of all claims for insured
losses filed by any of the Acquired Companies within the three-year period prior
to the date of this Agreement. Except as listed on Schedule 2.16, none
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of the Acquired Companies has received (a) any written notice, or (b) to the
Company's Knowledge, oral notice, from any insurance carrier that (1) any of the
Acquired Companies' coverage shall be canceled in whole or in part or (2) the
premiums or premium rates (where the premium is computed on a fluctuating base)
shall be increased.
2.17 INVESTMENT PORTFOLIO. The Company has provided Humana with a list
which sets forth all assets held in the investment portfolios of the Acquired
Companies as of March 31, 1997. Since March 31, 1997, there has been no change
in the credit quality, yield and diversification characteristics of the
investment portfolios of the Acquired Companies which has resulted or would
result in a Material Adverse Effect, except as provided on Schedule 2.17.
2.18 LABOR MATTERS. None of the Acquired Companies has been, nor is it
currently a party to, nor negotiating, any collective bargaining agreement.
Except as set forth on Schedule 2.18, to the Company's Knowledge, there has not
been in the last five years, and there is not presently pending or existing, any
union organizational or representation efforts underway or threatened, nor are
there any existing or threatened labor strikes, slow downs, disputes, grievances
or disturbances which would result in a Material Adverse Effect.
2.19 LICENSES, PERMITS AND FRANCHISES.
(a) Except for "Permits" (as defined in this Section 2.19(a)), the
absence of which would not result in a Material Adverse Effect, and Permits
required pursuant to any Environmental Law, as to which the provisions of
Section 2.13 apply, Schedule 2.19(a) lists all permits, concessions, franchises,
certificates of compliance, certificates of accreditation, certifi cates of
need, consents, licenses, certificates of authority issued by a Governmental
Body, orders, approvals, and other certificates and authorizations issued by a
Governmental Body required or necessary for the operation of any of the Acquired
Companies' business, as currently conducted, by all applicable Governmental
Bodies (the "Permits"). Each of the Acquired Companies has all Permits for all
applicable federal, state and local authorization necessary or required for any
of the Acquired Companies' operations, except for Permits, which if absent would
not result in a Material Adverse Effect. The Company has made available to
Humana a copy of each of the Permits. All of the Permits are in full force and
effect, except as disclosed on Schedule 2.19(a), and to the Company's Knowledge
(1) no suspension or cancellation of any of them is threatened and, (2) the
Permits shall not be affected by the consummation of the Merger.
(b) Each Acquired Company operating as a health maintenance
organization is authorized to engage in the business of operating a health
maintenance organization in the states in which it presently operates. Each
Acquired Company operating as a health maintenance organization meets all
statutory requirements of all Governmental Bodies which have jurisdiction over
it to be an authorized health maintenance organization, except as would not
result in a Material Adverse Effect. Except as set forth on Schedule 2.19(b),
all health maintenance organization contracts being used by an Acquired Company
which require preapproval of a Governmental Body, including, but not limited to,
the provider and member contracts listed in Schedule 2.10(a) are on forms
approved by the Governmental Body having jurisdiction over the approval of such
contracts.
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2.20 LITIGATION. Except as set forth on Schedule 2.20, to the Company's
Knowledge, there are no investigations actions, lawsuits, claims, arbitrations
or proceedings, either judicial, administrative or otherwise, pending,
threatened or contemplated, against or affecting any of the Acquired Companies,
the assets or properties of any of the Acquired Companies, the business of any
of the Acquired Companies, or any employee, officer or director of any of the
Acquired Companies, by or before any court, governmental department, commission,
board, bureau, agency, mediator, arbitrator or other person or instrumentality.
Except as set forth on Schedule 2.20, to the Company's Knowledge, none of the
Acquired Companies is subject to, nor in default under, any court or
administrative order, writ, injunction or decree applicable to it, any of the
Acquired Companies' business or the assets and properties of any of the Acquired
Companies, and none of the Acquired Companies is in violation of any law,
regulation or rule applicable to any of them, except, in each case, regulations
of business enterprises generally or which would not result in a Material
Adverse Effect.
2.21 MINUTES AND STOCK BOOKS. Prior to the execution of this Agreement, the
Company has made available to Humana the minute and stock books of each of the
Acquired Companies or a complete copy thereof, which books contained a true and
complete record of any and all proceedings and actions at all meetings of each
of the Acquired Companies' shareholders and board of directors required to be
set forth in said minutes or for which minutes were prepared except as set forth
on Schedule 2.21. Except as set forth on Schedule 2.21, no changes or addi tions
to the minutes or stock books of any of the Acquired Companies have been made
since the date such books were furnished to Humana, and no proceeding or action
required to be set forth in said books has occurred since the date such books
were made available to Humana.
2.22 NO MATERIAL CHANGES. Except as set forth on Schedule 2.22, to the
Company's Knowledge, no law, rule, order or regulation of any Governmental Body
is pending, published for comment, introduced or enacted which would result in a
Material Adverse Effect.
2.23 PROPRIETARY PROPERTY.
(a) For purposes of this Agreement, the term "Proprietary
Property" shall mean and include all of the following properties of any Acquired
Company to the extent they are listed on Schedule 2.23(a) which any Acquired
Company has or claims to have a right in: (1) the name ChoiceCare, fictional
business names, trade names, registered and unregistered trademarks, service
marks, and applications (collectively, "Marks"); (2) patents, patent
applications, and inventions and discoveries that may be patentable
(collectively, "Patents"); (3) copyright registrations in both published works
and unpublished works (collectively, "Copyrights"); and (4) know-how, trade
secrets, confidential information, customer lists, software, technical
information, data, process technology, plans, drawings and blue prints
(collectively, "Trade Secrets").
(b) Each of the Acquired Companies owns or, as of the Effective
Date shall own or have, the right to use all of the Proprietary Property
necessary for the operation of its businesses as currently conducted. Except for
the Proprietary Property licensed by each of the Acquired Companies as a
licensee and except as disclosed on Schedule 2.23(b), each of the Acquired
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Companies owns all right, title, and interest in and to all of the Proprietary
Property, free and clear of all material liens, security interests, charges,
encumbrances, and equities and to the Company's Knowledge has the right to use
all of such Proprietary Property without payment to a third party.
(c) Set forth on Schedule 2.23(c) is a complete and accurate list
and summary description of all Patents. Except as disclosed on Schedule 2.23(c),
to the Company's Knowledge:
(1) All of the issued Patents are currently in compliance with
all applicable laws and regulations (including payment of filing,
examination and maintenance fees and proofs of working or use), are
valid and enforceable, and are not subject to any maintenance fees or
taxes or actions falling due within ninety days after the Effective
Date;
(2) No Patent has been or is now involved in any interference,
re-issue, reexamination, or opposition proceeding, and there is no
potentially interfering patent or patent application of any third
party;
(3) No Patent is infringed by any third party, or has been
alleged to be invalid or unenforceable; and
(4) No products or services offered commercially by any
Acquired Company infringe or are alleged to infringe any patent or
other proprietary right of any third party.
(d) Set forth on Schedule 2.23(d) is a complete and accurate
list and summary description of all Marks. Except as disclosed on
Schedule 2.23(d):
(1) Each Acquired Company is, or as of the Effective Date
shall be, the owner of all right, title and interest in and to each of
the Marks, free and clear of all Encumbrances;
(2) All Marks which have been registered with the United
States Patent and Trademark Office are currently in compliance with all
applicable laws and regulations (including the timely post-registration
filing of affidavits of use and incontestability and renewal
applications), are valid and enforceable, and are not subject to
actions falling due within 90 days after the Effective Date;
(3) No Mark has been or is now involved in any opposition,
invalidation, cancellation or infringement action and, to the Company's
Knowledge, no such action is threatened against any of the Marks; and
(4) None of the Marks used by any of the Acquired Companies
infringes or is alleged to infringe on any trade name, trademark or
service mark of any third party.
(e) Set forth on Schedule 2.23(e) is a complete and accurate list
of all Copyrights. Except as disclosed on Schedule 2.23(e), to the Company's
Knowledge:
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(1) Each of the Acquired Companies is, or as of the Effective
Date shall be, the owner of all right, title and interest in and to
each of the Copyrights, free and clear of all liens, security
interests, charges, encumbrances and equities;
(2) All of the Copyrights are currently in compliance with
formal legal requirements, are valid and enforceable, and are not
subject to any fees or actions falling due within 90 days after the
date of Effective Date;
(3) No Copyright is infringed by any third party, or has been
alleged to be invalid or unenforceable; and
(4) None of the subject matter of any of the Copyrights
infringes or is alleged to infringe on any copyright of any third party
or is an unlicensed derivative work based on the work of a third party.
(f) Acquired Companies have taken reasonable precautions to
protect the secrecy, confidentiality and value of the Trade Secrets. To the
Company's Knowledge, each of the Acquired Companies has good title and an
absolute (but not necessarily exclusive) right to use the Trade Secrets. The
Trade Secrets, to the Company's Knowledge, have not been used, divulged or
appropriated either for the benefit of any other person or to the detriment of
any of the Acquired Companies. To the Company's Knowledge, no Trade Secret is
subject to any adverse claim by any third party.
(g) Schedule 2.23(g) contains a complete and accurate list,
including any royalties paid or received by any of the Acquired Companies, of
all agreements or contracts relating to any of the Proprietary Property to which
any of the Acquired Companies is a party or by which it is bound, except for any
license implied by the sale of a product and perpetual, paid-up licenses for
commonly available software programs with a value of less than $5,000 under
which such Acquired Company is the licensee. To the Company's Knowledge, there
are no outstanding and no threatened disputes or disagreements relating to any
such agreement.
2.24 SECURITIES REPORTS. Schedule 2.24 lists each registration statement,
schedule, report, proxy statement or information statement prepared by the
Company and filed with the Securities and Exchange Commission (the "SEC")
(collectively, including any subsequently filed reports, the "Company Reports").
As of their respective dates, the Company Reports did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements made therein, in light of the
circumstances under which they were made, not misleading.
2.25 TAKEOVER STATUTES. The Company has taken the necessary steps so that
Ohio Revised Code Section 1701.831 does not apply to the Merger.
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2.26 TAXES. Except as set forth on Schedule 2.26:
(a) Each of the Acquired Companies has timely paid in full all ad
valorem property taxes and other assessments levied on its assets and properties
which have heretofore become due and payable. Each of the Acquired Companies has
withheld amounts from its employees in compliance in all material respects with
the tax withholding provisions of the Code and other applicable federal, state
or local laws, and has filed federal, state and local returns and reports, as
appropriate, accurate in all material respects for all years and periods (and
portions thereof) for which any such returns and reports were due for employee
income tax, withholding taxes, social security taxes and unemployment taxes.
Each of the Acquired Companies has paid or remitted taxes and other amounts
correct in all material respects from its employees' wages for periods ended on
or prior to the date of this Agreement, and, for periods ended after the date of
this Agreement, for which payment is not yet due, each of the Acquired Companies
has made adequate accruals on its regular books of accounts to cover any
material liability for such taxes.
(b) Each of the Acquired Companies has prepared, signed and filed
all federal, state and other tax returns and reports required to be filed by all
applicable laws and regulations on or before the date of this Agreement. All
such tax returns and reports were correct and complete in all material respects
and the Acquired Companies have timely paid or accrued all taxes or installments
thereof, interest, penalties, assessments and deficiencies of every kind and
nature whatsoever which were due and owing on such tax returns and reports or
for which any material liability is otherwise due and owing under any applicable
law and regulation for any periods for which returns or reports were due,
whether or not reflected on such returns and reports and whether or not relating
to the income of any of the Acquired Companies. The amounts recorded as payable
for taxes in the Acquisition Balance Sheet are sufficient for the payment of all
federal, state, foreign and local taxes attributable to all periods ended on or
before the date of the Acquisition Balance Sheet, and adequate accruals have
been made by all of the Acquired Companies for all material liabilities for
taxes accruing since the date of the Acquisition Balance Sheet. There are in
effect no agreements, waivers or other arrangements providing for an extension
of time with regard to the assessment of any tax, or any deficiency with respect
thereto, against any of the Acquired Companies, other than routine extensions in
filing deadlines. There are no actions, suits, proceedings, investigations or
claims now pending, nor, to the Company's Knowledge, proposed, against any of
the Acquired Companies, nor are there any matters under discussion with the
Internal Revenue Service or other governmental authority, relating to any taxes
or assessments, or any claims or deficiencies with respect thereto. Set forth on
Schedule 2.26, is a list of federal income tax returns that the Internal Revenue
Service has audited.
(c) True and complete copies of all federal and state income tax
returns filed by each of the Acquired Companies since December 31, 1995, have
been delivered to Humana.
(d) None of the Acquired Companies is a United States real
property holding corporation within the meaning of section 897(c)(2) of the
Code. None of the Acquired Companies is a "consenting corporation" under section
341(f) of the Code. The Company has not agreed to, nor is it required to make,
any adjustment under section 481(a) of the Code by reason of a change in
accounting method or otherwise.
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(e) None of the Acquired Companies is, nor has it ever been, a
party to any tax allocation or sharing agreement. None of the Acquired Companies
(1) has been a member of an affiliated group filing a consolidated federal
income tax return (other than with each other), or (2) has any liability for the
taxes of any corporation or other entity under Treas. Reg. Sec. 1.1502-6 (or any
similar provision of state, local, or foreign law), as a transferee or
successor, by contract, or otherwise.
(f) None of the Acquired Companies shall recognize income as a
result of the termination of their affiliated group under the consolidated
return regulations.
2.27 TITLE TO PROPERTIES. Each of the Acquired Companies owns all of the
properties and assets (whether real, personal or mixed and whether tangible or
intangible) that they purport to own or reflected as owned in the Acquisition
Balance Sheet (except for assets held under capitalized leases disclosed on
Schedule 2.27 and personal property sold or disposed of since the date of the
Acquisition Balance Sheet in the ordinary course of business consistent with
past practice), and all of the properties and assets purchased or otherwise
acquired by any of the Acquired Companies since the date of the Acquisition
Balance Sheet.
3. REPRESENTATIONS AND WARRANTIES OF SHAREHOLDER. Shareholder hereby represents
and warrants to Humana and Acquisition Subsidiary as follows:
3.1 TITLE TO THE COMPANY SHARES. Shareholder is the record and lawful owner
of 13,500,000 issued and outstanding Company Shares and has good and marketable
title to all such Company Shares free and clear of all liens, pledges,
encumbrances, proxies and charges of any nature whatsoever other than as set
forth on Schedule 3.1 to this Agreement. None of Company Shares owned by
Shareholder is subject to any proxy, voting trust, stock restriction, stock
purchase or stock redemption agreement or the like, other than (a) those
provided for in the Shareholder Agreement, dated January 25, 1996, between
Shareholder and the Company, (b) restrictions of transfer under applicable state
and federal securities laws and (c) those restrictions described on Schedule
3.1. Shareholder has received a written consent from the Company in accordance
with the requirements of the Shareholder Agreement consenting to Shareholder
entering into this Agreement and consummating the transactions in accordance
with the terms of this Agreement.
3.2 ORGANIZATION AND STANDING OF SHAREHOLDER; CORPORATE POWER. Shareholder
is duly organized, validly existing and in good standing as a nonprofit
corporation under the laws of the State of Ohio. Shareholder has full corporate
power and authority to own and lease its properties as such properties are now
owned and leased and to conduct its business as and where its business has and
is now being conducted.
3.3 STOCK OWNERSHIP AND RIGHTS. To "Shareholder's Knowledge" (as defined in
Section 3.4(d)), none of the Company Shares owned by Shareholder has been issued
in violation of any federal, state or other law pertaining to the issuance of
securities, or in violation of any rights, pre-emptive or otherwise, of any
present or past shareholder of the Company. Shareholder has not granted any
irrevocable proxies to vote any of its Company Shares.
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3.4 AUTHORITY; NO CONFLICT.
(a) Shareholder has no members other than the trustees of
Shareholder. The trustees of Shareholder have approved this Agreement and the
consummation of the transactions subject to the terms of this Agreement. This
Agreement constitutes the valid and binding obligation of Shareholder,
enforceable against it in accordance with its terms. Shareholder has the right,
power, authority and capacity to execute and deliver this Agreement and to
perform its obligations under this Agreement.
(b) Except as set forth on Schedule 3.4(b), neither the execution
and delivery of this Agreement by Shareholder nor the consummation or
performance by Shareholder of any of the transactions described in this
Agreement shall, directly or indirectly (with or without notice or lapse of
time):
(1) Contravene, conflict with or result in a violation of any
provision of the articles of incorporation or regulations of Shareholder,
or any resolution adopted by the trustees of Shareholder;
(2) To Shareholder's Knowledge, contravene, conflict with or
result in a violation of, or give any Governmental Body, or other person
the right to challenge any of the transactions described in this Agreement
or to exercise any remedy or obtain any relief under, any law, rule,
ordinance or regulation to which Shareholder, or any of the Company Shares
owned by Shareholder, may be subject which, in any such case, would result
in a "Shareholder Material Adverse Effect" (as defined in Section 3.4(e));
or
(3) To Shareholder's Knowledge, result in the imposition or
creation of any Encumbrances on or with respect to any of the Company
Shares owned by Shareholder which, would result in a Shareholder Material
Adverse Effect.
(c) Except for the approval under the HSR Act and as set forth on
Schedule 2.3(b), Shareholder is not, and shall not be, required to give any
notice to or obtain any consent from any person in connection with the execution
and delivery of this Agreement or the consummation or performance of any of the
transactions described in this Agreement which, if not given or obtained, would
result in a Shareholder Material Adverse Effect; provided, however, Shareholder
is relying on the accuracy of Schedule 2.3(b).
(d) For purposes of this Agreement, "Shareholder's Knowledge"
means information, facts or events which any presently serving officer of
Shareholder actually knows or which any presently serving officer of Shareholder
reasonably should know in connection with their performance of their duties as
an officer of Shareholder.
(e) For purposes of this Agreement, "Shareholder Material Adverse
Effect" means any event or events that would be reasonably expected to have a
material and adverse effect on the business, assets, properties, liabilities,
condition (financial or otherwise) or results of operations of the Shareholder,
taken as a whole;
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3.5 SHAREHOLDER'S BROKER FEES. Except as disclosed in Schedule 3.5, all
negotiations relative to this Agreement and the transactions described in this
Agreement have been conducted by Shareholder directly with Humana in such manner
so as not to give rise to any valid claim against Humana, Acquisition Subsidiary
or the Acquired Companies for a finder's fee, investment banking fees, brokerage
commission or other like payment.
3.6 LITIGATION. Except as set forth on Schedule 2.20, to Shareholder's
Knowledge, there are no investigations, actions, lawsuits, claims, arbitrations
or proceedings, either judicial, administrative or otherwise, pending,
threatened or contemplated, against or affecting the Shareholder's ability to
perform its obligations hereunder.
4. REPRESENTATIONS AND WARRANTIES OF HUMANA AND ACQUISITION SUBSIDIARY. Each of
Humana and Acquisition Subsidiary, jointly and severally, represents and
warrants to the Company and Shareholder as follows:
4.1 INCORPORATION; CORPORATE POWER. Humana is duly organized, validly
existing and in good standing under the laws of the State of Delaware.
Acquisition Subsidiary is duly organized, validly existing and in good standing
under the laws of the State of Ohio. Humana and Acquisition Subsidiary each has
full corporate power and authority to own and lease its properties as such
properties are now owned and leased and to conduct its business as and where its
business has and is now being conducted.
4.2 AUTHORITY; NO CONFLICT.
(a) Humana and Acquisition Subsidiary have each approved this
Agreement and the consummation of the transactions subject to the terms of this
Agreement by all necessary corporate action. This Agreement constitutes the
valid and binding obligation of each of Humana and Acquisition Subsidiary,
enforceable against each of them in accordance with its terms. Each of Humana
and Acquisition Subsidiary has the right, power, authority and capacity to
execute and deliver this Agreement and to perform its obligations under this
Agreement.
(b) Except as set forth on Schedule 4.2(b), neither the execution
and delivery of this Agreement by Humana or Acquisition Subsidiary nor the
consummation or performance by Humana or Acquisition Subsidiary of any of the
transactions described in this Agreement shall, directly or indirectly (with or
without notice or lapse of time):
(1) Contravene, conflict with, or result in a violation of any
provision of the articles of incorporation, regulations or bylaws, as the
case may be, of Humana or Acquisition Subsidiary, or any resolution adopted
by the board of directors of either Humana or Acquisition Subsidiary; or
(2) To "Humana's Knowledge" (as defined in Section 4.2(d)) or
"Acquisition Subsidiary's Knowledge" (as defined in Section 4.2(d)),
contravene, conflict with, or result in a violation of, or give any
Governmental Body, or other person the right to challenge any of the
transactions described in this Agreement or to exercise any remedy or
obtain any relief
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under, any law, rule, ordinance or regulation to which Humana or
Acquisition Subsidiary may be subject.
(c) Except for the approval under the HSR Act and as set forth on
Schedule 2.3(b), neither Humana nor Acquisition Subsidiary is, or shall be,
required to give any notice to or obtain any consent from any person in
connection with the execution and delivery of this Agreement or the consummation
or performance of any of the transactions described in this Agreement which, if
not given or obtained, would reasonably be expected to have a material adverse
effect on the business, assets, properties, liabilities, condition (financial or
otherwise) or results of operations of Humana and Acquisition Subsidiary, taken
as a whole; provided, however, Humana and Acquisition Subsidiary are relying on
the accuracy of Schedule 2.3(b).
(d) For purposes of this Agreement, "Humana's Knowledge" means
information, facts or events which any presently serving officer of Humana
actually knows or which any presently serving officer of Humana reasonably
should know in connection with his or her performance of his or her duties as an
officer of Humana. For purposes of this Agreement, "Acquisition Subsidiary's
Knowledge" means information, facts or events which any officer or director of
Acquisition Subsidiary actually knows or which any officer or director of
Acquisition Subsidiary reasonably should know in connection with his or her
performance of his or her duties as an officer or director of Acquisition
Subsidiary.
4.3 HUMANA'S AND ACQUISITION SUBSIDIARY'S BROKER FEES. Except as set forth
on Schedule 4.3, all negotiations relative to this Agreement and the
transactions described in this Agreement have been conducted by Humana and
Acquisition Subsidiary directly with Shareholder and the Company in such manner
so as not to give rise to any valid claim against Shareholder or the Acquired
Companies for a finder's fee, investment banking fees, brokerage commission or
other like payment.
4.4 LITIGATION. To Humana's Knowledge or Acquisition Subsidiary's
Knowledge, there are no investigations, actions, lawsuits, claims, arbitrations
or proceedings, either judicial, administrative or otherwise, pending,
threatened or contemplated, against or affecting the Humana's or Acquisition
Subsidiary's ability to perform its obligations hereunder.
5. COVENANTS OF THE PARTIES.
5.1 OPERATION OF THE COMPANY PENDING EFFECTIVE DATE. From the date of this
Agreement through the Effective Date, the Acquired Companies shall, except (1)
as otherwise provided in this Agreement, (2) with the written consent of Humana,
which consent shall not be unreasonably withheld or (3) for actions or omissions
disclosed in any Schedule as of the date of this Agreement (not including
"Updated Schedules" (as defined in Section 11.3(b))):
(a) Continue each of the Acquired Companies' business and
operations substantially in the same manner as heretofore, not undertake any
transactions or enter into any contracts, commitments or arrangements other than
(1) in the ordinary course of business consistent with
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past practices or (2) as disclosed in this Agreement, and use its reasonable
best efforts to preserve each of the Acquired Companies' present business and
organization;
(b) Refrain from disposing of or encumbering or agreeing to
dispose of or encumber any of the Acquired Companies' assets other than in the
ordinary course of business consistent with past practices except as would not,
together with any other occurrence referred to in a clause of this Section 5.1
similarly limited, result in a Material Adverse Effect;
(c) Maintain the Permits and not take any action, or refrain from
taking any action, which could cause any of the Permits to be revoked,
restricted or suspended, except as would not, together with any other occurrence
referred to in a clause of this Section 5.1 similarly limited, result in a
Material Adverse Effect;
(d) Not permit any Acquired Company to make any commitment for
capital expenditure in excess of $50,000 in a single transaction or series of
related transactions other than those capital expenditures disclosed in this
Agreement;
(e) Maintain the existing insurance coverage of each Acquired
Company, subject to variations in amounts required by ordinary operations
consistent with past practices, except as would not, together with any other
occurrence referred to in a clause of this Section 5.1 similarly limited, result
in a Material Adverse Effect;
(f) Not terminate or amend any Contract or Permit except in the
ordinary course of business consistent with past practices, except as would not,
together with any other occurrence referred to in a clause of this Section 5.1
similarly limited, result in a Material Adverse Effect;
(g) Not take or omit to take any action which would cause any of
the representations and warranties made by it in this Agreement to be untrue or
incorrect;
(h) Not declare or pay any dividend on, or make any distribution
to the holders in their capacity as such of, any of the Company Shares;
(i) Not change any of the Acquired Companies' Articles of
Incorporation or Regulations;
(j) Maintain each of the Acquired Companies' existence;
(k) Not authorize for issue or issue any additional shares of
capital stock or any options, warrants, agreements or other rights entitling any
person or entity to purchase or acquire any of the shares of capital stock of
any of the Acquired Companies or change or otherwise adjust the number of shares
of capital stock outstanding;
(l) Not permit the Acquired Companies to make any investment in
any other corporation, association, partnership, limited liability company or
other business organization or enter into, modify, terminate or waive any right
under any material lease, license, contract or
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other instrument other than in the ordinary course of business consistent with
past practice or as disclosed in this Agreement;
(m) Except in the ordinary course of business consistent with past
practices, not modify or amend any agreement, plan, contract or arrangement of
an Acquired Company (1) offering health care to its members or subscribers, (2)
obtaining health care services on behalf of its members or subsidiaries, or (3)
providing for re-insurance of health care costs or risks;
(n) Except in the ordinary course of business consistent with past
practices, not increase the rate or change the nature of the compensation
payable to any of the Acquired Companies' officers or directors or any health
care provider; and
(o) Not incur or agree to incur on the part of the Acquired
Companies any indebtedness for borrowed money or allow any of their assets to be
subjected to any Encumbrance which would, together with any other occurrence
referred to in a clause of this Section 5.1 similarly limited, result in a
Material Adverse Effect.
5.2 NEGOTIATIONS WITH OTHERS.
(a) Except as provided in Sections 5.2(b) and 5.2(c), from and
after the date of this Agreement and prior to the Effective Date:
(1) Neither the Company nor Shareholder shall, and the Company
and Shareholder shall direct and use their reasonable best efforts to cause
the Acquired Companies and the officers, directors, trustees, employees and
authorized agents and representatives of Shareholder and the Acquired
Companies (including, without limitation, any investment banker, attorney
or accountant retained by Shareholder or the Company) not to (A) initiate,
solicit or encourage, directly or indirectly, any inquiries from potential
third party acquirors (together with any agents, investment bankers,
attorneys or accountants for such persons, "Third Party Acquirors") or the
making or implementation of any proposal or offer (including, without
limitation, any proposal or offer to shareholders of the Company) with
respect to a merger, acquisition, consolidation or similar transaction
involving, or any purchase of all or any significant portion of the assets
or any equity securities of the Acquired Companies (any such inquiry,
proposal or offer, an "Acquisition Proposal"), (B) have discussions
concerning, engage in any negotiations concerning, or provide any
"Information" (as defined in Section 11.9(a)) to potential Third Party
Acquirors relating to, an Acquisition Proposal, or (C) otherwise facilitate
any effort or attempt to make or implement an Acquisition Proposal;
(2) Each of Shareholder and the Company shall, and the Company
shall cause the Acquired Companies to, immediately cease and cause to be
terminated any existing activities, discussions or negotiations with any
potential Third Party Acquirors conducted heretofore with respect to any of
the foregoing and shall take the necessary steps to inform the individuals
or entities referred to above of the obligations undertaken in this Section
5.2; and
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(3) Shareholder and the Company, as the case may be, shall
notify Humana immediately if any Acquisition Proposal is received by, any
information is requested from, or any such negotiations or discussions are
sought to be initiated or continued, with any of them, as the case may be,
and Shareholder or the Acquired Companies, as the case may be, shall
promptly provide Humana with copies of any written materials Shareholder or
any of the Acquired Companies receive from any potential Third Party
Acquiror that relates to an Acquisition Proposal without identifying the
identity of any such potential Third Party Acquiror.
(b) Notwithstanding anything to the contrary contained in Section
5.2(a), from the date of this Agreement through 4:00 p.m. Cincinnati time on the
date which is two weeks after the date of this Agreement (the "Window Period"),
the Board of Directors of the Company and the trustees of Shareholder and their
officers, directors, trustees, employees and authorized agents and
representatives (including, without limitation, any investment banker, attorney
or accountant retained by the Company or Shareholder) may:
(1) Advise a Third Party Acquiror that the Company and
Shareholder may consider a "Third Party Offer" (as defined in Section
5.2(d)); and
(2) Furnish information to or enter into discussions or
negotiations with, any person or entity that expresses, in writing, a
desire to make a Third Party Offer if, and only to the extent that:
(A) Prior to or concurrently with furnishing such
information to, or entering into discussions or negotiations with, such a
person or entity concerning a Third Party Offer, the Company provides
written notice to Humana to the effect that it is furnishing information
to, or entering into discussions or negotiations with, such person or
entity; and
(B) Shareholder and the Company keep Humana informed
generally of the status of any such discussions or negotiations without
identifying the identity of the person making the Third Party Offer or the
specific terms thereof.
(c) Shareholder and the Company may accept a Third Party Offer
received during the Window Period provided that:
(1) Neither Shareholder nor the Company has breached in any
material respect its obligations under this Section 5.2;
(2) Shareholder or the Company delivers a copy of the Third
Party Offer to Humana on or before the expiration of the Window Period;
(3) Shareholder and the Company accept the Third Party Offer
prior to 4:00 p.m. Cincinnati time on the first to occur of (A) the date
which is three weeks after the date of this Agreement or (B) June 23, 1997;
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(4) The negotiation and documentation of the Third Party Offer
occurred in accordance with the following:
(A) Immediately after the date of this Agreement, the
Company shall issue a press release describing in reasonable detail the
Agreement and the transaction proposed to be consummated;
(B) The person making the Third Party Offer has been
furnished a copy of this Agreement; and
(C) The person making the Third Party Offer has made such
offer utilizing the form of this Agreement, if an all-cash offer, or
utilizing that form to the extent possible, making only necessary changes
therein for an offer involving consideration other than all cash;
(5) If the Third Party Offer is an all-cash offer, it provides
"Total Consideration" (as defined in Section 5.2(e)) that is at least
$1,000,000 greater than the sum of (A) the Per-Share Merger Consideration
multiplied by the number of Company Shares outstanding on the date of this
Agreement, (B) the maximum cash consideration payable by the Company with
respect to the Options pursuant to Section 5.16(b) and (C) the amounts
payable to Humana pursuant to Section 11.1, or if the Third Party Offer
provides for consideration other than all cash, the Board of Directors of
the Company has been furnished with a written opinion of a
nationally-recognized investment banking firm dated on or before June 23,
1997, stating that the Total Consideration is at least $1,000,000 greater
than the sum of (A) the Per-Share Merger Consideration multiplied by the
number of Company Shares outstanding on the date of this Agreement, (B) the
maximum cash consideration payable by the Company with respect to the
Options pursuant to Section 5.16(b) and (C) the termination fee payable to
Humana pursuant to Section 11.1;
(6) Shareholder and the Company contemporaneously terminate
this Agreement pursuant to Section 8.1(b)(4); and
(7) The Company shall pay to Humana the amounts contemplated
by Section 11.1.
(d) For purposes of this Agreement, a "Third Party Offer" means a
bona fide proposal in writing, not subject to any financing condition, to
acquire substantially all of the Company Shares by purchase or merger.
(e) For purposes of this Agreement, "Total Consideration" means,
with respect to a Third Party Offer, the total consideration to be paid by the
Third Party Acquiror pursuant to a Third Party Offer including (1) the
consideration for the outstanding stock of the Company, (2) all amounts or
consideration payable with respect to the Options and (3) the assumption or the
past or future payment of the amounts payable to Humana pursuant to Section
11.1, whether by the Company or the Third Party Acquiror.
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5.3 REQUIRED APPROVALS. As promptly as practicable after the date of this
Agreement, Humana, Acquisition Subsidiary, Shareholder and the Company shall,
and the Company shall cause all Acquired Companies to, make all filings required
by applicable law to be made by any of them in order to consummate the
transactions in accordance with the terms of this Agreement (including all
filings under the HSR Act). Between the date of this Agreement and the Effective
Date, Humana, Acquisition Subsidiary, Shareholder and the Company shall, and the
Company shall cause all Acquired Companies to, (a) cooperate with each other
with respect to all filings that any party elects to make or is required by
applicable law to make in connection with the transactions described in this
Agreement, and (b) cooperate with each other in obtaining all necessary
consents.
5.4 MEETING OF THE COMPANY'S SHAREHOLDERS.
(a) The Company shall take, consistent with applicable law and its
Articles of Incorporation and Regulations, all actions necessary to convene a
timely meeting of its shareholders as promptly as practicable to consider and
vote upon the approval of this Agreement and the Merger. The Board of Directors
of the Company shall recommend approval of the Merger and this Agreement, and
the Company shall take all lawful action to solicit such approval.
(b) The Company's proxy or information statement with respect to
such meeting of shareholders (the "Proxy Statement"), at the date thereof and at
the date of such meeting, shall not include an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading; provided, however, that the foregoing shall not apply
to the extent that any such untrue statement of a material fact or omission to
state a material fact was made by the Company in reliance upon and in conformity
with written information concerning Humana or Acquisition Subsidiary furnished
to the Company by Humana specifically for use in the Proxy Statement. The
Company shall give Humana and its counsel the opportunity to review the Proxy
Statement and all amendments and supplements to the Proxy Statement prior to
such document being filed with, or sent to, the SEC. Humana and the Company
shall cooperate with each other in the prompt preparation and filing of the
Proxy Statement with the SEC. The Company shall notify Humana promptly of the
receipt of any comments of the SEC and of any request by the SEC for amendments
or supplements to the Proxy Statement or for additional information, and shall
supply Humana with copies of all correspondence between the Company or its
representatives, on the one hand, and the SEC, on the other hand, with respect
to the Proxy Statement or the transactions contemplated by this Agreement. The
Company shall use its reasonable best efforts, after consultation with the other
parties to this Agreement, to respond promptly to all comments of and requests
by the SEC. The Proxy Statement shall not be filed, and no amendment or
supplement to the Proxy Statement shall be made by the Company, without prior
consultation with Humana and its counsel. As promptly as practical after the
Proxy Statement has been cleared by the SEC, the Company shall mail the Proxy
Statement and related form of proxy to the shareholders of the Company. If the
Company mails definitive proxy materials to its Shareholders prior to June 23,
1997, then (1) if the Company intends to accept a Third Party Offer, the Board
of Directors of the Company shall be permitted to withdraw or modify its
recommendations to shareholders of the Merger and this Agreement, and to make
any
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recommendation to shareholders necessary in connection with the acceptance by
the Company of such Third Party Offer, and (2) the Company shall be permitted to
amend the Proxy Statement to reflect any Third Party Offer or any amendment of
this Agreement arising from a Third Party Offer and to take all appropriate
actions, including canceling, rescheduling or adjourning the meeting of
Shareholders of the Company.
(c) No written information concerning Humana or Acquisition
Subsidiary furnished to the Company by Humana specifically for use in the Proxy
Statement shall, at the date thereof and at the date of such meeting, include an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
5.5 VOTING AGREEMENT OF SHAREHOLDER. At any meeting of the shareholders of
the Company, or in any action of shareholders of the Company taken by written
consent in lieu of a meeting, Shareholder shall vote all of the Company Shares
owned or controlled by it (1) in favor of the Merger, this Agreement and all of
the transactions described in this Agreement and (2) against any proposal which
may materially impair the Company's ability to consummate, or materially reduce
the benefits to Humana resulting from, the Merger. Notwithstanding anything
contained in this Section 5.5, the voting agreement of Shareholder shall
terminate upon termination of this Agreement by Shareholder and the Company in
compliance with Section 8, below.
5.6 FILINGS; OTHER ACTION; FURTHER ACTIONS. Subject to the terms and
conditions of this Agreement, the Company, Shareholder, Humana and Acquisition
Subsidiary shall, and the Company shall cause all Acquired Companies to,
promptly make their respective filings and thereafter make any other required
submissions under health maintenance organization and insurance licensure,
certificate of need and certificate of authority laws and regulations that may
be applicable to the Acquired Companies and the Merger.
5.7 NON-COMPETITION AGREEMENT. In further consideration of the Merger and
subject to the consummation of the Merger, Shareholder hereby agrees that it
shall not after the Effective Time, directly or indirectly, jointly or
severally, as a principal, partner, joint venturer, proprietor, consultant,
franchisor, franchisee, agent, shareholder, lender, member or in any other
capacity, own, operate or manage a health maintenance organization or otherwise
engage in any health benefit plan business in Indiana, Kentucky or Ohio for a
period of four years from the Effective Date, except as the owner of less than
five percent (5%) of the outstanding stock of a publicly-traded company.
5.8 COMPLIANCE WITH CONDITIONS. All parties shall cooperate fully with each
other in order to meet the conditions set forth in Sections 6 and 7. All parties
shall use their respective reasonable best efforts, and act in good faith, to
consummate the transactions in accordance with the terms of this Agreement as
promptly as possible.
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5.9 FURTHER INVESTIGATION OF THE COMPANY AND HUMANA. During the period from
the date of this Agreement through the Effective Date, Shareholder and Company
shall and shall cause all Acquired Companies to:
(a) Afford to Humana and the officers, employees and
representatives of Humana free access to the premises of any of the Acquired
Companies, and to all records and information of the Acquired Companies relating
to the Company Shares and the business assets and operations of the Acquired
Companies during normal business hours upon reasonable prior notice so that
Humana may have full opportunity to make such investigation as it shall desire
of the affairs of the Acquired Companies; provided, however, that Humana shall
take reasonable efforts to not interfere with or disrupt the business activities
of the Company; and
(b) Furnish or cause to be furnished to Humana and the officers,
employees and representatives of Humana, all data and information concerning the
business, finances, properties, assets and affairs of the Acquired Companies as
reasonably requested by Humana.
5.10 GOVERNANCE OF THE SURVIVING CORPORATION. For a period of three years
after the Effective Date, Humana shall vote its shares in the Surviving
Corporation at any meeting at which directors are elected in favor of those
nominated directors so that after such election, if such persons are elected,
there would be six directors (a) two directors of the Surviving Corporation who
are trustees of Shareholder who shall be nominated by Shareholder, (b) two
directors of the Surviving Corporation who are senior management members of
Humana and (c) two directors of the Surviving Corporation who are officers of
the Surviving Corporation and, if Daniel A. Gregorie, M.D. is then serving as
the senior officer of the Surviving Corporation, one of whom shall be Dr.
Gregorie, and the other of whom shall be nominated by Dr. Gregorie; provided,
however, that each such election is subject to the willingness of each such
person to serve as a director of the Surviving Corporation. If Dr. Gregorie no
longer serves as the senior officer of the Surviving Corporation, the director
positions to be filled by Dr. Gregorie and his nominee shall be filled by the
senior officer of the Surviving Corporation resident in Cincinnati and his or
her nominee.
5.11 SECURITIES REPORTS. Any Company Reports filed with the SEC subsequent
to the date of this Agreement and prior to the Effective Date shall not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements made therein,
in light of the circumstances under which they were made, not misleading.
5.12 FORMATION OF TASK FORCE. Promptly after the execution of this
Agreement, Humana and the Company shall form a transition task force. The Chief
Executive Officer of the Company shall chair the task force. The task force
shall review and make recommendations to Humana and the Company concerning
transition issues.
5.13 NOTICE OF INACCURACIES. Humana or Acquisition Subsidiary shall notify
the Company and Shareholder promptly, and in any case on or prior to the
Effective Date, of any inaccuracy or omission in any Company or Shareholder
representation, warranty or covenant which comes
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to Humana's or Acquisition Subsidiary's attention on or prior to the Effective
Date. The Company or Shareholder, as the case may be, shall notify Humana
promptly, and in any case on or prior to the Effective Date, of any inaccuracy
or omission in any Humana or Acquisition Subsidiary representation, warranty or
covenant which comes to the Company's or Shareholder's attention on or prior to
the Effective Date.
5.14 TAXES.
(a) Humana shall cause the Surviving Corporation to prepare and to
timely file all required tax returns, including, without limitation, federal,
state and local returns, for the Acquired Companies for any period that ends on
or before the Effective Date, for which returns have not been filed as of such
date.
(b) After the Effective Date, the parties shall make available to
one another, as reasonably requested, and to any taxing authority, all
information, records, or documents relating to tax liabilities or possible tax
liabilities of the Acquired Companies for all periods that begin before or end
on the Effective Date and shall preserve all such information, records and
documents until the expiration of any applicable statute of limitations or
extensions thereof.
5.15 INDEMNIFICATION; DIRECTORS AND OFFICERS INSURANCE.
(a) From and after the Effective Time, Humana agrees to, and to
cause the Surviving Corporation to, indemnify and hold harmless all past and
present officers, directors, employees and agents (the "Indemnified Parties") of
the Acquired Companies to the full extent such persons may be indemnified by the
Acquired Companies pursuant to the Acquired Companies' Articles of Incorporation
and Regulations as in effect as of the date of this Agreement for acts and
omissions occurring at or prior to the Effective Time and shall advance
reasonable litigation fees and expenses incurred by such persons in connection
with defending any action arising out of such acts or omissions, provided that
such persons provide any requisite affirmations and undertaking, as set forth in
the Acquired Companies' Regulations as in effect on the date of this Agreement.
(b) Any Indemnified Party shall promptly notify Humana and
Surviving Corporation of any claim, action, suit, proceeding or investigation
for which such party may seek indemnification under this Section 5.15; provided,
however, that the failure to furnish any such notice shall not relieve Humana or
the Surviving Corporation from any indemnification obligation under this Section
5.15 except to the extent Humana or the Surviving Corporation is materially
prejudiced thereby. In the event of any such claim, action, suit, proceeding, or
investigation, (1) the Surviving Corporation shall have the right to assume the
defense thereof, and the Surviving Corporation shall not be liable to such
Indemnified Parties for any legal expenses of other counsel or any other
expenses subsequently incurred thereafter by such Indemnified Parties in
connection with the defense thereof, except that all Indemnified Parties (as a
group) shall have the right to retain separate counsel, reasonably acceptable to
such Indemnified Parties and Humana, at the expense of the Indemnifying Party if
the named parties to any such proceeding include both the Indemnified Party and
the Surviving Corporation and there is a potential conflict of interest
requiring retention of separate counsel for one or more Indemnified Parties, (2)
the Indemnified
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Parties shall cooperate in the defense of any such matter, and (3) the Surviving
Corporation shall not be liable for any settlement effected without its prior
written consent. In addition, Humana shall provide, or cause the Surviving
Corporation to provide, for a period of not less than six years after the
Effective Time, the Acquired Companies' current directors and officers an
insurance and indemnification policy that provides coverage for events occurring
at or prior to the Effective Time (the "D&O Insurance") that is no less
favorable than the policy maintained by the Company on January 1, 1997, or, if
substantially equivalent insurance coverage is unavailable, the best available
coverage; provided, however, that Humana and the Surviving Corporation shall not
be required to pay an annual premium for the D&O Insurance in excess of one and
one-half times the last annual premium paid by the Company prior to January 1,
1997, but in such case shall purchase as much such coverage as possible for such
amount.
(c) This Section 5.15 is intended to benefit the Indemnified
Parties, shall be enforceable by each Indemnified Party and his or her heirs and
representatives, and shall be binding on all successors and assigns of the
Company, Humana, Acquisition Subsidiary and the Surviving Corporation. If the
Merger occurs, the covenant contained in this Section 5.15 shall survive the
Effective Time and shall never expire.
5.16 COMPANY STOCK OPTIONS.
(a) The Company shall (1) terminate the Company's 1996 Long Term
Stock Incentive Plan (the "Option Plan") immediately prior to the Effective Time
without prejudice to the holders of the Options and (2) grant no additional
options or rights under the Option Plan.
(b) The Company has granted certain of its employees options to
purchase Company Shares pursuant to the Option Plan as set forth on Schedule
5.16 (the "Options"). Schedule 5.16 sets forth options granted (including the
name of each option holder, the option exercise price, the number of Company
Shares which each person has an option to purchase and the date of each grant)
by the Company. Prior to the Effective Time, the Company shall take action
sufficient to cause at least 1,000,000 of the Options to terminate at the
Effective Time. The Company may agree to provide holders of Options as
consideration for such termination cash in the per share amount equal to the
difference between (1) the Per Share Merger Consideration and (2) $10. Such cash
payments shall be payable to holders of Options as soon as practicable after the
Effective Date, subject to all applicable payroll and withholding taxes.
6. CONDITIONS TO THE OBLIGATIONS OF HUMANA AND ACQUISITION SUBSIDIARY. The
obligations of Humana and Acquisition Subsidiary to consummate the transactions
described in this Agreement are subject to the fulfillment, prior to or at the
Effective Date, of the following condi tions precedent, any of which may be
waived in writing by Humana at any time prior to the Effective Date:
6.1 REPRESENTATIONS AND WARRANTIES CORRECT. All representations and
warranties of the Acquired Companies and Shareholder in this Agreement shall be
true and correct in all material respects on and as of the Effective Date as
though made on such date without taking into account the effect of Updated
Schedules other than changes to the Schedules which are not material.
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6.2 COMPLIANCE WITH COVENANTS. The Acquired Companies and Shareholder shall
have per formed and complied in all material respects with all of the covenants,
agreements and conditions required by this Agreement to be performed or complied
with by them prior to or at the Effective Date or cured any default, breach or
failure thereof prior to or at the Effective Date.
6.3 NO LITIGATION. No action or proceeding before any court or any
governmental body shall be pending or threatened pursuant to which an
unfavorable judgment, decree, injunction or order would reasonably be expected
to (a) prevent the carrying out of this Agreement or any of the transactions
contemplated hereby, (b) declare unlawful the transactions described in this
Agreement, (c) cause such transactions to be rescinded or (d) adversely affect
the right of Humana to own the Company Shares or operate or control the
business, operations or assets of the Acquired Companies.
6.4 COMPLIANCE WITH LAWS; GOVERNMENTAL APPROVALS. Shareholder, to the
extent applicable, and the Acquired Companies have complied with all laws and
regulations relating to the operations of the Acquired Companies through the
Effective Date and Humana has received all state licenses, certificates of
authority and certifications necessary for it to operate the Acquired Companies'
businesses on and after the Effective Date in substantially the same manner as
they were operated immediately prior to the Effective Date (including all
approvals under the HSR Act).
6.5 NO MATERIAL CHANGES. Humana is satisfied that no law, rule, order or
regulation is pending, published for comment, introduced or enacted which, in
the reasonable opinion of Humana, would result in a Material Adverse Effect on
the Acquired Companies following the Effective Date.
7. CONDITIONS TO OBLIGATIONS OF SHAREHOLDER AND THE COMPANY. The obligations of
Shareholder and the Company to consummate the Merger are subject to the
fulfillment prior to or at the Effective Date of the following conditions
precedent, any of which may be waived in writing by Shareholder and the Company
at any time prior to the Effective Date:
7.1 REPRESENTATIONS AND WARRANTIES CORRECT. All representations and
warranties of Humana and Acquisition Subsidiary in this Agreement shall be true
and correct in all material respects on and as of the Effective Date as though
made on such date.
7.2 COMPLIANCE WITH COVENANTS. Humana and Acquisition Subsidiary shall have
performed and complied in all material respects with all of the covenants,
agreements and conditions required by this Agreement to be performed or complied
with by them prior to or at the Effective Date or cured any default, breach or
failure thereof prior to or at the Effective Date.
7.3 NO LITIGATION. No action or proceeding before any court or any
governmental body shall be pending or threatened pursuant to which an
unfavorable judgment, decree, injunction or order would reasonably be expected
to (a) prevent the carrying out of this Agreement or any of the transactions
contemplated hereby, (b) declare unlawful the transactions described in this
Agreement or (c) cause such transactions to be rescinded.
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7.4 SHAREHOLDER APPROVAL. This Agreement and the Merger have been approved
by the holders of a requisite number of Company Shares in accordance with
applicable law and the Articles of Incorporation and Regulations of the Company.
7.5 COMPLIANCE WITH LAWS; GOVERNMENTAL APPROVALS. Humana, to the extent
applicable, and Acquisition Subsidiary have complied with all laws and
regulations relating to the operations of the Acquired Companies through the
Effective Date and Humana has received all state licenses, certificates of
authority and certifications necessary for it to acquire and operate the
Acquired Companies' businesses on and after the Effective Date in substantially
the same manner as they were operated immediately prior to the Effective Date
(including all approvals under the HSR Act). Shareholder, Acquired Companies,
Humana and/or Acquisition Subsidiary shall have received all material consents,
authority, certifications or approvals from all Governmental Bodies required or
necessary in order to consummate the transactions in accordance with the terms
of this Agreement, including without limitation any approvals from the Ohio
Attorney General, if required, and any state department of insurance, if
required.
8. TERMINATION.
8.1 TERMINATION EVENTS.
(a) Humana may terminate this Agreement by delivery of notice of
termination to Shareholder and the Company if at any time prior to the Effective
Date:
(1) Any representation or warranty of Shareholder or the
Acquired Companies in this Agreement or any other agreement or instrument
delivered in connection therewith becomes materially untrue and the breach
has not been cured within ten (10) business days following the receipt by
the Company and Shareholder of notice of the breach;
(2) Shareholder or the Acquired Companies fail or refuse to
perform in any material respect any obligation or covenant to be performed
by either of them prior to the Effective Date and the breach has not been
cured within ten (10) business days following the receipt of notice by the
Company and Shareholder of the breach;
(3) Any of the conditions in Section 6 has not been satisfied
as of the Effective Date or, if satisfaction of such a condition is or
becomes impossible (other than through the failure of Humana to comply with
its obligations under this Agreement), Humana has not waived such condition
on or before the Effective Date; or
(4) The Company delivers to Humana Updated Schedules which
materially modify the Schedules as of the date of this Agreement.
(b) Shareholder and the Company may terminate this Agreement by
delivery of notice of termination to Humana if at anytime prior to the Effective
Date:
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(1) Any representation or warranty of Humana or Acquisition
Subsidiary in this Agreement or any other agreement or instrument delivered
in connection therewith becomes materially untrue and the breach has not
been cured within ten (10) business days following the receipt by Humana of
notice of the breach;
(2) Humana or Acquisition Subsidiary fail or refuse to perform
any obligation or covenant to be performed in any material respect by it
prior to the Effective Date which has not been cured within ten (10)
business days following Humana's receipt of notice of the breach;
(3) Any of the conditions in Section 7 has not been satisfied
as of the Effective Date or, if satisfaction of such a condition is or
becomes impossible (other than through the failure of Shareholder or the
Acquired Companies to comply with their respective obligations under this
Agreement), Shareholder and the Company have not waived such condition on
or before the Effective Date;
(4) The Company and Shareholder deliver notice of termination
to Humana contemporaneously with their accepting a Third Party Offer
pursuant to Section 5.2(c); or
(5) On or before the end of the Window Period, (1) the Company
shall have received a written notice from Morgan Stanley & Co., Inc. that
the previously issued opinion on the fairness of this Agreement has been
withdrawn, or (2) Shareholder shall have received a written notice from
Credit Suisse First Boston that the previously issued opinion on the
fairness of this Agreement has been withdrawn; provided, however, that a
copy of such notice is promptly delivered to Humana and that the Company or
Shareholder, as the case may be, gives notice of the termination of this
Agreement to Humana within five (5) business days after the end of the
Window Period.
(c) The parties may terminate this Agreement at any time prior to
the Effective Date by mutual written consent; or
(d) Any party may terminate this Agreement by delivery of notice
of termination to the other parties if the Merger has not occurred (other than
through the failure of any party seeking to terminate this Agreement to comply
fully with its obligations under this Agreement) on or before January 31, 1998,
or such later date as the parties may agree in writing.
8.2 EFFECT OF TERMINATION. Each party's right of termination under Section
8.1 is in addition to any other rights it may have under this Agreement or
otherwise, and the exercise of a right of termination shall not be an election
of remedies. If this Agreement is terminated pursuant to Section 8.1, all
further obligations of the parties under this Agreement shall terminate, except
that the rights and obligations in Sections 2.7, 3.5, 4.3, 11.1 and 11.9 shall
survive; provided, however, notwithstanding anything to the contrary contained
in this Agreement, that if this Agreement is terminated by a party because of
the breach of the Agreement by another party or because one or more of the
conditions to the terminating party's obligations under this Agreement is not
satisfied as a result of the other party's failure to comply with its
obligations under this
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Agreement, the terminating party's right to pursue all legal remedies shall
survive such termination unimpaired.
9. DELIVERIES AND ACTIONS TAKEN AT EFFECTIVE DATE.
9.1 DELIVERIES BY SHAREHOLDER AND THE COMPANY. On the Effective Date,
Shareholder and the Company, as appropriate, shall deliver to Humana the
following (duly executed and notarized where appropriate):
(a) Certified copies of resolutions of each of (1) the Board of
Directors of the Company and (2) trustees of Shareholder which shall be in full
force and effect as of the Effective Date authorizing the execution and delivery
of this Agreement and the consummation of the Merger;
(b) Certified copies of resolutions of Shareholders of the Company
which shall be in full force and effect as of the Effective Date approving the
Merger;
(c) Certificates of Good Standing from the Secretaries of State of
the States of Indiana, Kentucky and Ohio for each of the Acquired Companies, if
applicable;
(d) Certificates signed by the chairman of Shareholder and an
executive officer of the Company, respectively, in their capacities as such,
certifying as to the fulfillment of the conditions applicable to each set forth
in Sections 6.1 through 6.4;
(e) An opinion of Frost & Jacobs, counsel to the Company, in
substantially the form attached as Exhibit B;
(f) An opinion of Dinsmore & Shohl, LLP, counsel to Shareholder,
in substantially the form attached as Exhibit C; and
(g) Such other documents as may be reasonably requested by Humana
that it deems reasonably necessary to effect the Merger.
9.2 DELIVERIES BY HUMANA AND ACQUISITION SUBSIDIARY. On the Effective Date,
Humana and Acquisition Subsidiary, as appropriate, shall deliver to Shareholder
or the Paying Agent, as appropriate, the following (duly executed and notarized
where appropriate):
(a) The Merger Consideration to the Paying Agent pursuant to
Section 1.5;
(b) Certified copies of the resolutions of the Board of Directors
of Humana or the Executive Committee of Humana's Board of Directors, which shall
be in full force and effect as of the Effective Date, authorizing the execution
of this Agreement and the consummation of the Merger;
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(c) Certified copies of the resolutions of the Board of Directors
of Acquisition Subsidiary, which shall be in full force and effect as of the
Effective Date, authorizing the execution of this Agreement and the consummation
of the Merger;
(d) A Certificate of Good Standing for Humana from the Secretary
of State of Delaware;
(e) A Certificate of Good Standing for Acquisition Subsidiary from
the Secretary of State of Ohio;
(f) A certificate signed by an officer of Humana in his or her
capacity as such certi fying as to the fulfillment of the conditions set forth
in Sections 7.1 through 7.5;
(g) An opinion of Greenebaum Doll & McDonald PLLC, counsel to
Humana, in substantially the form attached as Exhibit D; and
(h) Such other documents as may be reasonably necessary to effect
the Merger.
10. INDEMNIFICATION; SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
10.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All statements
constituting representations and warranties contained in this Agreement shall be
deemed representations and warranties only of the party to whom same are
attributable. All representations and warranties set forth in this Agreement
shall survive the date of this Agreement and the consummation of the
transactions contemplated by this Agreement. Prior to the Effective Time, Humana
and Acquisition Subsidiary shall pursue only the Company for the breach of any
representation or warranty or the default, nonfulfillment or breach of any
covenant of the Company. In no event shall the Company be liable for breach of
any representation or warranty or the default, nonfulfillment or breach of any
covenant following the Effective Time.
10.2 CERTAIN DEFINITIONS. As used in this Section 10, the following terms
shall have the meanings set forth below:
(a) "Losses" shall mean any and all losses, liabilities, damages,
or reasonable expenses (whether or not known or asserted prior to the date of
this Agreement), including, without limitation, interest on any amount payable
to a third party as a result of the foregoing, liabilities on account of taxes
and any legal or other expenses reasonably incurred in connection with defending
any claims or actions, which result in any liability to "Indemnitee" (as defined
in Section 10.2(c)) under this Agreement; provided, however, that Losses shall
be net of any proceeds recovered or recoverable by Indemnitee from an insurance
company on account of the Losses (after taking into account any costs incurred
in obtaining such proceeds).
(b) "Third-Party Claim" or "Third-Party Claims" shall mean any and
all Losses which arise out of or result from (1) any claims, actions, or suits
asserted against an Indemnitee by a third party, or (2) any liabilities of, or
amounts payable by, an Indemnitee to a third party arising
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out of clause (1), including, without limitation, claims, actions or suits
asserted against an Indemnitee by any taxing authority on account of taxes.
(c) "Indemnitee" shall mean any person which may be entitled to
seek indemnification pursuant to the provisions of Section 10.3 or 10.4.
(d) "Indemnitor" shall mean any person which may be obligated to
provide indemnification pursuant to Section 10.3 or 10.4.
(e) "Notice Period," as applied to any Third-Party Claim for which
an Indemnitee seeks to be indemnified pursuant to this Section 10, shall mean
the period ending on the earlier of the following:
(1) Thirty (30) days after the time at which Indemnitee has
either (A) received notice of the facts giving rise to the Third-Party
Claim or (B) commenced an active investigation of circumstances likely to
give rise to the Third-Party Claim and, in each case, where Indemnitee
believes or should reasonably believe that such facts or circumstances
would give rise to the Third-Party Claim for which Indemnitee would be
entitled to indemnification pursuant to this Section 10; and
(2) Thirty (30) days after the time at which any Third-Party
Claim against Indemnitee has become the subject of proceedings before any
court or tribunal.
(f) "Claim Notice" shall have the meaning set forth in Section
10.5.
10.3 INDEMNITY BY SHAREHOLDER. From and after the Effective Time,
Shareholder shall indemnify and hold harmless Humana and the Surviving
Corporation and the respective directors, officers, employees, agents and
representatives of Humana and Acquisition Subsidiary (each of whom may be an
Indemnitee pursuant to this Section 10) from and against the following:
(a) Any and all Losses which Indemnitee may incur or suffer and
which arise out of or result from:
(1) Any breach of any of the representations and warranties
of Shareholder set forth in Section 3.1; or
(2) Any Third-Party Claim relating to, or any liability of the
Company, the Surviving Corporation or Humana for, Ohio corporation
franchise (income) tax, interest and penalties thereon or costs and
expenses related to an actual or proposed assessment of such obligations
relating to the application or operation of provisions of Sections
5733.04(I)(12), 5733.042 or other comparable provisions of the Ohio Revised
Code, imposing what is commonly referred to as the "Pick-up Tax," to any
part of the gain realized by the Shareholder associated with the
acquisition or disposition of Company Shares; and
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(b) Subject to Section 10.6, any and all actions, suits,
proceedings, assessments, judgments, writs, decrees, orders, costs and expenses
(including reasonable fees and expenses of Indemnitee's counsel) arising from
any Losses identified in Section 10.3(a).
10.4 INDEMNITY BY HUMANA AND ACQUISITION SUBSIDIARY. Humana and Acquisition
Subsidiary shall indemnify and hold harmless the Company (for periods prior to
the Effective Time) and Shareholder (before and after the Effective Time) and
their respective directors, trustees, officers, employees, agents and
representatives (each of whom may be an Indemnitee pursuant to this Section 10)
from and against the following:
(a) Any and all Losses which may be asserted against Indemnitee or
which any Indemnitee shall incur or suffer and which arise out of or result
from:
(1) Any material breach of any of the representations and
warranties of Humana or Acquisition Subsidiary under this Agreement or any
Schedule; or
(2) Any material default, nonfulfillment or breach of any
covenants on the part of Humana or Acquisition Subsidiary under this
Agreement; and
(b) Subject to Section 10.6, any and all actions, suits,
proceedings, claims, demands, assessments, judgments, writs, decrees, orders,
costs and expenses (including reasonable fees and expenses of Indemnitee's
counsel) arising from any Losses identified in Section 10.4(a).
10.5 NOTIFICATION OF THIRD-PARTY CLAIMS. In no case shall any Indemnitor
under this Agreement be liable with respect to any Third-Party Claim against any
Indemnitee unless Indemnitee shall have delivered to Indemnitor a "Claim Notice"
(as defined in Section 10.5(a)) and the following conditions are satisfied:
(a) Except as provided in Section 10.5(b), Indemnitee shall have
delivered to Indemnitor within the Notice Period a notice (a "Claim Notice")
describing in reasonable detail the facts giving rise to the Third-Party Claim
and stating that Indemnitee intends to seek indemnification for the Third-Party
Claim from Indemnitor pursuant to this Section 10.
(b) If, in the case of a Third-Party Claim, a Claim Notice is not
given by Indemnitee within the Notice Period set forth in Section 10.5(a),
Indemnitee shall nevertheless be entitled to be indemnified under this Section
to the extent that Indemnitee can establish that Indemnitor has not been
materially prejudiced by such time elapsed.
10.6 DEFENSE OF CLAIMS. Upon receipt of a Claim Notice from an Indemnitee
with respect to any Third-Party Claim, Indemnitor may assume the defense thereof
with counsel reasonably satisfactory to Indemnitee and Indemnitee shall
cooperate in all reasonable respects in such defense. Indemnitee shall have the
right to employ separate counsel in any action or claim and to participate in
the defense thereof, provided that the fees and expenses of counsel employed by
Indemnitee shall be at the expense of Indemnitor only if the counsel is retained
pursuant to the following sentence or if the employment of the counsel has been
specifically authorized by
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Indemnitor. If Indemnitor does not notify Indemnitee within thirty (30) days
after receipt of the Claim Notice that it elects to undertake the defense
thereof, Indemnitee shall have the right to defend the claim with counsel of its
choosing reasonably satisfactory to Indemnitor, subject to the right of
Indemnitor to assume the defense of any claim at any time prior to settlement or
final determination thereof. Indemnitee shall send a written notice to
Indemnitor of any proposed settlement of any claim, which settlement Indemnitor
may reject, in its reasonable judgment, within thirty (30) days of receipt of
such notice. Failure to reject such notice within the thirty (30) day period
shall be deemed an acceptance of the notice.
10.7 ACCESS AND COOPERATION. After the Effective Time, Humana and Surviving
Corporation, on the one hand, and Shareholder, on the other hand, shall (a) each
cooperate fully with the other as to delivery of all documentation for and the
defense of any and all claims for Losses, shall make available to the other, as
reasonably requested, all information, records and documents relating to such
claims and shall preserve all such information, records and documents until the
termination of any such claims, and (b) make available to the other, as
reasonably requested, personnel (including technical and scientific), agents and
other representatives who are responsible for preparing or maintaining
information, records or other documents, or who may have particular knowledge
with respect to such claims.
10.8 ASSIGNMENT OF CLAIMS. In the event that any Losses for which an
Indemnitor is responsible or allegedly responsible pursuant to Section 10.3 or
10.4 are recoverable or potentially recoverable against any third party,
Indemnitee shall assign any and all rights that it may have to recover the
Losses to Indemnitor, or, if the rights are not assignable under applicable law
or otherwise, Indemnitee shall attempt in good faith to collect any and all
Losses on account thereof from the third party for the benefit of, and at the
expense and direction of, Indemnitor.
10.9 EXCLUSIVE REMEDY. Notwithstanding anything to the contrary contained
in this Agreement, including but not limited to the terms and conditions
contained in Section 8.2 (but except for claims arising pursuant to Section 5.7
or 11.9), the sole and exclusive remedy available against Shareholder from and
after the Effective Time for any and all claims arising under this Agreement
regardless whether a remedy otherwise would have been sought on the basis of
contract, quasi-contract, tort strict liability or absolute liability (whether
statutory or common law) and regardless whether or to what extent any statute or
common law may provide, shall be indemnification pursuant to this Section 10.
11. MISCELLANEOUS PROVISIONS.
11.1 EXPENSES. Except as otherwise expressly provided in this Agreement,
each party to this Agreement shall bear its respective expenses incurred in
connection with the preparation, execution and performance of this Agreement,
including all fees and expenses of agents, representatives, counsel and
accountants. Humana and the Company shall split the HSR Act filing fee equally.
If Shareholder and the Company terminate this Agreement in accordance with
Section 8.1(b)(4), the Company shall pay Humana the following amounts by wire
transfer as consideration for terminating this Agreement: (a) contemporaneously
with such termination reimbursement of all of Humana's reasonable, documented
costs and expenses (including, without
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limitation, all legal, investment banking, depositary, filing fees and related
fees and expenses) but not in excess of $1,000,000; (b) contemporaneously with
such termination, two percent (2%) of the Total Consideration provided for in
the Third Party Offer; and (c) upon the closing of a purchase or merger
transaction involving a material portion of the assets or stock of the assets or
stock of the Acquired Companies closing on or before June 30, 1999, (1) four
percent (4%) of the total value of such transaction (provided that any such
transaction having a total value less than $250,000,000 shall be deemed to have
a total value of $250,000,000) minus (2) the amount paid pursuant to clause (b)
of this Section 11.1.
11.2 NOTICE. All notices, requests, demands and other communications
required or permitted to be given or made under this Agreement shall be in
writing and shall be deemed delivered (a) on the date of personal delivery or
transmission by confirmed telegram or confirmed facsimile transmission, (b) on
the third business day following the date of deposit in the United States mail,
postage prepaid, by registered or certified mail, return receipt requested, or
(c) on the first business day following the date of delivery to a
nationally-recognized overnight courier service, in each case addressed as
follows, or to such other address, person or entity as either party shall
designate by notice to the other in accordance herewith:
<TABLE>
<S> <C>
If to Humana or Humana Inc.
Acquisition Subsidiary: 500 W. Main Street
Louisville, Kentucky 40202
Attn: George Veith
Telephone No.: (502) 580-3528
Fax No.: (502) 580-3639
With a copy to: Humana Inc.
500 W. Main Street
Louisville, Kentucky 40202
Attn: General Counsel
Telephone No.: (502) 580-3711
Fax No.: (502) 580-3615
With an additional copy to: Greenebaum Doll & McDonald PLLC
3300 National City Tower
Louisville, Kentucky 40202-3197
Attn: Michael de Leon Hawthorne, Esq.
Telephone No.: (502) 587-3684
Fax No.: (502) 540-2233
If to the Company: ChoiceCare Corporation
655 Eden Park Drive
Cincinnati, Ohio 45202-6056
Attn: Thomas D. Anthony, Esq.
Telephone No.: (513) 684-7499
Fax No.: (513) 784-5300
</TABLE>
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<TABLE>
<S> <C>
With a copy to: Frost & Jacobs
2500 PNC Center
201 East Fifth Street
Cincinnati, Ohio 45202-4182
Attn: Mark H. Longenecker, Jr., Esq.
Telephone No.: (513) 651-6904
Fax No.: (513) 651-6981
If to Shareholder: The ChoiceCare Foundation
One West Fourth Street, Suite 502
Cincinnati, Ohio 45202
Attn: Donald E. Hoffman, President
Telephone No.: (513) 241-1400
Fax No.: (513) 241-1818
With a copy to: Dinsmore & Shohl, LLP
1900 Chemed Center
255 East Fifth Street
Cincinnati, Ohio 45202
Attn: Paul R. Mattingly, Esq.
Telephone No.: (513) 977-8281
Fax No.: (513) 977-8141
</TABLE>
11.3 EXHIBITS; SCHEDULES; ENTIRE AGREEMENT.
(a) All Exhibits and Schedules to this Agreement shall be deemed
to be incorporated in this Agreement by reference and made a part of this
Agreement as if set out in full at the place where first mentioned. As used in
this Agreement, the term "Agreement" shall mean this Agreement and Plan of
Merger and the Exhibits and Schedules as amended or supplemented as permitted in
Section 11.3(b). This Agreement embodies the entire agreement and understanding
of the parties regarding its subject matter and supersedes all prior agreements,
correspondence, arrangements and understandings relating to the subject matter
of this Agreement. No repre sentation, promise, inducement or statement of
intention has been made by any party which has not been embodied in this
Agreement.
(b) If, after the date of this Agreement, the Company or
Shareholder, as the case may be, first obtains Company Knowledge or Shareholder
Knowledge, respectively, of facts, circumstances or events that cause the
disclosures in the Schedules to be inaccurate or incomplete, the Company and
Shareholder shall supplement, amend, modify or update the Schedules to this
Agreement on or before the Effective Time (the "Updated Schedules"); provided,
however, that Humana may give written notice to the Company and Shareholder that
Humana has elected to delay the Merger up to twenty (20) business days if, and
only if, the Updated Schedules are delivered to Humana less than twenty (20)
business days prior to the date which would otherwise be the Effective Date.
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11.4 AMENDMENT; WAIVER. Except as provided in Section 11.3, this Agreement
may be amended, modified, superseded or canceled only by a written instrument
signed by all of the parties, and any of the terms, provisions and conditions
may be waived, only by a written instrument signed by the waiving party. Failure
of any party at any time or times to require performance of any provision of
this Agreement shall not be considered to be a waiver of any succeeding breach
of such provision by any party.
11.5 BINDING EFFECT; ASSIGNMENT. All the terms, provisions and conditions
of this Agreement shall be binding upon and shall inure to the benefit of and be
enforceable by the parties and their respective heirs, legal representatives,
successors and assigns; provided, however, that this Agreement, and the rights
and obligations contained in this Agreement, shall not be assigned, delegated or
otherwise transferred, directly or indirectly, by any party to this Agreement
without the prior written consent of the other parties. Unless otherwise agreed
to in writing, in the event of an assignment, the assigning party shall remain
primarily responsible for its obligations arising under this Agreement.
11.6 CAPTIONS. The captions in this Agreement are included for purposes of
convenience only and shall not be considered a part of the Agreement in
construing or interpreting any provision of this Agreement.
11.7 SEVERABILITY OF PROVISIONS. If any provision of this Agreement or the
application thereof to any person or circumstance shall to any extent be held in
any proceeding to be invalid or unenforceable, the remainder of this Agreement,
or the application of such provision to persons or circumstances other than
those to which it was held to be invalid or unenforceable, shall not be affected
thereby, and shall be valid and be enforceable to the fullest extent permitted
by law, but only if and to the extent such enforcement would not materially and
adversely frustrate the parties' essential objectives as expressed in this
Agreement. No party shall make a claim for damages or other remedy for any such
provision held to be invalid or unenforceable.
11.8 FURTHER ASSURANCES. Each of Shareholder, the Company, Humana and
Acquisition Subsidiary shall execute and deliver all agreements, documents,
instruments, deeds, assignments, transfers, conveyances, powers of attorney and
assurances required to be executed and delivered by them in this Agreement, and
to execute and deliver such additional instruments and documents and to take
such additional actions as may reasonably be required from time to time in order
to effect the transactions described in this Agreement, whether prior to, at or
after the Merger.
11.9 CONFIDENTIALITY.
(a) The parties shall and shall use their reasonable best efforts
to cause their respective agents and employees to hold and keep confidential all
information which is proprietary in nature and non-public or confidential, in
whole or in part (the "Information") which any of them may receive from the
other party concerning the other party, including, but not limited to, (1) any
and all marketing techniques and arrangements, mailing lists, purchasing
information, pricing policies, quoting procedures, financial information,
customer and prospect names and requirements, employee, customer, supplier and
distributor data, (2) any and all concepts and ideas including,
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without limitation, techniques and "know-how" (whether patentable or protected
by copyright laws of the United States) and (3) Trade Secrets.
(b) Failure to mark any of the Information as non-public,
proprietary or confidential shall not affect its status as part of the
Information under the terms of this Agreement.
(c) None of the parties nor their respective agents or employees
shall, without the prior consent of the other parties, disclose or use any such
Information, in whole or in part, except in connection with the performance of
the transactions described in this Agreement.
(d) Unless otherwise required by law, each of the parties agrees
that none of them shall disclose any Information acquired as a result of this
Agreement to any person or entity, other than its respective counsel and other
representatives, and such other third parties, such as bankers and lessors, with
whom it must communicate to consummate the transactions described by this
Agreement.
(e) Humana's obligation of confidence with respect to any
Information relating to the Company shall cease upon consummation of the Merger.
If the parties do not consummate the Merger, each party shall promptly upon
termination of this Agreement and the expiration of any rights and obligations
under this Agreement redeliver to each all Information and all other copies,
notes, compilations, extracts and other records or written material relating to
the Information or destroy such documents and Information.
(f) Information shall not include any information in the
possession of the receiving party that (1) is independently developed by such
party, (2) is learned from a third party not under any duty of confidence to the
disclosing party or (3) becomes part of the public domain through no fault of
the receiving party.
11.10 CONSENT TO JURISDICTION; GOVERNING LAW. Any action instituted by any
party against any other party with respect to this Agreement shall be instituted
exclusively in the United States District Court for the Southern District of
Ohio or, if such court does not have jurisdiction to adjudicate such action, in
the courts of the State of Ohio located in Hamilton County. This Agreement shall
be governed by, and shall be construed and enforced in accordance with, the laws
of the State of Ohio without application of Ohio conflicts of laws principles.
11.11 PUBLICITY; NO DISCLOSURE. Before the Effective Date, no party to this
Agreement shall make any press release or make any other public announcement
regarding the existence of this Agreement or the transactions described in this
Agreement, without prior consultation with and consent of the other parties to
this Agreement, which consent shall not be unreasonably withheld, except as a
party's counsel shall advise such party that such press release or announcement
is required by law.
11.12 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
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11.13 SPECIFIC PERFORMANCE. The parties acknowledge that irreparable injury
would occur in the event any of the provisions of this Agreement were not to be
performed in accordance with the terms of this Agreement and that the parties
shall be entitled to specific performance of the terms of this Agreement in
addition to any other remedies at law or in equity.
* * * * * *
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IN WITNESS WHEREOF, the parties have entered into this Agreement as of the
date first written above.
HUMANA INC.
By: /s/ Gregory H. Wolf
--------------------------------
Title: President and C.O.O.
-----------------------------
("Humana")
HOCC, INC.
By: /s/ Gregory H. Wolf
--------------------------------
Title: President and C.O.O.
-----------------------------
("Acquisition Subsidiary")
CHOICECARE CORPORATION
By: /s/ Daniel A. Gregorie
--------------------------------
Title: President, Chairman, and CEO
-----------------------------
("Company")
THE CHOICECARE FOUNDATION
By: /s/ Donald E. Hoffman
--------------------------------
Title: President and Chairman
-----------------------------
("Shareholder")
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APPENDIX B
Board of Directors
Daniel A. Gregorie, M.D., Chairman
ChoiceCare Corporation
655 Eden Park Drive, Suite 400
Cincinnati, Ohio 45202
Gentlemen and Ladies:
We understand that ChoiceCare Corporation (the "Company"), Humana Inc.
("Buyer"), and HOCC, Inc., a wholly owned subsidiary of Buyer ("Acquisition
Sub") and The ChoiceCare Foundation, have entered into an Agreement and Plan of
Merger dated as of June 4, 1997 (the "Merger Agreement"), which provides, among
other things, for the merger (the "Merger") of Acquisition Sub with and into the
Company. Pursuant to the Merger, the Company will become a wholly owned
subsidiary of Buyer and each outstanding common share, without par value (a
"Common Share"), of the Company, other than shares held in treasury or held by
Buyer or any affiliate of Buyer or as to which dissenters' rights have been
perfected, will be converted into the right to receive $16.38 per share (the
"Merger Consideration"), with respect to 14,852,844 Common Shares as of June 4,
1997, in cash. We further understand that pursuant to the terms of the Merger
Agreement, the Company, prior to the Effective Time, shall take action to
terminate at least 1,000,000 of the outstanding options to purchase Common
Shares for consideration to be received by such holders of an amount equal to
$6.38 per share subject to option. The terms and conditions of the Merger are
more fully set forth in the Merger Agreement.
You have asked for our opinion as to whether the Merger Consideration to be
received by the holders of Common Shares pursuant to the Merger Agreement is
fair from a financial point of view to such holders.
For the purposes of the opinion set forth herein, we have:
(i) reviewed certain publicly available financial and other
information of the Company;
(ii) reviewed certain internal financial statements and other
financial and operating data concerning the Company prepared
by the management of the Company;
(iii) analyzed certain financial projections concerning the Company
prepared by the management of the Company;
(iv) discussed the past and current operations and financial
condition and the prospects of the Company with senior
executives of the Company;
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(v) reviewed and discussed with senior executives of the Company
the strategic objectives of the merger and the long-term
benefits expected to result from the merger;
(vi) compared the financial performance of the Company with that of
certain other comparable companies that have publicly-traded
securities;
(vii) reviewed the financial terms, to the extent publicly
available, of certain comparable acquisition transactions;
(viii) participated in discussions and negotiations among
representatives of the Company, Buyer and their financial and
legal advisors;
(ix) reviewed the Merger Agreement and certain related documents;
and
(x) performed such other analyses and considered such other
factors as we have deemed appropriate.
We have assumed and relied upon without independent verification the accuracy
and completeness of the information reviewed by us for the purposes of the
opinion. With respect to the financial projections, we have assumed that they
had been reasonably prepared on bases reflecting the best currently available
estimates and judgments of the future financial performance of the Company. We
have not made any independent valuation or appraisal of the assets or
liabilities of the Company, nor have we been furnished with any such appraisals.
Our opinion is necessarily based on economic, market and other conditions as in
effect on, and the information made available to us as of, the date hereof.
We have acted as financial advisor to the Board of Directors of the Company in
connection with this transaction and will receive a fee for our services. In the
past, Morgan Stanley & Co. Incorporated and its affiliates provided advisory
services for the Company and the Buyer and received fees for the rendering of
these services.
It is understood that this letter is for the information of the Board of
Directors of the Company only and may not be used for any other purpose without
our prior written consent.
Based on the foregoing, we are of the opinion on the date hereof that the
Merger Consideration to be received by the holders of Common Shares pursuant to
the Merger Agreement is fair from a financial point of view to such holders.
Very truly yours,
MORGAN STANLEY & CO. INCORPORATED
By: /s/ Mary Anne Citrino
-----------------------------
Mary Anne Citrino
Principal
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APPENDIX C
CHAPTER 1701: GENERAL CORPORATION LAW
ORC Ann. 1701.85 (Anderson 1996)
Section 1701.85 Dissenting shareholder's demand for fair cash value of shares.
(A)(1) A shareholder of a domestic corporation is entitled to relief as a
dissenting shareholder in respect of the proposals described in sections
1701.74, 1701.76, and 1701.84 of the Revised Code, only in compliance with this
section.
(2) If the proposal must be submitted to the shareholders of the corporation
involved, the dissenting shareholder shall be a record holder of the shares of
the corporation as to which he seeks relief as of the date fixed for the
determination of shareholders entitled to notice of a meeting of the
shareholders at which the proposal is to be submitted, and such shares shall not
have been voted in favor of the proposal. Not later than ten days after the date
on which the vote on the proposal was taken at the meeting of the shareholders,
the dissenting shareholder shall deliver to the corporation a written demand for
payment to him of the fair cash value of the shares as to which he seeks relief,
which demand shall state his address, the number and class of such shares, and
the amount claimed by him as the fair cash value of the shares.
(3) The dissenting shareholder entitled to relief under division (C) of
section 1701.84 of the Revised Code in the case of a merger pursuant to section
1701.80 of the Revised Code and a dissenting shareholder entitled to relief
under division (E) of section 1701.84 of the Revised Code in the case of a
merger pursuant to section 1701.801 [1701.80.1] of the Revised Code shall be a
record holder of the shares of the corporation as to which he seeks relief as of
the date on which the agreement of merger was adopted by the directors of that
corporation. Within twenty days after he has been sent the notice provided in
section 1701.80 or 1701.801 [1701.80.1] of the Revised Code, the dissenting
shareholder shall deliver to the corporation a written demand for payment with
the same information as that provided for in division (A)(2) of this section.
(4) In the case of a merger or consolidation, a demand served on the
constituent corporation involved constitutes service on the surviving or the new
entity, whether the demand is served before, on, or after the effective date of
the merger or consolidation.
(5) If the corporation sends to the dissenting shareholder, at the address
specified in his demand, a request for the certificates representing the shares
as to which he seeks relief, the dissenting shareholder, within fifteen days
from the date of the sending of such request, shall deliver to the corporation
the certificates requested so that the corporation may forthwith endorse on them
a legend to the effect that demand for the fair cash value of such shares has
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been made. The corporation promptly shall return such endorsed certificates to
the dissenting shareholder. A dissenting shareholder's failure to deliver such
certificates terminates his rights as a dissenting shareholder, at the option of
the corporation, exercised by written notice sent to the dissenting shareholder
within twenty days after the lapse of the fifteen-day period, unless a court for
good cause shown otherwise directs. If shares represented by a certificate on
which such a legend has been endorsed are transferred, each new certificate
issued for them shall bear a similar legend, together with the name of the
original dissenting holder of such shares. Upon receiving a demand for payment
from a dissenting shareholder who is the record holder of uncertificated
securities, the corporation shall make an appropriate notation of the demand for
payment in its shareholder records. If uncertificated shares for which payment
has been demanded are to be transferred, any new certificate issued for the
shares shall bear the legend required for certificated securities as provided in
this paragraph. A transferee of the shares so endorsed, or of uncertificated
securities where such notation has been made, acquires only such rights in the
corporation as the original dissenting holder of such shares had immediately
after the service of a demand for payment of the fair cash value of the shares.
A request under this paragraph by the corporation is not an admission by the
corporation that the shareholder is entitled to relief under this section.
(B) Unless the corporation and the dissenting shareholder have come to an
agreement on the fair cash value per share of the shares as to which the
dissenting shareholder seeks relief, the dissenting shareholder or the
corporation, which in case of a merger or consolidation may be the surviving or
new entity, within three months after the service of the demand by the
dissenting shareholder, may file a complaint in the court of common pleas of the
county in which the principal office of the corporation that issued the shares
is located or was located when the proposal was adopted by the shareholders of
the corporation, or, if the proposal was not required to be submitted to the
shareholders, was approved by the directors. Other dissenting shareholders,
within that three-month period, may join as plaintiffs or may be joined as
defendants in any such proceeding, and any two or more such proceedings may be
consolidated. The complaint shall contain a brief statement of the facts,
including the vote and the facts entitling the dissenting shareholder to the
relief demanded. No answer to such a complaint is required. Upon the filing of
such a complaint, the court, on motion of the petitioner, shall enter an order
fixing a date for a hearing on the complaint and requiring that a copy of the
complaint and a notice of the filing and of the date for hearing be given to the
respondent or defendant in the manner in which summons is required to be served
or substituted service is required to be made in other cases. On the day fixed
for the hearing on the complaint or any adjournment of it, the court shall
determine from the complaint and from such evidence as is submitted by either
party whether the dissenting shareholder is entitled to be paid the fair cash
value of any shares and, if so, the number and class of such shares. If the
court finds that the dissenting shareholder is so entitled, the court may
appoint one or more persons as appraisers to receive evidence and to recommend a
decision on the amount of the fair cash value. The appraisers have such power
and authority as is specified in the order of their appointment. The court
thereupon shall make a finding as to the fair cash value of a share and shall
render judgment against the corporation for the payment of it, with interest at
such rate and from such date as the court considers equitable. The costs of the
proceeding, including reasonable compensation to the appraisers to be fixed by
the court, shall be assessed or
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apportioned as the court considers equitable. The proceeding is a special
proceeding and final orders in it may be vacated, modified, or reversed on
appeal pursuant to the Rules of Appellate Procedure and, to the extent not in
conflict with those rules, Chapter 2505 of the Revised Code. If, during the
pendency of any proceeding instituted under this section, a suit or proceeding
is or has been instituted to enjoin or otherwise to prevent the carrying out of
the action as to which the shareholder has dissented, the proceeding instituted
under this section shall be stayed until the final determination of the other
suit or proceeding. Unless any provision in division (D) of this section is
applicable, the fair cash value of the shares that is agreed upon by the parties
or fixed under this section shall be paid within thirty days after the date of
final determination of such value under this division, the effective date of the
amendment to the articles, or the consummation of the other action involved,
whichever occurs last. Upon the occurrence of the last such event, payment shall
be made immediately to a holder of uncertificated securities entitled to such
payment. In the case of holders of shares represented by certificates, payment
shall be made only upon and simultaneously with the surrender to the corporation
of the certificates representing the shares for which the payment is made.
(C) If the proposal was required to be submitted to the shareholders of the
corporation, fair cash value as to those shareholders shall be determined as of
the day prior to the day on which the vote by the shareholders was taken, and,
in the case of a merger pursuant to section 1701.80 or 1701.801 [1701.80.1] of
the Revised Code, fair cash value as to shareholders of a constituent subsidiary
corporation shall be determined as of the day before the adoption of the
agreement of merger by the directors of the particular subsidiary corporation.
The fair cash value of a share for the purposes of this section is the amount
that a willing seller who is under no compulsion to sell would be willing to
accept and that a willing buyer who is under no compulsion to purchase would be
willing to pay, but in no event shall the fair cash value of a share exceed the
amount specified in the demand of the particular shareholder. In computing such
fair cash value, any appreciation or depreciation in market value resulting from
the proposal submitted to the directors or to the shareholders shall be
excluded.
(D)(1) The right and obligation of a dissenting shareholder to receive such
fair cash value and to sell such shares as to which he seeks relief, and the
right and obligation of the corporation to purchase such shares and to pay the
fair cash value of them terminates if any of the following applies:
(a) The dissenting shareholder has not complied with this section, unless the
corporation by its directors waives such failure;
(b) The corporation abandons the action involved or is finally enjoined or
prevented from carrying it out, or the shareholders rescind their adoption of
the action involved;
(c) The dissenting shareholder withdraws his demand, with the consent of the
corporation by its directors;
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(d) The corporation and the dissenting shareholder have not come to an
agreement as to the fair cash value per share, and neither the shareholder nor
the corporation has filed or joined in a complaint under division (B) of this
section within the period provided in that division.
(2) For purposes of division (D)(1) of this section, if the merger or
consolidation has become effective and the surviving or new entity is not a
corporation, action required to be taken by the directors of the corporation
shall be taken by the general partners of a surviving or new partnership or the
comparable representatives of any other surviving or new entity.
(E) From the time of the dissenting shareholder's giving of the demand until
either the termination of the rights and obligations arising from it or the
purchase of the shares by the corporation, all other rights accruing from such
shares, including voting and dividend or distribution rights, are suspended. If
during the suspension, any dividend or distribution is paid in money upon shares
of such class or any dividend, distribution, or interest is paid in money upon
any securities issued in extinguishment of or in substitution for such shares,
an amount equal to the dividend, distribution, or interest which, except for the
suspension, would have been payable upon such shares or securities, shall be
paid to the holder of record as a credit upon the fair cash value of the shares.
If the right to receive fair cash value is terminated other than by the purchase
of the shares by the corporation, all rights of the holder shall be restored and
all distributions which, except for the suspension, would have been made shall
be made to the holder of record of the shares at the time of termination.
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CHOICECARE CORPORATION
PROXY - SPECIAL MEETING OF SHAREHOLDERS, OCTOBER 10, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned shareholder appoints Daniel A. Gregorie, M.D., Donald A.
Saelinger, M.D. and Thomas D. Anthony, Esq. and each of them, as attorneys, with
full power of substitution, to vote all shares in CHOICECARE CORPORATION (the
"Company") that the undersigned is entitled to vote at the special meeting of
the Company's shareholders to be held at the Grand Baldwin Building, 8th Floor
Meeting Room, 655 Eden Park Drive, Cincinnati, Ohio 45202 on Friday,
October 10, 1997 at 10:00 A.M., and at any adjournment thereof, upon the
matters indicated on the reverse side hereof and as fully described in the
Company's Proxy Statement dated September 15, 1997, as well as upon any other
matters properly coming before the meeting.
SHARES
-------
(Continued, and to be signed on the reverse side)
<PAGE> 182
1. To approve and adopt the Agreement and Plan of Merger, dated as of June
3, 1997 (the "Merger Agreement") by and among Humana Inc. ("Humana"),
HOCC, Inc., a wholly-owned subsidiary of Humana ("Humana Sub"), the
Company and The ChoiceCare Foundation whereby (i) Humana Sub will merge
with and into the Company, which will thereupon become a subsidiary of
Humana (the "Merger"), and (ii) each shareholder of the Company will
receive $16.38 in cash for each common share of the Company held as of
the effective date of the Merger.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. In their discretion, to act upon such other matters as may properly
come before the meeting.
The shares represented by this Proxy will be voted as directed or, if no
direction is specified, will be voted FOR the approval and adoption of the
Merger Agreement.
Please sign name(s) exactly as printed hereon. If your shares are held jointly,
both holders must sign. In signing as attorney, administrator, executor,
guardian or trustee, please give title as such. If you are an authorized
individual signing on behalf of a corporation or partnership, please state the
full corporate or partnership name.
- -------------------------------- --------------------------------------
SIGNATURE DATE SIGNATURE IF HELD JOINTLY DATE
VOTES MUST BE INDICATED (X) IN BLACK OR BLUE INK.
PLEASE MARK, SIGN AND RETURN THIS PROXY CARD PROMPTLY, USING THE ENVELOPE
PROVIDED.
