<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
__________________________________
DATE OF REPORT
(DATE OF EARLIEST EVENT REPORTED): AUGUST 4, 1996
FHP INTERNATIONAL CORPORATION
(Exact Name of Registrant as Specified in Charter)
DELAWARE
(State or Other 0-14796 33-0072502
Jurisdiction of (Commission (IRS Employer
Incorporation) File Number) Identification No.)
9900 TALBERT AVENUE
FOUNTAIN VALLEY, CALIFORNIA 92708
(Address of Principal Executive Offices)
REGISTRANT'S TELEPHONE NUMBER
INCLUDING AREA CODE: (714) 963-7233
Page 1 of 4
Exhibit Index on Page 4
<PAGE>
Item 5. OTHER EVENTS.
On August 4, 1996, FHP International Corporation, a Delaware
corporation (the "Registrant"), entered into an Agreement and Plan of
Reorganization (the "Merger Agreement") dated August 4, 1996 by and among the
Registrant, PacifiCare Health Systems, Inc., a Delaware corporation ("PHS"), N-T
Holdings, Inc., a Delaware corporation ("New PacifiCare"), Neptune Merger Corp.,
a Delaware corporation and a wholly-owned subsidiary of New PacifiCare, and Tree
Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of New
PacifiCare ("Company Sub"). Pursuant to the Merger Agreement, New PacifiCare
will acquire all the stock of the Registrant by merger of the Registrant with
Company Sub (the "Company Merger"). In the Company Merger, holders of the
Registrant's common stock will receive consideration of an approximate value of
$35.00 per share through a combination of $17.50 in cash and shares of Class A
common stock and Class B common stock of New PacifiCare, plus rights to purchase
stock of two subsidiaries of the Registrant, Talbert Medical Management
Corporation and Talbert Health Services Corporation ("Talbert"). The maximum
amount of Class A common stock of New PacifiCare that will be issued to
stockholders of the Registrant will be 2,350,000 shares. The balance of New
PacifiCare stock to be issued to the Registrant's stockholders will be Class B
common stock. Holders of the Registrant's Series A Preferred Stock will receive
for each such share $14.113 in cash plus one-half share of new Series A
Preferred Stock of New PacifiCare which shall be convertible into Class B Common
Stock of New PacifiCare. The number of shares to be delivered in the Company
Merger is subject to adjustment based on the price of PHS stock during a twenty
day trading period ending prior to the Registrant's stockholders meeting.
PHS has received a commitment from Bank of America to provide
financing for the cash portion of the transaction. The closing of the Merger is
subject to customary closing conditions, including the approval of the
stockholders of the Registrant and PHS, various regulatory approvals and passage
of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of
1976.
The description of the Merger set forth herein is qualified in its
entirety by the terms and conditions of the Merger Agreement attached as an
exhibit to this report and incorporated herein by reference.
Item 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL
INFORMATION AND EXHIBITS
(a) Not applicable.
(b) Not applicable.
Page 2 of 4
<PAGE>
(c) Exhibits.
Exhibit No. Description of Exhibit
- ----------- ----------------------
2 Agreement and Plan of Reorganization dated August 4, 1996 by
and among FHP International Corporation, a Delaware
corporation, PacifiCare Health Systems, Inc., a Delaware
corporation, N-T Holdings, Inc., a Delaware corporation,
Neptune Merger Corp., a Delaware corporation, and Tree
Acquisition Corp., a Delaware corporation (the "Merger
Agreement"). (Schedules and Exhibits have been omitted pursuant
to Rule 601(b)(2) of Regulation S-K. Such Schedules and
Exhibits are listed and described in the Merger Agreement.
Registrant hereby agrees to furnish supplementally to the
Securities and Exchange Commission, upon its request, any or
all such omitted Schedules and Exhibits.)
99 Press Release dated August 5, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
FHP INTERNATIONAL CORPORATION
By: /s/ Michael J. Weinstock
-----------------------------------
Michael J. Weinstock
Secretary
Dated: August 19, 1996
Page 3 of 4
<PAGE>
INDEX TO EXHIBITS
Sequentially
Numbered
Exhibit Number Description of Exhibit Page
- -------------- ---------------------- --------
2 Agreement and Plan of Reorganization dated
August 4, 1996 by and among FHP International
Corporation, a Delaware corporation,
PacifiCare Health Systems, Inc., a Delaware
corporation, N-T Holdings, Inc., a Delaware
corporation, Neptune Merger Corp., a Delaware
corporation, and Tree Acquisition Corp., a
Delaware corporation (the "Merger Agreement").
(Schedules and Exhibits have been omitted
pursuant to Rule 601(b)(2) of Regulation S-K.
Such Schedules and Exhibits are listed and
described in the Merger Agreement. Registrant
hereby agrees to furnish supplementally to the
Securities and Exchange Commission, upon its
request, any or all such omitted Schedules and
Exhibits.)
99 Press Release dated August 5, 1996
Page 4 of 4
<PAGE>
AGREEMENT
AND PLAN OF REORGANIZATION
AMONG
PACIFICARE HEALTH SYSTEMS, INC.
NT HOLDINGS, INC.
NEPTUNE MERGER CORP.
TREE ACQUISITION CORP.
AND
FHP INTERNATIONAL CORPORATION(1)
-----------------
AUGUST 4, 1996
-----------------
- --------
(1) Schedules omitted pursuant to Item 601(b)(2) of Regulation S-K.
The Company hereby undertakes to provide supplementally copies of
any of the omitted schedules upon request of the Securities and
Exchange Commission.
<PAGE>
TABLE OF CONTENTS
Article 1
Description of Transaction................................................2
1.1 Mergers............................................................2
1.2 Effect of the Mergers..............................................2
1.3 Closing; Effective Time............................................2
1.4 Certificates of Incorporation and Bylaws; Directors and Officers. 3
1.5 Conversion of Shares...............................................3
1.6 Closing of the Transfer Books of the Company and PacifiCare........7
1.7 Exchange of Certificates...........................................7
1.8 Appraisal Rights...................................................9
1.9 Stock Subject to Conditions........................................9
1.10 Tax Consequences..................................................10
1.11 Accounting Consequences...........................................10
1.12 Further Action....................................................10
Article 2
Representations and Warranties of The Company............................10
2.1 Organization; Subsidiaries; Capitalization........................10
2.2 SEC Filings; Financial Statements.................................12
2.3 Absence of Certain Changes or Events..............................13
2.4 Tax Matters.......................................................13
2.5 Contracts.........................................................14
(a) Company Material Contracts...................................14
2.6 Employees.........................................................16
2.7 Litigation and Claims; Compliance with Law........................18
2.8 Properties........................................................19
2.9 Disclosure........................................................19
2.10 Transactions with Affiliates......................................20
2.11 Vote Required.....................................................20
2.12 Takeover Provisions Inapplicable..................................21
2.13 Company Action....................................................21
2.14 Fairness Opinion..................................................21
2.15 Financial Advisor.................................................21
2.16 Enforceability....................................................21
2.17 Governmental Consents; No Conflicts...............................22
2.18 Reserves..........................................................22
2.19 Audits or Investigations by Governmental Entities.................23
2.20 Environmental Provisions..........................................23
2.21 Intellectual Property.............................................24
i
<PAGE>
Article 3
Representations and Warranties of PacifiCare and Holding.................25
3.1 Organization; Subsidiaries; Capitalization........................25
3.2 SEC Filings; Financial Statements.................................27
3.3 Absence of Certain Changes or Events..............................28
3.4 Tax Matters.......................................................28
3.5 Contracts.........................................................29
3.6 Employees.........................................................30
3.7 Litigation and Claims; Compliance with Law........................31
3.8 Properties........................................................32
3.9 Disclosure........................................................32
3.10 Transactions with Affiliates......................................33
3.11 Vote Required.....................................................33
3.12 Takeover Provisions Inapplicable..................................33
3.13 PacifiCare Action.................................................33
3.14 Actions by Holding, Neptune Sub and Company Sub...................34
3.15 Fairness Opinion..................................................34
3.16 Financial Advisor.................................................34
3.17 Enforceability....................................................34
3.18 Governmental Consents; No Conflicts...............................35
3.19 Common and Preferred Stock To Be Issued...........................35
3.20 Reserves..........................................................35
3.21 Audits or Investigations by Governmental Entities.................36
3.22 Environmental Provisions..........................................36
3.23 Intellectual Property.............................................37
3.24 Formation of Holding..............................................38
Article 4
Conduct And Transactions Prior to Effective Time; Additional Agreements..38
4.1 Information and Access............................................38
4.2 Conduct of Business of the Company................................39
4.3 Conduct of Business of PacifiCare.................................42
4.4 Negotiation With Others...........................................43
4.5 Registration Statement; Prospectus/Proxy Statement................44
4.6 Stockholders' Meetings............................................45
4.7 Regulatory Approvals..............................................46
4.8 Employee Benefits Plans...........................................47
ii
<PAGE>
4.9 Indemnification...................................................50
4.10 Additional Agreements.............................................52
4.11 Disclosure........................................................52
4.12 Affiliate Agreements..............................................53
4.13 Tax Qualification and Opinion Back-Up Certificates................53
4.14 Financing.........................................................53
4.15 Talbert...........................................................53
4.16 7% Senior Notes Due 2003..........................................54
4.17 Notices of Certain Events.........................................54
4.18 Certain Corporate Matters with Respect to PacifiCare..............55
4.19 Compliance with Regulations.......................................55
4.20 Assumption by Successor...........................................55
4.21 No Activity by Holding............................................55
Article 5
Conditions Precedent To Obligations Of PacifiCare And Holding ...........55
5.1 Representations and Warranties Accurate...........................55
5.2 Compliance With Covenants.........................................56
5.3 No Material Adverse Effect........................................56
5.4 Certificate.......................................................56
5.5 Effectiveness of Registration Statement...........................56
5.6 Stockholder Approval..............................................56
5.7 Affiliates Agreements.............................................56
5.8 Legal Opinion.....................................................56
5.9 Tax Opinion.......................................................57
5.10 Absence of Restraint..............................................57
5.11 No Governmental Litigation........................................57
5.12 No Other Litigation...............................................57
5.13 HSR Act...........................................................57
5.14 Quotation on Nasdaq National Market or New York Stock Exchange....57
5.15 Other Required Consents and Approvals.............................58
5.16 TakeCare Board Representation.....................................58
5.17 Restated Rights Plan..............................................58
5.18 Talbert...........................................................58
Article 6
Conditions Precedent To The Company's Obligations........................58
6.1 Representations and Warranties Accurate...........................58
6.2 Compliance With Covenants.........................................59
6.3 No Material Adverse Effect........................................59
6.4 Certificate.......................................................59
6.5 Effectiveness of Registration Statement...........................59
6.6 Stockholder Approval..............................................59
iii
<PAGE>
6.7 Legal Opinion.....................................................59
6.8 Tax Opinion.......................................................59
6.9 Absence of Restraint..............................................59
6.10 No Governmental Litigation........................................60
6.11 HSR Act...........................................................60
6.12 Quotation on Nasdaq National Market or New York Stock Exchange....60
Article 7
Termination of Agreement.................................................60
7.1 Termination.......................................................60
7.2 Effect of Termination.............................................62
7.3 Fees and Expenses.................................................62
Article 8
Miscellaneous............................................................64
8.1 Amendment.........................................................64
8.2 Waiver............................................................64
8.3 No Survival of Representations and Warranties.....................64
8.4 Entire Agreement; Counterparts; Applicable Law....................64
8.5 Attorneys' Fees...................................................65
8.6 Assignability.....................................................65
8.7 Notices...........................................................65
8.8 Cooperation.......................................................68
8.9 Certain Terms.....................................................68
8.10 Titles............................................................69
8.11 Articles, Sections and Exhibits...................................69
8.12 Jurisdiction......................................................69
8.13 Counterparts; Effectiveness.......................................69
8.14 Schedules.........................................................69
iv
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made and
entered into as of August 4, 1996, by and among: N-T HOLDINGS, INC., a Delaware
corporation ("Holding"), PACIFICARE HEALTH SYSTEMS, INC., a Delaware corporation
("PacifiCare"); NEPTUNE MERGER CORP., a Delaware corporation and a wholly-owned
subsidiary of Holding ("Neptune Sub"); FHP INTERNATIONAL CORPORATION, a
Delaware corporation (the "Company"), and TREE ACQUISITION CORP., a Delaware
corporation and a wholly-owned subsidiary of Holding ("Company Sub").
RECITALS
A. The parties intend concurrently to effect a merger of Neptune Sub into
PacifiCare (the "PacifiCare Merger") and a merger of Company Sub into Company
(the "Company Merger"), each such merger to be carried out in accordance with
this Agreement and the laws of the State of Delaware (the "Mergers"), such that
PacifiCare and Company become wholly-owned subsidiaries of Holding and the
shareholders of PacifiCare and Company become shareholders of Holding. After
the Closing, Holding will act as a holding company for PacifiCare and the
Company.
B. This Agreement has been approved by the respective Boards of Directors
of Holding, PacifiCare, Neptune Sub, Company and Company Sub.
C. For United States federal income tax purposes, it is intended that the
transactions contemplated by this Agreement qualify as transfers subject to
Section 351(a) of the Internal Revenue Code of 1986, as amended, and the rules
and regulations promulgated thereunder (the "Code") and that the shareholders of
the Company be treated as if they transferred their stock in Company to Holding
in exchange for the Company merger consideration and that the shareholders of
PacifiCare be treated as if they transferred their stock in PacifiCare to
Holding in exchange for the PacifiCare merger consideration.
D. PacifiCare presently has issued and outstanding approximately
12,370,758 shares of Class A Common Stock, $0.01 par value ("PacifiCare Class A
Common Stock") and 18,812,799 shares of Class B Common Stock, $0.01 par value
("PacifiCare Class B Common Stock"). The Company presently has issued and
outstanding approximately 40,806,165 shares of Common Stock, $0.05 par value
("Company Common Stock") and approximately 21,030,345 shares of Series A
Cumulative Convertible Preferred Stock, $0.05 par value ("Company Series A
Preferred Stock").
1
<PAGE>
E. Contemporaneously with the execution and delivery of this Agreement,
certain stockholders of PacifiCare and of the Company are executing Voting and
Non-Disposition Agreements.
AGREEMENT
Holding, PacifiCare, Neptune Sub, the Company, and Company Sub hereby agree
as follows:
ARTICLE 1
DESCRIPTION OF TRANSACTION
1.1 MERGERS.
(a) Upon the terms and subject to the conditions set forth in this
Agreement, at the Effective Time (as defined in Section 1.3), Company Sub shall
be merged into the Company and the separate existence of the Company Sub shall
cease. The Company will be the surviving corporation in the Company Merger (the
"Company Surviving Corporation") and its separate corporate existence, with all
its purposes, objects, rights, privileges, powers and franchises shall continue
unaffected by such merger. Upon the terms and subject to the conditions set
forth in this Agreement, at the Effective Time, Neptune Sub shall be merged into
PacifiCare and the separate existence of Neptune Sub shall cease. PacifiCare
shall be the surviving corporation in PacifiCare Merger ("PacifiCare Surviving
Corporation") and its separate corporate existence, with all its purposes,
objects, rights, privileges, powers and franchises shall continue unaffected by
such merger. Company Sub and Neptune Sub have been formed solely for the
purpose of effecting the Company Merger and the PacifiCare Merger, respectively,
and there will be no other activity in Company Sub and Neptune Sub.
1.2 EFFECT OF THE MERGERS. The Mergers shall have the effects set forth
in this Agreement and in Section 259 of the Delaware General Corporation Law
(the "DGCL").
1.3 CLOSING; EFFECTIVE TIME. The consummation of the transactions
contemplated by this Agreement (the "Closing") shall take place at the offices
of PacifiCare on the second business day following the date as of which each of
the conditions set forth in Articles 5 and 6 has been fulfilled or waived or on
such other date or at such other place as may be jointly designated by
PacifiCare and the Company (the "Closing Date"). As soon as practicable after
the Closing, properly executed certificates of merger for each Merger conforming
to the requirements of the DGCL and changing the name of Holding to "PacifiCare
Health Services, Inc." and the name of PacifiCare to "PacifiCare Operations,
Inc." or some other name chosen by PacifiCare, shall be filed with the Delaware
Secretary of State. The Mergers shall become
2
<PAGE>
effective at the time said certificates of merger are filed with the Delaware
Secretary of State or at such later time as may be specified in said
certificates of merger (the "Effective Time").
1.4 CERTIFICATES OF INCORPORATION AND BYLAWS; DIRECTORS AND OFFICERS.
(a) The Certificates of Incorporation of PacifiCare and Company shall
be the Certificates of Incorporation of PacifiCare Surviving Corporation and the
Company Surviving Corporation, respectively, as of the Effective Time.
(b) The Bylaws of PacifiCare and the Company, as in effect
immediately prior to the Effective Time, shall become the Bylaws of PacifiCare
Surviving Corporation and the Company Surviving Corporation, respectively, at
the Effective Time.
(c) The directors of the Company shall resign or be removed
concurrently with the Effective Time. The directors and officers of PacifiCare
shall become the directors and officers of PacifiCare Surviving Corporation at
the Effective Time.
(d) PacifiCare and the Company shall cause Holding to take all
necessary corporate action to adopt or amend the Certificate of Incorporation
and Bylaws of Holding prior to the Effective Time to be in substantially the
form of the Amended and Restated Certificate of Incorporation attached hereto as
Exhibit 1.4 (the "Holding Restated Certificate of Incorporation") and the Bylaws
of PacifiCare in effect on the date hereof. PacifiCare shall cause the Board of
Directors of Holding immediately after the Effective Time to consist of at least
ten persons, of which two individuals shall be designated by the Board of
Directors of the Company and be reasonably satisfactory to the Board of
Directors of PacifiCare. Such new directors shall be appointed to different
classes, and they shall commence to serve within 60 days of the Effective Date
and remain as directors until their successors have been duly elected or until
their earlier death, removal or resignation, provided that they shall be
renominated as required to be able to serve a minimum of three years. If, prior
to the end of such period, either of such directors becomes unable to serve as
director, or is no longer qualified to serve as a director, the remaining
director (or his successor) shall select a replacement nominee (which nominee
shall be satisfactory to the Board of Directors of Holding) to be appointed to
serve the remaining term.
1.5 CONVERSION OF SHARES.
(a) At the Effective Time, by virtue of the Company Merger (and
without any action on the part of any stockholder of the Company):
(i) any shares of Company Common Stock or Company Series A
Preferred Stock then held by the Company or any subsidiary of the Company (or
held in the Company's treasury) shall be canceled;
3
<PAGE>
(ii) any shares of Company Common Stock or Company Series A
Preferred Stock then held by PacifiCare, Neptune Sub or any other subsidiary of
PacifiCare shall be canceled;
(iii) except as provided in clauses (i) and (ii) above or as
provided in Section 1.8 with respect to shares as to which appraisal rights have
been exercised and subject to Section 1.5(c) below, each share of Company Common
Stock then outstanding shall be converted into the right to receive (calculated
to the nearest .001):
(A) an amount of Cash equal to $17.50 (the "Common Cash
Consideration"), plus
(B) the Final Class A/Common Share Ratio (as defined in
Section 1.5(a)(v)(D) below) of a share of Holding's Class A Common Stock, $.01
par value, as provided in the Holding Restated Certificate of Incorporation
("Holding Class A Common Stock"), plus
(C) the Final Class B/Common Share Ratio (as defined in
Section 1.5(a)(v)(E) below) of a share of Holding's Class B Common Stock, $.01
par value, as provided in the Holding Restated Certificate of Incorporation
("Holding Class B Common Stock");
(D) subject to Section 1.8 and subject to the completion of
the transactions contemplated by Section 4.15, one right to purchase a share or
shares in Talbert (as defined below) in such a manner that the holders of the
Company Common Stock and Company Series A Preferred Stock are entitled to
receive rights to purchase all of the Company's interest in Talbert Medical
Management Corporation and Talbert Health Services Corporation (collectively,
"Talbert") pro rata based on the number of outstanding shares of Company Common
Stock and the number of shares of Company Common Stock into which outstanding
shares of Company Series A Preferred Stock are convertible. The exercise price
of such right shall be $1.00.
(iv) except as provided in clauses (i) and (ii) above and subject
to Section 1.5(c), each share of Company Series A Preferred Stock shall be
converted into (A) an amount of cash equal to $14.113 (the "Series A Cash
Consideration"); (B) and one-half (1/2) share of Holding Series A (as defined in
section 1.7(a)); and (C) subject to Section 1.8 and to the completion of the
transactions contemplated by Section 4.15, one right to purchase a share or
shares in Talbert in such a manner that the holders of the Company Common Stock
and Company Series A Preferred Stock are entitled to receive rights to purchase
all of the Company's interest in Talbert pro rata based on the number of
outstanding shares of Company Common Stock into which such Company Series A
Preferred Stock is convertible.
4
<PAGE>
(v) for purposes of this Agreement:
(A) the "Average Pre-Vote Closing Share Price" for the
PacifiCare Class B Common Stock shall be the average closing price as quoted in
the Wall Street Journal of PacifiCare's Class B Common Stock ("PacifiCare Class
B Common Stock") during the twenty trading days ending on the trading date
immediately prior to the date of the stockholder meeting at which the Company's
stockholders vote on whether to approve the Company Merger,
(B) the "Initial Exchange Ratio" shall be .258,
(C) the "Closing Price/Signing Price Ratio" shall be the
Average Pre-Vote Closing Share Price for PacifiCare Class B Common Stock divided
by $68.00,
(D) the "Final Class A/Common Share Ratio" shall be
2,350,000 divided by the Common Outstanding Number,
(E) the "Final Class B/Common Share Ratio" shall be the
Final Exchange Ratio minus the Final Class A/Common Share Ratio,
(F) the "Final Exchange Ratio" shall be the product of the
Initial Exchange Ratio times the following multiplier:
MULTIPLIER CLOSING PRICE/SIGNING PRICE RATIO
- ----------------------------------------- ----------------------------------
0.8875 above 1.30
One minus (1/2 times (the Closing 1.075- 1.30
Price/Signing Price Ratio less 1.075))
1 .925- 1.075
One plus (1/2 times (0.925 less the Closing .70- .925
Price/Signing Price Ratio))
1.1125 less than .70
(G) The "Common Outstanding Number" shall be the number of
shares of Company Common Stock issued and outstanding immediately before the
Effective Time plus the number of shares of Company Common Stock subject to
Company Options (as
5
<PAGE>
defined below), if any, which at the Effective Time have the right to receive,
upon exercise, the consideration set forth in Section 1.5(iii) after the
Effective Time.
(vi) each share of the Common Stock, par value $.01 per share, of
Company Sub outstanding shall be converted into an equal number of shares of
Company Common Stock.
(b) At the Effective Time, by virtue of the PacifiCare Merger (and
without any action on the part of any stockholder of PacifiCare):
(i) any shares of PacifiCare Class A Common Stock or PacifiCare
Class B Common Stock (PacifiCare Class A Common Stock and PacifiCare Class B
Common Stock being sometimes collectively referred to herein as "PacifiCare
Common Stock") then held by PacifiCare or any subsidiary of PacifiCare (or held
in PacifiCare's treasury) shall be canceled and no payment shall be made with
respect thereto;
(ii) any shares of PacifiCare Common Stock then held by the
Company, Company Sub or any other subsidiary of the Company shall be canceled;
(iii) except as provided in clauses (i) and (ii) above and
subject to Section 1.5(c) below, each share of PacifiCare Class A Common Stock
then outstanding shall be converted into the right to receive one share of
Holding Class A Common Stock and each share of PacifiCare Class B Common Stock
then outstanding shall be converted into the right to receive one share of
Holding Class B Common Stock (Holding Class A Common Stock and Holding Class B
Common Stock being sometimes collectively referred to herein as "Holding Common
Stock");
(iv) each share of Common Stock, par value $.001 per share, of
Neptune Sub then outstanding shall be converted into one share of PacifiCare
Class A Common Stock; and
(v) each share of the capital stock of Holding existing
immediately prior to the Effective Time shall be canceled.
(c) If, between the date of this Agreement and the Effective Time,
the outstanding shares of Company Common Stock or Company Series A Preferred
Stock or PacifiCare Class A Common Stock or PacifiCare Class B Common Stock are
changed into a different number or class of shares by reason of any stock
dividend, subdivision, reclassification, recapitalization, split-up, combination
or similar transaction, the exchange ratio applicable thereto shall be
appropriately adjusted.
6
<PAGE>
1.6 CLOSING OF THE TRANSFER BOOKS OF THE COMPANY AND PACIFICARE. At the
Effective Time, holders of certificates representing shares of Company Common
Stock, Company Series A Preferred Stock, PacifiCare Class A Common Stock and
PacifiCare Class B Common Stock shall cease to have any rights as stockholders
of the Company or PacifiCare, respectively, and the stock transfer books of the
Company and PacifiCare shall be closed with respect to all shares of Company
Common Stock, Company Series A Preferred Stock, PacifiCare Class A Common Stock
and PacifiCare Class B Common Stock outstanding immediately prior to the
Effective Time. No further transfer of any such shares of Company Common Stock,
Company Series A Preferred Stock, PacifiCare Class A Common Stock or PacifiCare
Class B Common Stock shall thereafter be made on such stock transfer books. If,
after the Effective Time, a valid certificate previously representing any of
such shares of Company Common Stock, Company Series A Preferred Stock,
PacifiCare Class A Common Stock or PacifiCare Class B Common Stock (an "Old
Stock Certificate") is presented to the Exchange Agent (as defined in Section
1.7) or to the Company or PacifiCare, as applicable, such Old Stock Certificate
shall be canceled and exchanged as provided in Section 1.7.
1.7 EXCHANGE OF CERTIFICATES.
(a) The Holding Restated Certificate of Incorporation shall establish
the terms of Holding's preferred stock, including the Series A Preferred Stock
(the "Holding Series A"). Such Holding Restated Certificate of Incorporation
shall be substantially in the form of Exhibit 1.4 hereto and shall be filed with
the Secretary of State of the State of Delaware prior to the Effective Time.
The Holding Series A shall be convertible into Holding Class B Common Stock upon
the terms and conditions, and shall have the rights, preferences and privileges,
set forth in Exhibit 1.4.
(b) Prior to the Closing Date, PacifiCare shall select a reputable
bank or trust company to act as exchange agent in the Merger (the "Exchange
Agent"). Promptly after the Effective Time, (i) Holding shall deposit with the
Exchange Agent certificates representing the shares of Holding Class A Common
Stock, Holding Class B Common Stock and Holding Series A issuable pursuant to
this Article 1 and (ii) Holding shall deposit cash sufficient to make the
payments called for in Section 1.5 and payments in lieu of fractional shares in
accordance with Section 1.7(d). The shares of Holding Class A Common Stock,
Holding Class B Common Stock and Holding Series A and cash amounts so deposited
with the Exchange Agent, together with any dividends or distributions received
by the Exchange Agent with respect to such shares, are referred to collectively
as the "Exchange Fund."
(c) As soon as practicable after the Effective Time, the Exchange
Agent will mail to the holders of Old Stock Certificates (i) a letter of
transmittal in customary form and containing such provisions as PacifiCare may
reasonably specify and (ii) instructions for use in effecting the surrender of
Old Stock Certificates in exchange for the consideration set forth in this
Article 1. Upon surrender of an Old Stock Certificate to the Exchange Agent for
7
<PAGE>
exchange, together with a duly executed letter of transmittal and such other
documents as may be reasonably required by the Exchange Agent, the holder of
such Old Stock Certificate shall be entitled to receive in exchange therefor (i)
in the case of holders of Company Common Stock, (A) a check in the amount
calculated pursuant to this Article 1 (subject to required tax withholding) and
(B) certificates representing the number of whole shares of Holding Class A
Common Stock and Holding Class B Common Stock that such holder has the right to
receive pursuant to the provisions of this Article 1; (ii) in the case of
holders of Company Series A Preferred Stock, (A) a check in the amount
calculated pursuant to this Article 1 (subject to required tax withholding), (B)
and a certificate representing the whole number of shares of Holding Series A
that such holder has the right to receive pursuant to the provisions of this
Article 1; (iii) in the case of holders of PacifiCare Class A Common Stock and
PacifiCare Class B Common Stock, certificates representing the number of whole
shares of Holding Series A and Holding Series B Common Stock that such holder
has the right to receive pursuant to the provisions of this Article 1. In each
case, the Old Stock Certificate so surrendered shall be canceled. Until
surrendered as contemplated by this Section 1.7, each Old Stock Certificate
shall be deemed, from and after the Effective Time, to represent only the right
to receive upon such surrender the consideration contemplated by this Article 1.
(d) No dividends or other distributions declared or made with respect
to Holding Class A Common Stock, Holding Class B Common Stock or Holding Series
A with a record date after the Effective Time shall be paid to the holder of any
unsurrendered Old Stock Certificate with respect to the shares of Holding Class
A Common Stock, Holding Class B Common Stock and Holding Series A represented
thereby, and no cash payment shall be paid to any such holder, until such holder
surrenders such Old Stock Certificate in accordance with this Section 1.7 (at
which time such holder shall be entitled to receive all such dividends and
distributions and such cash payment).
(e) No certificates or scrip for fractional shares of Holding Class A
Common Stock, Holding Class B Common Stock or Holding Series A shall be issued,
but in lieu thereof, each holder of shares of Company Common Stock or Company
Series A Preferred Stock who would otherwise be entitled to receive a
certificate or scrip for a fraction of a share of Holding Class A Common Stock,
Holding Class B Common Stock or Holding Series A shall receive from Holding a
cash amount equal to the market value of one share of Holding Class A Common
Stock, Holding Class B Common Stock or Holding Series A, as the case may be,
(based on the closing sales price of one share of Holding Class A Common Stock
or Holding Class B Common Stock as quoted on the Nasdaq National Market or the
New York Stock Exchange ("NYSE"), and the as-converted value of the Holding
Series A, as the case may be, on the first trading day the Merger becomes
effective) multiplied by the fraction of a share of Holding Class A Common
Stock, Holding Class B Common Stock or Holding Series A to which such holder
would otherwise be entitled.
8
<PAGE>
(f) Any portion of the Exchange Fund that remains undistributed to
former stockholders of the Company or PacifiCare as of the date 365 days after
the date on which the Mergers become effective shall be delivered to Holding
upon demand, and any former stockholders of the Company or PacifiCare who have
not theretofore surrendered their Old Stock Certificates in accordance with this
Section 1.7 shall thereafter look only to Holding for payment of their claims
for cash, Holding Class A Common Stock, Holding Class B Common Stock, Holding
Series A and any dividends or distributions with respect thereto.
(g) Neither PacifiCare nor the Company shall be liable to any holder
or former holder of shares of Company Common Stock, PacifiCare Common Stock or
Company Series A Preferred Stock with respect to any shares (or dividends or
distributions with respect thereto) or cash amounts from the Exchange Fund
delivered to a public official pursuant to any applicable abandoned property,
escheat or similar law.
1.8 APPRAISAL RIGHTS. Notwithstanding Section 1.5 above, shares of stock
of the Company or PacifiCare outstanding immediately prior to the Effective Time
and held by a holder who has not voted in favor of the Company Merger or the
PacifiCare Merger, as applicable, and who has and who exercises appraisal rights
in respect of such shares of the Company or PacifiCare in accordance with the
DGCL, shall not be converted into a right to receive shares or cash or other
consideration otherwise available to such holder unless such holder fails to
perfect or withdraws or otherwise loses his appraisal rights. Shares of
Company's and PacifiCare's stock in respect of which appraisal rights have been
exercised shall be treated in accordance with Section 262 of the DGCL. If after
the Effective Time such holder fails to perfect or withdraws or otherwise loses
his right to demand payment of the fair value of his shares under the DGCL, such
shares shall be treated as if they had been converted as of the Effective Time
into a right to receive the shares and consideration such holder would have
received if such holder had not exercised his appraisal rights; provided,
however, that if such event occurs after the thirtieth day after the Closing,
such shares shall not be entitled to a distribution of any rights to purchase
Talbert as provided in Section 4.15, but shall be entitled to receive in cash
the initial value of such rights. The Company shall give PacifiCare prompt
notice of any demands received by the Company for the exercise of appraisal
rights with respect to shares of the Company's stock and PacifiCare shall have
the right to participate in all negotiation and proceedings with respect to such
demands. The Company shall not, except with the prior written consent of
PacifiCare, make any payment with respect to, or settle or offer to settle, any
such demands.
1.9 STOCK SUBJECT TO CONDITIONS. If any shares of Company Common Stock or
PacifiCare Common Stock outstanding immediately prior to the Effective Time are
unvested or are subject to a repurchase option, risk of forfeiture or other
condition under any applicable stock purchase agreement, restriction agreement
or other agreement with the Company or PacifiCare, then (unless such condition
terminates by virtue of the applicable Merger pursuant to the express terms of
such agreement) the shares of Holding Common Stock issued in
9
<PAGE>
exchange for such shares of Company Common Stock or PacifiCare Common Stock, as
the case may be, will also be unvested or subject to the same repurchase option,
risk of forfeiture or other condition, and the certificates evidencing such
shares of Holding Common Stock may accordingly be marked with appropriate
legends.
1.10 TAX CONSEQUENCES. For federal income tax purposes, the Mergers are
intended to constitute contributions of property in exchange for stock within
the meaning of Section 351(a) of the Code. Neither the Company nor PacifiCare
shall take a position inconsistent with this Section 1.10 on any tax return.
1.11 ACCOUNTING CONSEQUENCES. For accounting purposes, the Company Merger
is intended to be treated as a "purchase."
1.12 FURTHER ACTION. If at any time after the Effective Time any further
action is determined by Holding to be necessary or desirable to carry out the
purposes of this Agreement or to vest the Company Surviving Corporation or
PacifiCare Surviving Corporation with the full right, title and possession of
and to all assets, property, rights, privileges, immunities, powers and
franchises of Company Sub and the Company or of Neptune Sub and PacifiCare,
respectively, the officers and directors of the applicable Surviving Corporation
shall be fully authorized (in the name of Company Sub, in the name of the
Company, in the name of Neptune Sub, or in the name of PacifiCare and otherwise)
to take such action.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as set forth in the disclosure schedule delivered to PacifiCare on
the date of this Agreement and signed by the President of the Company (the
"Company Disclosure Schedule"), the Company represents and warrants to
PacifiCare and Holding as follows:
2.1 ORGANIZATION; SUBSIDIARIES; CAPITALIZATION.
(a) The Company is a corporation duly organized, existing and in good
standing under the laws of the State of Delaware. The Company has all necessary
power and authority under applicable corporate law and its organizational
documents to own or lease its properties and to carry on its business as
presently conducted. As of the date of this Agreement, the Company Disclosure
Schedule sets forth a list of all of the Company's subsidiaries. For purposes
of this Agreement, a company's "subsidiaries" shall include all corporations,
limited partnerships, joint ventures and other entities in which such company,
directly or indirectly, owns a majority interest.
10
<PAGE>
(b) Each of the Company and its subsidiaries, to the extent
conducting business as a health maintenance organization ("HMO"), insurance
company, third-party administrator or otherwise requiring any form of
governmental licensure, qualification or authorization, is duly licensed,
qualified or authorized and in good standing under the applicable laws and
regulations, respectively, of each state or territory in which the conduct of
such business requires such licensure, qualification or authorization, except
where failure would not have a material adverse effect on the Company or its
material subsidiaries as set forth in Schedule 2.1(b) (the "Company's Material
Subsidiaries"). The conduct of the Company's and its subsidiaries' respective
business is in conformity with all applicable foreign, federal, state or
territorial, local and other governmental and regulatory requirements and the
forms, procedures and practices of the Company and its subsidiaries in the
conduct of their respective business are also in compliance with all such
requirements, to the extent applicable, except where nonconformity or
noncompliance would not constitute a Material Adverse Effect on the Company.
For purposes of this Agreement, "Material Adverse Effect," as it applies to the
Company, means a material adverse effect on the business, operations, financial
condition or assets of the Company and its subsidiaries, taken as a whole, other
than as a result of the performance by the Company of its obligations, or the
exercise by Holding, PacifiCare and Neptune Sub of their rights, under this
Agreement.
(c) As of the date of this Agreement, the authorized capital stock of
the Company consists of: 100,000,000 shares of Company Common Stock, par value
$0.05 per share, of which, as of the date hereof, 40,806,165 shares were issued
and outstanding; and 40,000,000 shares of preferred stock, par value $0.05 per
share, of which, as of the date hereof, 21,030,345 shares of Company Series A
Preferred Stock were issued and outstanding. All the issued and outstanding
shares of Company Common Stock and Company Series A Preferred Stock are validly
issued, fully paid and nonassessable and free of preemptive rights. As of the
date of this Agreement, the Company has issued outstanding options to purchase a
total of 3,917,259 shares of Company Common Stock (the "Company Options")
pursuant to Company's stock option plans and agreements. The Company has
provided PacifiCare a schedule (the "Option and Restricted Stock Schedule")
which sets forth (i) with respect to the Company Options, the name of each
optionee, the number of shares of Company Common Stock subject to each Company
Option, the date of grant and exercise price and the vesting schedule of each
Company Option, (ii) each option plan and agreement under which the Company
Options have been granted, and the Company has delivered to PacifiCare complete
and accurate copies of all such plans, and (iii) the name of each holder of
restricted stock, the date of sale and issuance of such restricted stock to each
such holder, and the applicable restrictions on such restricted stock. The
Company has an Amended and Restated Rights Agreement dated as of March 28,1994
between Company and American Stock Transfer & Trust Co., as agent (the "Restated
Rights Agreement") under which certain shareholder rights have been granted.
The execution of Voting and Non-Disposition Agreements by certain stockholders
of the Company has not and will not give rise to any rights or benefits under
the Restated Rights Plan. Except as set forth above or on the Company
Disclosure Schedule, as of
11
<PAGE>
the date of this Agreement, (i) there are no shares of capital stock of the
Company authorized, issued or outstanding, (ii) there are no outstanding
subscriptions, options, warrants, stock appreciation right plans, calls, rights,
convertible securities, stockholder rights plans (or similar plans commonly
referred to as "poison pills") or other agreements or commitments of any
character relating to issued or unissued capital stock or other securities of
the Company or any of its subsidiaries, or obligating the Company or any other
party to issue, transfer or sell any shares of the capital stock or other
securities of the Company or any of its subsidiaries, and (iii) there are no
other outstanding securities convertible into, exchangeable for or evidencing
the right to subscribe for any shares of the capital stock or other securities
of the Company or any of its subsidiaries or any successor corporation or
controlling person of such successor corporation. The Company is not under any
obligation to register under the Securities Act any of its presently outstanding
securities or any securities that may be subsequently issued.
(d) Each subsidiary of the Company is a corporation duly organized,
validly existing and in good standing under the laws of its jurisdiction of
incorporation and has all necessary power and authority under applicable
corporate law to own and lease its properties and to carry on its business as
presently conducted. All of the outstanding shares of capital stock of each
subsidiary of the Company are validly issued, fully paid and nonassessable and
are owned beneficially and of record by the Company or another subsidiary of the
Company, free and clear of any liens, claims or encumbrances.
(e) Complete and accurate copies of the Certificate of Incorporation
and Bylaws (or other or comparable charter documents), each as amended to date,
of the Company and each of its subsidiaries are filed as exhibits to the Company
SEC Reports or have been delivered to PacifiCare.
2.2 SEC FILINGS; FINANCIAL STATEMENTS.
(a) The Company has made available to PacifiCare a complete and
accurate copy of each report, schedule, registration statement and definitive
proxy statement filed by the Company with the Securities and Exchange Commission
("SEC") on or after July 1, 1995 (the "Company SEC Reports"), which are all the
forms, reports and documents required to be filed by the Company with the SEC
since July 1, 1995. The Company SEC Reports (i) complied in all material
respects with the requirements of the Securities Act or the Exchange Act (as
such terms are defined in Section 2.17), as the case may be, at and as of the
times they were filed (or, if amended or superseded by a filing prior to the
date of this Agreement, then on the date of such filing) and (ii) did not at and
as of the time they were filed (or, if amended or superseded by a filing prior
to the date of this Agreement, then on the date of such filing) contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading.
12
<PAGE>
(b) Each of the sets of financial statements (including, in each
case, any related notes thereto) contained in the Company SEC Reports and the
Company's estimated balance sheet as of May 31, 1996 (the "May 31, 1996 Balance
Sheet"), as well as the Company's preliminary interim income statement for the
fiscal year ended June 30, 1996 (the "June 30 Statement") that have been
delivered to PacifiCare (collectively, the "Past Financial Statements") were
prepared in accordance with generally accepted accounting principles ("GAAP")
applied on a consistent basis throughout the periods involved (except as may be
indicated in the notes thereto) and fairly presents the consolidated financial
position of the Company and its subsidiaries as at the respective dates thereof
and the consolidated results of its operations and cash flows for the periods
indicated, except that the May 31, 1996 Balance Sheet and the June 30 Statement
included in the Past Financial Statements (i) were or are subject to normal
year-end audit adjustments which were not or are not expected to be material in
amount and (ii) do not contain footnotes.
(c) The Company and its subsidiaries have no Liabilities, except for
(i) any Liability which is accrued or fully reserved against in the May 31, 1996
Balance Sheet or disclosed in the notes included in the Past Financial
Statements, (ii) any Liability which was incurred after May 31, 1996 in the
ordinary course of business, (iii) other Liabilities which, individually or in
the aggregate, have not had and would not reasonably be expected to have a
Material Adverse Effect on the Company or (iv) any Liability under or disclosed
in this Agreement. As used herein, "Liabilities" shall mean any liability or
obligation of any kind or nature, secured or unsecured (whether absolute,
accrued, contingent or otherwise, and whether due or to become due).
2.3 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since March 31, 1996, there has
not been (a) any change, or any development or combination of changes or
developments that has had or would reasonably be expected to have a Material
Adverse Effect on the Company, (b) any damage, destruction or loss, whether or
not covered by insurance, that has had or would reasonably be expected to have a
Material Adverse Effect on the Company or (c) except as permitted or required in
this Agreement, any transaction, commitment, dispute or other event or condition
(financial or otherwise) of any character (whether or not in the ordinary course
of business) which would be prohibited by Section 4.2(b)(i), (ii), (v), (vi),
(vii), (ix), (xiv), and (xvi) if it were to occur or be effected between the
date of this Agreement and the Effective Time.
2.4 TAX MATTERS.
(a) The Company (or, if applicable, one of its subsidiaries) has
filed, within the time (including any extensions of applicable due dates) and in
the manner prescribed by law, all material returns, declaration, reports,
estimates, information returns and statements, including information returns and
reports ("Returns"), required to be filed under federal, state or territorial,
local or any foreign laws regarding Taxes (as defined below) by the Company
13
<PAGE>
and its subsidiaries, except for such Returns the failure of which to timely
file would not result in a liability of more than $5,000,000.
(b) The Company (or, if applicable, one of its subsidiaries) has,
within the time (including any extensions of applicable due dates) and in the
manner prescribed by law, paid all Taxes (as defined below) that are due and
payable except Taxes (i) for which adequate reserves have been established under
the Past Financial Statements, (ii) which are being contested in good faith or
(iii) which involve permanent differences in the aggregate less than $5,000,000
or involve timing differences in the aggregate less than $10,000,000.
(c) The Company and its subsidiaries have not filed (and will not
file prior to the Closing Date) any consent agreement under Section 341(f) of
the Code or agreed to have Section 341(f)(2) of the Code apply to any
disposition of any subsection (f) asset (as such term is defined in Section
341(f)(4) of the Code) owned by the Company or such subsidiaries.
(d) No outstanding debt obligation of the Company is "corporate
acquisition indebtedness" within the meaning of Section 279(b) of the Code.
(e) There are no claims or assessments in excess of $5,000,000,
pending or threatened, by any taxing authority against the Company or any of its
subsidiaries. The Company Disclosure Schedule lists all pending tax audits by
the IRS, all agreements with the IRS to delay the applicable statute of
limitations and all settlements of any tax audits or claims by the IRS since
July 1, 1993.
(f) For purposes of this Article 2, "Taxes" shall mean all taxes,
charges, fees, levies, or other assessments of whatever kind or nature,
including, without limitation, all net income, gross income, gross receipts,
sales, use, value-added, ad valorem, transfer, franchise, profits, license,
withholding, payroll, employment, excise, estimated, severance, stamp, net
worth, environmental, occupancy or property taxes, fees, assessments or charges
of any kind whatsoever (together with any interest and any penalties, additions
to tax or additional amounts) imposed by any taxing authority (domestic or
foreign) upon or payable by the Company or any of its subsidiaries.
2.5 CONTRACTS.
(a) COMPANY MATERIAL CONTRACTS. For purposes of this Agreement,
"Company Material Contracts" shall mean (i) each contract, agreement or other
arrangement of or involving the Company or any of its subsidiaries with respect
to indebtedness for money borrowed in excess of $3,000,000 (other than trade
payables in the ordinary and usual course of business), including, but not
limited to, letters of credit, guaranties and swap and similar agreements; (ii)
each contract, agreement or other arrangement which limits or restricts the
ability of the Company or any of its subsidiaries to compete or otherwise
conduct its business
14
<PAGE>
in any manner or place which materially affects the Company or any material
subsidiary; (iii) each mortgage, contract, license, lease, indenture or other
agreement of the Company or any of its subsidiaries (A) which would be required
by Rule 601(b)(10) of SEC Regulation S-K to be filed as an exhibit to an Annual
Report on Form 10-K (other than any employee benefit plan) or (B) which
constitutes any other liability (including, without limitation, any guarantee,
surety contract or similar instrument), obligation or transaction and, in the
case of any item referred to in this clause, is material to the Company and its
subsidiaries or their businesses or prospects taken as a whole; and (iv) for
each state in which the Company or its subsidiary conducts business as an HMO,
insurance company, third-party administrator or otherwise requiring licensure as
set forth in Section 2.1(b), (A) the material contracts (based on gross revenues
generated thereunder) with government agencies or employer or other groups, (B)
the material contracts (based on payments made thereunder) with physician
providers of health care services, (C) the material contracts (based on payments
made thereunder) with providers of hospital services, and (D) the material
contracts (based on payments made thereunder) with providers of non-hospital,
non-physician medical services, all as specified in the next sentence. In
California, material contracts are the twenty-five largest government agency or
employer or other group contracts, the twenty-five largest physician provider
contracts, the ten largest hospital contracts and the ten largest non-physician,
non-hospital contracts. In Colorado, material contracts are the five largest
hospital contracts and the ten largest physician provider contracts. In
Arizona, material contracts are the five largest hospital contracts and five
largest physician provider contracts. In Utah, material contracts are the six
largest hospital contracts and nine largest physician provider contracts. In
all other states or territories in which the Company or a subsidiary conducts
business, material contracts are the five largest government agency or employer
or other group contracts, the five largest physician provider contracts and the
five largest hospital contracts. The Company will use its best efforts to
provide a true and complete copy of each Company Material Contract to PacifiCare
within 30 days of the date hereof.
All Company Material Contracts, are in full force and effect and are
binding upon Company or its subsidiary, as the case may be, and, to the
Company's knowledge, are binding on the other parties thereto, except as
enforcement thereof may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws, both state and federal, affecting the
enforcement of creditors' rights or remedies in general from time to time in
effect and the exercise by courts of equity powers. To the Company's knowledge,
no material default by the Company or any of its subsidiaries has occurred under
any of the Company Material Contracts and (A) no material default by any of the
other contracting parties has occurred under any of the Company Material
Contracts, (B) no event has occurred which with the giving of notice or the
lapse of time, or both, would constitute a material default by the Company or
any of its subsidiaries or any of the other contracting parties and (C) there is
no other reason, including without limitation any pending or threatened
termination, that any Company Material Contract will terminate (other than
expiration in accordance with its terms).
15
<PAGE>
(b) The Company Disclosure Schedule sets forth a list of all claims
other than invoices in the ordinary course of business, or claims made under
risk programs in the ordinary course of business made or, to the Company's
knowledge, threatened against the Company or any of its subsidiaries under each
Company Material Contract presently or heretofore in effect (including claims
for back charges, rebates, price reductions, breaches of product or service
warranties or for product or service liability for products manufactured or
sold), to the extent such claims have had or would reasonably be expected to
have (i) for provider contracts, a cost to the Company or its Material
Subsidiaries in excess of $5,000,000 or (ii) for other Company Material
Contracts, a material adverse effect on the Company or any of its Material
Subsidiaries.
(c) Except as listed on the Company Disclosure Schedule, there are no
contracts, agreements or understandings, oral or written, between the Company or
any of its subsidiaries and Talbert that would interfere or conflict with the
transactions contemplated by Section 4.15 hereof.
2.6 EMPLOYEES.
(a) The Company has made available to PacifiCare a list of the top
100 paid employees of the Company and its subsidiaries and, to the Company's
knowledge, the information relating to each person on such list is correct. The
Company Disclosure Schedule identifies each "employee benefit plan," as defined
in Section 3(3) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), currently or previously maintained, contributed to or entered
into by the Company or any ERISA Affiliate (as defined below) under which the
Company or any ERISA Affiliate thereof has any present or future obligation or
liability (collectively, the "Company Employee Plans"). For purposes of this
Section 2.6, "ERISA Affiliate" shall mean any entity which is a member of (A) a
"controlled group of corporations," as defined in Section 414(b) of the Code,
(B) a group of entities under "common control," as defined in Section 414(c) of
the Code, or (C) an "affiliated service group," as defined in Section 414(m) of
the Code, or treasury regulations promulgated under Section 414(o) of the Code,
any of which includes Company. Copies of all Company Employee Plans (and, if
applicable, related trust agreements) and all amendments thereto and written
interpretations thereof (including summary plan descriptions) have been made
available to PacifiCare or its counsel, together with the most recent annual
report (Form 5500, including, if applicable, Schedule B thereto) prepared in
connection with any such Company Employee Plan. All Company Employee Plans
which individually or collectively would constitute an "employee pension benefit
plan," as defined in Section 3(2) of ERISA (collectively, the "Company Pension
Plans"), are identified as such in the Company Disclosure Schedule. All
material contributions due from the Company with respect to any of the Company
Employee Plans have been made as required under ERISA or have been accrued on
the Company's financial statements as of March 31, 1996. Each Company Employee
Plan has been maintained substantially in compliance with its terms and with the
requirements
16
<PAGE>
prescribed by any and all statutes, orders, rules and regulations, including,
without limitation, ERISA and the Code, which are applicable to such Company
Employee Plans, except as would not have a Material Adverse Effect on the
Company.
(b) No Company Pension Plan constitutes, or has since the enactment
of ERISA constituted, a "multiemployer plan," as defined in Section 3(37) of
ERISA. No Company Pension Plans are subject to Title IV of ERISA. No
"prohibited transaction," as defined in Section 406 of ERISA or Section 4975 of
the Code, has occurred with respect to any Company Employee Plan which is
covered by Title I of ERISA which would have a Material Adverse Effect on the
Company, excluding transactions effected pursuant to a statutory or
administrative exemption. Nothing done or omitted to be done by the Company and
no transaction or holding of any asset under or in connection with any Company
Employee Plan has or will make the Company or any officer or director of the
Company subject to any material liability under Title I of ERISA or liable for
any material tax or penalty pursuant to Sections 4972, 4975, 4976 or 4979 of the
Code or Section 502 of ERISA.
(c) With respect to each Company Pension Plan that is intended to be
qualified under Section 401(a) of the Code (a "Company 401(a) Plan"), either (A)
a favorable determination letter has been received from the Internal Revenue
Service ("IRS") as to such qualification under the Code as in effect immediately
after the Tax Reform Act of 1986, (B) an application for a favorable
determination letter is pending that was duly filed with the IRS prior to the
expiration of the time within which retroactive amendment relating back to the
effective date of such plan may be made under Section 401(b) of the Code and
regulations or IRS pronouncements thereunder, or (C) the time provided under
Section 401(b) of the Code and regulations or IRS pronouncements thereunder for
making retroactive amendments relating back to the effective date of such plan
will not expire before the date that is sixty (60) days after the date hereof,
and there is no reason to believe that any favorable determination letter will
not be received.
(d) No Company Employee Plan provides or ever has provided death,
medical or health benefits (whether or not insured) with respect to current or
former employees after any such employee's retirement or other termination of
service (other than (A) benefit coverage mandated by applicable law, including,
without limitation, coverage provided pursuant to Section 4980B of the Code, (B)
death benefits or retirement benefits under any Company Pension Plan, (C)
deferred compensation benefits accrued as liabilities on the books of the
Company, or (D) benefits the full cost of which is borne by the current or
former employee (or the employee's beneficiary)).
(e) The Company Disclosure Schedule lists each material employment,
severance or other similar contract, arrangement or policy and each plan or
arrangement (written or oral) providing for insurance coverage (including any
self-insured arrangements), workers' benefits, vacation benefits, severance
benefits, disability benefits, death benefits,
17
<PAGE>
hospitalization benefits, retirement benefits, deferred compensation,
profit-sharing, bonuses, stock options, stock purchase, phantom stock, stock
appreciation or other forms of incentive compensation or post-retirement
insurance, compensation or benefits for employees, consultants or directors
which (A) is not a Company Employee Plan, (B) is entered into, maintained or
contributed to, as the case may be, by the Company or any subsidiary and (C)
covers any employee or former employee of the Company. Such contracts, plans
and arrangements as are described in this Section 2.6(e) are herein referred to
collectively as the "Company Benefit Arrangements." Each Company Benefit
Arrangement has been maintained in substantial compliance with its terms and
with the requirements prescribed by any and all statutes, orders, rules and
regulations which are applicable to such Company Benefit Arrangement. The
Company has delivered to PacifiCare or its counsel a complete and correct copy
or description of each contract, plan or arrangement that constitutes a Company
Benefit Arrangement.
(f) There has been no amendment to, written interpretation or
announcement (whether or not written) by the Company relating to, or change in
employee participation or coverage under, any Company Employee Plan or Company
Benefit Arrangement that would increase materially the expense of maintaining
such Company Employee Plan or Company Benefit Arrangement above the level of the
expense incurred in respect thereof for the year ended June 30, 1996.
(g) The Company has provided, or will have provided prior to the
Closing to individuals entitled thereto all required notices and coverage
pursuant to Section 4980B of the Code and the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended ("COBRA"), with respect to any
"qualifying event" (as defined in Section 4980B(f)(3) of the Code) occurring
prior to and including the Closing, and no material tax payable on account of
Section 4980B of the Code has been incurred with respect to any current or
former employees (or their beneficiaries) of the Company.
(h) Neither the Company nor any of its subsidiaries is subject to any
collective bargaining agreement with respect to any of its employees, has any
material current labor problems or disputes, and, to its knowledge, has been
subject to any effort to organize any employees during the last 24 months. The
Company has good labor relations and has no knowledge of any facts indicating
that the consummation of the transactions contemplated hereby will have a
material adverse effect on labor relations.
2.7 LITIGATION AND CLAIMS; COMPLIANCE WITH LAW.
(a) Except as set forth in the Company Disclosure Schedule, there is,
to the Company's knowledge, no examination, audit, review, investigation,
arbitration, suit, litigation or other proceeding (a "Proceeding") pending or
threatened by or before any court or Governmental Authority (as defined in
Section 2.17) to which the Company or any of its
18
<PAGE>
subsidiaries is a party or otherwise involved or to which any of the business or
assets of the Company or any of its subsidiaries is subject which has or would
reasonably be expected to have (i) a potential liability in excess of $5,000,000
or (ii) a material adverse effect on Company, or any Company Material
Subsidiary, whether or not covered by insurance.
(b) Neither the Company nor any of its subsidiaries is a party to any
decree, order or arbitration award (or agreement entered into in any Proceeding)
with respect to its properties, assets, personnel or business activities which
has had or would reasonably be expected (i) to have a potential cost in excess
of $5,000,000, or (ii) to affect materially the operations of the Company or any
Company Material Subsidiary.
(c) Except as set forth on the Company Disclosure Schedule or in
Company SEC Reports or other public filings with the SEC, neither the Company
nor any of its subsidiaries is or has at any time since July 1, 1993 (July 1,
1990 in the case of any violation involving any Government Authority) been in
violation of, or delinquent in respect to, any decree, order or arbitration
award or law, statute or regulation of, or agreement with, or any license or
permit from, any Governmental Authority to which any of its properties, assets,
personnel or business activities are subject or to which any of them is subject,
including laws, rules and regulations relating to the environment, insurance
companies, HMOs, third-party administrators or other businesses required to be
licensed under Section 2.1(b), occupational health and safety, employee
benefits, wages, workplace safety, equal employment opportunity and race,
religious, sex and age discrimination which has had or would reasonably be
expected have a Material Adverse Effect on the Company.
2.8 PROPERTIES.
(a) The Company and its subsidiaries have insurance policies,
commercially adequate to protect against the risks so insured. The Company has
made available copies of all such policies to PacifiCare or its counsel.
Neither the Company nor any of its subsidiaries has done anything by way of
action or inaction which might invalidate any of such policies in whole or in
part, except in the ordinary course of business.
(b) The Company and its subsidiaries own and hold title to all real
and other property reflected in the Company SEC Reports as owned by the Company
or any of its subsidiaries, as the case may be.
2.9 DISCLOSURE.
(a) The copies of all documents furnished by the Company pursuant to
the terms of this Agreement are complete and accurate copies of the originals.
19
<PAGE>
(b) During the past 12 months, the Company has timely filed all
required forms, reports and documents required to be filed with the SEC and the
National Association of Securities Dealers (the "NASD").
(c) None of the information supplied or to be supplied by the Company
for inclusion or incorporation by reference in the registration statement on
Form S-4 to be filed with the SEC by Holding in connection with the issuance of
the Holding Class A Common Stock, Holding Class B Common Stock and Holding
Series A in the Mergers and the votes of the Company's and PacifiCare's
stockholders (the "S-4 Registration Statement") will, at the time the S-4
Registration Statement is filed with the SEC or at the time the S-4 Registration
Statement becomes effective under the Securities Act, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading. None of the
information supplied or to be supplied by the Company for inclusion or
incorporation by reference in the Prospectus/Proxy Statement filed as a part of
the S-4 Registration Statement (the "Prospectus/Proxy Statement"), will, at the
time mailed to the stockholders of the Company, at the time of the Company
Stockholders' Meeting (as defined in Section 4.6) and as of the Effective Time,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading. The Prospectus/Proxy Statement will comply as to form in all
material respects with the provisions of the Exchange Act and the rules and
regulations promulgated by the SEC thereunder.
2.10 TRANSACTIONS WITH AFFILIATES. Except for compensation of employees,
every transaction between Company and any of its "affiliates" or their
"associates" (as such terms are defined in the rules and regulations of the SEC)
which is currently in effect or was consummated since July 1, 1995, and for
which disclosure is required under Item 404 of Regulation S-K promulgated by the
SEC is set forth in the Company SEC Reports or in the Company Disclosure
Schedule.
2.11 VOTE REQUIRED. The affirmative vote of the holders of a majority of
the outstanding Company Common Stock is necessary to adopt and approve this
Agreement and the Company Merger. The affirmative vote of the holders of a
majority of the outstanding Common Stock and of 66 2/3% of the outstanding
Company Series A Preferred Stock is necessary to adopt and approve an amendment
(the "Series A Amendment") to the Company's Restated and Amended Certificate of
Incorporation (the "Company Restated Certificate of Incorporation") providing
for the payments in Section 5.1 (a)(iv) in lieu of those currently required by
the Certificate of Designation for the Company Series A Preferred Stock (the
"Certificate of Designation"). Such affirmative votes are herein collectively
referred to as the "Company Required Vote".
20
<PAGE>
2.12 TAKEOVER PROVISIONS INAPPLICABLE. As of the date hereof and at all
times on or prior to the Effective Date, Section 203 of the DGCL are, and shall
be, inapplicable to the Company Merger and the other Transactions.
2.13 COMPANY ACTION. The Board of Directors of the Company (at a meeting
duly called and held) has (a) unanimously determined that the Company Merger and
the Series A Amendment are advisable and fair and in the best interests of the
Company and its stockholders, (b) unanimously approved this Agreement, the
Series A Amendment and the Company Merger in accordance with the provisions of
Section 251 of the DGCL, (c) unanimously recommended the adoption and approval
of this Agreement and the Company Merger by the holders of Company Common Stock
and directed that the Company Merger be submitted for consideration by the
Company's stockholders at the Company Stockholders' Meeting, (d) taken all
necessary steps to render Section 203 of the DGCL inapplicable to the Company
Merger, (e) unanimously recommended the adoption and approval of the Series A
Amendment by the holders of Company Common Stock and of Company Series A
Preferred Stock and directed that the Series A Amendment be submitted for
consideration by the Company's stockholders at the Company Stockholders'
Meeting, and (f) taken all necessary steps to ensure that the Company Merger and
related transactions, including, without limitation, the execution of any of the
Voting and Non-Distribution Agreements, will not result in the distribution or
exercisability of any rights under the Restated Rights Agreement.
2.14 FAIRNESS OPINION. The Company has received the written opinion of
Merrill Lynch & Co., financial advisor to the Company, dated the date of this
Agreement, to the effect that the consideration to be received by the holders of
the Company's Common Stock is fair to such holders from a financial point of
view.
2.15 FINANCIAL ADVISOR. The Company represents and warrants that (a)
except for Merrill Lynch & Co., no broker, finder or investment banker is
entitled to any brokerage, finder's or other fee or commission payable by the
Company or its subsidiaries in connection with the Company Merger, except a fee
not to exceed $400,000 payable with respect to the proposed Talbert separation
described in Section 4.15 below.
2.16 ENFORCEABILITY. The Company has full corporate power and authority to
execute, deliver and perform each of the Transactional Agreements to which it is
or will become a party. The execution and delivery of said Transactional
Agreements have been duly and validly authorized by the Board of Directors of
the Company, and no other corporate proceedings on the part of the Company are
necessary for the Company to authorize any of the Transactional Agreements, and
no such proceedings (other than the approval of the Company's stockholders) are
necessary to enable the Company to perform or consummate any of the transactions
contemplated by this Agreement. Said Transactional Agreements (a) have been (or
will be) duly executed and delivered by duly authorized officers of the Company
and (b) constitute (or, when executed by the Company, will constitute) legal,
valid and binding
21
<PAGE>
obligations of the Company enforceable against it in accordance with their terms
(except as enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws, both state and federal,
affecting the enforcement of creditors' rights or remedies in general from time
to time in effect and the exercise by courts of equity powers). For purposes of
this Article 2, "Transactional Agreements" means this Agreement and the related
Agreement of Merger for the Company Merger.
2.17 GOVERNMENTAL CONSENTS; NO CONFLICTS. Except as may be required by the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Securities
Act of 1933, as amended (the "Securities Act"), state securities or blue sky
laws, the DGCL, the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the
"HSR Act"), the NASD Bylaws (as they relate to the S-4 Registration Statement
and the Prospectus/Proxy Statement) and laws governing insurance companies,
HMOs, and third-party administrators or other businesses operated by the Company
or its subsidiaries requiring licensure, qualification or authorization, there
is no requirement applicable to the Company or any of its subsidiaries to make
any filing with, or to obtain any permit, authorization, consent or approval of,
any federal, state or territorial, local or foreign governmental or regulatory
agency, department, commission or other authority (a "Governmental Authority"),
except for such filings, permits, authorizations, consents or approvals which,
if not made or obtained, would not have a Material Adverse Effect on the
Company. Neither the execution and delivery of this Agreement by the Company
nor the consummation by the Company of any of the transactions contemplated by
this Agreement will (a) conflict with, violate or result in any breach of any
provision of the Certificate of Incorporation or Bylaws (or comparable charter
documents) of the Company or Talbert, (b) result in a material default (or with
notice or lapse of time or both would result in a default) under, or materially
impair the rights of the Company or any of its subsidiaries or materially alter
the rights or obligations of any third party under, or require the Company or
any of its subsidiaries to make any material payment or become subject to any
material liability to any third party under, or give rise to any right of
termination, amendment, cancellation, acceleration, repurchase, put or call
under, any of the terms, conditions or provisions of any Company Material
Contract, (c) result in the creation of any material (individually or in the
aggregate) liens, charges or encumbrances on any of the material assets of the
Company or any of its subsidiaries or (d) conflict with or violate any law,
statute, rule, regulation, judgment, order, writ, injunction, decree or
arbitration award applicable to the Company or any of its subsidiaries or any of
their material assets, which conflict or violation has had or would reasonably
be expected to have a Material Adverse Effect on the Company.
2.18 RESERVES. The reserves established by the Company and its
subsidiaries in the Company SEC Reports, or in any financial statement or
balance sheet contained in any document filed with the SEC after the date
hereof, for statutorily required reserves and for incurred but not yet paid
claims for, or relating to, medical treatment or similar claims (i) are computed
in accordance with presently accepted industry standards consistently applied,
(ii) meet the requirements of any law, rule or regulation applicable to such
reserves, (iii) are
22
<PAGE>
computed on the basis of assumptions consistent with those used in computing the
corresponding reserves in the prior fiscal year, and (iv) include provision for
all actuarial reserves and related items which ought to be established in
accordance with applicable laws or regulations and prudent industry practices.
As of the date of this Agreement, neither the Company nor its senior management
is aware of any fact or circumstance which would necessitate, in the good faith
application of prudent reserving practices and policies, any material adverse
change in statutorily required reserves or reserves for such incurred but not
yet paid claims above that reflected in the most recent balance sheet included
in the Company SEC Reports (other than increases consistent with past experience
resulting from increases in enrollment with respect to the Company's services).
2.19 AUDITS OR INVESTIGATIONS BY GOVERNMENTAL ENTITIES. As of the date of
this Agreement, other than as disclosed in the Company Disclosure Schedule, no
audit or investigation of the Company or any of its subsidiaries which may be
expected to have a Material Adverse Effect on the Company is pending before, or
to the Company's knowledge has been threatened by, any governmental or
regulatory authority of the United States (other than the Internal Revenue
Service), the several States or territories (other than state taxing
authorities) or any foreign jurisdiction. There are no pending or anticipated
proceedings which may be expected to have a Material Adverse Effect on the
Company by or on behalf or in the name of the state or federal government or any
governmental agency relating to the imposition of civil monetary penalties,
exclusion or debarment from governmental programs or other administrative
sanctions.
2.20 ENVIRONMENTAL PROVISIONS.
(a) For the purposes of this Section 2.20, the following definitions
apply. "Environmental Claim" means any claim, action, cause of action, or
written notice by any person or entity alleging potential liability (including,
without limitation, potential liability for investigatory costs, cleanup costs,
governmental response costs, natural resources damages, property damages,
personal injuries, or penalties) resulting from (A) the presence, or release
into the environment, of any Material of Environmental Concern at any location,
whether or not owned or operated by the Company or any subsidiary, or (B) any
violation, or alleged violation, of any Environmental Law. "Environmental Laws"
means all applicable federal, state or territorial, local and foreign laws and
regulations relating to pollution or protection of human health or the
environment (including, without limitation, ambient air, surface water, ground
water, land surface or subsurface strata), including, without limitation, laws
and regulations relating to emissions, discharges, releases or threatened
releases of Materials of Environmental Concern, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Materials of Environmental Concern. "Materials of
Environmental Concern" means chemicals, pollutants, contaminants, wastes, and
substances that are hazardous, toxic or otherwise a danger to health,
reproduction, or the environment or are regulated by Environmental Laws.
23
<PAGE>
(b) The Company and its subsidiaries are in compliance in all
material respects with all applicable Environmental Laws, which compliance
includes, but is not limited to, the possession by them of all material permits
and other governmental authorizations required under applicable Environmental
Laws, and compliance in all material respects with the terms and conditions
thereof, except where the costs of any failure to comply will not exceed, in the
aggregate, $5,000,000. The Company and its subsidiaries have not received any
written communication, whether from a Governmental Authority, citizens group,
employee or otherwise, that alleges that they are not in such full compliance in
all material respects, and, to the knowledge of the Company, there are no
circumstances that may prevent or interfere with such full compliance in all
material respects in the future. To the knowledge of the Company, no current or
prior owner of any property owned or leased by the Company and its subsidiaries
has received any written communication, whether from a Government Authority,
citizens group, employee or otherwise, that alleges that the Company and its
subsidiaries is not in such compliance in all material respects.
(c) There is no material Environmental Claim pending or, to the
knowledge of the Company, threatened against the Company or a subsidiary or
against any person or entity whose liability for any Environmental Claim the
Company and its subsidiaries have or may have retained or assumed either
contractually or by operation of law which Environmental Claim would reasonably
be expected to have a Material Adverse Effect on the Company.
(d) To the knowledge of the Company, there are no past or present
actions, activities, circumstances, conditions, events or incidents, including,
without limitation, the release, emission, discharge, presence or disposal of
any Material of Environmental Concern, that could reasonably form the basis for
any material Environmental Claim against the Company or its subsidiaries or, to
the knowledge of the Company, against any person or entity whose liability for
any Environmental Claim the Company or a subsidiary has or may have retained or
assumed either contractually or by operation of law which Environmental Claim
would reasonably be expected to have a Material Adverse Effect on the Company.
2.21 INTELLECTUAL PROPERTY.
(a) To the knowledge of the Company, all patents, registered
trademarks and registered copyrights of the Company are valid and enforceable.
There are no interference, opposition or cancellation proceedings or
infringement suits pending or, to the knowledge of the Company or its
subsidiaries, threatened, with respect to any of the patents, registered
trademarks or copyrights. The Company or its subsidiaries have not been
advised, nor has either any reason to believe that the Company or a subsidiary
is infringing a patent, trademark or copyright held by another person.
(b) The Company and its subsidiaries own or have in their possession
certain information of the sort typically considered as trade secrets in the
healthcare industry (the
24
<PAGE>
"Trade Secrets"). The Company and its subsidiaries have taken commercially
reasonable precautions to maintain Trade Secrets in confidence and to prevent
their disclosure to unauthorized persons. To the knowledge of the Company, the
Company and its subsidiaries have good title and an absolute (though not
necessarily exclusive) right to use all Trade Secrets and the use of the Trade
Secrets does not infringe the rights of any third party.
(c) Except as set forth in the Company Disclosure Schedule, to the
knowledge of the Company and its subsidiaries, no person is infringing upon any
patent, trademark or any copyright or is misappropriating any Trade Secret owned
by the Company or a subsidiary. To the best of the Company or its subsidiaries'
knowledge none of the processes or know-how used by the Company or its
subsidiaries infringes any patent, trademark or copyright of any third party.
To the best of the Company or its subsidiaries' knowledge, there is no
intellectual property, in any form, necessary for the operation of the Company
and its subsidiaries' business as currently conducted which the Company or a
subsidiary does not currently own or license on commercially reasonable terms.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF PACIFICARE AND HOLDING
Except as set forth in the disclosure schedule delivered to Company on the
date of this Agreement and signed by the Presidents of PacifiCare and Holding,
respectively (collectively, the "PacifiCare Disclosure Schedule"), PacifiCare
and Holding represent and warrant to the Company as follows:
3.1 ORGANIZATION; SUBSIDIARIES; CAPITALIZATION.
(a) PacifiCare is a corporation duly organized, existing and in good
standing under the laws of the State of Delaware. Holding is a corporation duly
organized, existing and in good standing under the laws of the State of
Delaware. Neptune Sub and Company Sub are corporations duly organized, existing
and in good standing under the laws of the State of Delaware. Each of
PacifiCare, Holding, Neptune Sub and Company Sub has all necessary power and
authority under applicable corporate law and its organizational documents to own
or lease its properties and to carry on its business as presently conducted. As
of the date of this Agreement, the PacifiCare Disclosure Schedule sets forth a
list of all of PacifiCare's subsidiaries. As of the date of this Agreement,
other than PacifiCare's subsidiaries, neither PacifiCare nor any of its
subsidiaries owns or holds, directly or indirectly, any debt or equity
securities of, or has any other interest in, any corporation, partnership, joint
venture or other entity, except publicly traded debt or equity which in any
event represents less than 1% of such outstanding securities, and neither
PacifiCare nor any of its subsidiaries has entered into any agreement to acquire
any such interest.
25
<PAGE>
(b) Each of PacifiCare and its subsidiaries, to the extent conducting
business as an HMO, insurance company, third-party administrator or other entity
requiring any form of governmental licensure, qualification or authorization is
duly licensed, qualified or authorized and in good standing under the applicable
laws and regulations, respectively, of each state or territory in which the
conduct of such business requires such licensure, qualification or
authorization, except where failure would not have a material adverse effect on
PacifiCare or on any of its material subsidiaries as set forth in the PacifiCare
Disclosure Schedule ("PacifiCare's Material Subsidiaries"). The conduct of
PacifiCare's and its subsidiaries' respective business is in conformity with all
applicable foreign, federal, state or territorial, local and other governmental
and regulatory requirements and the forms, procedures and practices of
PacifiCare and its subsidiaries in the conduct of their respective businesses
are also in compliance with all such requirements, to the extent applicable,
except where nonconformity or noncompliance would not constitute a Material
Adverse Effect on PacifiCare. For purposes of this Agreement, "Material Adverse
Effect," as it applies to PacifiCare, means a material adverse effect on the
business, operations, financial condition or assets of PacifiCare and its
subsidiaries, taken as a whole, other than as a result of the performance by
PacifiCare or Holding of their obligations, or the exercise by the Company of
its rights, under this Agreement.
(c) As of the date of this Agreement, the authorized capital stock of
PacifiCare consists of: 100,000,000 shares of PacifiCare Class A Common Stock
and 100,000,000 shares of PacifiCare Class B Common Stock of which, as of the
date hereof, 12,370,758 shares of PacifiCare Class A Common Stock and 18,812,799
of PacifiCare Class B Common Stock were issued and outstanding; and 20,000,000
shares of preferred stock, par value $1.00 per share, of which, as of the date
hereof, no shares of were issued and outstanding. All the issued and
outstanding shares of PacifiCare Class A Common Stock and PacifiCare Class B
Common Stock are validly issued, fully paid and nonassessable and free of
preemptive rights. As of the date of this Agreement, PacifiCare has issued
outstanding options to purchase a total of 317,734 shares of PacifiCare Class A
Common Stock and 1,742,939 shares of PacifiCare Class B Common Stock (the
"PacifiCare Options") pursuant to PacifiCare's stock option plans and
agreements. Except as set forth above, as of the date of this Agreement, (i)
there are no shares of capital stock of PacifiCare authorized, issued or
outstanding, (ii) there are no outstanding subscriptions, options, warrants,
stock appreciation right plans, calls, rights, convertible securities,
stockholder rights plans (or similar plans commonly referred to as "poison
pills") or other agreements or commitments of any character relating to issued
or unissued capital stock or other securities of PacifiCare or any of its
subsidiaries, or obligating PacifiCare or any other party to issue, transfer or
sell any shares of the capital stock or other securities of PacifiCare or any of
its subsidiaries, and (iii) there are no other outstanding securities
convertible into, exchangeable for or evidencing the right to subscribe for any
shares of the capital stock or other securities of PacifiCare or any of its
subsidiaries or any successor corporation or controlling person of such
successor corporation. The authorized capital of Holding, Neptune Sub and
Company Sub each consists of 1,000
26
<PAGE>
shares of Common Stock, par value $.001 per share, 100 of which are issued and
outstanding and, in the case of Holding, are held beneficially and of record by
PacifiCare, while in the case of Neptune Sub and Company Sub are held
beneficially and of record by Holding.
(d) Each subsidiary of PacifiCare is a corporation duly organized,
validly existing and in good standing under the laws of its jurisdiction of
incorporation and has all necessary power and authority under applicable
corporate law to own and lease its properties and to carry on its business as
presently conducted. All of the outstanding shares of capital stock of each
subsidiary of the Company are validly issued, fully paid and nonassessable and
are owned beneficially and of record by PacifiCare or another subsidiary of
PacifiCare, free and clear of any liens, claims or encumbrances.
(e) Complete and accurate copies of the Certificate of Incorporation
and Bylaws (or other or comparable charter documents), each as amended to date,
of PacifiCare and each of its subsidiaries are filed as exhibits to PacifiCare
SEC Reports or have been made available to the Company.
3.2 SEC FILINGS; FINANCIAL STATEMENTS.
(a) PacifiCare has made available to the Company a complete and
accurate copy of each report, schedule, registration statement and definitive
proxy statement filed by PacifiCare with the SEC on or after July 1, 1995 (the
"PacifiCare SEC Reports"), which are all the forms, reports and documents
required to be filed by PacifiCare with the SEC since July 1, 1995. The
PacifiCare SEC Reports (i) complied in all material respects with the
requirements of the Securities Act or the Exchange Act, as the case may be, at
and as of the times they were filed (or, if amended or superseded by a filing
prior to the date of this Agreement, then on the date of such filing) and (ii)
did not at and as of the time they were filed (or, if amended or superseded by a
filing prior to the date of this Agreement, then on the date of such filing)
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
(b) Each of the sets of financial statements (including, in each
case, any related notes thereto) contained in the PacifiCare SEC Reports and the
set of PacifiCare's unaudited interim financial statements as of and for the
nine-month period ended June 30, 1996 including PacifiCare's unaudited
consolidated balance sheet as of June 30, 1996 (the "PacifiCare June 30, 1996
Balance Sheet") that are attached to the PacifiCare Disclosure Schedule
(collectively, the "PacifiCare Past Financial Statements") was prepared in
accordance with GAAP applied on a consistent basis throughout the periods
involved (except as may be indicated in the notes thereto) and fairly presents
the consolidated financial position of PacifiCare and its subsidiaries as at the
respective dates thereof and the consolidated results of its operations and cash
flows for the periods indicated, except that (i) the quarterly unaudited
27
<PAGE>
interim financial statements included in the PacifiCare Past Financial
Statements were or are subject to normal year-end audit adjustments and (ii) the
unaudited interim financial statements as of and for the nine-month period ended
June 30, 1996 included in the PacifiCare Past Financial Statements are subject
to normal year-end audit adjustments and do not contain footnotes.
(c) PacifiCare and its subsidiaries have no Liabilities, except for
(i) any Liability which is accrued or fully reserved against in the PacifiCare
June 30, 1996 Balance Sheet or disclosed in the notes included in the PacifiCare
Past Financial Statements, (ii) any Liability which was incurred after June 30,
1996 in the ordinary course of business, (iii) other Liabilities which,
individually or in the aggregate, have not had and would not reasonably be
expected to have a Material Adverse Effect on PacifiCare or (iv) any Liability
under or disclosed in this Agreement.
3.3 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since June 30, 1996, there has
not been (a) any change, or any development or combination of changes or
developments that has had or would reasonably be expected to have a Material
Adverse Effect on PacifiCare, (b) any damage, destruction or loss, whether or
not covered by insurance, that has had or would reasonably be expected to have a
Material Adverse Effect on PacifiCare or (c) except as permitted or required in
this Agreement, any transaction, commitment, dispute or other event or condition
(financial or otherwise) of any character (whether or not in the ordinary course
of business) which would be prohibited by Section 4.3(a), 4.3(b), 4.3(c),
4.3(d), 4.3(e), 4.3(f), 4.3(g) or 4.3(h), if it were to occur or be effected
between the date of this Agreement and the Effective Time.
3.4 TAX MATTERS.
(a) PacifiCare (or, if applicable, one of its subsidiaries) has
filed, within the time (including any extensions of applicable due dates) and in
the manner prescribed by law, all Returns, required to be filed under federal,
state, local or any foreign laws regarding Taxes by PacifiCare and its
subsidiaries, except for such Returns the failure of which to timely file would
not result in a liability of more than $5,000,000.
(b) PacifiCare (or, if applicable, one of its subsidiaries) has,
within the time (including any extensions of applicable due dates) and in the
manner prescribed by law, paid all Taxes (as defined below) that are due and
payable, except Taxes (i) for which adequate reserves have been established
under the Past Financial Statements, (ii) which are being contested in good
faith or (iii) which involve permanent differences in the aggregate less than
$5,000,000 or involve timing differences in the aggregate less than $10,000,000.
(c) PacifiCare and its subsidiaries have not filed (and will not file
prior to the Closing Date) any consent agreement under Section 341(f) of the
Code or agreed to have
28
<PAGE>
Section 341(f)(2) of the Code apply to any disposition of the subsection (f)
asset (as such term is defined in Section 341(f)(4) of the Code) owned by
PacifiCare or any of its subsidiaries.
(d) No outstanding debt obligation of PacifiCare is "corporate
acquisition indebtedness" within the meaning of Section 279(b) of the Code.
(e) For purposes of this Article 3, "Taxes" shall mean all taxes,
charges, fees, levies, or other assessments of whatever kind or nature,
including, without limitation, all net income, gross income, gross receipts,
sales, use, value-added, ad valorem, transfer, franchise, profits, license,
withholding, payroll, employment, excise, estimated, severance, stamp, net
worth, environmental, occupancy or property taxes, fees, assessments or charges
of any kind whatsoever (together with any interest and any penalties, additions
to tax or additional amounts) imposed by any taxing authority (domestic or
foreign) upon or payable by PacifiCare or any of its subsidiaries.
3.5 CONTRACTS.
(a) PACIFICARE MATERIAL CONTRACTS. For purposes of this Agreement,
"PacifiCare Material Contracts" shall mean (i) each contract, agreement or other
arrangement of or involving PacifiCare or any of its subsidiaries with respect
to indebtedness for money borrowed in excess of $3,000,000 (other than trade
payables in the ordinary and usual course of business), including, but not
limited to, letters of credit, guaranties and swap and similar agreements; (ii)
each contract, agreement or other arrangement which limits or restricts the
ability of PacifiCare or any of its subsidiaries to compete or otherwise conduct
its business in any manner or place which materially affects PacifiCare or any
material subsidiary; (iii) each mortgage, contract, license, lease, indenture or
other agreement of PacifiCare or any of its subsidiaries (A) which would be
required by Rule 601(b)(10) of SEC Regulation S-K to be filed as an exhibit to
an Annual Report on Form 10-K (other than any employee benefit plan) or (B)
which constitutes any other liability (including, without limitation, any
guarantee, surety contract or similar instrument), obligation or transaction
and, in the case of any item referred to in this clause, is material to
PacifiCare and its subsidiaries or their businesses or prospects taken as a
whole; and (iv) for each state in which PacifiCare or its subsidiaries conducts
business as an HMO, insurance company, third-party administrator or otherwise
requiring licensure as set forth in Section 3.1(b), (A) the contracts with
employer or other groups or government agencies, (B) the contracts with
physician providers of health care services, (C) the contracts with providers of
hospital services and (D) the contracts with providers of non-hospital,
non-physician medical services, which are material to PacifiCare and its
subsidiaries or their businesses or prospects taken as a whole.
All PacifiCare Material Contracts are in full force and effect and are
binding upon PacifiCare and, to PacifiCare's knowledge, are binding on the other
parties thereto, except as enforcement thereof may be limited by bankruptcy,
insolvency, reorganization,
29
<PAGE>
moratorium or other similar laws, both state and federal, affecting the
enforcement of creditors' rights or remedies in general from time to time in
effect and the exercise by courts of equity powers. To PacifiCare's knowledge,
no material default by PacifiCare or any of its subsidiaries has occurred under
any of the PacifiCare Material Contracts and (A) no material default by any of
the other contracting parties has occurred under any of the PacifiCare Material
Contracts and (B) no event has occurred which with the giving of notice or the
lapse of time, or both, would constitute a material default by PacifiCare or any
of its subsidiaries or any of the other contracting parties.
(b) The PacifiCare Disclosure Schedule sets forth a list of all
claims, other than invoices in the ordinary course of business, and claims made
under risk programs in the ordinary course of business made or, to PacifiCare's
knowledge, threatened against PacifiCare or any of its subsidiaries under each
PacifiCare Material Contract presently or heretofore in effect (including claims
for back charges, rebates, price reductions, breaches of product or service
warranties or for product or service liability for products manufactured or
sold), to the extent such claims have had or would reasonably be expected to
have a cost to PacifiCare or its subsidiaries in excess of $5,000,000 or have a
material adverse effect on PacifiCare or any of its Material Subsidiaries.
3.6 EMPLOYEES.
(a) "PacifiCare Employee Plan" means each "employee benefit plan," as
defined in Section 3(3) of ERISA, currently or previously maintained,
contributed to or entered into by PacifiCare or any ERISA Affiliate (as defined
below) under which PacifiCare or any ERISA Affiliate thereof has any present or
future obligation or liability. For purposes of this Section 3.6, "ERISA
Affiliate" shall mean any entity which is a member of (A) a "controlled group of
corporations," as defined in Section 414(b) of the Code, (B) a group of entities
under "common control," as defined in Section 414(c) of the Code, or (C) an
"affiliated service group," as defined in Section 414(m) of the Code, or
treasury regulations promulgated under Section 414(o) of the Code, any of which
includes PacifiCare. All material contributions due from PacifiCare with
respect to any of the PacifiCare Employee Plans have been made as required under
ERISA or have been accrued on PacifiCare's financial statements as of June 30,
1996. Each PacifiCare Employee Plan has been maintained substantially in
compliance with its terms and with the requirements prescribed by any and all
statutes, orders, rules and regulations, including, without limitation, ERISA
and the Code, which are applicable to such PacifiCare Employee Plans, except as
would not have a Material Adverse Effect on PacifiCare.
(b) No PacifiCare Pension Plan constitutes, or has since the
enactment of ERISA constituted, a "multiemployer plan," as defined in Section
3(37) of ERISA. No PacifiCare Pension Plans are subject to Title IV of ERISA.
No "prohibited transaction," as defined in Section 406 of ERISA or Section 4975
of the Code, has occurred with respect to
30
<PAGE>
any PacifiCare Employee Plan which is covered by Title I of ERISA which would
have a Material Adverse Effect on PacifiCare, excluding transactions effected
pursuant to a statutory or administrative exemption. Nothing done or omitted to
be done by PacifiCare and no transaction or holding of any asset under or in
connection with any PacifiCare Employee Plan has or will make PacifiCare or any
officer or director of PacifiCare subject to any material liability under Title
I of ERISA or liable for any material tax or penalty pursuant to Sections 4972,
4975, 4976 or 4979 of the Code or Section 502 of ERISA.
(c) With respect to each PacifiCare Pension Plan that is intended to
be qualified under Section 401(a) of the Code (a "PacifiCare 401(a) Plan"),
either (A) a favorable determination letter has been received from the IRS as to
such qualification under the Code as in effect immediately after the Tax Reform
Act of 1986, (B) an application for a favorable determination letter is pending
that was duly filed with the IRS prior to the expiration of the time within
which retroactive amendment relating back to the effective date of such plan may
be made under Section 401(b) of the Code and regulations or IRS pronouncements
thereunder, or (C) the time provided under Section 401(b) of the Code and
regulations or IRS pronouncements thereunder for making retroactive amendments
relating back to the effective date of such plan will not expire before the date
that is sixty (60) days after the date hereof, and there is no reason to believe
that any favorable determination letter will not be received.
(d) PacifiCare has provided, or will have provided prior to the
Closing (as defined in Section 1.3), to individuals entitled thereto all
required notices and coverage pursuant to Section 4980B of the Code and COBRA,
with respect to any "qualifying event" (as defined in Section 4980B(f)(3) of the
Code) occurring prior to and including the Closing, and no material tax payable
on account of Section 4980B of the Code has been incurred with respect to any
current or former employees (or their beneficiaries) of PacifiCare.
3.7 LITIGATION AND CLAIMS; COMPLIANCE WITH LAW.
(a) Except as set forth in the PacifiCare Disclosure Schedule, there
is, to PacifiCare's knowledge, no Proceeding pending or threatened by or before
any court or Governmental Authority in which PacifiCare or any of its
subsidiaries is a party or otherwise involved or to which any of the business or
assets of PacifiCare or any of its subsidiaries is subject, which has or would
reasonably be expected to have (i) a potential liability in excess of $5,000,000
or (ii) a material adverse effect on PacifiCare or any PacifiCare Material
Subsidiary.
(b) Neither PacifiCare nor any of its subsidiaries is a party to any
decree, order or arbitration award (or agreement entered into in any Proceeding)
with respect to its properties, assets, personnel or business activities which
has had or would reasonably be expected (i) to have a potential cost to
PacifiCare or its subsidiaries in excess of $5,000,000 or (ii) to affect
materially the operations of PacifiCare or any PacifiCare Material Subsidiary.
31
<PAGE>
(c) Except as set forth on the PacifiCare Disclosure Schedule or in
PacifiCare SEC Reports or other public filings with the SEC, neither PacifiCare
nor any of its subsidiaries is or has at any time since October 1, 1993, been in
violation of, or delinquent in respect to, any decree, order or arbitration
award or law, statute or regulation of, or agreement with, or any license or
permit from, any Governmental Authority to which any of its properties, assets,
personnel or business activities are subject or to which any of them is subject,
including laws, rules and regulations relating to the environment, insurance
companies, HMOs, third-party administrators or other businesses required to be
licensed under Section 3.1(b), occupational health and safety, employee
benefits, wages, workplace safety, equal employment opportunity and race,
religious, sex and age discrimination which has had or would reasonably be
expected (i) to have a potential cost to PacifiCare or its subsidiaries in
excess of $5,000,000 or (ii) to affect materially the operations of PacifiCare
or any PacifiCare Material Subsidiary.
3.8 PROPERTIES.
(a) PacifiCare and its subsidiaries have insurance policies adequate
to protect them against the risks so insured. Neither PacifiCare nor any of its
subsidiaries has done anything by way of action or inaction which might
invalidate any of such policies in whole or in part.
(b) PacifiCare and its subsidiaries own and hold title to all real
and other property reflected in the PacifiCare SEC Reports as owned by
PacifiCare or any of its subsidiaries, as the case may be.
3.9 DISCLOSURE.
(a) The copies of all documents furnished by PacifiCare pursuant to
the terms of this Agreement are complete and accurate copies of the originals.
(b) During the past 12 months, PacifiCare has timely filed all
required forms, reports and documents required to be filed with the SEC and the
NASD.
(c) None of the information supplied or to be supplied by PacifiCare
for inclusion or incorporation by reference in the S-4 Registration Statement
will, at the time the S-4 Registration Statement is filed with the SEC or at the
time the S-4 Registration Statement becomes effective under the Securities Act,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading. None of the information supplied or to be supplied by PacifiCare
for inclusion or incorporation by reference in the Prospectus/Proxy Statement,
will, at the time mailed to the stockholders of PacifiCare, at the time of the
PacifiCare Stockholders' Meeting (as defined in Section 4.6) and
32
<PAGE>
as of the Effective Time, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading. The Prospectus/Proxy Statement will comply as to
form in all material respects with the provisions of the Exchange Act and the
rules and regulations promulgated by the SEC thereunder.
3.10 TRANSACTIONS WITH AFFILIATES. Except for compensation of employees,
every transaction between PacifiCare and any of its "affiliates" or their
"associates" (as such terms are defined in the rules and regulations of the SEC)
which is currently in effect or was consummated since October 1, 1995, and for
which disclosure is required by Item 404 of Regulation S-K promulgated by the
SEC, is set forth in the PacifiCare SEC Reports or the PacifiCare Disclosure
Schedule.
3.11 VOTE REQUIRED. The affirmative vote of the holders of a majority of
the outstanding PacifiCare Class A Common Stock is the only vote of the holders
of any class or series of PacifiCare's capital stock necessary to adopt and
approve this Agreement and the PacifiCare Merger, while the affirmative vote of
the holders of a majority of the outstanding PacifiCare Class A Common Stock and
of the holders of a majority of the outstanding PacifiCare Class B Common Stock,
each voting as a separate class, is necessary to adopt and approve an amendment
to the Certificate of Incorporation of PacifiCare to exempt the PacifiCare
Merger from a requirement of PacifiCare's Certificate of Incorporation that, in
the event of a merger or consolidation of PacifiCare, the holders of PacifiCare
Class B Common Stock shall receive the same consideration per share as the per
share consideration for the PacifiCare Class A Common Stock in such merger or
consolidation (the "PacifiCare Amendment") (such votes together being referred
to herein as the "Required PacifiCare Vote").
3.12 TAKEOVER PROVISIONS INAPPLICABLE. As of the date hereof and at all
times on or prior to the Effective Date, Section 203 of the DGCL are, and shall
be, inapplicable to the PacifiCare Merger.
3.13 PACIFICARE ACTION. The Board of Directors of PacifiCare (at a meeting
duly called and held) has (a) determined that the PacifiCare Merger is advisable
and fair and in the best interests of PacifiCare and its stockholders, (b)
approved this Agreement and the PacifiCare Merger in accordance with the
provisions of Section 251 of the DGCL, (c) recommended the adoption and approval
of this Agreement and the PacifiCare Merger by the holders of PacifiCare Class A
Common Stock and directed that the PacifiCare Merger be submitted for
consideration by PacifiCare's stockholders at the PacifiCare Stockholders'
Meeting, (d) recommended the adoption and approval of the PacifiCare Amendment
by the holders of PacifiCare Class A Common Stock and PacifiCare Class B Common
Stock and directed that the PacifiCare Amendment be submitted for consideration
by PacifiCare's stockholders at the PacifiCare Stockholders' meeting, (e) taken
all necessary steps to render Section 203 of the DGCL inapplicable to the
PacifiCare Merger and (f) as sole stockholder of
33
<PAGE>
Holding, Neptune Sub and Company Sub, approved this Agreement and the Merger in
accordance with Section 251 of the DGCL.
3.14 ACTIONS BY HOLDING, NEPTUNE SUB AND COMPANY SUB. The Boards of
Directors of Holding, Neptune Sub and Company Sub (at meetings duly called and
held or by unanimous written consents) have respectively (a) determined that the
Mergers are advisable and fair and in the best interests of Holding, Neptune Sub
and Company Sub, (b) unanimously approved this Agreement and the Mergers in
accordance with the provisions of Section 251 of the DGCL, (c) taken all
necessary steps to render Section 203 of the DGCL inapplicable to the Mergers
and the other transaction contemplated herein. Holding, as the sole stockholder
of Neptune Sub and Company Sub, has also approved or will also approve this
Agreement and the Mergers.
3.15 FAIRNESS OPINION. PacifiCare and its Board of Directors has received
from Dillon, Read & Co., financial advisors to PacifiCare, an opinion dated the
date hereof, to the effect that the consideration to be paid to the stockholders
of PacifiCare in the PacifiCare Merger is fair, from a financial point of view,
to PacifiCare and its stockholders.
3.16 FINANCIAL ADVISOR. PacifiCare represents and warrants that except for
Dillon, Read & Co., no broker, finder or investment banker is entitled to any
brokerage, finder's or other fee or commission in connection with the PacifiCare
Merger or any of the other transactions contemplated in this Agreement based
upon arrangements made by or on behalf of PacifiCare or any of its subsidiaries.
3.17 ENFORCEABILITY. Each of PacifiCare and Holding has full corporate
power and authority to execute, deliver and perform each of the Transactional
Agreements to which it is or will become a party. The execution and delivery of
said Transactional Agreements have been duly and validly authorized by the
Boards of Directors of PacifiCare and Holding, and no other corporate
proceedings on the part of PacifiCare and Holding are necessary for PacifiCare
and Holding to authorize any of the Transactional Agreements, and no such
proceedings (other than the approval of PacifiCare's and Holding stockholders)
are necessary to enable PacifiCare and Holding to perform or consummate any of
the transactions contemplated by this Agreement. Said Transactional Agreements
(a) have been (or will be) duly executed and delivered by duly authorized
officers of PacifiCare and Holding and (b) constitute (or, when executed by
PacifiCare and Holding, will constitute) legal, valid and binding obligations of
PacifiCare and Holding enforceable against it in accordance with their terms
(except as enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws, both state and federal,
affecting the enforcement of creditors' rights or remedies in general from time
to time in effect and the exercise by courts of equity powers). For purposes of
this Article 3, "Transactional Agreements" means this Agreement and the related
Agreement of Merger for the PacifiCare Merger.
34
<PAGE>
3.18 GOVERNMENTAL CONSENTS; NO CONFLICTS. Except as may be required by the
Exchange Act, the Securities Act, state securities or blue sky laws, the DGCL,
the HSR Act, the NASD Bylaws (as they relate to the S-4 Registration Statement
and the Prospectus/Proxy Statement) and laws governing insurance companies,
HMOs, third-party administrators or other businesses operated by PacifiCare or
its subsidiaries requiring licensure, qualification or authorization, there is
no requirement applicable to PacifiCare or any of its subsidiaries to make any
filing with, or to obtain any permit, authorization, consent or approval of any
Governmental Authority as a condition to the lawful consummation of any of the
transactions contemplated by this Agreement, except for such filings, permits,
authorizations, consents or approvals which, if not made or obtained, would not
have a Material Adverse Effect on PacifiCare. Except as set forth in the
PacifiCare Disclosure Schedule, neither the execution and delivery of this
Agreement by PacifiCare nor the consummation by PacifiCare will (a) conflict
with, violate or result in any breach of any provision of the Certificate of
Incorporation or Bylaws (or comparable charter documents) of PacifiCare or any
of its subsidiaries, (b) result in a material default (or with notice or lapse
of time or both would result in a default) under, or materially impair the
rights of PacifiCare or any of its subsidiaries or materially alter the rights
or obligations of any third party under, or require PacifiCare or any of its
subsidiaries to make any material payment or become subject to any material
liability to any third party under, or give rise to any right of termination,
amendment, cancellation, acceleration, repurchase, put or call under, any of the
terms, conditions or provisions of any PacifiCare Material Contract, (c) result
in the creation of any material (individually or in the aggregate) liens,
charges or encumbrances on any of the material assets of PacifiCare or any of
its subsidiaries or (d) conflict with or violate any law, statute, rule,
regulation, judgment, order, writ, injunction, decree or arbitration award
applicable to PacifiCare or any of its subsidiaries or any of their material
assets, which violation has had or would reasonably be expected to have a
Material Adverse Effect on PacifiCare.
3.19 COMMON AND PREFERRED STOCK TO BE ISSUED. The Holding Class A Common
Stock, Holding Class B Common Stock and Holding Series A to be issued to the
Company's stockholders in the Company Merger, when issued by Holding pursuant to
the terms of this Agreement, will be duly authorized, validly issued, fully paid
and non-assessable, will be issued in compliance with applicable federal and
state securities laws and will be clear of all liens, encumbrances and adverse
claims and may be resold by Company Affiliates (as defined in Section 4.12) in
accordance with paragraph (d) of Rule 145 of the Securities Act.
3.20 RESERVES. The reserves established by PacifiCare and its subsidiaries
in the PacifiCare SEC Reports, or in any financial statement or balance sheet
contained in any document filed with the SEC after the date hereof, for
statutorily required reserves and for incurred but not yet paid claims for, or
relating to, medical treatment or similar claims (i) are computed in accordance
with presently accepted industry standards consistently applied, (ii) meet the
requirements of any law, rule or regulation applicable to such reserves, (iii)
are computed on the basis of assumptions consistent with those used in computing
the
35
<PAGE>
corresponding reserve in the prior fiscal year, and (iv) include provision for
all actuarial reserves and related items which ought to be established in
accordance with applicable laws or regulations and prudent industry practices.
As of the date of this Agreement, neither PacifiCare nor its senior management
is aware of any fact or circumstance which would necessitate, in the good faith
application of prudent reserving practices and policies, any material adverse
change in statutorily required reserves or reserves for such incurred but not
yet paid claims above that reflected in the most recent balance sheet included
in the PacifiCare SEC Reports (other than increases consistent with past
experience resulting from increases in enrollment with respect to PacifiCare's
services).
3.21 AUDITS OR INVESTIGATIONS BY GOVERNMENTAL ENTITIES. As of the date of
this Agreement, other than as disclosed in the PacifiCare Disclosure Schedule,
no audit or investigation of PacifiCare or any of its subsidiaries which may be
expected to have a Material Adverse Effect on PacifiCare is pending before, or
to PacifiCare's knowledge has been threatened by, any governmental or regulatory
authority of the United States (other than the IRS), the several States or
territories (other than state taxing authorities) or any foreign jurisdiction.
There are no pending or anticipated proceedings which may be expected to have a
Material Adverse Effect on PacifiCare by or on behalf or in the name of the
state or federal government or any governmental agency relating to the
imposition of civil monetary penalties, exclusion or debarment from governmental
programs or other administrative sanctions.
3.22 ENVIRONMENTAL PROVISIONS.
(a) For the purposes of this Section 3.22, the following definitions
apply. "Environmental Claim" means any claim, action, cause of action, or
written notice by any person or entity alleging potential liability (including,
without limitation, potential liability for investigatory costs, cleanup costs,
governmental response costs, natural resources damages, property damages,
personal injuries, or penalties) resulting from (A) the presence, or release
into the environment, of any Material of Environmental Concern at any location,
whether or not owned or operated by PacifiCare or any subsidiary, or (B) any
violation, or alleged violation, of any Environmental Law. "Environmental Laws"
means all applicable federal, state or territorial, local and foreign laws and
regulations relating to pollution or protection of human health or the
environment (including, without limitation, ambient air, surface water, ground
water, land surface or subsurface strata), including, without limitation, laws
and regulations relating to emissions, discharges, releases or threatened
releases of Materials of Environmental Concern, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Materials of Environmental Concern. "Materials of
Environmental Concern" means chemicals, pollutants, contaminants, wastes, and
substances that are hazardous, toxic or otherwise a danger to health,
reproduction, or the environment or are regulated by Environmental Laws.
36
<PAGE>
(b) PacifiCare and each subsidiary is in compliance in all material
respects with all applicable Environmental Laws, which compliance includes, but
is not limited to, the possession by them of all material permits and other
governmental authorizations required under applicable Environmental Laws, and
compliance in all material respects with the terms and conditions thereof except
where the costs of any failure to comply will not exceed $5,000,000. PacifiCare
and its subsidiaries have not received any written communication, whether from a
Governmental Authority, citizens group, employee or otherwise, that alleges that
they are not in such full compliance in all material respects, and, to the
knowledge of PacifiCare, there are no circumstances that may prevent or
interfere with such full compliance in all material respects in the future. To
the knowledge of PacifiCare, no current or prior owner of any property owned or
leased by PacifiCare or any subsidiary has received any written communication,
whether from a Government Authority, citizens group, employee or otherwise, that
alleges that any of them is not in such compliance.
(c) There is no material Environmental Claim pending or, to the
knowledge of PacifiCare, threatened against PacifiCare or any subsidiary or
against any person or entity whose liability for any Environmental Claim
PacifiCare has or may have retained or assumed either contractually or by
operation of law.
(d) To the knowledge of PacifiCare, there are no past or present
actions, activities, circumstances, conditions, events or incidents, including,
without limitation, the release, emission, discharge, presence or disposal of
any Material of Environmental Concern, that could reasonably form the basis for
any Environmental Claim against PacifiCare, any subsidiary or, to the knowledge
of PacifiCare, against any person or entity whose liability for any material
Environmental Claim PacifiCare or any subsidiary has or may have retained or
assumed either contractually or by operation of law which Environmental Claim
would reasonably be expected to have a Material Adverse Effect on PacifiCare.
3.23 INTELLECTUAL PROPERTY.
(a) To the knowledge of PacifiCare, PacifiCare and its subsidiaries
own or have in their possession certain information of the sort typically
considered as trade secrets in the healthcare industry (the "Trade Secrets").
PacifiCare and its subsidiaries have good title and an absolute (though not
necessarily exclusive) right to use all Trade Secrets, and, to the knowledge of
PacifiCare, the use of the Trade Secrets does not infringe the rights of any
third party.
(b) To the knowledge of PacifiCare, none of the processes or know-how
used by PacifiCare infringes any patent, trademark or copyright of any third
party. To the best of PacifiCare's knowledge, there is no intellectual
property, in any form, necessary for the operation of PacifiCare's or its
subsidiaries' business as currently conducted which
37
<PAGE>
PacifiCare or its subsidiaries do not currently own or license on commercially
reasonable terms.
3.24 FORMATION OF HOLDING. PacifiCare has caused Holding, Neptune Sub and
Company Sub to be formed and organized in anticipation of execution of this
Agreement and solely for the purposes of carrying out the Mergers and the
transactions contemplated hereby, and solely for such purposes (i) Holding has
issued 200 shares of Common Stock to PacifiCare in exchange for $1.00 per share;
(ii) Neptune Sub has issued 100 shares of Common Stock to Holding in exchange
for $1.00 per share, and (iii) Company Sub has issued 100 shares of Common Stock
to Holding in exchange for $1.00 per share. No other shares of stock or
securities have been issued by Holding, Neptune Sub or Company Sub. The
directors and officers of Holding, Neptune Sub and Company Sub consist solely of
officers of PacifiCare and no other persons. Neither Holding, Neptune Sub nor
Company Sub has acquired any property, incurred any liabilities, or engaged in
any business or activity whatsoever other than (i) its organization as described
above, (ii) the adoption of stockholder and director resolutions in connection
therewith and to authorize execution and delivery of this Agreement, adoption of
the Holding Restated Certificate of Incorporation, consummation of the Mergers
and the transactions contemplated hereby, and performance of its obligations
hereunder, and (iii) the execution and delivery of this Agreement.
ARTICLE 4
CONDUCT AND TRANSACTIONS PRIOR TO
EFFECTIVE TIME; ADDITIONAL AGREEMENTS
4.1 INFORMATION AND ACCESS.
(a) During the period from the date of this Agreement through the
Effective Time, the Company shall afford, and shall cause the independent
auditors, counsel, financial and other advisors and representatives
(collectively, "Representatives") of the Company and its subsidiaries to afford,
to PacifiCare and to PacifiCare's Representatives, reasonable access to the
properties, books, records, financial and operating data (including audit work
papers and other such information) and other information and personnel of the
Company and its subsidiaries in order that PacifiCare and PacifiCare's
Representatives may have a full opportunity to make such investigation as
PacifiCare reasonably desires to make of the Company and its subsidiaries.
(b) Without limiting the generality of Section 4.1(a), during the
period from the date of this Agreement through the Effective Time, the Company
shall promptly provide PacifiCare with copies of any notice, report or other
document filed with or sent to any Governmental Authority in connection with any
of the transactions contemplated by this Agreement.
38
<PAGE>
(c) No investigation by PacifiCare or any of its Representatives
pursuant to this Section 4.1 shall limit or otherwise affect any representations
or warranties of the Company or any condition to any obligation of PacifiCare.
(d) During the period from the date of this Agreement through the
Effective Time, the Company shall promptly advise PacifiCare in writing of (A)
any Material Adverse Effect on the Company and (B) the occurrence of any event
which causes the representations and warranties made by the Company in this
Agreement or the information included in the Company Disclosure Schedule to be
incomplete or inaccurate in any material respect.
(e) The rights and obligations of PacifiCare and the Company in this
Section 4.1 shall apply, MUTATIS MUTANDIS, to the Company and PacifiCare.
4.2 CONDUCT OF BUSINESS OF THE COMPANY.
(a) Except as provided in Section 4.2(b), during the period from the
date of this Agreement through the Effective Time, (i) the Company shall conduct
its business, and shall cause each of its subsidiaries to conduct its business,
in the ordinary and usual course consistent with past practice and (ii) the
Company shall use, and shall cause each of its subsidiaries to use, all
commercially reasonable efforts to maintain and preserve intact its business
organization, to keep available the services of its officers and employees and
to maintain satisfactory relations with lessors, suppliers, contractors,
distributors, customers and others having business relationships with the
Company or any of its subsidiaries (it being recognized, however, that nothing
in this Agreement shall be construed to hold the Company liable for any adverse
effect that the announcement of the transactions contemplated by this Agreement
may have on such business organizations and relationships, including on
decisions of officers and employees whether to continue to provide services to
the Company or its subsidiaries).
(b) Except as expressly contemplated by this Agreement, during the
period from the date of this Agreement through the Effective Time, the Company
shall not do, and shall not permit any of its subsidiaries to do, any of the
following, without PacifiCare's prior written consent:
(i) declare, set aside or pay any dividend or make any other
distribution in respect of any capital stock, except (A) regular dividends on
the Company Series A Preferred Stock and (B) dividends from the subsidiaries of
the Company to the Company sufficient to allow the Company to make the dividends
referred to in clause (A);
(ii) split, combine or reclassify any capital stock of the
Company or repurchase, redeem or otherwise acquire any capital stock of the
Company or any of its subsidiaries, except pursuant to contractual rights
presently in existence;
39
<PAGE>
(iii) except for (x) the issuance of up to 900,000 Talbert stock
options to be granted to Talbert employed physicians in connection with the
separation of Talbert from the Company or (y) the issuance of up to 10,000
Company Options per individual and the issuance of up to 75,000 Company Options
in the aggregate to be granted in connection with the Company's new hires,
outstanding performances or promotions, as well as previously authorized
automatic grants of Company Options to directors, by the Company, issue,
deliver, pledge, encumber, sell or transfer, or authorize or propose the
issuance, delivery, pledge, encumbrance, sale or transfer of, any shares of
capital stock of the Company or any of its subsidiaries or any securities
convertible into, or rights, warrants or options to acquire, any such shares of
capital stock or other convertible securities (except that the Company may issue
Company Common Stock upon the exercise of Company Options issued and
outstanding)or upon the conversion of Company Series A Preferred Stock into
Company Common Stock, or, except as expressly contemplated herein, make any
change in its equity capitalization or to the terms of any option, warrant or
other equity security of the Company or any of its subsidiaries that is
currently outstanding;
(iv) except as expressly contemplated herein, amend the
Certificate of Incorporation, Bylaws or other organizational or charter
documents of the Company or any of its subsidiaries, or amend its Restated
Rights Plan;
(v) acquire (by merging or consolidating with, by purchasing any
material portion of the capital stock or assets of or by any other means) any
business or any corporation, partnership, association or other business
organization or division thereof;
(vi) sell, lease, pledge or otherwise dispose of or encumber any
of its material assets, except in the ordinary course of business consistent
with past practice or consistent with written disclosure made to PacifiCare
prior to the date hereof;
(vii) except pursuant to lines of credit and subject to credit
limits in effect prior to the date of this Agreement, incur any indebtedness for
borrowed money, or issue or sell any debt securities or guarantee, endorse or
otherwise become responsible for any obligation of any other person, provided
that this Section 4.2(b) shall not apply to indebtedness for borrowed money,
debt securities or guaranties that aggregate up to $20,000,000 or the proceeds
of which are used to capitalize Talbert in accordance with Section 4.15;
(viii) except as specifically contemplated by Section 4.8, adopt
or amend in any material respect any collective bargaining agreement or Company
Employee Plan, or enter into or amend any employment agreement, severance
agreement, special pay arrangement with respect to termination of employment or
other similar arrangement or agreement with any director or officer, or enter
into or amend any severance or termination arrangement with any director or
officer;
40
<PAGE>
(ix) change in any material respect the accounting methods or
practices followed by the Company (including any material change in any
assumption underlying, or any method of calculating, any bad debt, contingency
or other reserve), except as may be required by changes in GAAP;
(x) except in the ordinary course of business consistent with
past practice or as permitted in Section 4.4(a), enter into any material
contract or agreement involving payments in excess of market rates;
(xi) except as specifically contemplated by Section 4.8, change
any compensation payable or to become payable to any of its officers or
employees (other than any adjustment to the salary of any employee that is made
in the ordinary course of business consistent with past practice and that does
not exceed the higher of 6% of such employee's previous salary or $10,000 or
that is made in accordance with a budget approved in writing by PacifiCare);
(xii) make any capital expenditures in excess of $2,500,000 in
the aggregate, except those set forth in a budget to be reviewed and approved by
PacifiCare and the Company within two weeks following the date hereof;
(xiii) make any loan to or engage in any transaction with any
director or officer;
(xiv) settle or compromise any lawsuit or other Proceeding
against the Company or any of its subsidiaries for an amount in excess of
$5,000,000; provided, however, that in no event shall the Company or its
subsidiaries settle or compromise any matter in a manner which would have a
material non-financial adverse impact on the Company or its Material
Subsidiaries;
(xv) cause or permit any material amendment, modification or
premature termination to any Company Material Contract as defined Section 2.5(a)
without the prior approval of PacifiCare, such approval not to be unreasonably
withheld and to be given or not given on a timely basis;
(xvi) cause or agree to the termination or material modification
of any material licensure, qualification, or authorization of the Company or any
Material Subsidiary;
(xvii) enter into any new contract or amend or modify any
existing contract between the Company or any subsidiary and Talbert or to cause
any capital transfer to or from the Company or any subsidiary and from or to
Talbert, except as contemplated by Section 4.15; or
41
<PAGE>
(xviii) enter into any contract, agreement, commitment or
arrangement contemplating any of the foregoing.
4.3 CONDUCT OF BUSINESS OF PACIFICARE. Except as expressly contemplated
by this Agreement, during the period from the date of this Agreement through the
Effective Time, PacifiCare shall not, without the Company's prior written
consent:
(a) declare, set aside or pay any dividend or make any other
distribution in respect of any capital stock;
(b) split, combine or reclassify any capital stock of PacifiCare
or repurchase, redeem or otherwise acquire any capital stock of PacifiCare,
except pursuant to contractual rights presently in existence;
(c) issue, deliver, pledge, encumber, sell or transfer, or
authorize or propose the issuance, delivery, pledge, encumbrance, sale or
transfer of, any shares of capital stock of PacifiCare or any of its
subsidiaries or any securities convertible into, or rights, warrants or options
to acquire, any such shares of capital stock or other convertible securities
(except that PacifiCare may issue PacifiCare Class A Common Stock or PacifiCare
Class B Common Stock upon the exercise of PacifiCare Options issued and
outstanding on the date of this Agreement in accordance with their present
terms), or, except as expressly contemplated herein, make any change in its
equity capitalization or to the terms of any option, warrant or other equity
security of the Company or any of its subsidiaries that is currently
outstanding;
(d) except as expressly contemplated herein, amend the
Certificate of Incorporation, Bylaws or other organizational or charter
documents of PacifiCare or any of its subsidiaries;
(e) acquire (by merging or consolidating with, by purchasing any
material portion of the capital stock or assets of or by any other means) any
business or any corporation, partnership, association or other business
organization or division thereof;
(f) sell, lease, pledge or otherwise dispose of or encumber any
of its material assets, except in the ordinary course of business consistent
with past practice or consistent with written disclosure made to Company prior
to the date hereof;
(g) except pursuant to lines of credit and subject to credit
limits in effect prior to the date of this Agreement, incur any indebtedness for
borrowed money, or issue or sell any debt securities or guarantee, endorse or
otherwise become responsible for any obligation of any other person, provided
that this Section 4.2(g) shall not apply to indebtedness for borrowed money,
debt securities or guaranties that aggregate up to $20,000,000 or to financing
the purpose of which is to consummate the Mergers;
42
<PAGE>
(h) change in any material respect the accounting methods or
practices followed by PacifiCare (including any material change in any
assumption underlying, or any method of calculating, any bad debt, contingency
or other reserve), except as may be required by changes in GAAP;
(i) or enter into any contract, agreement, commitment or
arrangement contemplating any of the foregoing.
4.4 NEGOTIATION WITH OTHERS.
(a) The Company shall not, and it shall not authorize or permit any
of its subsidiaries, officers, directors or employees or any of its or its
subsidiaries' Representatives, directly or indirectly, to (i) solicit, initiate
or knowingly encourage or induce the making of any Acquisition Proposal (as
defined in Section 7.1), (ii) furnish non-public information regarding the
Company or any of its subsidiaries in connection with an Acquisition Proposal or
potential Acquisition Proposal, (iii) negotiate or engage in discussions with
any third party with respect to any Acquisition Proposal, (iv) approve, endorse
or recommend any Acquisition Proposal or (v) enter into any letter of intent,
contract or other instrument related directly or indirectly to any Acquisition
Proposal (other than a nondisclosure agreement entered into in accordance with
Section 4.4(c) or contracts with advisors or consultants). Notwithstanding the
foregoing, nothing in this Section 4.4 shall be construed to prohibit the
Company or its Board of Directors from taking any actions or permitting any
actions described above (other than any action described in clause (i) above)
with respect to any Acquisition Proposal to the extent that the Board of
Directors of the Company shall conclude in good faith, based upon the advice of
its outside counsel, that such action is required in order for the Board of
Directors of the Company to act in a manner that is consistent with its
fiduciary obligations under applicable law (PROVIDED that, in the event any
letter of intent, contract or other instrument of the type described in clause
(v) of the preceding sentence is entered into, the consummation of any
transaction contemplated by the Acquisition Proposal to which such instrument
relates must be expressly conditioned upon the prior and valid termination of
this Agreement and the payment of any fee due under Article 7 hereof).
(b) The Company shall immediately advise PacifiCare orally and in
writing of the receipt of any Acquisition Proposal or any inquiry relating to an
Acquisition Proposal prior to the Effective Time, including a full description
of the terms of such Acquisition Proposal.
(c) Notwithstanding anything to the contrary contained herein, the
Company shall not furnish any information to any third party pursuant to clause
(ii) of the first sentence of Section 4.4(a) unless such third party has
executed and delivered to the Company a nondisclosure agreement that is not
substantially less restrictive than the nondisclosure agreement then in effect
between the Company and PacifiCare.
43
<PAGE>
(d) The Company shall immediately cease and cause to be terminated
any discussions or negotiations with any parties existing as of the date of this
Agreement and that relate to any Acquisition Proposal and shall request the
return or destruction of all information previously disclosed to such parties in
accordance with the terms of any confidentiality agreements with such parties,
and shall use commercially reasonable efforts to ensure that such information is
returned or destroyed.
4.5 REGISTRATION STATEMENT; PROSPECTUS/PROXY STATEMENT.
(a) As promptly as practicable after the date of this Agreement,
Holding and PacifiCare shall prepare, with the assistance of the Company, and
cause to be filed with the SEC the S-4 Registration Statement, together with the
Prospectus/Proxy Statement and any other documents required by the Securities
Act or the Exchange Act in connection with the Mergers. Each of Holding,
PacifiCare and the Company shall use all commercially reasonable efforts to
cause the S-4 Registration Statement to comply with the rules and regulations
promulgated by the SEC, to respond promptly to any comments of the SEC or its
staff and to have the S-4 Registration Statement declared effective under the
Securities Act as promptly as practicable after such filing. The Company shall
promptly furnish to Holding and PacifiCare all information concerning the
Company, its subsidiaries and its stockholders as may be required or reasonably
requested in connection with any action contemplated by this Section 4.5. Each
of Holding, PacifiCare and the Company shall (i) notify the other promptly of
the receipt of any comments from the SEC or its staff and of any request by the
SEC or its staff for amendments or supplements to the S-4 Registration Statement
or the Prospectus/Proxy Statement or for additional information and (ii) shall
supply the other with copies of all correspondence with the SEC or its staff
with respect to the S-4 Registration Statement or the Prospectus/Proxy
Statement. Neither Holding, PacifiCare nor the Company shall file any amendment
or supplement to the S-4 Registration Statement or the Prospectus/Proxy
Statement to which the other shall have reasonably objected. Whenever any event
occurs that should be set forth in an amendment or supplement to the S-4
Registration Statement or the Prospectus/Proxy Statement, Holding, PacifiCare or
the Company, as the case may be, shall promptly inform the other of such
occurrence and shall cooperate in filing with the SEC or its staff, and, if
appropriate, mailing to stockholders of the Company and PacifiCare, such
amendment or supplement.
(b) Prior to the Effective Time, Holding shall make all required
filings with state regulatory authorities and the NASD and shall use all
commercially reasonable efforts to obtain all regulatory approvals needed to
ensure that the Holding Class A Common Stock, Holding Class B Common Stock and
Holding Series A to be issued in the Mergers (i) will be qualified under the
securities or "blue sky" law of every jurisdiction of the United States in which
any registered stockholder of the Company or PacifiCare has an address of record
on the record date for determining the stockholders entitled to notice of and to
vote on the
44
<PAGE>
Mergers and (ii) will be approved for quotation at the Effective Time on the
Nasdaq National Market or the NYSE.
(c) Prior to the Effective Time, Holding shall file the Holding
Restated Certificate of Incorporation with the Secretary of State of the State
of Delaware.
4.6 STOCKHOLDERS' MEETINGS.
(a) The Company shall take all action necessary in accordance with
applicable law to call and convene a meeting of the holders of Company Common
Stock and Company Series A Preferred Stock (the "Company Stockholders' Meeting")
to consider, act upon and vote upon the adoption and approval of this Agreement,
the Company Merger and the Series A Amendment. The Company Stockholders'
Meeting will be held within 60 days after the S-4 Registration Statement is
declared effective by the SEC. The Company shall ensure that the Company
Stockholders' Meeting is called, held and conducted, and that all proxies
solicited in connection with the Company Stockholders' Meeting are solicited, in
compliance with applicable law.
(b) The Board of Directors of the Company has unanimously recommended
(and the Prospectus/Proxy Statement shall include a statement to the effect that
the Board of Directors of the Company has unanimously recommended) that the
holders of Company Common Stock and Company Series A Preferred vote in favor of
and adopt and approve this Agreement, the Company Merger and the Series A
Amendment at the Company Stockholders' Meeting and any related amendment to the
Company's Certificate of Incorporation, which unanimous recommendation shall not
be withdrawn, amended or modified in a manner adverse to PacifiCare. For
purposes of this Agreement, it shall constitute a modification adverse to
PacifiCare if such recommendation shall no longer be unanimous.
(c) PacifiCare shall take all action necessary in accordance with
applicable law to call or convene a meeting of the holders of PacifiCare Class A
Common Stock (the "PacifiCare Stockholders' Meeting") to consider, act upon and
vote upon the approval of this Agreement, the PacifiCare Merger, the PacifiCare
Amendment and any related matters. The PacifiCare Stockholders' Meeting will be
held as close to the date of the Company Stockholders' meeting as is
practicable. PacifiCare shall ensure that the PacifiCare Stockholder's Meeting
is called, held and conducted, and that all proxies solicited in connection with
such meeting are solicited, in compliance with applicable law.
(d) The Board of Directors of PacifiCare has recommended, with no
dissenting votes (and the Prospectus/Proxy Statement shall include a statement
to the effect that the Board of Directors has so recommended) that the holders
of PacifiCare Class A Common Stock vote in favor of this Agreement, the
PacifiCare Merger, and related matters
45
<PAGE>
and that the holders of PacifiCare Class A Common Stock and PacifiCare Class B
Common Stock vote in favor of the PacifiCare Amendment.
(e) Notwithstanding the foregoing, nothing in Section 4.5 or in this
Section 4.6 shall prevent the Board of Directors of the Company or PacifiCare
from withdrawing, amending or modifying its recommendation in favor of the
respective Mergers and approval and adoption of this Agreement and related
matters (and the Prospectus/Proxy Statement may reflect such withdrawal,
amendment or modification) to the extent that such Board of Directors of the
Company or PacifiCare shall conclude in good faith, based upon the advice of its
outside counsel, that such withdrawal, amendment or modification is required in
order for such Board of Directors to act in a manner that is consistent with its
fiduciary obligations under applicable law. Nothing contained in this Section
4.6(e) shall limit the Company's or PacifiCare's obligation to convene the
Company Stockholders' Meeting and PacifiCare's Stockholders' Meeting (regardless
of whether the recommendation of the Board of Directors of the Company or
PacifiCare, as the case may be, shall have been withdrawn, amended or modified).
4.7 REGULATORY APPROVALS.
(a) Holding, the Company, PacifiCare and Holding shall use all
reasonable efforts to file and to cause any stockholders of the Company or
PacifiCare, as the case may be, to file as soon as practicable after the date of
this Agreement all notices, reports and other documents required by law to be
filed with any Governmental Authority with respect to the Mergers and the other
transactions contemplated by this Agreement and to submit promptly any
additional information requested by any such Governmental Authority. Without
limiting the generality of the foregoing, Holding, the Company, PacifiCare and
Holding shall promptly, and no event more than ten (10) business days from the
date hereof prepare and file the notifications required under the HSR Act in
connection with the Mergers. Holding, the Company and PacifiCare shall respond
as promptly as practicable to (i) any inquiries or requests received from the
Federal Trade Commission or the Antitrust Division of the Department of Justice
for additional information or documentation and (ii) any inquiries or requests
received from any state attorney general or other Governmental Authority in
connection with antitrust or related matters.
(b) Holding, the Company and PacifiCare shall (i) give each other
prompt notice of the commencement of any Proceeding by or before any court or
Governmental Authority with respect to the Mergers or any of the other
transactions contemplated by this Agreement, (ii) keep each other informed as to
the status of any such Proceeding and (iii) except as may be prohibited by any
Governmental Authority or by any law or court order or decree, permit the other
party to be present at each meeting or conference relating to any such
Proceeding and to have access to and be consulted in advance in connection with
any document filed or provided to any Governmental Authority in connection with
any such Proceeding.
46
<PAGE>
4.8 EMPLOYEE BENEFITS PLANS.
(a) At least twenty (20) days before the date of the Company
Stockholders' Meeting, PacifiCare shall notify the Company if it wishes to
provide a mechanism to cash out either vested or all outstanding Company
Options. If PacifiCare wishes to provide such a mechanism, PacifiCare shall
offer (in a form reasonably acceptable to the Company) to each holder of
applicable Company Options, the right to receive on the Effective Date, in
return for the cancellation of such option, an amount equal to (i) the product
of the value of the consideration to be received for each share of Company
Common Stock covered by the cash out (with stock values of PacifiCare Common
Stock measured by the Average Pre-Vote Closing Share Price for PacifiCare Class
A Common Stock and PacifiCare Class B Common Stock) times the number of shares
of Company Common Stock with respect to which such option is exercisable, less
(ii) the aggregate exercise price of such shares. The amount paid to any holder
of Company Options following such payment and cancellation shall be net of
applicable withholding taxes.
(b) On the Closing Date, and subject to any required approval of the
holders of Company Options, which the Company hereby covenants to exercise its
best efforts to obtain, Holding and PacifiCare will cause each Company Option to
be replaced effective as of the Effective Time, by a substitute option of
Holding (an "Exchange Option") issued under a Holding stock option plan that
complies in all respects with the applicable requirements of Rule 16b-3
promulgated under the Exchange Act. The per share exercise price of an Exchange
Option shall equal (i) the aggregate exercise price of the corresponding Company
Option divided by the number of shares (including any fractional shares) subject
to the Exchange Option as determined in the next sentence, rounding up to the
nearest cent, less (ii) the closing price as quoted in the Wall Street Journal
at which the rights to acquire trade during their first trading day following
issuance. For each share of Company Common Stock subject to such Company
Option, the Exchange Option shall entitle the holder thereof to purchase a
fraction of a share of Holding Class B Common Stock equal to the sum of (i) the
fraction of a share of Holding Class B Common Stock into which one (1) share of
Company Common Stock actually outstanding at the Effective Time is converted
pursuant to Article 1, plus (ii) the fraction of a share of Holding Class B
Common Stock that could be purchased at the Average Pre-Vote Closing Share Price
for the value of the PacifiCare Class A Common Stock into which one (1) share of
Company Common Stock actually outstanding at the Effective Time is converted
pursuant to Article 1, which value shall be the average closing price as quoted
in the Wall Street Journal of the PacifiCare Class A Common Stock during the
same trading days that the Average Pre-Vote Closing Share Price is determined,
plus (iii) the fraction of a share of Holding Class B Common Stock that could be
purchased at the Average Pre-Vote Closing Share Price for $17.50. Any
restriction on the exercise of any Company Option shall apply to the Exchange
Option and the term, exercisability, vesting schedule and other provisions of
such Company Option shall similarly apply to the Exchange Option: provided,
however, that each such Exchange Option shall, in accordance with its terms, be
47
<PAGE>
subject to further adjustment as appropriate to reflect any stock split, stock
dividend, recapitalization or other similar transaction subsequent to the
Effective Time and provided, further, that in the case of an Exchange Option of
a person who is an employee of the Company or one of its subsidiaries, such
Exchange Option shall provide that (i) any unvested shares, the vesting of which
depends on achievement by the Company of earnings or financial performance of
the Company for a fiscal year beginning on or after July 1, 1996, shall instead
vest no later than 25% per year beginning with July 1, 1996 and (ii) if the
holder of such Exchange Option is terminated without cause after the Closing
Date and before the date as of which, determined as of execution of this
Agreement and assuming no termination of any employee, there would remain no
more than 100,000 of such Exchange Options in the aggregate that are not vested,
such option shall thereupon become fully vested and further provided, that, in
the case of a holder of an Exchange Option who is a director of the Company or
one of its subsidiaries and who is not an employee of the Company or any of its
subsidiaries, the Exchange Option shall vest immediately when such holder no
longer is serving as a director of Holding or Company or one of their
subsidiaries. The Company, Holding and PacifiCare shall take such reasonable
actions, and cooperate with each other in all action, that may be necessary and
permissible to effectuate the provisions of this Section 4.8(b), including
without limitation, timely sending notice of the Board of Director's
determination to suspend acceleration of vesting of Company Options issues under
the Exchange Incentive Plan. The provisions of this Section 4.8(b) shall not
limit in any manner PacifiCare's right to cash out the vested portion of
outstanding Company options under Section 4.8(a). To the extent required under
applicable law, the terms of the applicable Company Option plans or under any
agreement thereunder, the Company shall obtain stockholder approval of the
transactions contemplated by this Section 4.8(b) and shall use its best efforts
to obtain the consent of any optionee whose consent may be required. As soon as
practicable after the Effective Time, Holding shall file with the SEC a
registration statement on Form S-8 with respect to the shares of Holding Class B
Common Stock underlying the Exchange Options and use its reasonable best efforts
to have such registration statement declared effective under the Securities Act.
The Company may amend the employment agreements described in Schedule 2.6 of the
Company Disclosure Schedule to adjust the terms and conditions for vesting of
Company Options held by employees party to such agreements, provided the
adjusted vesting is no more favorable than acceleration upon a "Change of
Control" as defined in such agreements and does not render nondeductible to the
Company any amounts under Section 280G of the Code, and further provided any
such adjustment shall not increase other benefits or amounts payable by the
Company nor increase the number of shares or decrease the exercise price under
any Company Option now outstanding.
(c) Either (i) the Company shall cause the Company's Employee Stock
Purchase Plan to be terminated immediately prior to the Effective Time, and such
termination shall have the effects set forth in such Plan, or (ii) prior to the
Effective Time, Holding, Company and PacifiCare shall cause each right to
purchase Company Common Stock to be replaced, effective as of the Effective
Time, by a substitute right to purchase shares of Holding
48
<PAGE>
Class B Common Stock ("Exchange Purchase Right") issued under a Holding Employee
Stock Purchase Plan ("Holding Purchase Plan") that is intended to comply with
Section 423 of the Code. The purchase price of shares of Holding Class B Common
Stock under an Exchange Purchase Right shall be equal to 85% of the fair market
value of Holding Class B Common Stock on the first date on which shares of
Holding Class B Common Stock are purchased under the terms of the Holding
Purchase Plan. The terms and conditions of each Exchange Purchase Right shall
satisfy the requirements of Section 424(a) of the Code.
(d) As of the Effective Time and for a period of not less than one
year thereafter, except to the extent required to satisfy applicable, governing
law, Holding shall, or shall cause the Company Surviving Corporation and its
subsidiaries, to provide other employee benefits either (i) no less favorable
on an aggregate basis to the benefits provided by the Company or its
subsidiaries prior to the Effective Time or (ii) as provided to similarly
situated employees of PacifiCare and its subsidiaries. Thereafter, to the extent
that employees of the Company Surviving Corporation or its subsidiaries
participate in benefit plans of Holding, for purposes of eligibility of such
employees for such employee benefits, Holding agrees to credit such employee's
service with the Company or its subsidiaries for such purposes as vesting,
calculation of benefits, and eligibility to participate and, if applicable, to
waive any pre-existing condition limitations related thereto to the extent
permitted by such plans as currently in effect and applicable law. Holding and
PacifiCare shall cause the Company's and its subsidiaries' employees to be
offered the right to participate in Holding's and its subsidiaries' stock option
plans and arrangements upon substantially consistent terms.
(e) STOCK OPTIONS OF PACIFICARE. At the Effective Time, each
outstanding option to purchase shares of PacifiCare Class B Common Stock (a
"PacifiCare Class B Option") under any of PacifiCare's stock options plans,
shall be canceled and Holding shall issue in substitution therefor an option to
purchase Holding Class B Common Stock (a "Holding Class B Substitute Option")
issued under a Holding stock option plan to be adopted by Holding prior to the
Effective Time. The exercise price and the number of shares of Holding Class B
Common Stock subject to each Holding Class B Substitute Option of the Holding
Class B Substitute Option shall be identical to the exercise price and the
number of shares of PacifiCare Class B Common Stock subject to the PacifiCare
Class B Option that such Holding Class B Substitute Option replaces. In
compliance with Section 424(a) of the Code, each such Holding Class B Substitute
Option shall be subject to substantially all of the other terms and conditions
of PacifiCare stock option plan it replaces. At the Effective Time, each
outstanding option to purchase shares of PacifiCare Class A Common Stock shall
be converted into an option to purchase a Holding Class A Common Stock Option
MUTATIS MUTANDIS. The exercise price and the number of shares of Holding Class A
Common Stock subject to each Holding Class A Substitute Option of the Holding
Class A Substitute Option shall be identical to the exercise price and the
number of shares of PacifiCare Class A Common Stock subject to the PacifiCare
Class A Option that such Holding Class A Substitute Option replaces. In
compliance with Section 424(a) of the Code, each such Holding Class A Substitute
Option
49
<PAGE>
shall be subject to substantially all of the other terms and conditions of the
PacifiCare stock option it replaces.
4.9 INDEMNIFICATION.
(a) With respect to actions, omissions and events occurring through
the Effective Time, all rights to indemnification existing in favor of the
current directors and officers of the Company and PacifiCare as provided in
their respective Certificates of Incorporation and indemnification agreements,
each as in effect as of the date of this Agreement, shall survive the Mergers
and shall be observed by Holding, PacifiCare Surviving Corporation and Company
Surviving Corporation.
(b) In addition to and without limiting Section 4.9(a), Holding
shall, to the fullest extent permitted under applicable laws, indemnify, defend
and hold harmless the current officers and directors of PacifiCare and the
Company (collectively, the "Indemnified Parties") against all losses, expenses,
claims, damages, liabilities or amounts that are paid in settlement of (subject
to Section 4.9(c)), or otherwise incurred in connection with, any claim, action,
suit, proceeding or investigation by reason of the fact that such Indemnified
Party was a director or officer of PacifiCare or the Company prior to the
Effective Time and arising out of actions, omissions and events occurring at or
prior to the Effective Time or in connection with the Mergers and the actions
taken in connection therewith (a "Claim") and shall pay expenses in advance of
the final disposition of any such Claim to each Indemnified Party upon receipt
from the Indemnified Party to whom expenses are advanced of an undertaking
reasonably satisfactory to Holding to repay such advances if legally required to
do so PROVIDED, HOWEVER, that Holding will not be liable under this Section
4.9(b) to any Indemnified Party for any action found by a court of competent
jurisdiction to constitute a violation of law, a breach of fiduciary duty to the
Company (or any subsidiary) or wilful misconduct.
(c) For purposes of Section 4.9(b), in the event any Claim is brought
against any Indemnified Party, Holding will be entitled to participate therein
at its own expense. In such event, the Indemnified Parties shall cooperate with
and provide all information reasonably requested by Holding. Except as
otherwise provided below, Holding may, at its option, assume the defense of any
Claim, with counsel reasonably satisfactory to the Indemnified Party. After
notice from Holding to the Indemnified Party of the election by PacifiCare to
assume the defense thereof, Holding will not be liable to the Indemnified Party
under Section 4.9(b) for any legal or other expenses subsequently incurred by
the Indemnified Party in connection with the defense thereof except for
reasonable costs of investigation or otherwise as provided below. The
Indemnified Party shall have the right to employ separate counsel in connection
with such Claim, but the fees and expenses of such counsel incurred after notice
from Holding of its assumption of the defense thereof shall be at the expense of
the Indemnified Party unless (i) the employment of counsel by the Indemnified
Party has been authorized by Holding, (ii) the Indemnified Party shall have
reasonably concluded that there
50
<PAGE>
is, under applicable standards of professional conduct, an actual conflict
between the interests of Holding and the Indemnified Party in the conduct of the
defense of such action or (iii) Holding shall not have employed counsel to
assume the defense of such action, in each of which cases the reasonable fees
and expenses of the Indemnified Party's separate counsel shall be at the expense
of Holding. In any case where the expense of defending a Claim is to be borne
by Holding, the Indemnified Parties as a group shall be entitled to no more than
one law firm (in addition to local counsel) to represent them with respect to
such Claim unless there is, under applicable standards of professional conduct
(as reasonably determined by counsel to the Indemnified Parties), an actual
conflict between the interests of any two or more Indemnified Parties, in which
event such additional counsel as may be required by reason of such conflict may
be retained by the Indemnified Parties.
Holding shall not be liable to indemnify the Indemnified Party under this
Section 4.10(b) for any amounts paid in any settlement of any Claim if such
settlement is effected without Holding's written consent. Holding shall be
permitted to settle any Claim, except that Holding shall not settle any Claim in
any manner which would impose any non-monetary penalty or material limitation
(or any monetary penalty with respect to which the Indemnified Party is not
entitled to indemnification pursuant to Section 4.9(b)) on the Indemnified Party
without the Indemnified Party's consent.
Any Indemnified Party wishing to claim indemnification under Section 4.9
upon learning of any such Claim shall promptly notify Holding (although the
failure so to notify Holding shall not relieve Holding from any liability that
Holding may have under Section 4.9, except to the extent such failure materially
prejudices Holding's position with respect to such Claim), and shall deliver to
Holding the undertaking specified in Section 4.9 above.
(d) Holding shall maintain in effect for a period of not less than
five years from the Effective Time the current policy of directors' and
officers' liability insurance maintained by PacifiCare and the Company, as the
case may be, with respect to matters occurring prior to the Effective Time;
PROVIDED, HOWEVER, that (i) Holding may substitute therefor policies of
comparable coverage (with carriers comparable to PacifiCare's and the Company's
existing carriers) and (ii) Holding shall not be required to pay an annual
premium for such insurance in excess of two hundred percent (200%) of the last
annual premium paid by PacifiCare or the Company, as the case may be, for such
insurance prior to the date of this Agreement (the "200% Amount"). In the event
the annual premium for such insurance exceeds the 200% Amount, Holding shall be
entitled to reduce the amount of coverage of such insurance to the amount of
coverage that can be obtained for a premium equal to the 200% Amount.
(e) In the event Holding or any of its successors or assigns (i)
consolidates with or merges into any other Person and shall not be the
continuing or surviving corporation or entity of such consolidation or merger,
or (ii) transfers or conveys all or substantially all of
51
<PAGE>
its properties and assets to any Person, then, and in each such case, to the
extent necessary to effectuate the purposes of this Section 4.9, proper
provision shall be made so that the successors and assigns of Holding assume the
obligations set forth in this Section 4.9 and none of the actions described in
clause (i) or (ii) shall be taken until such provision is made.
4.10 ADDITIONAL AGREEMENTS.
(a) Subject to Section 4.10(b), Holding, PacifiCare and the Company
agree to use all commercially reasonable efforts to take, or cause to be taken,
all actions necessary to consummate the Mergers and make effective the other
transactions contemplated by this Agreement. Without limiting the generality of
the foregoing, but subject to Section 4.10(b), Holding, PacifiCare and the
Company shall use all commercially reasonable efforts to (i) obtain the consent
and approval of each Governmental Authority, lessor or other person whose
consent or approval is required (by virtue of any contractual provision or legal
requirement or otherwise) in order to permit the consummation of the Merger or
any of the other transactions contemplated by this Agreement or in order to
enable Holding, PacifiCare Surviving Corporation and Company Surviving
Corporation to conduct their respective businesses its business in the manner in
which such business is currently being conducted or is proposed to be conducted,
(ii) effect all registrations and filings necessary to consummate the Mergers
and (iii) lift any restraint, injunction or other legal bar to the Mergers.
(b) Notwithstanding anything to the contrary contained in Section
4.10(a) or elsewhere in this Agreement, (i) Holding shall not have any
obligation under this Agreement to dispose or cause any of its subsidiaries to
dispose of any material assets, (ii) Holding shall not have any obligation to
make any changes to its operations or proposed operations or to the operations
or proposed operations of any of its subsidiaries and (iii) Holding shall not
have any obligation to make any commitment (to any Governmental Authority or
otherwise) regarding its future operations, or the future operations of any of
its subsidiaries, or the future operations of PacifiCare Surviving Corporation
or the Company Surviving Corporation or any of their Material Subsidiaries which
would, in each of case (ii) and (iii) above, have a material adverse effect
thereon (even though the disposition of such assets or the making of such change
or commitment might facilitate the obtaining of a required approval from a
Governmental Authority or might otherwise facilitate the consummation of the
Mergers).
4.11 DISCLOSURE. PacifiCare and the Company will (i) mutually agree on the
text of any press release and (ii) consult with each other before making any
other public statement with respect to this Agreement and the transactions
contemplated by this Agreement, except, in each such case, as may be required by
applicable law (including disclosure requirements) or any listing or similar
agreement with any national securities exchange or the Nasdaq National Market.
52
<PAGE>
4.12 AFFILIATE AGREEMENTS. The Company shall deliver to PacifiCare, within
ten days after the date of this Agreement, a letter from the Company identifying
all persons who may be "affiliates" of the Company as that term is used in
paragraphs (c) and (d) of Rule 145 under the Securities Act ("Company
Affiliates"). The Company shall use all commercially reasonable efforts to
cause each person who is or becomes a Company Affiliate to execute and deliver
to PacifiCare, on or prior to the date of the mailing of the Prospectus/Proxy
Statement, an Affiliate Agreement in the form attached hereto as Exhibit 4.12.
PacifiCare shall use all commercially reasonable efforts to cause each person
who is or becomes an affiliate of PacifiCare to execute and deliver a similar
agreement on or prior to such date.
4.13 TAX QUALIFICATION AND OPINION BACK-UP CERTIFICATES. Each of Holding,
the Company and PacifiCare will use its reasonable best efforts to cause the
transactions contemplated by this Agreement, other than the transactions with
respect to Talbert contemplated by Section 4.15 hereof, to qualify as transfers
subject to the provisions of Section 351(a) of the Code and to deliver, in
connection with the tax opinions referred to in Sections 5.9 and 6.8,
certificates of representation reasonable under the circumstances ("Tax
Certificates").
4.14 FINANCING. PacifiCare has received from Bank of America NT&SA a
commitment letter dated August 2, 1996 (the "Commitment Letter") continuing its
commitment, subject to the terms and conditions thereof, to provide sufficient
financing to permit PacifiCare and Holding to consummate the transactions
contemplated hereby. A true and accurate copy of the Commitment Letter has been
provided to the Company. PacifiCare and Holding shall enter into the definitive
credit agreements contemplated by the Commitment Letter prior to the date on
which the Proxy/Prospectus is mailed to the Company's Stockholders.
4.15 TALBERT.
(a) The Company shall negotiate a written agreement with Talbert
under which all Talbert contracted medical providers or sites agree to provide
professional services to members of HMOs and enrollees in insurance products of
the Company and Company Surviving Corporation and their subsidiaries in exchange
for a current market rate capitation payment ("Capitated Contract"). The
Capitated Contract shall be subject to the review and approval of PacifiCare
prior to execution. In addition to the Capitated Contract, the Company and
Talbert shall enter into an agreement for the Company to render administrative
services (information systems, payroll, accounts payable, employee benefits
administration and the like) for a period not to exceed one year following the
Effective Date at a rate and on other terms approved by PacifiCare. PacifiCare
shall negotiate in good faith with the Company and Talbert in determining
whether to give its approval.
(b) Following execution of the Capitated Contract, the Company shall
capitalize Talbert to increase its net worth to approximately $60,000,000
("Capital
53
<PAGE>
Contribution"); provided, however, that in all events the net worth of Talbert
shall be equal to the proceeds of the rights offering referred to in Section
4.15(c) below, assuming all such rights are exercised.
(c) Following the Capital Contribution, simultaneous with
consummation of the Mergers, the Company shall issue rights to the persons
entitled to receive Holding Class A Common Stock, Holding Class B Common Stock
or Holding Series A in the Company Merger and allocated among them consistent
with an equal allocation on a Company common share equivalent basis, exercisable
until the first business day on or after the thirtieth day after the Closing
Date and expiring thereafter, to purchase, directly or indirectly through one or
more other corporations formed to facilitate such purchase all of Company's
interest in Talbert. In connection with the purchase, Holding, PacifiCare, the
Company and Talbert shall discuss the possibility of a Code section 338(h)(10)
election in connection with such purchase; provided however, that no such
election shall be made without the prior written consent of PacifiCare, which
consent shall not be withheld unless there is an adverse impact to PacifiCare.
(d) Before the Effective Time and with the prior consent of
PacifiCare as to significant actions, the Company and Talbert shall take such
steps as are reasonably required to consummate the separation of Talbert from
the Company. The Company and Talbert shall have the right to continue to
prosecute the application now pending before the California Department of
Corporations for the issuance of stock options to employees of Talbert and to
carry out transactions consistent with such application as permitted by Section
4.2(b) if and when a permit is granted pursuant thereto.
4.16 7% SENIOR NOTES DUE 2003. PacifiCare shall, in accordance with the
terms of the Company's 7% Senior Notes Due 2003 (the "Senior Notes"), assume the
Senior Notes.
4.17 NOTICES OF CERTAIN EVENTS. Each of Holding, the Company and
PacifiCare shall promptly notify the other of:
(a) any notice or other communication from any Person alleging that
the consent of such Person is or may be required in connection with the
transactions contemplated by this Agreement;
(b) any notice or other communication from any governmental body,
agency, official or authority in connection with the transactions contemplated
by this Agreement that indicates such body, agency, official or authority
intends to take action that would prevent or materially interfere with the
transactions contemplated by this Agreement; and
(c) any actions, suits, claims, investigations, proceedings or health
or insurance related proceedings or market conduct examinations or audits
commenced or, to the best of Company's or PacifiCare's knowledge (as the case
may be) threatened against, relating to or
54
<PAGE>
involving or otherwise affecting the Company or PacifiCare or any of their
subsidiaries which, if pending on the date of this Agreement, would have been
required to have been disclosed pursuant to Section 2.7 or 3.7 or which relate
to the consummation of the transactions contemplated by this Agreement.
4.18 CERTAIN CORPORATE MATTERS WITH RESPECT TO PACIFICARE.
(a) PacifiCare shall cause Holding to take all necessary corporate
action for the establishment of the Holding stock option plans contemplated by
Section 4.8 hereof and agrees to vote the shares of capital stock of Holding
owned by it in favor of the adoption of such plans as required under the laws of
the State of Delaware.
(b) From the date hereof until the Effective Time, PacifiCare shall
cause Holding (x) not to take any action inconsistent with the provisions of
this Agreement and (y) not to conduct business or activity other than in
connection with this Agreement.
4.19 COMPLIANCE WITH REGULATIONS. PacifiCare and the Company will each use
reasonable commercial efforts, and will cause their subsidiaries to use
reasonable commercial efforts, to comply with applicable rules and regulations
of the Health Care Financing Administration relating to so-called physician
incentive plans.
4.20 ASSUMPTION BY SUCCESSOR. Holding, effective as of the Effective Time,
assumes expressly and agrees to perform the employment agreements described in
Schedule 2.6 of the Company Disclosure Schedule in the same manner and to the
same extent that the Company would be required to perform them.
4.21 NO ACTIVITY BY HOLDING. From the date of this Agreement until the
Effective Time, PacifiCare shall not cause or permit Holding, Neptune Sub or
Company Sub to (i) issue any stock or securities or (ii) acquire any property,
incur any liabilities or engage in any business or activity whatsoever, other
than to consummate the Mergers and transactions contemplated hereby (including
the financing thereof) and to carry out its obligations hereunder.
ARTICLE 5
CONDITIONS PRECEDENT TO OBLIGATIONS OF PACIFICARE AND HOLDING
The obligations of PacifiCare and Holding to effect the Mergers and
otherwise consummate the transactions contemplated by this Agreement are subject
to the fulfillment, at or prior to the Closing, of each of the following
conditions:
5.1 REPRESENTATIONS AND WARRANTIES ACCURATE.
55
<PAGE>
(a) The representations and warranties of the Company contained in
this Agreement shall have been accurate in all material respects as of the date
of this Agreement.
(b) The representations and warranties of the Company contained in
this Agreement shall be accurate in all respects as of the date of the Closing
as if made on and as of the date of the Closing, except that any inaccuracies in
such representations and warranties will be disregarded if the circumstances
giving rise to such inaccuracies (considered individually and collectively) do
not constitute, and would not reasonably be expected to result in, a Material
Adverse Effect on the Company (it being understood that, for purposes of
determining the accuracy of such representations and warranties, (i) all
Material Adverse Effect qualifications shall be disregarded and (ii) any update
of or modification to the Company Disclosure Schedule made or purported to have
been made after the date of this Agreement shall be disregarded).
5.2 COMPLIANCE WITH COVENANTS. The Company shall have complied with and
performed in all material respects each covenant contained in this Agreement
that is required to be performed by the Company on or prior to the date of the
Closing.
5.3 NO MATERIAL ADVERSE EFFECT. Since the date of this Agreement, there
shall not have been any Material Adverse Effect on the Company and there shall
not have occurred any change or development, or any combination of changes or
developments, that would reasonably be expected to have a Material Adverse
Effect on the Company.
5.4 CERTIFICATE. The Company shall have delivered to PacifiCare a
certificate of the Chief Executive Officer of the Company evidencing compliance
with the conditions set forth in Sections 5.1, 5.2 and 5.3.
5.5 EFFECTIVENESS OF REGISTRATION STATEMENT. The S-4 Registration
Statement shall have become effective in accordance with the provisions of the
Securities Act, and no stop order shall have been issued by the SEC with respect
to the S-4 Registration Statement.
5.6 STOCKHOLDER APPROVAL. This Agreement, the Mergers, the PacifiCare
Amendment and the Series A Amendment shall have been adopted and approved by the
Required Company Vote or the Required PacifiCare Vote, as applicable.
5.7 AFFILIATES AGREEMENTS. The Affiliates Agreements described in Section
4.12 shall have been executed by each party therein described and delivered to
PacifiCare.
5.8 LEGAL OPINION. PacifiCare shall have received an opinion of Sheppard,
Mullin, Richter & Hampton LLP, counsel to the Company, dated as of the date of
the Closing, in such form as shall be reasonably acceptable to PacifiCare and
its counsel.
56
<PAGE>
5.9 TAX OPINION. Subject to receipt by PacifiCare's counsel of the Tax
Certificates, PacifiCare shall have received a written opinion from PacifiCare's
counsel, dated as of the date of the Closing (reasonably satisfactory in form
and substance to PacifiCare), to the effect that the PacifiCare Merger will
constitute a contribution of PacifiCare Common Stock to Holding in exchange for
Holding Common Stock as part of a transaction governed by Section 351 of the
Code. For purposes of rendering such opinion, PacifiCare's counsel shall be
entitled to rely upon the Tax Certificates.
5.10 ABSENCE OF RESTRAINT. No order to restrain, enjoin or otherwise
prevent the consummation of either of the Mergers shall have been entered by any
court or Governmental Authority.
5.11 NO GOVERNMENTAL LITIGATION. There shall not be pending or threatened
any Proceeding in which a Governmental Authority is or is threatened to become a
party: (a) challenging or seeking to restrain or prohibit the consummation of
either of the Mergers; (b) relating to either of the Mergers and seeking to
obtain from Holding or PacifiCare or any of their subsidiaries any damages that
may be material to Holding or PacifiCare; (c) seeking to prohibit or limit in
any material respect Holding's ability to vote, receive dividends with respect
to or otherwise exercise ownership rights with respect to the stock of
PacifiCare Surviving Corporation or Company Surviving Corporation (PacifiCare
Surviving Corporation and Company Surviving Corporation being sometimes referred
to below as "Surviving Corporations"); or (d) which would materially and
adversely affect the right of Holding, the Surviving Corporations or any
subsidiary thereof to own the assets or operate the business of PacifiCare or
the Company or any of their subsidiaries.
5.12 NO OTHER LITIGATION. There shall not be pending any Proceeding in
which there is a reasonable possibility of an outcome that would have a Material
Adverse Effect on Holding, PacifiCare or the Company: (a) challenging or
seeking to restrain or prohibit the consummation of either of the Mergers; (b)
relating to either of the Mergers and seeking to obtain from Holding or
PacifiCare or any of its subsidiaries any damages that may be material to
Holding or PacifiCare; (c) seeking to prohibit or limit in any material respect
Holding's ability to vote, receive dividends with respect to or otherwise
exercise ownership rights with respect to the stock of the Surviving
Corporations; or (d) which would affect adversely the right of PacifiCare, the
Surviving Corporations or any of their subsidiaries to own the assets or operate
the business of the Company or any of its subsidiaries.
5.13 HSR ACT. The waiting periods applicable to the consummation of the
Mergers, and the acquisitions of voting securities of Holding by the
stockholders of Company and PacifiCare, if any, under the HSR Act shall have
expired or been terminated.
5.14 QUOTATION ON NASDAQ NATIONAL MARKET OR NEW YORK STOCK EXCHANGE. The
Holding Class A Common Stock, Holding Class B Common Stock and Holding Series A
57
<PAGE>
issuable in the Mergers shall have been approved for quotation on the Nasdaq
National Market or NYSE upon official notice of issuance thereof.
5.15 OTHER REQUIRED CONSENTS AND APPROVALS. Holding, PacifiCare and the
Company shall have received all material approvals, licenses, consents,
assignments and authorizations of Governmental Authorities and other persons,
including those set forth on the Company Disclosure Schedule, as may be required
(a) to permit the performance by Holding, PacifiCare and the Company of their
respective obligations under this Agreement and the consummation of the Mergers
and (b) to permit Holding and the Surviving Corporations and their respective
subsidiaries to conduct their business and operations in the manner currently
conducted.
5.16 TAKECARE BOARD REPRESENTATION. The rights of certain former
stockholders of TakeCare to board representation on the Board of Directors of
the Company shall have been terminated.
5.17 RESTATED RIGHTS PLAN. The Restated Rights Plan shall have been
amended to provide that the transactions contemplated by this Agreement do not
give rise to any rights or benefits under the Restated Rights Plan.
5.18 TALBERT. The net worth of Talbert shall not exceed $60,000,000.
ARTICLE 6
CONDITIONS PRECEDENT TO THE COMPANY'S OBLIGATIONS
The obligations of the Company to effect the Company Merger and otherwise
consummate the transactions contemplated by this Agreement are subject to the
fulfillment, at or prior to the Closing, of the following conditions:
6.1 REPRESENTATIONS AND WARRANTIES ACCURATE.
(a) The representations and warranties of PacifiCare contained in
this Agreement shall have been accurate in all material respects as of the date
of this Agreement.
(b) The representations and warranties of PacifiCare contained in
this Agreement shall be accurate in all respects as of the date of the Closing
as if made on and as of the date of the Closing, except that any inaccuracies in
such representations and warranties will be disregarded if the circumstances
giving rise to such inaccuracies (considered individually and collectively) do
not constitute, and would not reasonably be expected to result in, a Material
Adverse Effect on PacifiCare (it being understood that, for purposes of
determining the accuracy of such representations and warranties as of the date
of the Closing,
58
<PAGE>
(i) all Material Adverse Effect qualifications shall be disregarded and (ii) any
update of or modification to the PacifiCare Disclosure Schedule made or
purported to have been made after the date of this Agreement shall be
disregarded).
6.2 COMPLIANCE WITH COVENANTS. PacifiCare shall have complied with and
performed in all material respects each covenant contained in this Agreement
that is required to be performed by PacifiCare on or prior to the date of the
Closing.
6.3 NO MATERIAL ADVERSE EFFECT. Since the date of this Agreement, there
shall not have been any Material Adverse Effect on PacifiCare, and there shall
not have occurred any change or development, or any combination of changes or
developments, that would reasonably be expected to have a Material Adverse
Effect on PacifiCare.
6.4 CERTIFICATE. PacifiCare shall have delivered to the Company a
certificate of an executive officer of PacifiCare evidencing compliance with the
conditions set forth in Sections 6.1, 6.2 and 6.3.
6.5 EFFECTIVENESS OF REGISTRATION STATEMENT. The S-4 Registration
Statement shall have become effective in accordance with the provisions of the
Securities Act, and no stop order shall have been issued by the SEC with respect
to the S-4 Registration Statement.
6.6 STOCKHOLDER APPROVAL. This Agreement and the Mergers shall have been
adopted and approved by the Required Company Vote or the Required PacifiCare
Vote, as applicable.
6.7 LEGAL OPINION. The Company shall have received an opinion of Cooley
Godward Castro Huddleson & Tatum, counsel to PacifiCare, dated as of the date of
the Closing, in such form as shall be reasonably acceptable to the Company and
its counsel.
6.8 TAX OPINION. Subject to receipt by the Company's counsel of the Tax
Certificates, the Company shall have received a written opinion from the
Company's counsel dated as of the date of the Closing to the effect that the
Merger will constitute a contribution of Company Common Stock and Company Series
A Preferred Stock to Holding in exchange for Holding capital stock as part of a
transaction governed by Section 351 of the Code. For purposes of rendering such
opinion, the Company's counsel shall be entitled to rely upon the Tax
Certificates.
6.9 ABSENCE OF RESTRAINT. No order to restrain, enjoin or otherwise
prevent the consummation either of the Mergers shall have been entered by any
court or Governmental Authority.
59
<PAGE>
6.10 NO GOVERNMENTAL LITIGATION. There shall not be pending or threatened
any Proceeding in which a Governmental Authority is or is threatened to become a
party: (a) challenging or seeking to restrain or prohibit the consummation of
either of the Mergers; (b) relating to either of the Mergers and seeking to
obtain from the Company or any of its subsidiaries any damages that may be
material to the Company (c) seeking to prohibit or limit in any material respect
the Company's ability to vote, receive dividends with respect to or otherwise
exercise ownership rights with respect to the stock of the Company Surviving
Corporation; or (d) which would materially and adversely affect the right of
Holding, the Surviving Corporations or any subsidiary thereof to own the assets
or operate the business of PacifiCare or the Company or any of their
subsidiaries.
6.11 HSR ACT. The waiting period applicable to the consummation of the
Mergers under the HSR Act shall have expired or been terminated.
6.12 QUOTATION ON NASDAQ NATIONAL MARKET OR NEW YORK STOCK EXCHANGE. The
Holding Class A Common Stock, Holding Class B Common Stock and Holding Series A
issuable in the Mergers shall have been approved for quotation on the Nasdaq
National Market or the NYSE upon official notice of issuance thereof.
ARTICLE 7
TERMINATION OF AGREEMENT
7.1 TERMINATION. This Agreement may be terminated prior to the Effective
Time, whether before or after approval of the Mergers by the stockholders of the
Company and PacifiCare:
(a) by mutual written consent of the respective Boards of Directors
of PacifiCare and the Company;
(b) by either PacifiCare or the Company if either of the Mergers
shall not have been consummated by April 30, 1997 (unless the failure to
consummate such Merger Company is attributable to a failure on the part of the
party seeking to terminate this Agreement to perform any material obligation
required to be performed by such party at or prior to the Effective Time);
(c) by either PacifiCare or the Company if a court of competent
jurisdiction or Governmental Authority shall have issued a final and
nonappealable order, decree or ruling, or shall have taken any other action,
having the effect of permanently restraining, enjoining or otherwise prohibiting
either of the Mergers;
60
<PAGE>
(d) by either PacifiCare or the Company if (i) the Company
Stockholders' Meeting shall have been held and (ii) this Agreement and the
Company Merger and any related matters shall not have been adopted and approved
at such meeting by the Required Company Vote;
(e) by PacifiCare (at any time prior to the adoption and approval of
this Agreement and the Company Merger by stockholders of the Company by the
Required Company Vote) if a Triggering Event (as defined below) shall have
occurred;
(f) by either PacifiCare or the Company if (i) the PacifiCare
Stockholders' Meeting shall have been held and (ii) consummation of the Merger
Company and any related matters shall not have been adopted and approved at such
meeting by the Required PacifiCare Vote;
(g) by PacifiCare if any of the Company's representations and
warranties contained in this Agreement shall be or shall have become materially
inaccurate as of the date of this Agreement, or if any of the Company's
covenants contained in this Agreement shall have been breached in any material
respect; PROVIDED, HOWEVER, that if an inaccuracy in the Company's
representations and warranties or a breach of a covenant by the Company is
curable by the Company and the Company is continuing to exercise all
commercially reasonable efforts to cure such inaccuracy or breach, then
PacifiCare may not terminate this Agreement under this Section 7.1(g) on account
of such inaccuracy or breach; or
(h) by the Company if any of PacifiCare's or Holding's
representations and warranties contained in this Agreement shall be or shall
have become materially inaccurate as of the date of this Agreement, or if any of
PacifiCare's or Holding's covenants contained in this Agreement shall have been
breached in any material respect; PROVIDED, HOWEVER, that if an inaccuracy in
PacifiCare's or Holding's representations and warranties or a breach of a
covenant by PacifiCare or Holding is curable by PacifiCare or Holding and
PacifiCare or Holding is continuing to exercise all commercially reasonable
efforts to cure such inaccuracy or breach, then the Company may not terminate
this Agreement under this Section 7.1(h) on account of such inaccuracy or
breach.
A "Triggering Event" shall be deemed to have occurred if (i) the Board of
Directors of the Company shall have failed to recommend, shall for any reason
have withdrawn or shall have amended or modified in a manner adverse to
PacifiCare its unanimous recommendation in favor of the Company Merger or
approval or adoption of this Agreement, or the Company shall have failed to
include in the Prospectus/Proxy Statement the unanimous recommendation of the
Board of Directors of the Company in favor of the Company Merger and approval
and adoption of this Agreement and related matters; (ii) the Board of Directors
of the Company shall have approved, endorsed or recommended any Acquisition
Proposal; (iii) the Company shall have entered into any letter of intent,
contract or other instrument related directly or
61
<PAGE>
indirectly to any Acquisition Proposal (other than a nondisclosure agreement
entered into in accordance with Section 4.4(c) or contracts with advisors or
consultants); or (iv) the Company shall have failed to hold the Company
Stockholders' Meeting as promptly as practicable and in any event within 60 days
after the S-4 Registration Statement is declared effective and any Acquisition
Proposal shall have been made during such 60-day period.
"Acquisition Proposal" shall mean any proposal (other than any proposal by
PacifiCare or Neptune Sub or in connection with the transactions contemplated in
Section 4.15 regarding Talbert) regarding (i) any merger, consolidation, share
exchange, business combination or other similar transaction or series of related
transactions involving the Company; (ii) any sale, lease, exchange, transfer or
other disposition of the assets of the Company or any subsidiary of the Company
constituting more than 50% of the consolidated assets of the Company or
accounting for more than 50% of the consolidated revenues of the Company in any
one transaction or in a series of related transactions; and (iii) any offer to
purchase, tender offer, exchange offer or any similar transaction or series of
related transactions made by any Person involving more than 50% of the
outstanding shares of the capital stock of the Company or the filing of any
Statement on Schedule 14D-1 with the SEC in connection therewith.
7.2 EFFECT OF TERMINATION. In the event of the termination of this
Agreement as provided in Section 7.1, this Agreement shall be of no further
force or effect; PROVIDED, HOWEVER, that (i) this Section 7.2, Section 7.3 and
Article 8 shall survive the termination of this Agreement and shall remain in
full force and effect, (ii) such termination shall have no effect on the
Confidentiality Agreement dated July 22, 1996 between PacifiCare and the Company
which shall remain in full force and effect and, (iii) subject to Section 7.3(b)
and 7.3(c) below, the termination of this Agreement shall not relieve any party
from any liability for any breach of this Agreement.
7.3 FEES AND EXPENSES.
(a) Except as set forth in this Section 7.3, all fees and expenses
incurred in connection with this Agreement and the transactions contemplated by
this Agreement shall be paid by the party incurring such expenses, whether or
not the Mergers are consummated.
(b) In consideration of the substantial time, expense and forgoing of
other opportunities that PacifiCare and Holding have invested in the
transactions contemplated hereby:
(i) If this Agreement is terminated pursuant to Section 7.1(d)
at any time after the occurrence of a Triggering Event or if this Agreement is
terminated by PacifiCare pursuant to Section 7.1(e), then the Company shall pay
to PacifiCare a fee, in immediately available funds, of $50,000,000 (the
"Termination Amount"). In the case of termination of this Agreement by the
Company pursuant to Section 7.1(d), the Termination
62
<PAGE>
Amount shall be paid prior to such termination, and in the case of termination
of this Agreement pursuant to Section 7.1(e) or by PacifiCare pursuant to
Section 7.1(d), the Termination Amount shall be paid within one business day of
such termination. If the Company fails to pay such fee by the date provided
herein, in addition to any other remedies that may be available to PacifiCare
for such breach by the Company, said fee shall bear interest at the lower of 10%
per annum and the maximum rate allowable by law from the date such payment was
due until the date such fee is actually paid.
(ii) If this Agreement is terminated pursuant to Section 7.1(d)
(and Section 7.3(b)(i) is not applicable) and within 12 months of the date of
the Company Stockholders' Meeting the Company enters into an agreement relating
to an Acquisition Proposal, the Company shall pay to PacifiCare, within one
business day of entering into such agreement, a fee in immediately available
funds, of the Termination Amount. If the Company fails to pay such fee by the
date provided herein, in addition to any other remedies that may be available to
PacifiCare for such breach by the Company, said fee shall bear interest at the
lower of 10% per annum and the maximum rate allowable by law from the date such
payment was due until the date such fee is actually paid.
(c) In consideration of the substantial time, expense and forgoing of
other opportunities that the Company has invested in the transactions
contemplated hereby if this Agreement is terminated pursuant to Section 7.1(f)
or if the Mergers are not consummated solely by reason of a breach by PacifiCare
caused by its failure to enter into definite agreements related to the financing
contemplated by the Commitment Letter, or the termination of such agreements or
the failure of PacifiCare to receive the funding contemplated by the Commitment
Letter, and after diligent efforts to find commercially reasonable alternative
financing (a "Financing Breach"), then PacifiCare shall pay the Company a fee,
in immediately available funds, of $50,000,000, in the case of a termination
pursuant to Section 7.1(f) or $100,000,000 in the case of a Financing Breach.
In the case of a termination by PacifiCare pursuant to Section 7.1(f), the
Termination Amount shall be paid upon to termination. In the case of a
termination by the Company pursuant to Section 7.1(f) or the failure to
consummate the transactions contemplated hereby solely because of a Financing
Breach, PacifiCare shall pay the Termination Amount promptly following such
event.
If PacifiCare fails to pay such fee by the date provided, in addition to
such other remedies as may be available to the Company for such breach by
PacifiCare, said fee shall bear interest on such fee at the lower of 10% per
annum and the maximum rate allowable by law from the date such fee was due until
the date it was actually paid.
(d) Each of PacifiCare and the Company acknowledge that the fees
payable pursuant to Sections 7.3(b) and 7.3(c) (and, if applicable, any interest
thereon and attorneys' fees and costs related to any suit to enforce such
provisions) are the sole remedies of such parties for termination or failure to
consummate the Mergers under the circumstances
63
<PAGE>
described in such sections (other than any willful breach of any agreement or
covenant set forth in this Agreement).
ARTICLE 8
MISCELLANEOUS
8.1 AMENDMENT. This Agreement may be amended with the approval of the
respective Boards of Directors of Holding, the Company and PacifiCare at any
time before or after approval of this Agreement by the stockholders of the
Company and the stockholders of PacifiCare; PROVIDED, HOWEVER, that after any
such stockholder approval, no amendment shall be made which would have a
material adverse effect on the stockholders of the Company or the stockholders
of PacifiCare without the further approval of such stockholders. This Agreement
may not be amended except by an instrument in writing signed on behalf of each
of the parties hereto.
8.2 WAIVER.
(a) No failure on the part of any party to exercise any power, right,
privilege or remedy under this Agreement, and no delay on the part of any party
in exercising any power, right, privilege or remedy under this Agreement, shall
operate as a waiver of such power, right, privilege or remedy; and no single or
partial exercise of any such power, right, privilege or remedy shall preclude
any other or further exercise thereof or of any other power, right, privilege or
remedy.
(b) No party shall be deemed to have waived any claim arising out of
this Agreement, or any power, right, privilege or remedy under this Agreement,
unless the waiver of such claim, power, right, privilege or remedy is expressly
set forth in a written instrument duly executed and delivered on behalf of such
party; and any such waiver shall not be applicable or have any effect except in
the specific instance in which it is given.
8.3 NO SURVIVAL OF REPRESENTATIONS AND WARRANTIES. None of the
representations and warranties contained in this Agreement or in any instrument
delivered pursuant to this Agreement shall survive the Merger.
8.4 ENTIRE AGREEMENT; COUNTERPARTS; APPLICABLE LAW. This Agreement and
the other agreements referred to herein and the Confidentiality Agreement dated
as of July 22, 1996 between PacifiCare and the Company constitute the entire
agreement and supersede all prior agreements and understandings, both written
and oral, among or between any of the parties with respect to the subject matter
hereof. This Agreement may be executed in several counterparts, each of which
shall be deemed an original and all of which shall constitute one
64
<PAGE>
and the same instrument, and shall be governed in all respects by the laws of
the State of Delaware without regard to its conflicts of laws principles.
8.5 ATTORNEYS' FEES. In any action at law or suit in equity to enforce
this Agreement or the rights of any of the parties hereunder, the prevailing
party in such action or suit shall be entitled to receive a reasonable sum for
its attorneys' fees and all other reasonable costs and expenses incurred in such
action or suit.
8.6 ASSIGNABILITY. This Agreement shall be binding upon, and shall be
enforceable by and inure solely to the benefit of, the parties hereto and their
respective successors; PROVIDED, HOWEVER, that this Agreement may not be
assigned by any party without the prior written consent of the other parties,
and any attempted assignment without such consent shall be void and of no
effect. Nothing in this Agreement, express or implied, is intended to or shall
confer upon any person except the parties hereto and their respective successors
any right, benefit or remedy of any nature whatsoever under or by reason of this
Agreement.
8.7 NOTICES. All notices and other communications pursuant to this
Agreement shall be in writing and shall be deemed given if delivered personally,
telecopied, sent by nationally-recognized, overnight courier or mailed by
registered or certified mail (return receipt requested), postage prepaid, to the
parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
To PacifiCare:
PacifiCare Health Systems, Inc.
5995 Plaza Drive
Cypress, California 90630
Attention: President
Telephone: (714) 952-1121
Fax: (714) 220-3725
65
<PAGE>
with a copy to:
Konowiecki & Rank
First Interstate World Center
633 West 5th Street, Suite 3500
Los Angeles, California 90071-2007
Attention: Joseph S. Konowiecki, Esq.
Telephone: (213) 229-0990
Fax: (213) 229-0992
and
Cooley Godward Castro Huddleson & Tatum
Five Palo Alto Square
Palo Alto, California 94306
Attention: Michael R. Jacobson, Esq.
Telephone: (415) 843-5000
Fax: (415) 857-0663
To Holding:
N-T Holdings, Inc.
c/o PacifiCare Health Systems, Inc.
5995 Plaza Drive
Cypress, California 90630
Attention: President
Telephone: (714) 952-1121
Fax: (714) 220-3725
with a copy to:
Cooley Godward Castro Huddleson & Tatum
Five Palo Alto Square
Palo Alto, California 94306
Attention: Michael R. Jacobson, Esq.
Telephone: (415) 843-5000
Fax: (415) 857-0663
66
<PAGE>
and:
Konowiecki & Rank
First Interstate World Center
633 West 5th Street, Suite 3500
Los Angeles, California 90071-2007
Attention: Joseph S. Konowiecki, Esq.
Telephone: (213) 229-0990
Fax: (213) 229-0992
To the Company:
FHP International Corporation
9900 Talbert Avenue
Fountain Valley, California 92708-8000
Attention: President
Telephone: (714) 378-5588
Fax: (714) 378-5089
with a copy to:
Sheppard, Mullin, Richter & Hampton LLP
333 South Hope Street, 48th Floor
Los Angeles, California 90017
Attention: John D. Hussey, Esq.
Telephone: (213) 620-1780
Fax: (213) 620-1398
To the Company Sub or Neptune Sub:
Tree Acquisition Corp. or Neptune Merger Corp. (as the case may be)
c/o PacifiCare Health Systems, Inc.
5995 Plaza Drive
Cypress, California 90630
Attention: President
Telephone: (714) 952-1121
Fax: (714) 220-3725
67
<PAGE>
with a copy to:
Konowiecki & Rank
First Interstate World Center
633 West 5th Street, Suite 3500
Los Angeles, California 90071-2007
Attention: Joseph S. Konowiecki, Esq.
Telephone: (213) 229-0990
Fax: (213) 229-0992
and
Cooley Godward Castro Huddleson & Tatum
Five Palo Alto Square
Palo Alto, California 94306
Attention: Michael R. Jacobson, Esq.
Telephone: (415) 843-5000
Fax: (415) 857-0663
All such notices and other communications shall be deemed to have been received
(a) in the case of personal delivery, on the date of such delivery, (b) in the
case of a telecopy, when the party receiving such telecopy shall have
confirmed receipt of the communication, (c) in the case of delivery by
nationally-recognized, overnight courier, on the business day following dispatch
and (d) in the case of mailing, on the fifth business day following such
mailing.
8.8 COOPERATION. Each of the Company and PacifiCare agrees to cooperate
fully with the other and to execute and deliver such further documents,
certificates, agreements and instruments and to take such other actions as may
be reasonably requested by the other to evidence or reflect the Mergers and to
carry out the intent and purposes of this Agreement.
8.9 CERTAIN TERMS. As used in this Agreement:
(a) the word "person" refers to any (i) individual, (ii) corporation,
partnership, limited liability company or other entity, or (iii) Governmental
Authority; and
(b) the words "include" and "including," and variations thereof,
shall not be deemed to be terms of limitation, but rather shall be deemed to be
followed by the words "without limitation."
68
<PAGE>
(c) representations or warranties made to the "knowledge of" or to
the "knowledge of the Company" or "knowledge of PacifiCare" shall include only
matters that are known or should have been known by the officers of those
corporations.
8.10 TITLES. The titles and captions of the Articles and Sections of this
Agreement are included for convenience of reference only and shall have no
effect on the construction or meaning of this Agreement.
8.11 ARTICLES, SECTIONS AND EXHIBITS. Except as otherwise indicated, all
references in this Agreement to "Articles," "Sections" and "Exhibits" are
intended to refer to Articles and Sections of this Agreement and Exhibits to
this Agreement.
8.12 JURISDICTION. Any suit, action or proceeding seeking to enforce any
provision of, or based on any matter arising out of or in connection with, this
Agreement or the transactions contemplated by this Agreement may be brought
against any of the parties in the [United States District Court for the Central
District of California or any state court sitting in Orange County, California],
and each of the parties hereto hereby consents to the exclusive jurisdiction of
such courts (and of the appropriate appellate courts) in any such suit, action
or proceeding and waives any objection to venue laid therein. Process in any
suit, action or proceeding may be served on any party anywhere in the world,
whether within or without the State of California. Without limiting the
generality of the foregoing, each party hereto agrees that service of process
upon such party at the address referred to in Section 8.7, together with written
notice of such service to such party, shall be deemed effective service of
process upon such party.
8.13 COUNTERPARTS; EFFECTIVENESS. This Agreement may be signed in any
number of counterparts, each of which shall be an original, with the same effect
as if the signatures thereto and hereto were upon the same instrument. This
Agreement shall become effective when each party hereto shall have received
counterparts hereof signed by all of the other parties hereto.
8.14 SCHEDULES. Any disclosure on a PacifiCare Disclosure Schedule or
Company Disclosure Schedule made with respect to an identified Section shall be
deemed to be a disclosure for the purpose of other sections of the applicable
Disclosure Schedule to which such disclosure is applicable on its face.
69
<PAGE>
IN WITNESS WHEREOF, the parties hereby have executed this Agreement and Plan of
Reorganization as of the date first above written.
PACIFICARE HEALTH SYSTEMS, INC.
By: /s/ Alan Hoops
-----------------------------------------
Its: President
N-T HOLDINGS, INC.
By: /s/ Alan Hoops
-----------------------------------------
Its: President
NEPTUNE MERGER CORP.
By: /s/ Alan Hoops
-----------------------------------------
Its: President
TREE ACQUISITION CORP.
By: /s/ Alan Hoops
-----------------------------------------
Its: President
FHP INTERNATIONAL CORPORATION
By: /s/ Westcott W. Price III
-----------------------------------------
Its: President
<PAGE>
FOR IMMEDIATE RELEASE
Contact: BEN SINGER RIA MARIE CARLSON
PACIFICARE HEALTH SYSTEMS FHP INTERNATIONAL
MEDIA RELATIONS MEDIA RELATIONS
(714) 229-2825 (714) 378-5750
WAYNE LOWELL CHARLIE ELDREDGE
PACIFICARE HEALTH SYSTEMS FHP INTERNATIONAL
INVESTOR RELATIONS INVESTOR RELATIONS
(714) 952-1121, EXT. 3200 (714) 825-6905
PACIFICARE HEALTH SYSTEMS ANNOUNCES AGREEMENT TO ACQUIRE
FHP INTERNATIONAL CORPORATION
ORANGE COUNTY, CALIFORNIA HEALTH PLANS TO CREATE ONE OF THE
NATION'S LARGEST MANAGED HEALTH CARE SERVICES COMPANY
IN TERMS OF PREMIUM REVENUE
CYPRESS, CALIF., AUGUST 5, 1996 -- PacifiCare Health Systems, Inc., (NASDAQ:
PHSYA and PHSYB) and FHP International Corporation (NASDAQ: FHPC and FHPCA)
announced today that PacifiCare has entered into a definitive Agreement and Plan
of Reorganization with FHP International, the Fountain Valley-based health care
services company, in which PacifiCare will acquire FHP. The combined company
will serve nearly 4 million commercial and Medicare members in 15 states and
Guam. Revenue of the combined company would total more than $8.5 billion. The
transaction is subject to various federal and state regulatory approvals,
approval of the stockholders of both companies, and other customary conditions.
The Boards of both companies unanimously approved the proposed 2.1 billion
dollar transaction this weekend. Terms of the transaction call for holders of
FHP Common Stock to receive a package of consideration equal, at present market
prices, to approximately $35.00 per share of FHP Common Stock held of which
$17.50 per FHP share of the total consideration will be paid in cash.
PacifiCare will also issue to holders of FHP Common Stock a total of 2,300,000
shares of PacifiCare's Class A Common Stock, with the remainder being paid in
shares of PacifiCare's Class B Common Stock.
Common and Preferred shareholders will also receive rights to purchase FHP's
ownership of the stock of Talbert Medical Management Corporation, to be
distributed following the completion of the merger.
The transaction will be accounted for as a purchase and is designed to qualify
as a tax-free exchange for the stock portion, according to PacifiCare officials.
The current operations of PacifiCare in California, Florida, Oklahoma, Oregon,
Texas and Washington will be expanded to include operations in
-1-
<PAGE>
Arizona, Colorado, Illinois, Indiana, Kentucky, New Mexico, Nevada, Ohio, Utah
and Guam.
"This is an extraordinary and unique opportunity," said Alan Hoops, PacifiCare's
president and chief executive officer. "The combination of two of the country's
leading managed health care services companies will result in better and more
comprehensive services for our members, with a significant concentration in the
western United States. With this transaction, PacifiCare will have a membership
and revenue platform to set a new standard for managed care now and in the
future -- one that makes it easier for doctors to do what they do best, practice
quality medicine. We look forward to more broad-based partnerships with
physicians and improved services to consumers.
"We and FHP have had much in common," said Hoops. "Our strategies, markets and
philosophy towards prepaid health care provide a solid foundation for
improvement in both the cost and quality of health care services. I believe
these similarities will be pivotal in our success in merging these two
companies, producing an even more stronger new company."
"For our members and physician partners, I truly believe this will benefit them
in the near and, more important, long term," added Westcott W. Price, III, FHP's
president and CEO. "PacifiCare has demonstrated its ability to succeed through
its expanding efforts and we have always respected them. PacifiCare has been an
innovative company -- achieving success through the growth of its Medicare risk
plan, Secure Horizons, and through its relationships with physician groups that
comprise its provider networks in six states. We are confident these qualities
will make them an excellent steward for our membership and partner with our
providers."
Price noted that FHP shareholders will also receive the opportunity to acquire
Talbert Medical Management Corporation stock. "Talbert will be a separately
functioning operation from FHP though owned by FHP shareholders," said Price.
"They will also continue to provide care to our members throughout the
transition period and ultimately be a contract provider in PacifiCare's
network."
FHP International Corporation is a diversified health care services company
which, through its HMO subsidiaries, serves nearly 1.9 million members in 11
states and Guam. The company also operates a health and life indemnity
insurer, a workers' compensation insurer, and a national preferred provider
organization. FHP is one of the largest providers of health care services for
Medicare beneficiaries in the United States.
PacifiCare Health Systems is one of the nation's leading managed health care
services companies. Primary operations include managed care products for
employer groups, and Medicare and Medicaid beneficiaries in California, Florida,
Oklahoma, Oregon, Texas and Washington serving 2 million members. Other
specialty managed care operations include Medicare risk management services,
pharmacy benefit management, military health care management, coordination of
managed care products for multi-region employers, health
-2-
<PAGE>
and life insurance, behavioral health, dental and vision services and health
promotion.
PacifiCare has received a commitment letter from Bank of America to provide
financing for the transaction. Acting as financial advisors for the parties
involved in this transaction were: Dillon, Read & Co., Inc., Merrill Lynch,
Pierce, Fenner & Smith Incorporated and Dean Witter Reynolds Inc.
# # #
THERE WILL BE A MEDIA TELECONFERENCE TODAY AT 11:00. (PDT) WITH REPRESENTATIVES
FROM BOTH COMPANIES. THE PNONE NUMBER TO PARTICIPATE ON THE CALL IS 1-800-434-
3018.
-3-
