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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: June 1, 1995
(Date of the Earliest Event Reported)
HEALTHSOURCE, INC.
(Exact name of Registrant as specified in its charter)
New Hampshire 1-11538 02-0387748
(State or other (Commission File (I.R.S. Employer
jurisdiction of Number) Identification Number)
incorporation)
Two College Park Drive
Hooksett, New Hampshire 03106
(Address of principal executive offices) (Zip Code)
603/268-7000
(Registrant's Telephone Number, including area code)
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Item 1. Not applicable.
Item 2. ACQUISITION OR DISPOSITION OF ASSETS.
(i) Background.
On June 1, 1995, Healthsource, Inc. (the "Company")
announced that it had closed its previously-announced
agreement to acquire the group health, HMO and third
party administration business (the "Acquired
Business") of Provident Life and Accident Insurance
Company of America ("Provident") of Chattanooga,
Tennessee, effective as of May 1, 1995, for $231
million in cash and securities (the "Acquisition").
The Acquired Business has $76 million in tangible net
equity, representing the assumption of approximately
$209 million in liabilities and the acquisition of
approximately $285 million in assets. Healthsource
paid $131 million in cash, subject to certain
post-closing adjustments, and issued to Provident
1,000,000 shares of non-voting, non-convertible Class
A Cumulative Preferred Stock with a face value of
$100 per share. The Preferred Stock will pay a
dividend of 6.25% for an initial two year period,
during which the Company will have the right to
redeem such stock for cash or by issuing a ten year
subordinated note bearing a market interest rate,
following which the dividend rate will be reset to a
market rate. The cash portion of the purchase price
was paid in part from cash on hand and in part from a
line of credit under the Credit Agreement dated as of
March 28, 1995 with Chase Manhattan Bank as
Administrative Agent.
The Company purchased the Acquired Business for a
lower purchase price than the original $310 million
purchase price called for in the Asset and Stock
Purchase Agreement of December 20, 1994 due to the
negotiated effect of certain formulaic adjustments
specified in such agreement and to the Acquired
Business having had lower earnings during 1994 than
guaranteed in such agreement.
The Acquisition took the form of a taxable purchase
of assets. In conjunction with the Acquisition, the
Company and Provident also entered into an agreement
expiring in December 1997 under which the Company
will provide certain administrative services relating
to Provident's retained stop-loss business for which
it will receive cost and performance-based
compensation. The Company and Provident also entered
into a disability services agreement with a term
expiring in December 1997 under which the Company
will provide consulting services for Provident's
disability
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products in return for monthly fees of approximately
$83,000 plus certain specified costs.
The Company entered into a non-competition agreement
pursuant to which it has agreed not to write for its
own account certain types of medical stop-loss
insurance, group long- and short-term disability
insurance or group life insurance for certain
restricted periods between three and five years as
specified in the agreement. Provident also entered
into a non-competition agreement pursuant to which it
agreed not to engage in the types of business
conveyed to the Company for certain restricted
periods between three and five years as specified in
the agreement. The non-competition agreements are
both subject to several exceptions as specified in
the agreements.
In connection with the Acquisition, the Company has
appointed Provident's President and Chief Executive
Officer, J. Harold Chandler, to serve on the
Company's Board of Directors.
(ii) The Acquired Business.
The Acquired Business insures or administers health
care benefits for an estimated 2.4 million lives,
over 800,000 of whom are concentrated in the four
Southeastern states of North Carolina, South
Carolina, Tennessee and Georgia. The Company will
continue the Acquired Business through its
newly-formed and licensed insurance and third party
administration companies, Healthsource Provident
Insurance Company and Healthsource Provident
Administrators, Inc.
(a) Healthsource Provident Insurance Company.
In connection with the Acquisition, the Company
formed a new insurance company, Healthsource
Provident Insurance Company ("HPIC") licensed in the
State of Tennessee and intended to be licensed in all
50 states, which at Closing had $35 million in net
tangible equity and was capitalized with $173 million
in investment grade assets and cash and $163 million
in total liabilities related to the group medical
insurance business acquired from Provident. HPIC
sells minimum premium experience-rated group health
insurance to larger employer groups and also sells
medical insurance to small and medium sized employer
groups (the "Select Group Business").
HPIC markets minimum premium and experience-rated
group health insurance to employers with more than
150 employees. With this type of coverage, the
employer bears all or a substantial portion of the
claims risk. Premiums for each
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experience rated case are set based on the actual
claims experience of the employer over prior periods,
adjusted for expected claims for the coming year,
plus an amount necessary to cover administrative
expenses and profit. At the end of a policy year, an
employer's account will show a surplus or deficit
balance depending on actual claims experience. Excess
balances for a current year are first applied to
prior deficits, if any, then either held in reserve
to offset any future deficits or returned to the
employer. In cases where deficit balances exist,
premiums for future periods are sought to be adjusted
so that HPIC may recover the deficit provided the
employer maintains its relationship with HPIC. There
is no assurance that any such deficit can ultimately
be recovered.
The current market of the Select Group Business is
primarily employers located in the southeastern
United States and having approximately 25 to 150
employees, although in some cases larger employers
may choose fully-insured group health plans.
Premiums for the Select Group Business represent
approximately 27% of the premium revenue of the
entire group health insurance business for the year
ended December 31, 1994. Premiums for Select Group
Business customers are based on expected claims of a
pool of similar risks plus provisions for
administrative expenses and profit.
Profitability of the Select Group Business is
affected by premium pricing competition, deviations
of actual claims experience from expected claims
experience and the ability to control administrative
expenses. Claims experience for the Select Group
Business is primarily a function of health care cost
inflation and morbidity rates. In general,
experience-rated group health coverages have narrower
profit margins and represent less risk to HPIC than
fully-insured Select Group Business sold to small and
medium employers. The Select Group Business market
is characterized by wide swings in operating results.
Until its licensure in each state, HPIC will
indemnity reinsure the insurance policies issued by
Provident related to the acquired group medical
insurance business. HPIC currently insures
approximately 390,000 lives, and for the year ended
December 31, 1994, the group medical insurance
business had $238 million in premium revenue.
(b) Healthsource Provident Administrators, Inc..
Also in connection with the Acquisition, the Company
formed a new third party administration company,
Healthsource Provident Administrators, Inc. ("HPA"),
licensed and headquartered in Tennessee and intended
to be licensed in
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all states where licensing is required. HPA
administers claims for self-funded, administrative
services only ("ASO") employer accounts with an
estimated total of approximately 2,000,000 covered
lives and will administer claims for the acquired
group medical insurance business until licensure of
HPIC in each state.
HPA markets ASO contracts to large employers that
elect to self-insure their group accident and health
and dental plans. HPA acts as the claims processor
for the contracting employer in exchange for fee
income related to claim volume. Services provided
under these contracts also include actuarial,
record-keeping, managed health care and other cost
containment services provided by PHCP and other
Company affiliates. Since HPA bears little or
no risk and realizes no underwriting or investment
income under ASO contracts, profitability depends
primarily upon controlling administrative expenses.
For the year ended December 31, 1994, Provident had
$2.7 billion in premium equivalents and approximately
$110 million in fee income related to the third party
claims administration business transferred to HPA.
(c) Managed Care/HMOs.
The Company also acquired in the Acquisition the
stock of Provident Health Care Plans, Inc. ("PHCP"),
the holding company for Provident's four HMOs located
in North Carolina, South Carolina, Tennessee and
Georgia.
In the states of Tennessee, North Carolina, South
Carolina and Georgia, PHCP owned PPO networks and
HMO coverage, together with other managed care
products and services (such as pre-admission
authorization and management of catastrophic claims),
are made available to employers primarily through
PHCP. In other areas of the country PHCP and HPA
generally affiliate with third party PPO networks to
make such network services available to its customers
along with its own managed care services. The
acquired HMOs have been in a start-up phase and
covered only approximately 10,000 lives on May 1,
1995.
(iii) Marketing.
The Acquired Business employs field sales and service
representatives in 19 sales offices throughout the
United States. Field sales representatives sell
large case group health products to employers on a
direct basis and through consultants, brokers and
independent general agents. The majority of
experience-rated cases and ASO contracts are
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sold through national brokers and consultants. The
principal elements necessary for success in the large
case market are quality of service (particularly with
respect to claims payment administration) and
effective management of health care costs.
The Select Group Business, fully-insured products
generally are sold by employees of HPA and its
affiliates and through local and regional brokers and
agents active in the employee benefits market. The
principal element necessary for success in selling
these products is competitive premium rates. Broker
relationships and the quality of customer service are
also important factors.
(iv) Operations.
Most of the operations of the Acquired Business,
including claim administration, are located at its
two offices in greater Chattanooga, Tennessee where
1,175 people are employed. An additional regional
claims office in Gastonia, North Carolina employs 150
people.
The Acquired Business also operates six (6) other
claims offices located throughout the United States,
staffed with approximately 571 claims personnel. The
Acquired Business has an additional 273 sales and
other full-time employees.
(v) Properties.
In the Acquisition, the Company acquired Provident's
claims processing facilities located in Hamilton
Village, Tennessee and Gastonia, North Carolina at
Provident's book value previously estimated at $6.8
million. The Company also leases a portion of
Provident's headquarters facilities in Chattanooga,
Tennessee for a four-year term (see Exhibit 10.4)
covering approximately 200,000 square feet at an
annual rent of approximately $2.8 million The
Acquired Business also occupies field claims and
sales offices located in 23 leased locations in 13
states.
(vi) Data Processing.
Although the Company has employed approximately 136
computer programmers and support personnel and has
acquired computer software, computer terminals and
related hardware as part of the Acquired Business,
Provident will continue to provide central data
processing services to the Company from its main
computer center in Chattanooga, Tennessee pursuant to
a Computer Services Agreement. The Agreement has a
four year term, terminable with one year's prior
notice by the Company and provides that the Company
will generally pay Provident's costs of providing
such services.
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Item 3 - 4. Not applicable.
Item 5. OTHER EVENTS.
On May 16, 1995, the Company's Texas affiliate, Healthsource
North Texas, Inc. ("Healthsource North Texas"), was licensed
to operate as an HMO in six counties in north-central Texas.
Healthsource North Texas has commenced operations and is
developing its membership. Healthsource North Texas is
located in Fort Worth and is owned 70% by the Company and 30%
by All Saints Health Systems, Inc., an integrated health care
delivery system that includes two hospitals with 580 beds
among them and several ambulatory care facilities.
Healthsource also announced that its agreement to acquire
Health New England, Inc. ("HNE"), a managed care organization
serving western Massachusetts, was terminated on June 1, 1995
due to the termination of negotiations regarding a hospital
contract with HNE's largest hospital provider and shareholder.
Item 6. Not applicable.
Item 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial statements of businesses acquired.
Audited statements of financial condition for the Acquired
Business at December 31, 1993 and 1994 with the statements
of income, owner's equity and cash flows for the period
ended December 31, 1994 are filed herewith. It is
impracticable to file the other required financial statements
at this time. The Company will file such financial statements
by amendment as soon as practicable but no later than 60 days
from the date this Current Report on Form 8-K must be filed
(June 16, 1995).
(b) Pro forma financial information.
It is impracticable to file the required pro forma financial
information at this time. The Company will file such pro
forma financial information by amendment at the time of
filing the full financial statements referred to in Item 7(a)
above.
(c) Exhibits.
7
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4.1 Articles of Amendment to the Healthsource, Inc.
Articles of Incorporation designating the rights,
privileges and limitations of the Class A Cumulative
Preferred Stock issued to Provident Life and Accident
Insurance Company.
10.1 Third Closing Amendment to Asset and Stock Purchase
Agreement dated May 31, 1995 among Provident Life and
Accident Insurance Company of America, et al. and
Healthsource, Inc.
10.2 Registration Rights Agreement dated May 31, 1995
between Provident Life and Accident Insurance Company
of America, Inc. and Healthsource, Inc.
10.3 Non-Competition Agreement dated May 31, 1995 between
Healthsource, Inc. and Provident Life and Accident
Insurance Company of America
10.4 Lease dated as of May 1, 1995 between Provident Life
and Accident Insurance Company and Healthsource
Provident Administrators, Inc. relating to a certain
property located at One Fountain Square, Chattanooga,
Tennessee.
23.1 Consent of Ernst & Young re audited 1994 financial
statements
Item 8. Not applicable.
SIGNATURE
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.
HEALTHSOURCE, INC.
Dated: June 14, 1995
By: /s/ Thomas M. Congoran
----------------------------
Thomas M. Congoran
Chief Financial Officer
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AUDITED FINANCIAL STATEMENTS
Provident Life and Accident Insurance
Company of America and Subsidiaries'
Medical Services Operations
December 31, 1994
ERNST& YOUNG LLP
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<TABLE>
AUDITED FINANCIAL STATEMENTS
PROVIDENT LIFE AND ACCIDENT INSURANCE COMPANY OF AMERICA AND SUBSIDIARIES'
MEDICAL SERVICES OPERATIONS
DECEMBER 31, 1994
<S> <C>
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Statements of Financial Condition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Statement of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Statement of Owner's Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
</TABLE>
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[LOGO] ERNST & YOUNG LLP 800 Krystal Building Phone: 615/756-3461
One Union Square Fax: 615/267-0304
Chattanooga, Tennessee 37402
REPORT OF INDEPENDENT AUDITORS
We have audited the accompanying statements of financial condition of Provident
Life and Accident Insurance Company of America and Subsidiaries' Medical
Services Operations as of December 31, 1994 and 1993, and the related
statements of income, owner's equity, and cash flows for the year ended
December 31, 1994. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Provident Life and Accident
Insurance Company of America and Subsidiaries' Medical Services Operations at
December 31, 1994 and 1993, and the results of its operations and cash flows
for the year ended December 31, 1994, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the financial statements, during 1994 the Company
changed its method of accounting for certain debt and equity securities.
/s/ Ernst & Young LLP
Chattanooga, Tennessee
May 12, 1995
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<TABLE>
STATEMENTS OF FINANCIAL CONDITION
PROVIDENT LIFE AND ACCIDENT INSURANCE COMPANY OF AMERICA AND SUBSIDIARIES' MEDICAL SERVICES OPERATIONS
<CAPTION>
December 31
1994 1993
(in thousands of dollars)
---------------------------------------------
<S> <C> <C>
ASSETS
Investment Pool-Note 1 $215,530 $233,863
Cash and Bank Deposits 5,482 5,948
Accounts Receivable 50,738 48,643
Premiums Receivable 18,734 20,712
Accrued Investment Income 3,987 4,182
Property and Equipment - at cost less accumulated depreciation 26,844 26,471
Intangible Assets 102,837 113,989
Miscellaneous 326 _
-------- --------
TOTAL ASSETS $424,478 $453,808
-------- --------
</TABLE>
See notes to financial statements.
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<TABLE>
STATEMENTS OF FINANCIAL CONDITION - CONTINUED
PROVIDENT LIFE AND ACCIDENT INSURANCE COMPANY OF AMERICA AND SUBSIDIARIES' MEDICAL SERVICES OPERATIONS
<CAPTION>
December 31
1994 1993
(in thousands of dollars)
---------------------------------------------
<S> <C> <C>
LIABILITIES AND OWNER'S EQUITY
Policy and Contract Benefits $ 78,275 $ 89,550
Unearned Premiums 910 -
Experience Rating Refunds 46,190 56,349
Policyholders' Funds 25,971 11,039
Deferred Federal Income Tax Liability 22,060 23,835
Cash Overdrafts 40,087 29,064
Deposits from Uninsured Accounts 11,025 11,711
Other Liabilities 8,033 7,301
------- -------
TOTAL LIABILITIES 232,551 228,849
------- -------
COMMITMENTS AND CONTINGENT LIABILITIES--NOTE 7
OWNER'S EQUITY
Allocated Capital 197,087 224,959
Net Unrealized Loss on Securities--Note 1 (5,160) _
------- -------
TOTAL OWNER'S EQUITY 191,927 224,959
------- -------
TOTAL LIABILITIES AND OWNER'S EQUITY $424,478 $453,808
======== ========
</TABLE>
See notes to financial statements.
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<TABLE>
STATEMENT OF INCOME
PROVIDENT LIFE AND ACCIDENT INSURANCE COMPANY OF AMERICA AND SUBSIDIARIES' MEDICAL SERVICES OPERATIONS
<CAPTION>
Year Ended December 31
1994
(in thousands of dollars)
-------------------------
<S> <C>
REVENUE
Premium Income $238,203
Net Investment Income 18,131
Net Realized Investment Gains 332
ASO Fees 108,949
Other Income 28,393
--------
TOTAL REVENUE 394,008
--------
BENEFITS AND EXPENSES
Policy and Contract Benefits 178,373
Change in Reserves 1,652
Salaries 93,176
Other Operating Expenses 108,081
--------
TOTAL BENEFITS AND EXPENSES 381,282
--------
INCOME BEFORE FEDERAL INCOME TAXES 12,726
--------
FEDERAL INCOME TAXES
Current 3,386
Deferred 1,004
--------
TOTAL FEDERAL INCOME TAXES 4,390
--------
NET INCOME $ 8,336
=======
</TABLE>
See notes to financial statements.
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<TABLE>
STATEMENT OF OWNER'S EQUITY
PROVIDENT LIFE AND ACCIDENT INSURANCE COMPANY OF AMERICA AND SUBSIDIARIES' MEDICAL SERVICES OPERATIONS
<CAPTION>
Year Ended December 31
1994
(in thousands of dollars)
-------------------------
<S> <C>
ALLOCATED CAPITAL
Balance at Beginning of Year $224,959
Return of Allocated Capital (36,208)
Net Income 8,336
--------
Balance at End of Year 197,087
--------
NET UNREALIZED LOSS ON SECURITIES
Balance at Beginning of Year -
Adjustment for the Application of SFAS 115-Note 1 9,258
Change During Year (14,418)
--------
Balance at End of Year (5,160)
--------
TOTAL OWNER'S EQUITY $191,927
========
</TABLE>
See notes to financial statements.
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<TABLE>
STATEMENT OF CASH FLOWS
PROVIDENT LIFE AND ACCIDENT INSURANCE COMPANY OF AMERICA AND SUBSIDIARIES' MEDICAL SERVICES OPERATIONS
<CAPTION>
Year Ended December 31
1994
(in thousands of dollars)
-------------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 8,336
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Depreciation and Amortization 16,881
Net Realized. Investment Gains (332)
Accounts Receivable (2,095)
Premiums Receivable 1,978
Accrued Investment Income 195
Insurance Reserves and Liabilities (5,592)
Federal Income Taxes 1,004
Change in Cash Overdrafts 11,023
Other (280)
-------
NET CASH PROVIDED BY OPERATING ACTIVITIES 31,118
-------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Sales of Investment Pool 15,204
Proceeds from Maturities of Investment Pool 26,522
Purchase of Investment Pool (31,000)
Purchase of Property and Equipment (6,102)
--------
NET CASH PROVIDED BY INVESTING ACTIVITIES 4,624
--------
CASH FLOWS FROM FINANCING ACTIVITIES
Return of Allocated Capital (36,208)
--------
NET CASH USED BY FINANCING ACTIVITIES (36,208)
--------
NET DECREASE IN CASH AND BANK DEPOSITS (466)
CASH AND BANK DEPOSITS AT BEGINNING OF YEAR 5,948
--------
CASH AND BANK DEPOSITS AT END OF YEAR $ 5,482
========
</TABLE>
See notes to financial statements.
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NOTES TO FINANCIAL STATEMENTS
PROVIDENT LIFE AND ACCIDENT INSURANCE COMPANY OF AMERICA AND SUBSIDIARIES'
MEDICAL SERVICES OPERATIONS
NOTE 1-SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The accompanying financial statements have been
prepared on the basis of generally accepted accounting principles. Such
accounting principles differ from statutory accounting practices prescribed or
permitted by state regulatory authorities. The financial statements include the
accounts of the Medical Services Operations (Medical Services) of the Group
Department of Provident Life and Accident Insurance Company of America and
Subsidiaries (the Company). Medical Services is not a separate legal entity but
is an operating division of the Group Department of the Company's wholly-owned
subsidiaries, Provident Life and Accident Insurance Company and Provident Life
and Casualty Insurance Company. Medical Services includes those products which
involve the delivery of healthcare to employee groups and which will be
transferred to Healthsource, Inc. under a purchase agreement dated December 20,
1994 (see Note 7).
OPERATIONS: Medical Services does business in the fifty states, the District of
Columbia, Puerto Rico, and Canada, Medical Services operates in the health
insurance business. As insurance companies, Provident Life and Accident
Insurance Company and Provident Life and Casualty Insurance Company are subject
to regulation by insurance regulatory bodies which, among other things,
requires the maintenance of minimum capital and surplus and places restrictions
on the amount of dividends which can be paid without regulatory approval.
INVESTMENTS: The investment pool reported in the statements of financial
condition represents Medical Services' portion of investments owned by the
Group Department of the Company and represents the invested assets necessary to
support the liabilities and allocated capital of Medical Services. Individual
investments of the Group Department are not specifically allocated to any
operating division of the Group Department but are held and managed to support
the operations of the Group Department as a whole. The Medical Services'
portion of Group Department investments is 28.1 percent and 29.0 percent at
December 31, 1994 and 1993, respectively. Net investment income and net
realized investment gains reported in the statement of income represent Medical
Services' pro rata share of net investment income and net realized investment
gains of the Group Department. Amounts reported in Notes 2 and 3 represent
total Group Department investments. The investments included in the investment
pool are reported as follows:
Available-for-Sale Fixed Maturity Securities are reported at fair value.
Held-to-Maturity Fixed Maturity Securities are generally reported at amortized
cost.
Equity Securities are reported at fair value.
Mortgage Loans are generally carried at the unpaid balance.
Real Estate other than foreclosed real estate is carried at cost less
accumulated depreciation which is calculated using principally the
straight-line method. Foreclosed real estate is carried at lower of cost or
fair value, giving consideration to current occupancy rates and economic
conditions, less accumulated depreciation from the date of foreclosure.
Short-term Investments are carried at cost.
Fixed maturity securities include bonds and redeemable preferred stocks. Equity
securities include common stocks and nonredeemable preferred stocks. Fixed
maturity and equity securities not bought and held for the purpose of selling
in the near term but for which the Company does not have the positive intent
and ability to hold to maturity are classified as available-for-sale. Fixed
maturity securities that the Company has the positive intent and ability to
hold to maturity are classified as held-to-maturity. The Company determines the
appropriate classification of fixed maturity securities at the time of purchase.
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NOTES TO FINANCIAL STATEMENTS - Continued
PROVIDENT LIFE AND ACCIDENT INSURANCE COMPANY OF AMERICA AND SUBSIDIARIES'
MEDICAL SERVICES OPERATIONS
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Realized investment gains and losses, which are reported as a component of
revenue in the statement of income, are based upon specific identification of
the investments sold. At the time a decline in the value of an investment is
determined to be other than temporary, a provision for loss is recorded which
is included in realized investment gains and losses. Unrealized holding gains
and losses, resulting from carrying available-for-sale securities at fair
value, are reported in owner's equity, net of deferred tax credits of
$2,779,000 at December 31, 1994.
PROPERTY AND EQUIPMENT: Property and equipment is depreciated on the
straight-line method over its estimated useful life. The accumulated
depreciation for property and equipment was $24,655,000 and $18,926,000 as of
December 31, 1994 and 1993, respectively.
INTANGIBLE ASSETS: Intangible assets have been recorded in connection with the
acquisition of the health insurance operations of an insurance company. The
balance is amortized on the straight-line method over the estimated life of the
insurance in force. The amortization periods do not exceed 20 years for
large-case group health business and 10 years for small-case group health
operations. Accumulated amortization was $77,683,000 and $66,531,000 as of
December 31, 1994 and 1993, respectively.
REVENUE RECOGNITION: The amounts collected from policyholders are recognized as
premium income over the premium paying period and are reported net of
experience rating refunds and unearned premiums. Policyholders' funds represent
funds deposited by contract holders and are not included in revenue.
POLICY AND CONTRACT BENEFITS: Policy and contract benefits are based on
reported losses and estimates of incurred but not reported losses and related
claim adjustment expenses. These estimates are subject to the effects of trends
in claim severity and frequency. Although considerable variability is inherent
in such estimates, management believes that such reserves are adequate. These
estimates are continually reviewed and adjusted as necessary as experience
develops or new information becomes known; such adjustments are included in
current operations.
POLICYHOLDERS' FUNDS: Policyholders' funds represent customer deposits plus
interest credited at contract rates.
OTHER OPERATING EXPENSES: Medical Services is provided certain administrative,
actuarial, and investment services from the Company. These services are
provided at cost.
FEDERAL INCOME TAXES: Deferred taxes have been recorded for significant
temporary differences between financial statement income and taxable income.
CHANGES IN ACCOUNTING PRINCIPLES:
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 115 (SFAS 115), ACCOUNTING FOR
CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES
SFAS 115 addresses the accounting and reporting for investments in fixed
maturity securities and for equity securities with readily determinable fair
values. SFAS 115 requires these investments to be classified into three
categories and accounted for as follows:
(1) Fixed maturity securities that the Company has the positive intent and
ability to hold to maturity are classified as held-to-maturity
securities and reported at amortized cost.
(2) Fixed maturity and equity securities that are bought and held
principally for the purpose of selling in the near term are classified
as trading securities and repone at fair value, with changes in
unrealized holding gains and losses included in INCOME.
-8-
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS - Continued
PROVIDENT LIFE AND ACCIDENT INSURANCE COMPANY OF AMERICA AND SUBSIDIARIES'
MEDICAL SERVICES OPERATIONS
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
(3) Fixed maturity and equity securities classified neither as
held-to-maturity securities nor as trading securities are classified
as available-for-sale securities and reported at fair value, with
unrealized holding gains and losses reported as a separate component
of owner's equity.
The issuance of SFAS 115 changed the previous definition of what constituted a
security being held-to-maturity. Due to the significant restrictions placed on
securities classified as held-to-maturity, the Company believes that prudent
asset management requires a major portion of debt securities to be classified
as available-for-sale.
The Company adopted the provisions of SFAS 115 as of January 1, 1994, and
classified over 99 percent of the Group Department's fixed maturity securities
as available-for-sale with the remainder reported as held-to-maturity. In
accordance with SFAS 115, the 1993 statement of financial condition has not
been restated to reflect the change in accounting principle.
<TABLE>
The adjustments for the Group Department related to the adoption of SFAS 115 are as follows:
<CAPTION>
December 31 January 1
1994 1994
(in thousands of dollars)
----------------------------------------
<S> <C> <C>
Fair Value Adjustment to Fixed Maturity Securities $(27,543) $54,780
Less Deferred Federal Income Taxes (9,640) 19,173
-------- -------
Net Unrealized Gain (Loss) on Securities $(17,903) $35,607
======== =======
</TABLE>
The changes required by SFAS 115 did not result in any changes to the net
income of Medical Services. The Company has not changed its investment policies
or strategies as a result of the implementation of the new accounting
requirements.
NOTE 2--FAIR VALUES OF FINANCIAL INSTRUMENTS
<TABLE>
The carrying amounts and fair values of the Group Department's financial instruments are as follows:
<CAPTION>
December 31
(in thousands of dollars)
----------------------------------------------------------------
1994 1993
Carrying Fair Carrying Fair
Amount Value Amount Value
----------------------------- ------------------------------
<S> <C> <C> <C> <C>
ASSETS
Fixed Maturity Securities
Available-for-Sale $674,928 $674,928 $ - $ -
Held-to-Maturity 3,565 3,486 708,158 763,593
Equity Securities 1,616 1,616 1,472 1,472
Mortgage Loans 48,716 49,107 52,270 56,935
Short-term Investments 13,719 13,719 24,149 24,149
Cash and Bank Deposits 5,808 5,808 6,863 6,863
</TABLE>
-9-
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS - Continued
PROVIDENT LIFE AND ACCIDENT INSURANCE COMPANY OF AMERICA AND SUBSIDIARIES'
MEDICAL SERVICES OPERATIONS
NOTE 2--FAIR VALUES OF FINANCIAL INSTRUMENTS - CONTINUED
The following methods and assumptions were used in estimating the fair values
of financial instruments:
Fixed Maturity Securities: Fair values for fixed maturity securities are based
on quoted market prices, where available. For fixed maturity securities not
actively traded, fair values are estimated using values obtained from
independent pricing services or, in the case of private placements, are
estimated by discounting expected future cash flows using a current market rate
applicable to the yield, credit quality, and maturity of the investments. See
Note 3 for the amortized cost and fair values of securities by security type
and by maturity date.
Equity Securities: Fair values for equity securities are based on quoted market
prices.
Mortgage Loans: Fair values for mortgage loans are estimated using discounted
cash flow analyses, using interest rates currently being offered for similar
loans to borrowers with similar credit ratings. Loans with similar
characteristics are aggregated for purposes of the calculations.
Short-term Investments and Cash and Bank Deposits: Carrying amounts for
short-term investments and cash and bank deposits approximate fair value.
NOTE 3--INVESTMENTS
SECURITIES
<TABLE>
The amortized cost and fair values of the Group Department's fixed maturity securities by security type are as follows:
<CAPTION>
December 31, 1994
(in thousands of dollars)
----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES
United States Government and
Government Agencies and Authorities $ 6,433 $ 71 $ 213 $ 6,291
Foreign Governments 1,590 37 84 1,543
Public Utilities 140,299 2,624 6,899 136,024
Mortgage-backed Securities 132,890 431 8,541 124,780
All Other Corporate Bonds 394,242 4,304 19,504 379,042
Redeemable Preferred Stocks 27,017 988 757 27,248
------- ------ ------- --------
Total Fixed Maturity Securities 702,471 8,455 35,998 674,928
Equity Securities 2,688 - 1,072 1,616
------- ------ ------- --------
705,159 $8,455 $37,070 $676,544
======= ====== ======= ========
HELD-TO-MATURITY SECURITIES
United States Government and
Government Agencies and Authorities $ 542 $ - $ 3 $ 539
States, Municipalities, and
Political Subdivisions 3,023 120 196 2,947
------- ------ ------- --------
Total $ 3,565 $ 120 $ 199 $ 3,486
======= ====== ======= ========
</TABLE>
-10-
<PAGE> 21
NOTES TO FINANCIAL STATEMENTS - Continued
<TABLE>
PROVIDENT LIFE AND ACCIDENT INSURANCE COMPANY OF AMERICA AND SUBSIDIARIES' MEDICAL SERVICES OPERATIONS
NOTE 3--INVESTMENTS - CONTINUED
<CAPTION>
December 31, 1993
(in thousands of dollars)
---------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------------------
<S> <C> <C> <C> <C>
United States Government and
Government Agencies and Authorities $ 458 $ 179 $ - $ 637
States, Municipalities, and
Political Subdivisions 3,586 440 3 4,023
Foreign Governments 1,643 228 - 1,871
Public Utilities 143,239 14,556 363 157,432
Mortgage-backed Securities 167,295 4,416 367 171,344
All Other Corporate Bonds 360,816 34,545 522 394,839
Redeemable Preferred Stocks 31,121 2,405 79 33,447
--------- ------- ------- --------
Total Fixed Maturity Securities $ 708,158 $56,769 $ 1,334 $763,593
========= ======= ======= ========
Equity Securities $ 2,231 $ 42 $ 801 $ 1,472
========= ======= ======= ========
</TABLE>
<TABLE>
The amortized cost and fair values of the Group Department's fixed maturity securities by maturity date are shown below. The
maturity dates have not been adjusted for possible calls or prepayments.
<CAPTION>
December 31, 1994
(in thousands of dollars)
-------------------------------------
Amortized Fair
Cost Value
-------------------------------------
<S> <C> <C>
AVAILABLE-FOR-SALE SECURITIES
1 year or less $ 29,722 $ 30,133
Over 1 year through 5 years 103,593 103,664
Over 5 years through 10 years 300,409 280,917
Over 10 years 135,857 135,434
-------- ---------
569,581 550,148
Mortgage-backed Securities 132,890 124,780
-------- ---------
$702,471 $ 674,928
======== =========
HELD-TO-MATURITY SECURITIES
1 year or less $ 578 $ 431
Over 1 year through 5 years 1,147 1,179
Over 5 years through 10 years 1,298 1,337
Over 10 years 542 539
-------- ---------
$ 3,565 $ 3,486
======== =========
</TABLE>
At December 31, 1994, the Group Department's investment in
below-investment-grade fixed maturity securities (securities rated below Baa3
by Moody's Investors Services or an equivalent internal rating) was $45,096,000
or 5.9 percent of invested assets. The amortized cost of these securities was
$47,500,000. At December 31, 1994, the Group Department had on deposit with
regulatory authorities securities with a book value of $4,349,000 held for the
protection of policyholders.
-11-
<PAGE> 22
NOTES TO FINANCIAL STATEMENTS- CONTINUED
PROVIDENT LIFE AND ACCIDENT INSURANCE COMPANY OF AMERICA AND SUBSIDIARIES'
MEDICAL SERVICES OPERATIONS
NOTE 3--INVESTMENTS - CONTINUED
MORTGAGE LOANS
<TABLE>
The Group Department's distribution of mortgage loans by property type and by the ten most significant states follows:
<CAPTION>
December 31, 1994
(in thousands of dollars)
---------------------------------
Amount %
------------ ------------
<S> <C> <C>
PROPERTY TYPE
Industrial and Warehouse $13,624 28.0%
Retail 11,290 23.2
Healthcare 8,281 17.0
Hotel 6,537 13.4
Apartment 4,736 9.7
General Office Buildings 3,737 7.7
Other 511 1.0
------- ------
Total $48,716 100.0%
======= ======
STATE
California $15,744 32.3%
Wisconsin 6,554 13.4
Colorado 5,174 10.6
Georgia 3,785 7.8
Maryland 3,084 6.3
Ohio 2,815 5.8
Washington 1,356 2.8
Virginia 1,346 2.8
Iowa 1,317 2.7
Kansas 1,254 2.6
Other 6,287 12.9
------- ------
Total $48,716 100.0%
======= ======
</TABLE>
The mortgage loans are typically collateralized by the related properties, and
the loan to value ratios at the date of loan origination generally do not
exceed 75 percent.
There were no mortgage loans in the process of foreclosure at December 31,
1994.
REAL ESTATE
Accumulated depreciation on the Group Department's allocated portion of the
Company's investment real estate portfolio was $3,182,000 and $2,341,000 as of
December 31, 1994 and 1993, respectively.
- 12-
<PAGE> 23
NOTES TO FINANCIAL STATEMENTS - CONTINUED
PROVIDENT LIFE AND ACCIDENT INSURANCE COMPANY OF AMERICA AND SUBSIDIARIES'
MEDICAL SERVICES OPERATIONS
NOTE 3--INVESTMENTS - CONTINUED
NON-CURRENT INVESTMENTS
There were no non-current investments at December 31, 1994. Bonds in default at
December 31, 1993 were $525,000, or .07% of Group Department invested assets.
NET INVESTMENT INCOME
<TABLE>
Sources for net investment income are as follows:
<CAPTION>
Year Ended December 31
1994
(in thousands of dollars)
-------------------------
<S> <C>
Fixed Maturity Securities $60,127
Equity Securities 98
Mortgage Loans 4,825
Real Estate 858
Short-term Investments 462
Other 239
-------
Gross Investment Income 66,609
Investment Expenses 650
-------
Net Investment Income - Group Department $65,959
=======
Net Investment Income - Medical Services $18,131
=======
</TABLE>
REALIZED INVESTMENT GAINS
<TABLE>
Realized investment gains are as follows:
<CAPTION>
Year Ended December 31
1994
(in thousands of dollars)
-------------------------
<S> <C>
Fixed Maturity Securities $ 954
Equity Securities 29
Real Estate 225
------
Net Realized Investment Gains - Group Department $1,208
======
Net Realized Investment Gains - Medical Services $ 332
======
</TABLE>
-13-
<PAGE> 24
NOTES TO FINANCIAL STATEMENTS- CONTINUED
PROVIDENT LIFE AND ACCIDENT INSURANCE COMPANY OF AMERICA AND SUBSIDIARIES'
MEDICAL SERVICES OPERATIONS
NOTE 3--INVESTMENTS - CONTINUED
<TABLE>
Proceeds from sales of Group Department fixed maturity and equity securities
and the related gross gains and losses realized on those sales are as follows:
<CAPTION>
Year Ended December 31
1994
(in thousands of dollars)
-------------------------
<S> <C>
PROCEEDS FROM SALES
Available-for-Sale Fixed Maturity Securities $26,377
Equity Securities 238
GROSS GAINS
Available-for-Sale Fixed Maturity Securities 1,126
Equity Securities 29
GROSS LOSSES
Available-for-Sale Fixed Maturity Securities 172
</TABLE>
NOTE 4-FEDERAL INCOME TAXES
<TABLE>
A reconciliation of the income tax attributable to continuing operations
computed at U.S. federal statutory tax rates to the income tax expense as
included in the statement of income follows:
<CAPTION>
Year Ended December 31
1994
----------------------
<S> <C>
Statutory Federal Income Tax Rate 35.0%
Tax-preferred Investment Income (0.8)
Other Items, Net 0.3
----
Effective Tax Rate 34.5%
====
</TABLE>
-14-
<PAGE> 25
NOTES TO FINANCIAL STATEMENTS- CONTINUED
PROVIDENT LIFE AND ACCIDENT INSURANCE COMPANY OF AMERICA AND SUBSIDIARIES'
MEDICAL SERVICES OPERATIONS
NOTE 4--FEDERAL INCOME TAXES - CONTINUED
<TABLE>
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities
for financial statement purposes and the amounts used for income tax purposes. Significant components of Medical Services' deferred
federal income tax liability are as follows:
<CAPTION>
December 31
1994 1993
(in thousands of dollars)
-------------------------------------------
<S> <C> <C>
DEFERRED TAX LIABILITY
Bond Market Discount $ 417 $ 409
Cost of Business Acquired 35,993 39,896
-------- --------
Total Deferred Tax Liability 36,410 40,305
-------- --------
DEFERRED TAX ASSET
Reserves 11,482 16,381
Realized Investment Gains and Losses 89 89
Unrealized Investment Gains and Losses 2,779 -
------- -------
Total Deferred Tax Asset 14,350 16,470
Valuation Allowance for Deferred Tax Asset - -
------- -------
Deferred Tax Asset after Allowance 14,350 16,470
------- -------
NET DEFERRED TAX LIABILITY $22,060 $23,835
======= =======
</TABLE>
Medical Services is required to establish a valuation allowance for any portion
of the deferred tax asset that management believes will not be realized. In the
opinion of management, it is more likely than not that Medical Services will
realize the benefit of the deferred tax asset, and, therefore, no such
valuation allowance has been established.
The financial results of Medical Services are included in a consolidated tax
return fled by the Company. The total federal income tax liability of Medical
Services is determined on a separate return basis.
- 15-
<PAGE> 26
NOTES TO FINANCIAL STATEMENTS - CONTINUED
PROVIDENT LIFE AND ACCIDENT INSURANCE COMPANY OF AMERICA AND SUBSIDIARIES'
MEDICAL SERVICES OPERATIONS
NOTE 5--RETIREMENT BENEFITS
PENSION PLAN
The Company provides a self-administered, defined benefit pension plan for
eligible salaried employees. The benefits are based on years of service and the
employee's highest consecutive five years of compensation. The Company's
funding policy is to contribute amounts to the plan sufficient to meet the
minimum funding requirements set forth in the Employee Retirement Income
Security Act of 1974, plus such additional amounts as the Company may determine
to be appropriate. Plan assets are invested in two separate accounts of a
subsidiary of the Company, one of which invests in listed equity securities and
the other in corporate obligations and U.S. bonds, and in guaranteed fixed
income group annuity contracts of a subsidiary of the Company. Medical Services
employees participate in the plan sponsored by the Company. Pension expense for
Medical Services was $1,783,000 for 1994.
POSTRETIREMENT PLANS
The Company sponsors two defined benefit postretirement plans other than
pensions for full-time employees who have ten years of credited service with
the Company and have reached age 55. One plan provides medical and dental
benefits, and the other provides life insurance benefits. The postretirement
health care plan is contributory, with retiree contributions adjusted annually,
and contains other cost-sharing features such as deductibles and coinsurance.
It is the Company's expressed intent to increase the health care plan's retiree
contribution rate annually as the cost of health care increases. The life
insurance plan is noncontributory and is fully funded through a life insurance
contract issued by the Company. The health care plan is unfunded. Medical
Services employees participate in the plans sponsored by the Company. Medical
Services' portion of the Company's postretirement benefit cost for the health
care plan was $2,531,000 in 1994.
- 16-
<PAGE> 27
NOTES TO FINANCIAL STATEMENTS- CONTINUED
PROVIDENT LIFE AND ACCIDENT INSURANCE COMPANY OF AMERICA AND SUBSIDIARIES'
MEDICAL SERVICES OPERATIONS
NOTE 6-LIABILITY FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES
<TABLE>
Changes in the liability for unpaid claims and claim adjustment expenses were as follows:
<CAPTION>
Year Ended December 31
1994
(in thousands of dollars)
-------------------------
<S> <C>
Balance at January 1 $ 59,878
--------
Incurred related to:
Current year 206,876
Prior years (17,508)
---------
Total incurred 189,368
--------
Paid related to:
Current year 150,209
Prior years 42,677
--------
Total paid 192,886
--------
Balance at December 31 $ 56,360
========
</TABLE>
There were no reinsurance recoverables at January 1 or December 31, 1994. The
provision for unpaid claims and claim adjustment expenses occurring in prior
years decreased due to lower than anticipated health care trends during this
period.
NOTE 7--COMMITMENTS AND CONTINGENT LIABILITIES
In December 1994, the Company entered into an Asset and Stock Purchase
Agreement (the Agreement) with Healthsource, Inc. under which Healthsource will
acquire the Company's Medical Services Operations for $310.0 million ($210.0
in cash and $100.0 million in a new issue of Healthsource 6.25% Convertible
Preferred Stock). The Agreement is subject to regulatory approvals and purchase
price adjustments in certain circumstances. The parties are currently
negotiating certain matters relating to the purchase price adjustments and
other aspects of the Agreement in an effort to resolve open issues and close
the transaction. It is unclear whether the resolution of those matters will
have a material effect on the transaction. Under the Agreement, disagreements
unresolved by the parties are submitted to arbitration. The transaction is
expected to close in the second quarter of 1995.
Various lawsuits against Medical Services have arisen in the normal course of
business. Contingent liabilities that might arise from litigation are not
deemed likely to materially affect the financial position or net income of
Medical Services.
- 17-
<PAGE> 1
Exhibit 4.1
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
PURSUANT TO THE PROVISIONS OF THE NEW HAMPSHIRE BUSINESS CORPORATION ACT, THE
UNDERSIGNED CORPORATION ADOPTS THE FOLLOWING ARTICLES OF AMENDMENT TO ITS
ARTICLES OF INCORPORATION:
FIRST: The name of the corporation is Healthsource, Inc.
SECOND: The text of each amendment adopted is:
See Attachment A.
THIRD: If the amendment provides for an exchange, reclassification,
or cancellation of issued shares the provisions for implementing the
amendment(s) if not contained in the above amendment are:
N/A
FOURTH: The amendment(s) were adopted on May 30, 1995.
FIFTH: (Check one)
A. x The amendment(s) were adopted by the incorporators or
----- board of directors without shareholder action and
shareholder action was not required.
B. The amendment(s) were approved by the shareholders.
-----
Dated: May 31, 1995
HEALTHSOURCE, INC.
----------------------------------------------
/s/ Norman C. Payson, M.D.
----------------------------------------------
Signature of its President and Chief Executive
Officer
Norman C. Payson, M.D.
----------------------------------------------
Print or type name
<PAGE> 2
ATTACHMENT A
TO
ARTICLES OF AMENDMENT
OF
HEALTHSOURCE, INC.
Pursuant to the provisions of RSA 293-A:6.02, the New Hampshire Business
Corporation Act, and Article SIXTH of the Articles of Incorporation of
Healthsource, Inc. (the "Corporation"), a corporation organized and existing
under the laws of the State of New Hampshire, the Board of Directors of the
Corporation hereby establishes and designates a class of shares of preferred
stock and fixes and determines the preferences, limitations and relative
rights thereof (terms not otherwise defined herein shall have the respective
meaning as set forth in the Articles of Incorporation):
1. Designation. This series of preferred stock shall be known and
designated as Class A Cumulative Preferred Stock (the "Preferred Stock"), and
shall consist of 1,000,000 shares, stated value $100 per share, and shall have
the preferences, limitations and relative rights set forth below in addition
to those set forth in Article SIXTH of the Articles of Incorporation of the
Corporation applicable to all series of preferred stock of the Corporation.
2. Voting Rights.
(i) The holder of the Preferred Stock shall have no voting rights
except as provided in subparagraphs (ii) and (iii) below, and except that such
holder may vote shares of Preferred Stock (a) to the extent New Hampshire law
requires that the holders of such shares have such voting rights under certain
circumstances, or (b) together with holders of Common Stock (and not as a
separate class) upon the occurrence of the following Material Transactions
affecting the Corporation: (x) a merger, consolidation or share exchange of
the Corporation with another corporation in which the Corporation is not the
resulting entity or (y) a sale of substantially all of the assets of the
Corporation to a third party not controlled by or under common control with
the Corporation.
(ii) So long as any shares of Preferred Stock shall be
outstanding, the Corporation shall not, without the affirmative vote at a
meeting called for that purpose or the written consent of the holder of the
shares of Preferred Stock at the time outstanding, considered as a class,
adopt any amendment to the Articles of Incorporation or to this designation
which would amend or repeal any of the terms and provisions of the
outstanding Preferred Stock in a manner adversely affecting the holders
thereof.
(iii)(a) So long as any shares of Preferred Stock shall be
outstanding, the Corporation shall not, without the affirmative vote at a
meeting called for that purpose or the written consent of the holder of the
shares of Preferred Stock, considered as a class, take action to authorize any
class or series of stock ranking prior to the Preferred Stock, or to increase
the authorized number of shares of any such prior class or series.
<PAGE> 3
(b) For the purposes of this subparagraph (iii), stock shall be
deemed to rank prior to the Preferred Stock (or the shares of Preferred Stock)
if the holders thereof shall be entitled to the receipt of dividends or of
amounts distributable on liquidation, dissolution or winding up, as the case
may be, in preference or priority to the holders of Preferred Stock (or the
shares of Preferred Stock), but shall be deemed to rank on a parity with, and
not prior to the Preferred Stock (or the shares of Preferred Stock), if the
holders of such class shall be entitled to the receipt of dividends or of
amounts distributable on liquidation, dissolution, or winding up, as the case
may be, in proportion to their respective dividend rates or liquidation
prices, without preference or priority one over the other as between the
holders of such stock and the holders of Preferred Stock (or the shares of
Preferred Stock), whether or not the dividend rates, dividend payment dates,
or redemption or liquidation prices per share thereof be different from those
of the Preferred Stock or any series thereof (or the shares of Preferred
Stock). The matters referred to in clauses (a) and (b) of this subparagraph
(iii) shall be governed by this subparagraph (iii) and not by subparagraph
(ii) of this SECTION 2. It shall not be deemed to be the creation of any such
prior class or series of stock if the Corporation shall take action to
authorize the creation or issuance of any indebtedness of the Corporation,
notwithstanding that such indebtedness may be subordinate to other
indebtedness of the Corporation, and notwithstanding that such indebtedness
may be convertible at the option of the Corporation or the option of the
holder into stock of the Corporation (but the authorization of any such stock
which is prior to the Preferred Stock (or the shares of Preferred Stock) shall
be subject to the foregoing provisions), and notwithstanding that such
indebtedness may be both so subordinate and so convertible.
3. REDEMPTION. (i) At any time or from time to time, prior to
June 1, 1997, or after June 1, 2002, the Corporation, at its option, may
redeem the Preferred Stock, in whole or in part, at a price per share equal
to its liquidation preference of $100 per share, plus an amount equal to
accrued and unpaid dividends to the date fixed for redemption (including an
accrual in respect of the preferred dividends from the date of the last
Preferred Dividend Payment Date through the redemption date) (such date
hereinafter referred to as a "redemption date").
(ii) All shares of Preferred Stock which shall have been issued
and reacquired in any manner by the Corporation (including shares redeemed and
shares otherwise repurchased)shall have the status of authorized but unissued
shares of preferred stock and, to the fullest extent permitted by applicable
law, may be reissued as part of the class or series of which they were
originally a part or may be reclassified and reissued as part of a new class
or series of preferred stock to be created by resolution or resolutions of the
Board of Directors or as part of any other class or series of preferred stock.
(iii) The Corporation will provide notice of any redemption of
shares of Preferred Stock to the holder of record of such Preferred Stock to
be redeemed not less than 20 nor more than 60 days prior to the date fixed for
such redemption. Such notice shall be provided by mailing notice of such
redemption by first class mail, postage prepaid, to the holder of the
Preferred Stock to be redeemed, at such holder's address as it appears on the
2
<PAGE> 4
stock register of the Corporation. Such mailed notice shall state, as
appropriate, the following:
(a) the redemption date;
(b) the total number of shares of Preferred Stock to be
redeemed; and
(c) the place or places where certificates for such shares are
to be surrendered for redemption.
(iv) The holder of shares of Preferred Stock called for redemption
shall surrender the certificate or certificates evidencing such shares to the
Corporation at the place designated in such notice and shall thereupon be
entitled to receive payment of the applicable redemption price plus an amount
equal to accrued and unpaid dividends to the redemption date, with such
payment to be made in accordance with Section 8 hereof. In case less than all
of the shares of Preferred Stock represented by any certificate surrendered
for redemption are redeemed, the Corporation shall, without charge, issue a
new certificate representing the unredeemed shares. If such notice of
redemption shall have been duly given, and if on the redemption date funds
necessary for the redemption shall be set aside therefor, then,
notwithstanding that, the certificates evidencing any shares of Preferred
Stock so called for redemption shall not have been surrendered, the dividends
with respect to the shares called for redemption shall cease to accrue after
the redemption date and all rights with respect to the shares called for
redemption shall forthwith cease.
(v) The redemption provisions of this Section 3 shall not be
construed so as to limit any contractual right of repurchase relating to the
Preferred Stock between the Corporation and the holder of the Preferred Stock.
4. Dividends. (i) The holder of the Preferred Stock shall be entitled
to receive, when, as and if declared by the Board of Directors of the
Corporation, out of assets of the Corporation legally available for payment,
cash dividends at the initial annual rate of 6.25% (calculated as a percentage
of the stated liquidation preference of $100 per share), subject to reset in
accordance with subparagraph (ii), for each quarterly dividend period ending
on the last day of March, June, September and December of each year, payable
in arrears on March 31, June 30, September 30 and December 31 (each such date
a "Preferred Dividend Payment Date") of each year, commencing on June 30,
1995; provided, however, that the first dividend period shall be the period
from the date of original issue of the first share thereof to the end of the
quarterly dividend period in which the original issuance occurs. Dividends on
the Preferred Stock shall be preferential and cumulative from the date of
original issue of the first shares thereof. Dividends payable on the
Preferred Stock for each full quarterly dividend period shall be computed by
dividing the applicable annual dividend rate by four. Dividends payable on
the Preferred Stock for any period greater or less than a full quarterly
dividend period, including the first dividend period, shall be computed on the
basis of a 360-day year consisting of twelve 30-day months. If any Preferred
Dividend Payment Date shall not be a business day (as defined below), then the
3
<PAGE> 5
Preferred Dividend Payment Date shall be the next succeeding business day.
The term "business day" shall mean any day other than a Saturday, Sunday or a
day on which banking institutions in the State of New Hampshire are authorized
or obligated by law or executive order to close.
(ii) On June 1, 1997, the dividend rate payable to the holder of
the Preferred Stock shall be reset to a rate, pursuant to subparagraph (iii)
below, equal to the lowest dividend rate which would cause the Preferred Stock
to trade at par on a fully-distributed basis as if offered publicly on June 1,
1997. The amount of dividends per share for each such Preferred Dividend
Payment Date shall be computed in the manner set forth in subparagraph (i)
above with respect to the initial annual rate, as such rate is reset pursuant
to this subparagraph (ii).
(iii) The dividend rate specified in subparagraph (ii) above shall
be determined as follows: On June 1, 1997, the Corporation shall secure sealed
indications from investment banking firms of recognized national standing
selected by each of the Corporation and the holders of the Preferred Stock as
well as an indication from a third investment banking firm of recognized
national standing selected by mutual agreement of the parties investment
bankers (the "Third Party Investment Bankers"), as to the indicated bid side
dividend yield on the Preferred Stock such that the Preferred Stock would
trade at par on June 1, 1997 on a fully distributed basis. The Corporation
and the holders of the Preferred Stock shall review such indications and the
middle indication shall be utilized to determine the dividend yield of the
Preferred Stock; provided, that if two indications are exactly the same, such
two indications shall be utilized to determine such dividend yield. Each of
the three investment banking firms will be instructed by the Corporation that
in determining such bid side dividend yield, it shall not take into account
any liquidity, nontransferability or blockage discounts. The Third Party
Investment Banker shall be selected by mutual agreement of the parties
designated investment bankers from a list of three bulge bracket investment
banking firms selected by the Corporation, which investment banking firms
shall not have performed material services for the Corporation or the holder
of the Preferred Stock, within the previous three years.
(iv) So long as any shares of Preferred Stock are outstanding, if
there shall be any arrearages in the payment of cumulative dividends on the
Preferred Stock for any past quarterly dividend periods or the Corporation
shall be in default of its obligation to redeem any of the shares of Preferred
Stock called for redemption, then, for so long as such state of facts shall
continue, the Corporation shall not: (a) make any distribution of the Common
Stock or the shares of any other class of stock of the Corporation ranking
junior to the Preferred Stock as to dividends, (b) redeem, purchase or
otherwise acquire (except by conversion into or exchange for shares of the
Corporation ranking junior to the Preferred Stock) any shares of Common Stock
or the shares of any other class of stock of the Corporation ranking junior to
the Preferred Stock as to dividends or upon liquidation. Subject to the
foregoing provisions, such dividends as may be determined by the Board of
Directors of the Corporation may be declared and paid from time to time on any
shares of the Corporation other than the Preferred Stock without any right of
participation therein by the holder of shares of Preferred Stock.
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(v) When dividends and any arrearages thereof are not paid in full
upon the shares of the Preferred Stock and any other preferred stock ranking
on a parity as to dividends with the Preferred Stock, all dividends declared
upon shares of the Preferred Stock and any other preferred stock ranking on a
parity as to dividends with the Preferred Stock shall be declared pro
rata so that the amount of dividends declared per share on the Preferred Stock
and such other preferred stock shall in all cases bear to each other the same
ratio that accrued dividends per share on the shares of the Preferred Stock
and such other preferred stock bear to each other. Holders of shares of
Preferred Stock shall not be entitled to any dividends, whether payable in
cash, property or stock in excess of the full dividends otherwise provided for
in Section 4(i) and (ii) above.
(vi) When dividends and any arrearages are not paid in full upon
the shares of Preferred Stock for a total of two quarterly dividend periods,
whether or not consecutive (a "Specified Default"), the holder of Preferred
Stock shall have the right to elect two directors to the Board of Directors of
the Corporation. Unless an annual meeting of the stockholders of the
Corporation for the election of directors is to be held within 90 days after
the occurrence of a Specified Default, the Corporation, as soon as
practicable, shall increase the number of members of the Board of Directors by
two (2) and call a special meeting of the holder of Preferred Stock for the
election of two (2) directors to fill the vacancies created by the increase in
the number of members of the Board of Directors. If, during the existence of
a Specified Default entitling the holder of Preferred Stock to elect two (2)
members of the Board of Directors, any annual meeting of stockholders is not
held when and as required by the Bylaws of the Corporation, the annual meeting
of the stockholders for the purpose of electing directors may be called by the
holder of record of at least 50% of the Preferred Stock. Any director elected
by the holder of the Preferred Stock, voting as a class pursuant to the
aforesaid right, shall continue to serve as such director until the Specified
Default in preferred dividends shall cease to exist, at which time such
director's term shall expire. If, prior to the end of the term of any
director so elected by the holder of Preferred Stock, a vacancy in the office
of such director shall occur by reason of death, resignation, removal or
disability of such director, or for any other cause, such vacancy shall be
filled for the unexpired term by the remaining director, if any, so elected by
the holder of Preferred Stock, provided that, if all such directorships shall
be vacant, such vacancies may be filled only by the holder of Preferred Stock,
voting as a class as aforesaid, at a special meeting called for such purpose,
unless in any such case, no Specified Default in preferred dividends shall
exist at the time of such meeting. Such special meeting of the holder of
Preferred Stock shall be called and held as provided in the Bylaws of the
Corporation. Having so occurred, such Specified Default in preferred
dividends shall be deemed to exist thereafter until all accrued dividends on
all shares of Preferred Stock then outstanding shall have been paid in full to
the end of the last preceding quarterly dividend period.
The Corporation agrees that, whenever necessary, it will take all such
appropriate corporate action as is necessary to increase the number of
directors to provide as additional places on the Board of Directors the two
(2) directorships to be filled by the two (2) directors so to be elected by
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the holder of shares of Preferred Stock. Nothing herein contained shall be
deemed to prevent any other change in the number of directors of the
Corporation.
For the purposes of this subparagraph (vi), it shall also constitute a
Specified Default if the Corporation shall default in the payment of any
redemption price as to the shares of Preferred Stock due pursuant to the
provisions of Section 3, and such default shall be continuing for 120 days.
Such Specified Default shall be deemed to continue and to have the effect set
forth above until the Corporation shall have cured each such default in the
payment of redemption price through payment or tender of payment of the
redemption price per share plus interest on the amount due from the date of
default to the date of payment at the rate of interest per annum in effect
during such period pursuant to subparagraph (i) or (ii).
5. Liquidation Rights. In the event of any voluntary or involuntary
dissolution, liquidation or winding up of the affairs of the Corporation,
after payment or provision for payment of debts and other liabilities of the
Corporation and before any payment or distribution is made to holders of
Common Stock or any other class of stock of the Corporation ranking junior to
the Preferred Stock upon liquidation, the holder of the Preferred Stock shall
be entitled to receive out of the net assets of the Corporation an amount in
cash for each outstanding share equal to $100 (for the shares of the Preferred
Stock, the "liquidation preference"), plus an amount equal to all dividends
accrued and unpaid on each such share of Preferred Stock up to the date fixed
for distribution (including an accrual in respect of the preferred dividends
from the date of the last Preferred Dividend Payment Date through the
redemption date), and no more. If the assets of the Corporation are
insufficient to permit the payment of the full liquidation preference payable
in such event to the holder of Preferred Stock and any class or series of
preferred stock ranking on a parity with the Preferred Stock as to the
distribution of assets upon liquidation, then the assets available for
distribution to the holders of the Preferred Stock and such other class or
series of preferred stock ranking on a parity with the Preferred Stock as to
the distribution of assets upon liquidation, shall be distributed ratably to
the holders of shares of Preferred Stock and such other classes and series of
preferred stock in proportion to the full liquidation preference amounts
payable on their respective shares upon liquidation (including the respective
amounts of all dividends accrued and unpaid on shares of such class or series
up to the date fixed for distribution). Neither the sale, conveyance,
exchange or transfer of all or substantially all of the property and assets of
the Corporation, the consolidation or merger of the Corporation with or into
any other corporation, nor the merger or consolidation of any other
corporation into or with the Corporation shall be deemed to be a dissolution,
liquidation or winding up of the Corporation.
6. Parity Issues. Nothing in this Designation of the Preferred Stock
shall prevent the Corporation from issuing other classes of preferred stock on
a parity with or junior to the Preferred Stock; the issuance of such other
parity or junior classes of preferred stock shall not be deemed to adversely
affect the Preferred Stock in any manner nor to require any vote, consent or
other approval of the Preferred Stock with respect thereto.
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<PAGE> 8
7. No Sinking Fund. The shares of Preferred Stock shall not be
subject to the operation of a purchase or sinking fund.
8. Method of Payment. All payments (including dividends and
redemption payments) shall be by wire transfer of immediately available funds
to an account designated by the holder of the Preferred Stock.
9. Restrictions on Transfer of Preferred Stock. Pursuant to the
authority granted in RSA 293-A:6.27, the Preferred Stock shall not be
transferable to any party under any circumstances and shall be held only by
the party to whom such shares of Preferred Stock shall have been issued by the
Corporation, except for a transfer pursuant to a private placement which is
exempt from registration under applicable law, or transfer incidental to a
public distribution of the Preferred Stock under the Registration Rights
Agreement dated as of May 31, 1995 or other agreement between Provident Life
and Accident Insurance Company and the Corporation or a transfer of some or
all of the Preferred Stock to an affiliate as part of a reorganization or upon
a change of control. The holder(s) of the Preferred Stock, by taking the
Preferred Stock, acknowledge that this restriction on transfer is hereby
created for a "reasonable purpose" as authorized by RSA 293-A:6.27(c). The
certificate or certificates evidencing the Preferred Stock shall bear an
appropriate legend reflecting such prohibition on transfer of the Preferred
Stock.
For purposes of the foregoing, the term "affiliate" shall have the same
meaning as set forth in Rule 405 under the Securities Act of 1933, as amended.
A "change of control" shall be deemed to have occurred at such time as (a) any
person (as that term is defined in Section 3(a)(9) of the Securities Exchange
Act of 1934, as amended) is or becomes the beneficial owner (as defined in
Rule 13d-3 thereof) directly or indirectly of securities representing 50% or
more of the combined voting power for election of directors of the then
outstanding securities of the subject person or any successor of the subject
person (provided that the current controlling position of the McClelland
Family shall not constitute a "change of control"); (b) during any period of
two consecutive years or less, those individuals, who at the beginning of such
period constituted the Board of Directors of the subject person, cease, for
any reason, to constitute at least a majority of the Board of Directors of the
subject person or a successor company into which the subject person may have
merged; (c) there shall have occurred (i) any liquidation of the subject
person not in the form of a merger into a corporation which is an affiliate of
the subject person or (ii) any sale or other disposition of assets
representing 50% or more of the book value of the subject person's net profit
over the three years preceding the transaction; or (d) the subject person is a
party to any merger as a result of which the persons who were shareholders of
the subject person immediately prior to the effective date of the merger shall
have beneficial ownership of less than 50% of the combined voting power for
election of directors of the surviving corporation following the effective
date of such merger.
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EXHIBIT 10.1
THIRD CLOSING AMENDMENT TO
ASSET AND STOCK PURCHASE AGREEMENT
This Third Closing Amendment to Asset and Stock Purchase Agreement
( Third Amendment ) entered into by and among PROVIDENT LIFE AND ACCIDENT
INSURANCE COMPANY OF AMERICA, a corporation organized under the laws of the
State of Tennessee with a principal address at One Fountain Square,
Chattanooga, Tennessee 37402, PROVIDENT LIFE AND ACCIDENT INSURANCE COMPANY
and PROVIDENT LIFE AND CASUALTY INSURANCE COMPANY, both of which are Tennessee
corporations with principal offices at One Fountain Square, Chattanooga,
Tennessee 37402, PROVIDENT LIFE CAPITAL CORPORATION, a corporation organized
under the laws of the State of Delaware with a principal office at One
Fountain Square, Chattanooga, Tennessee, PROVIDENT HEALTH CARE PLANS, INC., a
corporation organized as a holding company under the laws of the State of
Tennessee with a principal address at One Fountain Square, Chattanooga,
Tennessee 37402 (all of such Provident entities are collectively referred to
herein as "Seller"), and HEALTHSOURCE, INC., a New Hampshire corporation with
a principal office at Two College Park Drive, Hooksett, New Hampshire 03106
(the "Buyer"), on this 31st day of May, 1995.
WHEREAS, Seller and Buyer entered into a certain Asset and Stock
Purchase Agreement dated as of December 20, 1994, as amended (the
"Agreement"); and
WHEREAS, Seller and Buyer wish to make certain amendments to such
Agreement in consideration of the agreements contained herein; and
NOW, THEREFORE, Seller and Buyer agree as follows:
<PAGE> 2
1. Preferred Stock.
The terms of the Preferred Stock to be delivered at Closing by Buyer
shall be adjusted by substituting for Exhibit 19.06 to the Agreement the
Preferred Stock terms contained in Exhibit 19.06-A to this Third Amendment
(the "Preferred Stock"). Seller and Buyer agree that Buyer shall have the
option for two years following Closing to exchange the Preferred Stock for
Buyer's subordinated note on the terms contained in Exhibit 19.06-B to this
Third Amendment (the "Notes"). As a condition of Buyer's exchange of the
Preferred Stock for the Notes rather than cash, Buyer shall have a
registration statement covering the Notes which is effective with the SEC (and
Buyer shall have complied with the covenants contained in subparagraphs (b)
through (m) of Section 7 of the Registration Rights Agreement) on the date of
exchange permitting Seller to publicly distribute the Notes. Buyer shall also
cause a registration statement covering the Preferred Stock to be effective
with the SEC (and Buyer shall have complied with the covenants contained in
subparagraphs (b) through (m) of Section 7 of the Registration Rights
Agreement) on June 1, 1997 if Buyer has not redeemed the Preferred Stock for
cash or Notes prior to such date. Buyer shall pay the reasonable and
customary underwriting discounts, fees and concessions and other underwriters'
expenses of the sale by Provident of the Notes or the Preferred Stock pursuant
to either of such registration statements. Prior to the effective date of the
registration statements, Buyer shall have used its best efforts to obtain
credit ratings on the Preferred Stock and Notes from Standard & Poor's and
Moody's. Buyer will seek the concurrence of its bank lenders to the issuance
by Buyer of the Notes and agrees, if the banks so permit and if Buyer elects
not to redeem for cash, to exchange the Notes for the Preferred Stock on the
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<PAGE> 3
earlier of the exchange date selected by Buyer or the dividend reset date on
the Preferred Stock. Provident's agreement to accept Buyer's Notes shall be
referenced on the Stock Certificate for the Preferred Stock and shall bind
transferees of the Preferred Stock. Provident hereby agrees to cause any
transferee of the Preferred Stock to acknowledge and agree to Buyer's right to
exchange the Preferred Stock with Buyer's Notes as provided herein. Section
19.02 is hereby amended to add the following additional legend. "The shares
represented by this certificate are subject to the right of Healthsource, Inc.
under certain circumstances specified in a certain Asset and Stock Purchase
Agreement dated as of December 20, 1994, as amended, among Provident Life and
Accident Insurance Company of America, et al. and Healthsource, Inc. to redeem
such shares for subordinated promissory notes issued by Healthsource, Inc. as
further set forth in such Agreement." The parties agree that the form of the
Registration Rights Agreement executed at Closing shall be as attached hereto
as Exhibit 19.03-A, which Exhibit shall replace Exhibit 19.03. The parties
agree that Section 19.05(a) of the Agreement shall be deleted in its entirety.
Buyer shall cooperate with Seller in any private placement of the Preferred
Stock, provided that any such placement shall be permitted under applicable
law.
2. Purchase Price Adjustment.
The provisions of Sections 6.03 and 6.04 of the Agreement are hereby
deleted in their entirety.
3. Purchase Price.
(a) The words "Two Hundred Ten Million Dollars ($210,000,000), payment
of which is subject to credit and adjustment as provided in Section 6 below"
in the sixth, seventh and eighth lines of Section 5.01 of the Agreement shall
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be deleted and replaced with the words "One Hundred Thirty-One Million Dollars
($131,000,000), payment of which is subject to adjustment as provided in
Section 6.05 below".
(b) The first sentence of Section 5.03 of the Agreement shall be
deleted and replaced with the following:
Buyer shall make payment at the Closing of the
purchase price due Seller for the Transferred Business
(the "Purchase Price"), net of any applicable closing
prorations pursuant to Section 6.05 below, by delivery
of 1,000,000 shares of Preferred Stock plus cash of
One Hundred Thirty-One Million Dollars ($131,000,000).
Any adjustment pursuant to Section 6.05 below shall be
applied to adjust the cash portion of the Purchase
Price.
(c) Section 15.06(d) of the Agreement is amended to delete the words
"$310 million" at the end thereof and replace them with the words "$231
million".
3A. Financial Matters.
(a) Section 4.01 of the Agreement requires Seller to deliver the 1994
Audit Report, the Estimated Balance Sheet and the Historical Financials at
Closing. The parties recognize that delivery of all of the Historical
Financials at Closing will not be possible. Buyer acknowledges receipt of the
1994 Audit Report dated May 12, 1995. The Estimated Balance Sheet for Closing
purposes is attached hereto as Exhibit 7.01(a).
(b) Seller shall deliver the Historical Financials to Buyer within
forty-five (45) days of Closing. During such 45 day period, Buyer shall, at
no charge to Provident, cause Buyer s and its affiliates' employees and
representatives to cooperate fully with, and as reasonably requested by,
Seller in the preparation of such Historical Financials. Seller agrees and
acknowledges that time is of the essence with regard to delivery of the
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Historical Financials because Buyer is obligated by rules of the Securities
Exchange Commission ("SEC") to file the Historical Financials within sixty
(60) days of filing its Current Report on Form 8-K following the Closing or
Buyer will be subject to sanction, loss of short form registration rights,
possible delisting on the New York Stock Exchange, disruption in the trading
market, potential SEC enforcement action, other sanctions and damages which
could cause Buyer damages equal to or greater than the public market value of
Buyer. Seller shall be liable for all direct and consequential damages to
Buyer resulting from such failure to deliver the Historical Financials as
required hereby.
(c) For the purposes of determining the amount of Acceptable Financial
Assets to be transferred to Buyer sufficient to result in the Transferred
Business having $76 million in tangible net worth as required by Section
3.04(b) of the Agreement, the Estimated Balance Sheet and Final Balance Sheet
required pursuant to Section 3.04(d) of the Agreement shall be deemed to
include an additional liability for $1.2 million in reserves in the category
"Policy and Contract Benefits" over the reserves which otherwise have been
shown on the Estimated Balance Sheet and Final Balance Sheet based upon the
methodology for computing reserves used by Ernst & Young in the 1994 Audit
Report.
(d) Section 7.01 of the Agreement is amended to delete the words "the
Comfort Letter of Ernst & Young on Estimated Balance Sheet in the form of
Exhibit 7.01A,".
(e) Section 3.04(c) of the Agreement is amended by deleting the words
"the Closing Date" in the second and third lines thereof and replacing them
with the words "April 30, 1995".
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(f) Section 3.04(d) of the Agreement is amended by deleting the words
"the Closing Date in the fifth line thereof and replacing them with the words
"April 30, 1995".
4. Computer Services.
At Closing, the parties shall enter into the Computer Services Agreement
in the form attached hereto as Exhibit 4.04(a)-A, and the Software License
Agreement in the form attached hereto as Exhibit 4.04(b)-A, which such
Exhibits shall replace Exhibits 4.04(a) and 4.04(b), respectively, attached to
the Agreement at the time it was executed on December 20, 1994.
5. Transferred Employees.
The second sentence of Paragraph 1 of Schedule 4.05 of the Agreement
shall be deleted and replaced with the following:
A list of all Transferred Employees and their proposed
salaries at Buyer has been mutually prepared by the
parties as of the date of Closing.
6. Relocation Plan; Real Estate.
(a) The provisions of Section 4.03(b) of the Agreement are deleted and
replaced with the following: "The parties recognize that some of the
Transferred Employees are currently located in the West Building and the Main
Building in space to be leased by Buyer under a separate Lease Agreement
executed at Closing and attached hereto as Exhibit 4.03(a). Seller agrees to
provide at its expense certain partitioning within the West and Main Buildings
(including the construction of walls) to provide for segregation of Seller's
and Buyer's employees and to bring selected groups together (i.e., executives)
and to perform certain mutually agreeable relocation by December 1, 1995
required to rationalize the work force configuration during the ensuing period
of the Lease Agreement delivered at Closing, provided, however, that such
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<PAGE> 7
partitioning and relocation shall be moderate in scope and the parties shall
cooperate to mitigate such relocation; and provided, further, that in no event
shall Seller be obligated to pay more than $400,000.00 in total expenses for
such partitioning and relocation.
(b) Buyer shall not purchase the West Building and associated parking
lots. Accordingly, the second through seventh sentences of Section 4.03(a) of
the Agreement are deleted and replaced with the following:
At Closing, Seller and Buyer shall execute and deliver
an amendment to that certain Real Estate Transfer
Agreement dated March 15, 1995 by and between
Provident Life and Accident Insurance Company and
Buyer, which amendment shall be in the form attached
hereto as Exhibit 4.03(a)(1)-A (the "Real Estate
Amendment").
7. Section 4.07 Related Agreements/Stop-Loss Business.
(a) Section 4.07 of the Agreement is deleted in its entirety and
replaced with the following:
4.07 Related Agreements.
(a) At Closing, the parties will enter into
two Reinsurance Agreements in substantially in the
form of Exhibit 4.07A-A, one of which will be
applicable to the Insured Medical Business transferred
by Provident Life and Accident Insurance Company, and
one of which will be applicable to the Insured Medical
Business transferred by Provident Life and Casualty
Insurance Company. As of March 8, 1995, the parties
entered into an Administration and Services Agreement
(the "Original Administration Agreement") in
substantially the form of Exhibit 4.07B-A and, as of
Closing, the parties will enter into an Amended and
Restated Administration and Services Agreement which
will supersede such Original Administration Agreement.
(b) The parties acknowledge and agree that the Retained Business
includes, without limitation, all medical stop loss coverages and products
defined as the "Stop Loss Business" in the Stop-Loss Servicing and Marketing
Agreement which shall be executed by the parties at Closing and which is
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<PAGE> 8
attached hereto as Exhibit 4.07C (the "Medical Stop Loss Servicing
Agreement"). At Closing, the parties will also enter into a Medical Stop Loss
Reinsurance Agreement (the "Stop Loss Reinsurance Agreement"), in the form
attached hereto as Exhibit 4.07D and the Stop Loss Agreement ("Stop Loss
Agreement") in the form attached hereto as Exhibit 4.07E.
8. Definition of Buyer.
The following definition shall be substituted for the definition of
Buyer in page A-3 of Appendix I to the Agreement:
"Buyer" shall mean Healthsource, Inc.; provided,
however, that Buyer shall have the right to direct
that any of the Transferred Assets be transferred
directly to any designated subsidiary of Buyer
(including without limitation HTPA and HPIC) and to
direct that any such subsidiary of Buyer assume any
Assumed Liabilities; it being the agreement of the
parties that Buyer shall be the purchaser of all the
Transferred Assets for federal tax purposes, and
shall, in the event of such a directed transfer and
assumption, be considered to have immediately
transferred such assets and liabilities to such
subsidiary.
9. Section 17.01.
In the third sentence of Section 17.01 of the Agreement, the words, "on
or prior to the Closing" shall be deleted and replaced with the words,
"promptly after the parties have allocated the Purchase Price".
10. Section 17.09.
Section 17.09 is amended to delete after the word "Section" in the tenth
line thereof the words "5 ("Alternative Procedure")" and insert in place
thereof "4 ("Standard Procedure")" and further to insert the word "any" in the
last line thereof between the words "of" and "information".
11. Services.
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<PAGE> 9
Section 4.03(c) of the Agreement is amended to delete the entire section
and insert in its place the following:
Seller and Buyer shall execute and deliver at Closing the Corporate
Services Agreement in the form attached hereto as Exhibit 4.03(c)(1)
(the "Corporate Services Agreement"), and the Transitional Services
Agreement in the form attached hereto as Exhibit 4.03(c)(2) (the
"Transitional Services Agreement").
12. Non-Competition Agreements.
Seller and Buyer agree that the form of the Healthsource Non-Competition
Agreement executed at Closing shall be as attached hereto as Exhibit 18-A and
the form of the Provident Non-Competition Agreement executed at Closing shall
be as attached hereto as Exhibit 13-A, which Exhibits shall replace Exhibits
18 and 13 to the Agreement, respectively.
13. "As of" Closing.
Seller and Buyer agree that, subject to satisfaction or waiver of all
conditions to Closing, the Closing of the transactions contemplated in this
Agreement shall take place on May 31, 1995 but deemed to be effective as of
the close of business on April 30, 1995 for financial, accounting and other
purposes. Notwithstanding the actual transfer of title to some or all of the
Transferred Assets on the Closing date, or the actual date of employment by
Buyer of the Transferred Employees, specifically, but not in limitation
thereof, all of the revenues of the Transferred Business will belong to the
Buyer, all of the expenses and liabilities of the Transferred Business will be
assumed by Buyer (to the extent required to be assumed in the Agreement), and
the entire risk of gain or loss relating to the operation of the Transferred
Business shall pass to the Buyer, effective at the close of business on April
30, 1995; provided that Seller represents and warrants to Buyer that no
material adverse change has occurred in the Transferred Business from April 30
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<PAGE> 10
to the Closing (except to the extent that any adjustment to the purchase price
reflected in this Third Amendment is deemed by Buyer to reflect such a
material adverse change). Seller and Buyer shall cooperate to account for the
financial affairs of the Transferred Business for the period between the close
of business on April 30, 1995 through the physical Closing date to fully and
fairly effect the intent of the parties specified herein. Without in any way
limiting the generality of the foregoing, Seller and Buyer further
specifically agree that, notwithstanding any provision in the Agreement to the
contrary:
(a) Payroll for Transferred Employees. The Transferred Employees
shall become employees of Buyer on May 27, 1995. Buyer shall reimburse
Seller for the cost of the payroll for Transferred Employees for the
period May 1, 1995 through May 26, 1995. In addition, the closing pro-
rations for vacation, sick leave and personal leave required by Section
6.05(a) of the Agreement shall be as of April 30, 1995.
(b) Benefits for Transferred Employees. Buyer shall be responsible
for providing benefits to the Transferred Employees as specified in the
Asset and Stock Purchase Agreement beginning on May 27, 1995 at the
level of benefits provided in Schedule 4.05(a) of the Purchase Agreement
and shall reimburse Seller for Seller's cost of contributions for
benefits provided by Seller for the period May 1, 1995 through May 26,
1995.
(c) Operating Accounts/Entrusted Funds. Seller and Buyer agree that
all operating bank accounts, Entrusted Funds and other accounts included
in the Transferred Business were assigned provisionally to Buyer at the
close of business on April 30, 1995 and Seller and Buyer shall assure
that such funds were applied to the operation of the Transferred
Business in the ordinary course of business through the Closing date.
(d) Purchase Price. Buyer shall pay at Closing interest on the cash
portion of the Purchase Price from May 1 to Closing at 9% per annum plus
an amount equal to dividends on the Preferred Stock for the month of
May; dividends on the Preferred Stock shall accrue from June 1, 1995.
(e) Real Estate and Lease Prorations. The closing pro-rations
required by Section 6.05(b) of the Agreement shall be as of April 30,
1995.
(f) Definition of Closing Date. For purposes of Sections 8.01, 17.03,
17.04, 17.05 and 17.06 of the Agreement, and for purposes of the
following definitions set forth in Appendix I to the Agreement, the term
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"Closing" or "Closing Date" shall mean the close of business on April
30, 1995:
Acceptable Financial Assets
Accounts Receivable
Assumed Liabilities
Excluded Liability
Insurance Contracts
Insurance Liabilities
13A. Definition of "Tangible Assets".
The definition of "Tangible Assets" at page A-9 of Appendix I to the
Agreement shall be amended by deleting the words beginning with "all" in the
first line and ending with "Building" in the thirteenth line, and replacing
such words with the following: "all of the furniture, fixtures, equipment and
supplies located at the West Building or the Main Building and used in the
operation of the Transferred Business"
14. No Waivers.
Seller and Buyer agree that any actions taken in anticipation of or in
connection with the Closing, and the execution of this Third Amendment will in
no way be considered as a waiver or modification of any of the terms of the
Asset and Stock Purchase Agreement or other material agreements executed by
the parties or any rights of the parties pursuant thereto, except as otherwise
set forth in this Third Amendment.
15. Terms of Agreement.
Except as specifically amended in this Closing Amendment, all terms and
provisions of the Agreement shall remain unchanged and continue to be
effective and binding upon the parties hereto.
16. Updated Disclosure.
Seller has supplemented its disclosures under the Agreement in form
acceptable to Buyer and such supplemented disclosures are contained in a
separate binder delivered under Section 10.01(l) at Closing and initialed by
the parties.
17. Definition of Transaction Agreements.
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<PAGE> 12
The definition of "Transaction Agreements" on page A-9 of Appendix I to
the Agreement shall be amended to add the following words at the end thereof:
"the Stop Loss Reinsurance Agreement, the Corporate Services Agreement, the
Transitional Services Agreement, the Real Estate Amendment, the Stop-Loss
Agreement and the Stop-Loss Servicing and Marketing Agreement and any other
agreement referred to in the Third Amendment."
18. Consents to Assign Reinsurance Treaties.
Section 10.01(q) of the Agreement is deleted in its entirety, and
Section 3.04(d) of the Agreement is amended to delete the words "provided that
the Proposed Final Balance Sheet shall take into account only those
Reinsurance Treaties relating to the Insured Medical Business for which
consent has been obtained pursuant to Section 10.01(q)."
19. Entire Agreement.
This Third Amendment along with the First and Second Amendments to the
Agreement, the Agreement, the Transaction Agreements and the other documents
and agreements delivered at Closing embody the entire agreement and
understanding of the parties with respect to the subject matters hereof and
thereof and supersede any prior agreement and understanding between the
parties; there are no restrictions, promises, warranties, covenants or
understandings other than as set forth or referred to herein or therein.
20. Definitions.
Capitalized terms used but not defined herein shall have the meanings
assigned in the Agreement.
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<PAGE> 13
IN WITNESS WHEREOF, the parties have executed this Closing Amendment to
the Agreement as of the date first written above.
WITNESS PROVIDENT LIFE AND ACCIDENT INSURANCE
COMPANY OF AMERICA
By: /s/ Thomas R. Watjen
--------------------------- -----------------------------------------
Thomas R. Watjen, Executive Vice President
PROVIDENT LIFE CAPITAL CORPORATION
By: /s/ Thomas R. Watjen
--------------------------- -----------------------------------------
Thomas R. Watjen, Executive Vice President
PROVIDENT LIFE AND ACCIDENT INSURANCE
COMPANY
By: /s/ Thomas R. Watjen
--------------------------- -----------------------------------------
Thomas R. Watjen, Executive Vice President
PROVIDENT LIFE AND CASUALTY INSURANCE
COMPANY
By: /s/ Thomas R. Watjen
--------------------------- -----------------------------------------
Thomas R. Watjen, Executive Vice President
PROVIDENT HEALTH CARE PLANS, INC.
By: /s/ James H. Pesnell
--------------------------- -----------------------------------------
James H. Pesnell, President
HEALTHSOURCE, INC.
By: /s/ Norman C. Payson, M.D.
--------------------------- -----------------------------------------
Norman C. Payson, M.D., President
13
<PAGE> 14
EXHIBIT 19.06-B TO THIRD AMENDMENT
Terms of Subordinated Healthsource Notes to be accepted by Provident in
exchange for Class A Preferred:
1. Notes will be subordinated to all debt for borrowed monies other
than debt by its terms expressly junior to the Notes.
2. Notes will have a maturity date of ten (10) years from issuance
with a balloon payment of principal at maturity; Notes will be
pre-payable at any time after the fifth anniversary of the date
of issuance thereof without premium or penalty.
3. The interest rate on the Notes shall be determined as follows:
On the date of the exchange, the Buyer shall secure sealed
indications from investment banking firms of recognized national
standing selected by each of Buyer and the holders of the
Preferred Stock as well as an indication from a third investment
banking firm of recognized national standing selected by mutual
agreement of the parties' investment bankers (the "Third Party
Investment Bankers"), as to the indicated bid side interest
coupon on the Notes such that the Notes would trade at their face
principal amount on such date on a fully distributed basis. The
Buyer and the holders of the Preferred Stock shall review such
indications and the middle indication shall be utilized to
determine the interest rate on the Notes; provided, that if two
indications are exactly the same, such two indications shall be
utilized to determine such interest rate. Each of the three
investment banking firms will be instructed by Buyer that in
determining such bid side interest rate, it shall not take into
account any liquidity, nontransferability or blockage discounts,
and such indications shall be based on standard covenants for
similar subordinated notes which shall be provided to each
investment banking firm. The Third Party Investment Banker shall
be selected by mutual agreement of the parties' designated
investment bankers from a list of three bulge bracket investment
banking firms selected Buyer, which investment banking firms
shall not have performed material services for the Corporaton or
the holders of the Preferred Stock, within the previous three
years.
<PAGE> 1
EXHIBIT 10.2
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT dated as of May 31, 1995 by and among
HEALTHSOURCE, INC., a New Hampshire corporation (the "Company") with a
principal office at Two College Park Drive, Hooksett, New Hampshire 03106 and
PROVIDENT LIFE AND ACCIDENT INSURANCE COMPANY, a Tennessee corporation
("Provident") with a principal office at One Fountain Square, Chattanooga,
Tennessee 37402.
WHEREAS, pursuant to an Asset and Stock Purchase Agreement dated as of
December 20, 1994, as amended (the "Purchase Agreement") the Company has
issued to Provident 1,000,000 shares of its Class A Cumulative Preferred
Stock, $100 stated value ("Preferred Stock"), and
WHEREAS, Provident wishes to be granted certain registration rights with
respect to the Preferred Stock and to the Company's Subordinated Notes which
the Company has the right to issue in exchange for the Preferred Stock (the
"Notes") pursuant to the Third Amendment to the Purchase Agreement, and the
Company wishes to grant to Provident certain registration rights with respect
to such Preferred Stock and Notes, upon all the terms and conditions herein
set forth. Any holders to whom Provident transfers Preferred Stock or Notes
shall not have any registration rights hereunder, except such Registration
Rights shall be available to any affiliate of Provident in the event of an
internal restructuring or reorganization of Provident, to a holder of the
Preferred Stock following a change of control of Provident as provided herein,
or to a holder pursuant to Section 10 hereof.
NOW THEREFORE, in consideration of the mutual agreements contained
herein, the Company and Provident agree as follows:
ARTICLE I
Registration Rights
1. Demand Registration. To the extent Provident and the other holder
(if any) have not already sold all of the Preferred Stock or Notes and subject
to the provisions of this Agreement, the Company shall, upon the written
demand of Provident given at any time (x) after June 1, 1997, in the case of
the Preferred Stock, and (y) at any time after the issuance of the Notes, in
the case of the Notes, use its best efforts to file a registration statement
under the Securities Act of 1933 (the "Securities Act") of such number of
shares of Preferred Stock or Notes then beneficially owned by Provident as
shall be indicated in a written demand sent to the Company by Provident (a
"Demand Registration"); provided, however, that
(i) Provident may only make Demand Registration
requests on one (1) occasion;
(ii) the Company shall not be obligated to file a demand
Registration unless Provident proposes to sell all of the shares of Preferred
Stock or all of the Notes in a firm commitment underwriting managed or co-
managed by an underwriter acceptable to the Company;
<PAGE> 2
(iii) the Company shall not be required to file any
registration statement that would require the inclusion of audited statements
of the Company for any period more recent than the Company's most recent
fiscal year and shall not be obligated to file a registration statement within
120 days after the effective date of another registration statement filed
by the Company; and
(iv) the Company shall not be required to file any registration
statement pursuant to a demand under this Section 1 if it has in process a
registration pursuant to a transaction of the type specified in Rule 145(a)
under the Securities Act and for a period of sixty (60) days after
effectiveness of such registration.
2. Indemnification by the Company. In the event of any registration of
any Preferred Stock or Notes under the Securities Act, the Company shall, and
hereby does, agree to indemnify and hold harmless Provident, its directors and
officers, each other person who participates as an underwriter in the offering
or sale of such Preferred Stock or Notes and each other person, if any, who
controls Provident or any such underwriter within the meaning of Section 15 of
the Securities Act against any losses, claims, damages or liabilities, joint
or several, to which such party or any such director or officer or underwriter
or controlling person may become subject under the Securities Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions
or proceedings, whether commenced or threatened, in respect thereof) arise out
of or are based upon any untrue statement or alleged untrue statement of any
material fact contained in any registration statement under which the
Preferred Stock or Shares were registered under the Securities Act, any
preliminary prospectus, final prospectus or summary prospectus contained
therein, or any amendment or supplement thereto, or any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein in light of the circumstances in
which they were made not misleading, and the Company shall reimburse each such
party and each such director, officer, underwriter and controlling person for
any legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, liability, action or
proceeding; provided, however, that the Company shall not be liable in any
such case to the extent that any such loss, claim, damage, liability (or
action or proceeding in respect thereof) or expense arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in such registration statement, preliminary prospectus, final
prospectus, summary prospectus, amendment or supplement in reliance upon and
in conformity with written information about Provident furnished to the
Company by Provident for use in the preparation thereof.
3. Indemnification by Provident. The Company may require, as a
condition to including the Preferred Stock or Notes in any registration
statement filed pursuant to Section 1, that the Company shall have received an
undertaking satisfactory to it from the selling shareholder or noteholder to
indemnify and hold harmless (in the same manner and to the same extent as set
forth in Section 2) the Company, each director of the Company, each officer of
the Company signing such registration statement, each person who participates
as an underwriter in the offering or sale of such Preferred Stock or Notes and
2
<PAGE> 3
each other person, if any, who controls the Company or any such underwriter
within the meaning of Section 15 of the Securities Act with respect to any
untrue statement or alleged untrue statement in or omission or alleged
omission from such registration statement, any preliminary prospectus, final
prospectus or summary prospectus contained therein or any amendment or
supplement thereto, if such untrue statement or alleged untrue statement or
omission or alleged omission was made in reliance upon and in conformity with
written information about the selling shareholder furnished to the Company by
such selling shareholder for use in the preparation of such registration
statement, preliminary prospectus, final prospectus, summary prospectus,
amendment or supplement.
4. Notices of Claims, etc.. Promptly after receipt by an indemnified
party of notice of the commencement of any action or proceeding involving a
claim referred to in Section 2 or Section 3, such indemnified party will, if a
claim in respect thereof is to be made against an indemnifying party, give
notice to the latter of the commencement of such action; provided, however,
that the failure of any indemnified party to give notice as provided herein
shall not relieve the indemnifying party of its obligations under Section 2 or
Section 3, except to the extent that the indemnifying party is actually
prejudiced by such failure to give notice. In case any such action is brought
against an indemnified party, unless in such indemnified party's reasonable
judgment a conflict of interest between such indemnified and indemnifying
parties may exist or the indemnified party may have defenses not available to
the indemnifying party in respect of such claim, the indemnifying party shall
be entitled to participate in and to assume the defense thereof, with counsel
reasonably satisfactory to such indemnified party, and after notice from the
indemnifying party to such indemnified party of its election so to assume the
defense thereof, the indemnifying party shall not be liable to such
indemnified party for any legal or other expenses subsequently incurred by the
latter in connection with the defense thereof other than reasonable costs of
investigation. No indemnifying party shall be liable for any settlement of
any action or proceeding effected without its written consent. No
indemnifying party shall, without the consent of the indemnified party,
consent to entry of any judgment or enter into any settlement which does not
include as an unconditional term thereof the giving by the claimant or
plaintiff to such indemnified party of a release from all
liability in respect to such claim or litigation.
5. Other Indemnification. Indemnification similar to that specified in
Sections 2, 3, and 4 (with appropriate modifications) shall be given by the
Company and Provident with respect to any required registration or other
qualification of Preferred Stock or Notes under any federal or state law other
than the Securities Act.
6. Indemnification Payments. The indemnification required by this
Agreement shall be made by periodic payments of the amount thereof during the
course of the investigation or defense, as and when bills are received or
expense, loss, damage or liability is incurred.
7. Registration Covenants of the Company. In the event that any
Preferred Stock or Notes are to be registered pursuant to Section 1, the
3
<PAGE> 4
Company covenants and agrees that it shall use its best efforts to effect the
registration and cooperate in the sale of the Preferred Stock or Notes to be
registered and shall as expeditiously as possible:
(a) within 90 days (or less if reasonably possible without unusual
expense) prepare and file with the Securities and Exchange Commission (the
"SEC") a registration statement with respect to the Preferred Stock or Notes
on such form as determined by the Company to be appropriate (as well as any
necessary amendments or supplements thereto) (a "Registration Statement") and,
use its best efforts to cause the Registration Statement to become effective;
provided, however, that the Company may extend such 90 day period for a period
not to exceed 90 days if the Company would be required to disclose in the
Registration Statement any material nonpublic information and the Company
reasonably concludes that the disclosure of such information would be
inadvisable at that time;
(b) prior to the filing described in clause (a), furnish to
Provident copies of the Registration Statement and any amendments or
supplements thereto and any prospectus forming a part thereof;
(c) notify Provident, promptly after the Company shall receive
notice thereof, of the time when the Registration Statement is to become
effective or when any amendment or supplement or any prospectus forming a part
of the Registration Statement has been filed;
(d) notify Provident promptly of any request by the SEC for the
amending or supplementing of the Registration Statement or prospectus or for
additional information;
(e) (i) advise Provident after the Company shall receive notice or
otherwise obtain knowledge of the issuance of any order by the SEC suspending
the effectiveness of the Registration Statement or any amendment thereto or of
the initiation or threatening of any proceeding for that purpose and (ii)
promptly use its best efforts to prevent the issuance of any stop order or to
obtain its withdrawal promptly if a stop order should be issued;
(f) furnish to Provident and to each underwriter such number of
copies of the Registration Statement, each amendment and supplement thereto,
the prospectus included in the Registration Statement (including any
preliminary prospectus) and such other documents as Provident may
reasonably request in order to facilitate the disposition of the Preferred
Stock or Notes owned by Provident;
(g) make reasonable efforts to register or qualify such Preferred
Stock or Notes under such other securities or blue sky laws of such
jurisdictions as determined by the underwriters after consultation with the
Company and Provident and do any and all other acts and things which may
be reasonably necessary or advisable to enable Provident to consummate the
disposition in such jurisdictions of the Preferred Stock or Notes, provided
that the Company shall not be obligated to qualify to do business as a foreign
corporation under the laws of any jurisdiction in which it shall not then be
qualified or subject itself to taxation in any jurisdiction in which it would
4
<PAGE> 5
not otherwise be subject to taxation;
(h) notify Provident, at any time when a prospectus relating thereto
is required to be delivered under the Securities Act, of the happening of any
event as a result of which the Registration Statement would contain an untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading,
and, at the request of Provident, prepare a supplement or amendment to the
Registration Statement so that the Registration Statement shall not, to the
Company's knowledge, contain an untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading;
(i) use its best efforts to facilitate the listing of the Preferred
Stock or Notes on a securities exchange or the trading thereof through a
self-regulatory organization;
(j) provide a transfer agent and registrar, which may be a single
entity, for all the Preferred Stock or Notes not later than the effective date
of the Registration Statement;
(k) (i) make available for inspection by Provident, any
underwriter participating in any disposition pursuant to the Registration
Statement and any attorney, accountant or other agent retained by Provident or
any such underwriter all financial and other records, pertinent corporate
documents and properties of the Company reasonably requested by Provident and
such persons and (ii) cause the Company's officers, directors and employees to
supply all information reasonably requested by Provident or any such
underwriter, attorney, accountant or agent in connection with the
Registration Statement;
(l) use its best efforts to cause the Preferred Stock or Notes
covered by the Registration Statement to be registered with or approved by
such other governmental authorities as may be necessary to enable Provident to
consummate the disposition of such Preferred Stock or Notes; and
(m) if the offering is underwritten, on the date that Preferred
Stock or Notes are delivered to the underwriters for sale pursuant to such
registration: (i) an opinion dated such date of counsel representing the
Company for the purposes of such registration, addressed to the underwriters
and to Provident, stating that such registration statement has become
effective under the Securities Act and that (A)to the best knowledge of such
counsel, no stop order suspending the effectiveness thereof has been issued
and no proceedings for the purpose have been instituted or are pending or
contemplated under the Securities Act, (B) the registration statement, the
related prospectus and each amendment or supplement thereof comply as to form
in all material respects with the requirements of the Securities Act (except
that such counsel need not express any opinion as to financial statements
contained therein) and (C) to such other effects as reasonably may be
requested by counsel for the underwriters or by Provident or its counsel and
(ii) a letter dated such date from the independent public accountants retained
by the Company, addressed to the underwriters and to Provident, stating that
5
<PAGE> 6
they are independent public accountants within the meaning of the
Securities Act and that, in the opinion of such accountants, the financial
statements of the Company included in the registration statement, the related
prospectus or any amendment or supplement thereof, comply as to form in all
material respects with the applicable accounting requirements of the
Securities Act, and such letter shall additionally cover such other financial
matters (including information as to the period ending no more than five
business days prior to the date of such letter) with respect to such
registration as such underwriters reasonably may request.
In the event that Provident seeks Demand Registration rights pursuant to
Section 1(a), the Company may, in its sole discretion, in lieu of registering
the Preferred Stock or Notes for which registration is sought, elect to
repurchase such Registration Rights
Preferred Stock or Notes from Provident; Provident and each holder of
Preferred Stock or Notes hereby grants the Company an option to purchase such
Preferred Stock or Notes. If the Company so elects, it shall give notice of
the same to Provident within twenty (20) days of receipt of a Provident demand
or request for registration, following which it shall close the repurchase of
such Preferred Stock or Notes within an additional thirty (30) days. The
repurchase price shall be (i) with respect to Notes, the market value of such
Notes and (ii) with respect to the Preferred Stock, the market value of such
shares plus any dividends accrued thereon and owed pursuant to Section 4 of
the Preferred Stock Designation. For the purposes of this Section 7, the
market value of the Notes or the Preferred Stock shall be determined by the
same procedure (obtaining indications of fair market value from three
investment banking firms of recognized national standing) specified in either
the Preferred Stock Designation or Exhibit 19.06-B to the Third Amendment to
the Asset and Stock Purchase Agreement (in each case as of date (other than
Monday or Friday) during the second business week following the week in which
Provident has demanded registration pursuant to Section 1 hereof. Such
repurchase shall be effected through the delivery of all relevant stock
certificates or notes, free and clear of all liens and encumbrances, with
appropriate stock powers, against receipt of wire transfer funds for the
aggregate purchase price.
8. Cooperation of Provident. As a condition to the Company's
obligation to effect a Demand Registration, Provident shall cooperate with the
Company and (i) provide all requested information and certifications; (ii)
enter into, if required by the underwriters, an underwriting agreement
containing customary terms and conditions; (iii) execute a power of attorney
and custody agreement for the Preferred Stock or Notes to be sold; and, (iv)
execute such other documents as shall be reasonably necessary to accomplish
the registration.
9. Expenses. Except as provided in the last sentence hereof, Provident
and the Company shall each pay one-half of all the expenses in connection with
any Demand Registration (provided that the Company's share shall be limited to
$100,000), including all registration, filing and regulatory review fees, all
fees and expenses of complying with securities or blue sky laws, all listing
fees, all word processing, duplicating and printing expenses, all messenger
6
<PAGE> 7
and delivery expenses, the fees and disbursements of counsel for the Company
and of its independent public accountants (including the expenses of comfort
letters required by or incident to such performance and compliance), the
reasonable fees and disbursements of any counsel retained by the Company or
Provident and any fees and disbursements of underwriters customarily paid by
issuers or sellers of securities, but excluding any underwriting discounts and
commissions, and transfer taxes, if any (collectively "Expenses").
Notwithstanding the foregoing, in any registration, pursuant to this
Registration Rights Agreement, Provident shall pay for its own underwriting
discounts and commissions, and transfer taxes, if any.
10. No Assignment. Provident's rights under this Agreement may not be
assigned except to an affiliate of Provident in the event of an internal
reorganization or (ii) to the holder of the Preferred Stock following a change
of control as defined in Section 19.05(b) of the Purchase Agreement or (iii)
jointly with Provident to a holder of Preferred Stock or Notes, provided such
holder beneficially owns at least ten percent (10%) of the Preferred Stock or
Notes outstanding and, provided further, such holder is the only holder of
such securities in addition to Provident or one of its affiliates.
11. Termination. Provident's rights under Section 1 to a Demand
Registration shall cease immediately (and this Agreement shall terminate)
after the fourth anniversary hereof if Provident shall at any time thereafter
own less than either 500,000 shares of Preferred Stock or $50,000,000
principal amount of Notes.
12. Confidentiality. Provident and the Company each agrees that it will
not use, disseminate or transmit to an unauthorized party any confidential
information regarding the other obtained as a result of any of the
transactions contemplated by this Agreement.
13. Miscellaneous.
(a) Amendments and Waivers. This Agreement may be amended and the
Company may take any action herein prohibited, or omit to perform any act
herein required to be performed by it, only if the Company shall have obtained
the written consent to such amendment, action or omission to act, of
Provident.
(b) Notices. All communications provided for hereunder shall be
sent by first class mail:
If to the Company, to: Healthsource, Inc.
Two College Park Drive
Hooksett, NH 03106
Attn: Norman C. Payson, M.D.
President
7
<PAGE> 8
with a copy to: Sheehan Phinney Bass + Green,
Professional Association
1000 Elm Street, P.O. Box 3701
Manchester, NH 03105-3701
Attn: Jon S. Richardson, Esq.
If to Provident, to: Provident Life and Accident
Insurance Company
One Fountain Square
Chattanooga, TN 37402
Attn: J. Harold Chandler
President
with a copy to: Alston & Bird
One Atlantic Center
1201 West Peachtree Street
Atlanta, GA 30309-3424
F. Dean Copeland, Esq.
(c) Headings. The descriptive headings of the several ections and
paragraphs of this Agreement are inserted for convenience only and do not
constitute a part of this Agreement.
(d) Governing Law. This Agreement shall be construed and enforced
in accordance with, and the rights of the parties shall be governed by, the
laws of the State of New Hampshire.
(e) Counterparts. This Agreement may be executed simultaneously in
two or more counterparts, and by different parties on separate counterparts,
each of which shall be deemed an original, but all such counterparts shall
together constitute one and the same instrument, and it shall not be
necessary in making proof of this Agreement to produce or account for more
than one such counterpart.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered by their respective officer or officers thereto duly
authorized.
HEALTHSOURCE, INC.
By: /s/ Norman C. Payson, M.D.
- ------------------------ -------------------------------------
Norman C. Payson, M.D.
President and Chief Executive Officer
8
<PAGE> 9
PROVIDENT LIFE AND ACCIDENT
INSURANCE COMPANY
By: /s/ Thomas R. Watjen
- ------------------------ -------------------------------------
Thomas R. Watjen
Executive Vice President
9
<PAGE> 1
EXHIBIT 10.3
HEALTHSOURCE NON-COMPETITION AGREEMENT
This Non-Competition Agreement (the "Agreement") is dated as of the 1st of
May, 1995, by HEALTHSOURCE, INC., a New Hampshire corporation with a principal
office at Two College Park Drive, Hooksett, New Hampshire 03106, for all of
its present and future affiliates (collectively "Healthsource") in favor of
PROVIDENT LIFE AND ACCIDENT INSURANCE COMPANY OF AMERICA, a Tennessee
insurance company with a principal address at One Fountain Square,
Chattanooga, Tennessee 37402, for all of its present and future affiliates
(collectively "Provident").
WITNESSETH:
WHEREAS, pursuant to the terms of an Asset and Stock Purchase Agreement
dated as of December 20, 1994 by and among Provident, Healthsource, et al (the
"Asset and Stock Purchase Agreement"), Provident is selling to Healthsource
the Transferred Business (as defined therein); and
WHEREAS, Provident is retaining the business of writing Medical Stop-Loss
Insurance for self-funded accounts and Specific Medical Stop-Loss Insurance
for the MPP/Conventionally insured medical insurance policies transferred to
Healthsource, life insurance and group disability insurance;
WHEREAS, this Agreement is the agreement contemplated by Section 18 of the
Asset and Stock Purchase Agreement; and
WHEREAS, the parties have entered into a Stop-Loss Servicing and Marketing
Agreement of even date herewith;
NOW, THEREFORE, as an inducement for and in satisfaction of a condition to
the consummation by Provident of the transactions contemplated by the Asset
and Stock Purchase Agreement, and for other good and valuable consideration,
receipt of which is hereby acknowledged, Healthsource agrees with Provident as
follows:
1. Definitions. All capitalized terms not otherwise defined herein
shall have the meanings accorded to them in the Asset and Stock Purchase
Agreement unless the context otherwise requires.
2. Marketing Arrangements. Healthsource and Provident believe that they
will be strategically aligned to offer complementary products to employer
groups subsequent to the Closing under the Asset and Stock Purchase Agreement.
This strategic alliance is built on a myriad of factors including
Healthsource's extraordinary inclination to utilize Provident products for the
following reasons (among others): (1) the Healthsource sales force for the
Transferred Business will be substantially Provident's prior sales force, will
be intimately knowledgeable about Provident's products, has been associated
with same, and has had a longstanding commitment to Provident; (2)
Healthsource will make use of Provident's name pursuant to the Name License
Agreement and thus will be strongly identified with Provident in the
marketplace; (3) Healthsource will be utilizing the same information system as
Provident (see Computer Services Agreement); (4) Healthsource will be sharing
<PAGE> 2
administrative and sales offices with Provident; (5) Healthsource's Board of
Directors will include a representative of Provident; (6) Provident will have
a substantial equity investment in Healthsource; (7) Provident is the
principal existing insurer for products in the Transferred Business; (8)
Provident and Healthsource will have principal administrative offices in
physically contiguous locations in Chattanooga, Tennessee; (9) Healthsource
and the Transferred Business management hold Provident and its senior
management in high esteem and believe that the working relationship among the
respective senior management teams will continue to be positive. For these and
other factors the parties have strong reason to believe that their strategic
alliance will position Provident's Retained Business to expand after Closing.
Healthsource therefore agrees to use good faith efforts to allow Provident's
Retained Business an opportunity to prosper through the inherent relationships
of the parties. By "good faith efforts" the parties mean only that
Healthsource will provide information on results of prior sales efforts in a
mutually agreeable form (such information transfer will be limited if it
impedes Healthsource's ability to function in the marketplace or is excluded
due to account confidentiality requirements) and further agrees to have
Healthsource periodically meet with Provident senior managers to candidly
review and discuss problems and opportunities with the intent of providing
Provident with additional insight that could significantly assist Provident in
its marketing efforts. If Provident believes Healthsource is not using good
faith efforts as defined above or otherwise is not acting in the spirit of the
relationship it agrees to immediately notify Healthsource senior management
specifically stating its concerns and permitting Healthsource to cure any such
failure. Provident shall have no claims for damage arising from any
Healthsource action or inaction until it has given such notice and accorded an
opportunity to cure.
The above notwithstanding the parties, while recognizing each other's good
intentions in this strategic alliance, acknowledge that neither party can
predict with certainty changes in the market, evolving resources of either
party (including its senior management personnel) or evolving corporate
priorities of either organization. Healthsource for its part will need to
satisfy its clients' wishes for excellent, competitively priced products or
face substantial damage to its business. The Healthsource sales personnel
(whether employees, brokers or agents) will also need to receive competitive
commissions. Provident may not always choose to actively and aggressively bid
to be a provider for Healthsource clients as Provident desires to maintain its
flexibility as to the depth and extent to which it will write such business.
For these reasons, neither party can be dependent upon or exclusively linked
with the other. Therefore the parties agree that each should be independent
and not legally bound to serve the other's business other than as contemplated
by this Agreement.
The parties agree to work together in good faith to develop an ongoing
Joint Marketing Program (the "Joint Marketing Program") designed to share
appropriate information concerning products, clients and potential clients,
training and marketing arrangements for sales personnel about the other
party's products and compensation arrangements for the other party and its
sales personnel. In this connection, but with respect to Provident's Medical
Stop-Loss Insurance products only, Healthsource will be provided with
Provident's underwriting standards, pricing and other placing criteria (the
"stop-loss guidelines") and will be kept current with regard to Provident's
2
<PAGE> 3
changes thereto.
3. Non-Competition Covenant. Subject to the last sentence of this
section, Healthsource agrees not to write for its own account on its own
policies any Medical Stop-Loss Insurance, group long-term and short-term
disability insurance or group life insurance ("Covered Products") during the
applicable Restrictive Period defined below with respect to the geographic
areas or clients defined opposite each such period (collectively the
"Restrictive Covenant"); provided that the Restrictive Covenant shall cease
and terminate permanently if any of the following events occur (i) a Change in
Control (as defined in the Asset and Stock Purchase Agreement) affecting
Provident or Healthsource or a breach by Provident of the Standstill Covenant
in Section 20 of the Asset and Stock Transfer Agreement; (ii) if Provident
shall have failed in any six month period to provide the client- accepted bid
on Medical Stop-Loss Insurance for at least 50% of the stop-loss premium
clients for whom Healthsource has received or renewed the business and has
introduced Provident during such period and which are reasonable prospects for
Provident to place medical stop-loss products; (iii) if Provident ceases to
actively engage in the medical stop-loss business by failing to regularly and
within seven (7) calendar days following receipt of all required data quote
stop-loss products to employer accounts; (iv) Provident experiences a
reduction in its insurance rating (claims paying ability or financial
condition) by more than two categories (without regard to downgrades that are
reasonably determined by Provident to be industry-wide) from at least two (2)
major rating agencies; (v) Provident fails to offer Healthsource and its
associated brokers and agents a competitive commission on all Provident
stop-loss products sold by them after such circumstance has been reasonably
demonstrated by Healthsource to Provident with information on comparable
commission structures and Provident fails to take reasonable corrective action
within sixty (60) days; or (vi) Provident shall become non-competitive with
regard to Covered Products for any reason and such "non-competitive" condition
is reasonably demonstrated by Healthsource to Provident with information
concerning comparable products offered by competing companies and Provident
fails to take reasonable corrective action within sixty (60) days. Nothing
herein shall prevent Healthsource from placing in any account anywhere in the
United States, as broker, agent or consultant, any Covered Product written by
any other insurance company, or prevent Healthsource from insuring any of its
HMOs or other affiliates against health care expense or other loss on such
terms as Healthsource deems appropriate. Nothing in this document shall
preclude Healthsource from (i) directly (and for its own exclusive benefit)
including within its minimum premium or conventionally insured,
experience-rated health insurance policies Aggregate Medical Stop-Loss
Insurance (as defined in Section 11.01) or (ii) directly including within its
minimum premium or conventionally insured, experience-rated health insurance
policies Specific Medical Stop-Loss Insurance provided in the case of Specific
Medical Stop-Loss Insurance only Healthsource agrees to cede (or retrocede
where applicable) all of the risk and premium for such Specific Medical
Stop-Loss Insurance to either Provident or another insurer (other than
Healthsource or any of its affiliates) chosen by Healthsource in its sole
discretion, but such limited covenant to cede or retrocede shall only apply
during the applicable Restrictive Period.
4. Restrictive Periods. The following Restrictive Periods apply to the
clients and geographic areas set opposite below:
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Period From
Closing Date Client Employer/Area
3 years any potential client
headquartered in the United
States
4 years any potential client
headquartered in the four
southeastern United States
defined as TN, SC, NC, GA.
5 years any existing client of
Provident on the Closing Date
5. Permitted Insurance Acquisition. Notwithstanding the prohibitions
of Section 3, Healthsource not earlier than six (6) months from the date of
this Agreement may agree to acquire any company which writes, as one of its
lines of business a Covered Product ("Covered Product Line"); provided, with
respect to such planned acquisition, if Healthsource desires to be relieved of
the prohibitions of Section 3, Healthsource offers to sell such Covered
Product Line to Provident at the then fair market value of such business
(determined in the first instance by Healthsource's investment bankers based
upon a review of comparable transactions and other recognized applicable
investment banking valuation criteria, but nonetheless consistent with and no
higher than Healthsource's intended purchase price for such business) and
failing Provident's agreement with such value, at a price determined by
special arbitration under Section 12 below. Provident agrees that in order to
maintain its rights under the foregoing Healthsource offer it must indicate
interest within ten (10) days of receipt thereof and accept such offer within
thirty (30) days of receipt of same by entering into a binding definitive
Purchase and Sale Agreement for such business containing only terms typical
for such transactions (or as contemplated by Healthsource in its purchase of
the Covered Product Line), and thereafter close such acquisition as soon as
any required regulatory approvals are obtained, using indemnity reinsurance or
any other approved vehicle to substantially accomplish same. Notwithstanding
the foregoing, Healthsource shall not be under any obligation to offer to sell
the Covered Product Line to Provident provided Healthsource takes other steps
to comply with the Restrictive Covenant and provided Healthsource does not
agree to acquire a business which writes a Covered Product Line prior to six
(6) months from the date of this Agreement.
6. Entry Into Business Subject to Restrictive Covenant. At such point
in time as Healthsource has been relieved of the Restrictive Covenant for any
reason, Healthsource may enter the Covered Product business provided that
Healthsource first gives Provident thirty (30) days notice of its intent so to
do. In the event that Healthsource gives such notice of intent, Provident may
exercise its rights under the Name License Agreement to cancel Healthsource's
right to the use of the "Provident" name.
7. Limitation or Equitable Remedies; Arbitration. For a period of two
(2) years from the Closing, Healthsource acknowledges that Provident shall be
entitled to equitable relief from a court of competent jurisdiction in order
to enjoin any violation of the Restrictive Covenant; however, after such two
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<PAGE> 5
(2) year period, the parties agree that monetary damages are sufficient and
agree that Provident shall have no right to seek injunctive or other equitable
remedies with respect to any breach of the Restrictive Covenant by
Healthsource. Provident's only remedy for such a breach after such two (2)
year period by Healthsource is for money damages which, in view of the
difficulty of calculating same, are agreed to be liquidated in an amount equal
to the profit on any Covered Product written in violation of the Restrictive
Covenant, except in instances of bad faith or intentional breach in which case
the money damages shall not be so limited. The right to obtain such
liquidated damages or the right to obtain money damages for the breach of any
other provision of this Agreement and a determination as to the existence of a
breach of this Agreement shall be limited to a binding arbitration proceeding
pursuant to Section 21 of the Asset and Stock Purchase Agreement.
8. Acknowledgement of Reasonableness; Severability. Healthsource
acknowledges and agrees that the duration, scope and geographical area for
which this Agreement is to be effective have been specifically negotiated by
the parties and specifically agrees that such duration, scope and geographical
area are reasonable. If any provision of this Agreement is determined by any
arbitration panel to be invalid or unenforceable by reason of such provision
extending the covenants and agreements contained herein for too great a period
of time or over too great a geographical area, or by reason of its being too
extensive in any other respect, such agreement or covenant shall be
interpreted to extend only over the maximum period of time and geographical
area, and to the maximum extent in all other respects, as to which it is valid
and enforceable, all as determined by such panel. Should any provision of
this Agreement or part thereof be held under any circumstances in any
jurisdiction to be invalid or unenforceable, such validity or
unenforceability shall not affect the validity or enforceability of any other
provisions or other part of such provision, or of such provision or part
thereof under any other circumstances or in any other jurisdiction.
9. Governing Law. The construction, validity and enforceability of this
Agreement shall be governed by the internal laws of the State of Tennessee
without regard to the conflicts of law principles thereof.
10. Exceptions. Notwithstanding anything to the contrary in this
Agreement Healthsource, through its affiliate Healthsource Indiana Insurance
Company, may continue the sale of group life products to employers
headquartered or located in the State of Indiana free of any constraints of
this Agreement. The terms "Medical Stop-Loss Insurance", "Aggregate Stop-Loss
Insurance" or "Specific Stop-Loss Insurance" shall not under any circumstances
be deemed to include insurance or reinsurance of Healthsource's exposure to
individual or aggregate health care expense at various expense levels, which
insurance or reinsurance Healthsource, HPIC or any of their HMO or other
affiliates shall be free to arrange with any insurance company without
reference to this Agreement or any other agreement with Provident.
11. Definitions.
11.01 "Aggregate Medical Stop-Loss Insurance" means insurance
which limits the aggregate benefits that may be charged against the claims
experience of an insured experience-rated plan (whether a conventionally
insured or minimum premium plan) with respect to all covered persons
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<PAGE> 6
during the policy year.
11.02 "Specific Medical Stop-Loss Insurance"
(also referred to as Excess Medical Pooling) means insurance which limits the
benefits that may be charged against the claims experience of an insured
experience-rated plan (whether a conventionally insured or minimum premium
plan) with respect to each individual covered person during the policy year.
11.03 "Medical Stop-Loss Insurance" shall include both Aggregate
and Specific Stop-Loss Business Insurance unless otherwise
limited.
12. Special Arbitration. In the sole event of a dispute over the value
of Healthsource's Covered Product Line business as determined by its
investment bankers under Section 5 above, such dispute shall be resolved by
having a third national investment banking firm (selected by the Healthsource
and Provident investment bankers) determine the value of such Covered Business
Product Line within twenty (20) days of appointment and after giving each
party's banker an opportunity to argue and defend its position on value,
provided that the finally determined value shall be consistent with and not
higher than the Healthsource intended purchase price for such business.
13. Limitation on Claims. No claim by Provident for damages or a
determination of the existence of a breach of the Restrictive Covenant shall
be made after six (6) months from the date of the conduct giving rise to such
claim, provided Provident has knowledge of the facts which would be the basis
of such claim.
14. Notices. All notices, consents, demands, requests, approvals and
other communications, which are required or may be given hereunder shall be in
writing and shall be deemed to have been duly given if hand-delivered or
mailed certified first class mail, postage prepaid. Notice shall be deemed
effective on the date of such hand delivery or three (3) days after (not
including Sundays and federal holidays) the date of mailing of such certified
mail:
(i) If to Provident:
Provident Life and Accident Insurance
Company of America
One Fountain Square
Chattanooga, Tennessee 46204
Attn: J. Harold Chandler
President and CEO
with a copy to:
Alston & Bird
One Atlantic Center
1201 W. Peachtree Street
Atlanta, Georgia 30309
Attn: F. Dean Copeland, Esq.
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<PAGE> 7
(ii) If to Healthsource:
Healthsource, Inc.
Two College Park Drive
Hooksett, New Hampshire 03106
Attn: Norman C. Payson, M.D.,
President and CEO
with a copy to:
Sheehan, Phinney, Bass + Green
Professional Association
1000 Elm Street
P.O. Box 3701
Manchester, New Hampshire 03105-3701
Attn: Jon S. Richardson, Esq.
or to such other person or persons at such address or addresses as may be
designated by written notice to the other parties hereunder.
15. Covenant Not to Hire. Healthsource agrees that during the period
that the Restrictive Covenant remains in effect, it will not employ, or seek
to employ, any person who is then employed by Provident, without the written
consent of Provident.
16. Waiver. The rights of a party hereunder may be waived only by a duly
executed writing expressly setting forth the rights so waived and the matters
with respect to which they are so waived, and any such waiver shall be limited
to the matters expressly set forth in such writing. No failure or delay of a
party in enforcing any of its rights hereunder at any time shall constitute or
evidence any waiver of such rights.
17. Miscellaneous. The captions of this Agreement are for convenience of
reference only and shall not affect in any manner any of the terms, covenants
or conditions hereof. This Agreement may not be modified or amended except in
writing signed by the party against whom such amendment or modification is
sought to be enforced. All prior discussions concerning the subject matter of
this Agreement are merged herein. This Agreement may be executed in any
number of counterparts, all of which taken together shall constitute a single
agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
WITNESS: HEALTHSOURCE, INC.
By: /s/ Norman C. Payson, M.D.
- --------------------- --------------------------------
Norman C. Payson, M.D.
President
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<PAGE> 8
Accepted:
PROVIDENT LIFE AND ACCIDENT INSURANCE COMPANY OF AMERICA
By: /s/ Thomas R. Watjen
------------------------------------------
Thomas R. Watjen, Executive Vice-President
8
<PAGE> 1
EXHIBIT 10.4
LEASE
One Fountain Square
THIS LEASE, made as of this 1st day of May, 1995, by and between Provident
Life and Accident Insurance Company, with a principal place of business at One
Fountain Square, Chattanooga, Tennessee 37402 (sometimes referred to as
"Provident" or "Lessor") and Healthsource Provident Administrators, Inc., a
Tennessee corporation with a principal office at One Fountain Square,
Chattanooga, Tennessee 37402 (sometimes referred to as "Healthsource" or
"Lessee").
W I T N E S S E T H :
1. Leased Premises.
Lessor, in consideration of the covenants of Lessee hereinafter recited,
does hereby lease to Lessee space in the Main Building and the West Building
which are located on the property One Fountain Square, in Chattanooga,
Tennessee (the "Property") shown on Schedule 1 to be attached hereto (the
"Leased Premises"). The Leased Premises may change, however, as certain
Transferred Employees' work stations are relocated from their current
locations in the Main Building or the West Building to other locations within
the Main Building or the West Building in accordance with the Third Amendment
to the Asset and Stock Purchase Agreement (the "Third Amendment Relocation").
Upon completion of the Third Amendment Relocation, Lessor and Lessee agree to
attach a new Schedule 1 to this Lease.
2. Common Areas.
Lessor grants Lessee the non-exclusive privilege to use the following
Common Areas: Main Building and West Building, use of lobbies, public hallways
and outside walkways. Lessee shall also have a non-exclusive right of access
in common with Lessor, other tenants and its and their business invitees,
agents, successors and assigns, in and to the parking areas, driveways,
sidewalks and access roads serving the Main Building and West Building and the
lavatories, lobbies and cafeteria and other areas within the Buildings which
may be designated by Lessor as common area.
3. Term.
The term of this Lease is four (4) years (through May 31, 1999) unless
sooner terminated in accordance with Section 14 below.
4. Rent.
The annual rent shall be determined by multiplying the Net rentable square
footage (as defined in the Builders Owners Managers Association ("BOMA")) of
the Leased Premises occupied by Lessee (as reflected on the then current
Schedule 1) by a certain rental rate. The rental rate for the portions of the
Leased Premises located on Levels A and B of the West Building and Levels A
and B of the Main Building is $10.50 per rentable square foot for the first
year. The rental rate for Floors 1-4 of the West Building and Floors 1-7 of
<PAGE> 2
the Main Building is $14.35 per rentable square foot per year (collectively,
the "Annual Rent"). The Annual Rent shall be payable in advance commencing on
the date hereof and on the first day of each month thereafter in twelve (12)
equal monthly installments.
5. Covenant of Quiet Enjoyment
Lessor hereby covenants and agrees that Lessee, upon paying the rent
herein provided and performing the agreements herein contained, shall
peaceably hold the Leased Premises.
6. Use of Leased Premises.
Lessee may use the Main Building and West Building for the purpose of
office space. Lessee shall not use the Leased Premises for the generation,
storage or treatment of any hazardous waste or substance which is regulated by
any federal, state or local statute, regulation or order and hereby certifies
that its operation or other use of the Leased Premises will not involve any
such hazardous waste or substance.
7. Taxes and Operating Expenses; Gross Lease
Lessor shall provide electricity, septic, heat, air conditioning and hot
and cold water to the Leased Premises. Heat and air conditioning shall be
supplied during the hours of 7:30 a.m. to 6:00 p.m., and at other times
requested by Lessee at a reasonable charge to Lessee. Lessor shall maintain
the Leased Premises consistent with the standards of an office building.
Accordingly, Lessor is responsible, at its sole expense, for timely and
properly performing all repairs, maintenance and replacement of the Leased
Premises and access thereto, including repairs and alterations necessary to
keep the Leased Premises in a first class condition, in compliance with all
building, fire and life safety codes, in compliance with all zoning and
environmental protection laws (including maintaining a so-called sick free
building) and in compliance with OSHA, ADA, and local/state storm drainage,
fire zone and other ordinances.
The Rent set forth above includes real estate taxes, water and sewer
charges, storm drainage assessments and other governmental charges
(collectively "Taxes") as well as all costs and expenses of management,
excluding facilities planning and telecommunications, ownership, operation and
maintenance of the Leased Premises ("Operating Expenses") including building
and cleaning supplies and equipment, costs of maintenance, cleaning, repairs,
landscaping, trash removal, water, electricity, gas, telephone and other
utilities, wages, salaries, employment taxes, janitorial, gardening, security,
elevator servicing, painting, plumbing, electrical, carpentry and window
washing for the first year of this Lease. Commencing one (1) year from the
date hereof, Lessee shall pay its Proportionate Share of the amount by which
the Taxes and Operating Expenses (excluding the cost of electricity to operate
the data processing center and computer equipment in the West Building which
shall be separately metered and the sole responsibility of Provident) exceed
the actual first year expenses. Lessee's Proportionate Share shall be the
quotient obtained by dividing the total rentable square feet occupied by
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<PAGE> 3
Lessee (based on an annual average) by the total rentable square feet of the
West Building and the Main Building. The total rentable square footage of the
West Building and Main Building is 755,432 (excluding the atrium, cafeteria
serving and seating areas, kitchen and dining rooms on the first floor of the
West Building). Furthermore, Lessee shall not be responsible for increases in
Operating Expenses greater than five Percent (5%), per annum (other than
Operating Expenses such as Taxes and utilities whose cost is not within
Lessor's control).
8. Additional Rent for Parking for Headquarters Transferees.
As of the Physical Closing Date, the Headquarters Transferees shall park
in the parking spaces assigned to them and Provident shall continue to
administer the parking lots and assignments of parking spaces in substantially
the same manner as it currently administers them including the queuing process
for new employees that work in the Main Building or the West Building
(hereinafter "Parking"). Lessor shall charge its employees and Lessee's
Headquarters Transferees the same rate for parking, i.e., if Provident raises
the charge to its employees for parking from the current charge per employee
of $4.50 per pay period to $7.00 per pay period, each Headquarters Transferee
would pay $7.00 per pay period for his or her parking space. Each month,
Lessee shall pay in advance to Lessor, as additional Rent for parking,
Provident's then current rate for an employee parking space ($4.50 per pay
period as of Closing) multiplied by the number of Headquarters Transferees
that have parking spaces assigned to them in Lessor's parking lots.
9. Maintenance and Repairs by Lessee.
Lessee agrees, at its sole expense, to keep and maintain its personal
property, in good, sanitary and neat order, condition and repair, as may be
necessary or required for its use of said Leased Premises.
10. Alterations and Improvements.
Lessee is permitted to make non-structural alterations to the interior of
the Leased Premises so long as (i) such alterations/additions do not adversely
affect the structural integrity of the Leased Premises or the building of
which it is a part, (ii) Lessee is solely responsible for any increase in
Taxes or Operating Expenses resulting therefrom, and (iii) Lessee provides
Lessor with reasonable advance notice of its intent to make alterations. All
alterations will be done in a good and workmanlike manner, lien free, and in
accordance with all applicable laws, codes, ordinances and permits. Lessee
agrees to defend, indemnify and hold Lessor harmless from any and all
mechanic's liens and other costs or damages suffered by Lessor as a result of
said alterations.
11. Fixtures.
The parties agree that any personal property owned by Lessee which may be
attached to the real estate by screws, nails or other readily detachable
means, may be removed at the stated expiration of this Lease provided that all
damage to the Leased Premises occasioned by such removal shall be repaired by
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<PAGE> 4
Lessee at his own expense to the satisfaction of Lessor, and any such fixtures
not removed by the stated expiration of this Lease, or not susceptible to
removal as aforesaid, shall be considered and remain as a part of the real
estate.
12. Assignment and Sublease.
Lessee may assign or sublet the Leased Premises, in whole or in part to
any (i) parent, subsidiary or affiliate of Lessee , or (ii) a corporation
succeeding to all or substantially all of the assets of Lessee as a result of
a sale, acquisition, consolidation or merger, or (iii) a corporation to which
all or substantially all of the assets of Tenant have been sold, with the
prior written consent of Lessor which consent shall not be unreasonably
withheld.. All other assignments and subleases shall require the prior
written consent of Lessor. If Lessee shall sublet or assign the Leased
Premises, Lessee shall, however, remain liable to Lessor for all rentals
called for under the term of this Lease and performance of all covenants
herein.
13. Insurance.
Lessee shall maintain comprehensive liability insurance in the name of and
for the benefit of Lessee and Lessor (as an additional insured), which will be
written on an occurrence form, including broad form endorsement,
products/completed operations coverage, personal injury liability coverage,
broad form property damage liability coverage and contractual
liability coverage. Such insurance must be carried at a minimum of
$1,000,000.00 per person and $3,000,000.00 per occurrence. Lessee shall
maintain insurance which contains fire and extended coverage on a replacement
basis upon its trade fixtures or equipment or improvements erected or
installed by it on the Leased Premises. All policies must be taken in
companies authorized to do business in Tennessee and must be in form
satisfactory to Lessor. Lessee shall furnish to Lessor a certificate of such
insurance which provides that the insurance indicated therein will not be
cancelled or modified without a least twenty (20) days written notice to
Lessor.
Lessor shall maintain fire and extended coverage insurance on a
replacement basis on the Building. In the event of loss, Lessee shall
cooperate with Lessor and any mortgagee in connection with the collection of
claims and shall execute and deliver to Lessor such proofs of loss, releases
and other instruments as may be necessary to settle any such claims and obtain
the proceeds thereof.
To the extent permitted without prejudice to any rights of Lessor or
Lessee under the applicable insurance policies referred to in this Lease, each
party will be held free and harmless from liability for loss or damage to the
Leased Premises and the common areas by fire, the extended coverage perils,
sprinkler leakage, vandalism and malicious mischief or other act, if and to
the extent actually insured against, whether or not such loss or damage is the
result of the negligence of Lessee or Lessor, its employees or agents. This
section does not impose any added obligation or expense on either party nor
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require that it carry any additional insurance of any kind and is to be
construed only as a limitation upon the rights of the insurance carriers to
subrogation.
14. Events of Default and Remedies.
A. Default by Lessee:
(1) failure by Lessee to make any payment by the tenth (10th)
day of the month in which such payment is due or failure by Lessee to observe
or perform any non-monetary covenant, condition or agreement on its part
in this Lease to be observed or performed for a period of thirty (30) days
after written notice specifying such failure and requesting that it be
remedied.
(2) filing by Lessee of a voluntary petition, or the filing
against Lessee of an involuntary petition, in bankruptcy, or failure by Lessee
promptly to lift any execution, garnishment or attachment of such consequence
as will materially impair its ability to carry on its business at the Leased
Premises, or the commission by Lessee of any act of bankruptcy, or the
insolvency of Lessee, or adjudication of Lessee as a bankrupt, or assignment
by Lessee under the bankruptcy laws of the United States of America or of any
state, or the entry by Lessee into an agreement of composition with its
creditors, or the institution of any proceedings for any relief of Lessee
under any bankruptcy or insolvency laws or any laws relating to the relief of
debtors, readjustment of indebtedness arrangements, composition or extension.
B. Lessor's Remedies
Upon any default by Lessee, Lessor may, at its option;
(1) Declare all installments of rent payable for the remainder
of the lease term to be immediately due and payable and (subject to Lessor's
duty to take reasonable steps to mitigate its damages as set forth below)
thereupon the same shall become immediately due and payable;
(2) Re-enter and take possession of the Leased Premises without
terminating this Lease, and sublease the Leased Premises for the account of
Lessee, holding Lessee liable for the difference in the rent and other amounts
payable for such sublessee in such subleasing and the rents and other amounts
payable by Lessee hereunder;
(3) Terminate the lease and exclude Lessee from possession of
the Leased Premises and use its best efforts to lease the Leased Premises to
another for the account of Lessee, holding Lessee liable for all rent and
other payments due up to the effective date of such leasing; and,
(4) Lessor may take whatever action at law or in equity that
may appear necessary or desirable to collect the rent and any other amounts
payable by Lessee hereunder, then due and thereafter to become due, or to
enforce performance and observance of any obligation, agreement or covenant of
Lessee under this Lease.
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In exercising any of its remedies set forth hereunder or otherwise
reserved to it, Lessor agrees that it will take reasonable steps to mitigate
the damages caused by Lessee's default hereunder; provided, however, that the
reasonable costs to Lessor of such steps shall be additional rent due from
Lessee to Lessor hereunder and Lessee covenants and agrees to pay the same
upon demand.
C. Default by Lessor:
(1) failure by Lessor to observe or perform any covenant,
condition or agreement on its part in this Lease to be observed or performed
for a period of thirty (30) days after written notice specifying such failure
and requesting that it be remedied.
(2) filing by Lessor of a voluntary petition, or the filing
against Lessor of an involuntary petition, in bankruptcy, or failure by Lessor
promptly to lift any execution, garnishment or attachment of such consequence
as will materially impair its ability to carry on its business at the Leased
Premises, or the commission by Lessor of any act of bankruptcy, or the
insolvency of Lessor, or adjudication of Lessor as a bankrupt, or assignment
by Lessor under the bankruptcy laws of the United States of America or of any
state, or the entry by Lessor into an agreement of composition with its
creditors, or the institution of any proceedings for any relief of Lessor
under any bankruptcy or insolvency laws or any laws relating to the relief
of debtors, readjustment of indebtedness arrangements, composition or
extension.
D. Lessee Remedies.
Upon any default by Lessor, Lessee may, at its option:
Perform repairs and/or maintenance and deduct the cost thereof from
Rent, terminate the Lease (this right may only exercised in the Event of a
Default under 14.C(2), bring a suit for damages or bring a suit for specific
performance.
15. Damage, Destruction and Condemnation.
A. Definition of "Substantial Damage" and "Partial Damage". The
term "substantial damage" shall refer to damage which is of such a character
that in Lessor's reasonable opinion the same cannot, in ordinary course, be
expected to be repaired within 90 calendar days from the time that such repair
work would commence. Any damage which is not "substantial damage" is
"partial damage";
B. Partial Damage to the Building. If during the term hereof there
shall be partial damage to the Leased Premises or Parking by fire or other
casualty and if such damage shall materially interfere with Lessee's use
of the Leased Premises, Lessor shall promptly proceed to restore the Leased
Premises to substantially the condition in which it was immediately prior to
the occurrence of such damage;
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C. Substantial Damage to the Building. If during the term hereof
there shall be substantial damage to a substantial portion of the Leased
Premises or Parking by fire or other casualty and if such damage shall
materially interfere with Lessee's use of the Leased Premises, Lessor shall
promptly restore the Leased Premises to the extent reasonably necessary to
enable Lessee's use of the Leased Premises, unless Lessor or Lessee, within
forty-five (45) days after the occurrence of such damage, shall give notice to
the other party that it elects to terminate this Lease. Upon such notice,
then this Lease shall terminate as of the date of such notice with the same
force and effect as if such date were originally established as the expiration
date hereof;
D. Abatement of Rent. If during the term hereof the Leased
Premises or Parking shall be damaged by fire or casualty and if such damage
shall materially interfere with Lessee's use of the Leased Premises, a just
proportion of the rent shall abate for the period in which, by reason of such
damage, there is such interference with Lessee's use of the Leased Premises;
and,
E. In the event of any damage or destruction, and this Lease is not
so terminated, Lessor shall exercise reasonable efforts immediately to
commence and complete such repairs or restoration; provided Lessor shall not
be required to expend more than the net proceeds of insurance in repairing
such damage, unless, if the damage is more extensive than is compensable by
such net proceeds, Lessee, by immediate written notice to Lessor, agrees to
furnish the excess amount required to repair or restore;
F. Condemnation. If the Leased Premises or any portion thereof are
taken under the power of eminent domain, or sold under the threat of the
exercise of said power (all of which are herein called "condemnation"), this
Lease shall terminate as to the part so taken as of the date the condemning
authority takes title or possession, whichever first occurs. If more than
fifty percent (50%) of the Parking or of the floor area of the improvements on
the Leased Premises is taken by condemnation, Lessee may, at Lessee's option,
to be exercised in writing within ten (10) days after Lessor shall have given
Lessee written notice of such taking (or in the absence of such notice, within
ten (10) days after the condemning authority shall have taken possession)
terminate this Lease as of the date the condemning authority takes such
possession. If Lessee does not terminate this Lease in accordance with the
foregoing, this Lease shall remain in full force and effect as to the portion
of the Leased Premises remaining, except that the rent shall be reduced in the
proportion that the floor area of the Leased Premises taken bears to the total
floor area of the Leased Premises. Any award for the taking of all or any
part of the Leased Premises under the power of eminent domain or any payment
made under threat of the exercise of such power shall be the property of
Lessor, whether such award shall be made as compensation for diminution in
value of the leasehold or for the taking of the fee, or as severance damages;
PROVIDED, HOWEVER, that Lessee shall be entitled to any award for loss of or
damage to Lessee's trade fixtures and Lessee's removable personal property.
In the event that this Lease is not terminated by reason of such condemnation,
Lessor shall, to the extent of severance damages received by Lessor in
connection with such condemnation, repair any damage to the Leased Premises
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caused by such condemnation except to the extent that Lessee has been
reimbursed therefor by the condemning authority.
16. Subordination.
This Lease shall be subordinate to any mortgage or deed of trust
encumbering the Leased Premises, now existing or hereafter arising. Lessor
shall provide Lessee with a Non-Disturbance Agreement from such
trustee/mortgagee whereby such trustee/mortgagee agrees to honor Lessee's
lease of Leased Premises provided Lessee is not in default under Lease
irrespective of whether Lessor is in default under its deed of trust/mortgage.
At Lessor's request, Lessee shall execute and deliver estoppel certificates
and subordination, non-disturbance and attornment agreements to Lessor, any
mortgagee or beneficiary of a deed of trust or, with respect to estoppel
certificates to any prospective purchaser of the Property in form and
substance reasonably satisfactory to Lessor and Lessee.
17. Miscellaneous.
A. Any written notice, required by this Lease shall be deemed given
if sent by certified mail, postage prepaid or by overnight courier with a
national reputation for reliability, to the address set forth in the beginning
of this Lease or to such other person or persons at such address or addresses
as may be designated by written notice to the other parties hereunder.
B. This Lease shall be binding upon and inure to the benefit of the
heirs, executors, administrators, successors and permitted assigns of the
parties hereto.
C. Any acceptance of rent or consent, express or implied, by Lessor
to any breach by Lessee of any covenant or condition hereunder shall not
constitute a waiver by Lessor of any prior or succeeding breach by Lessee of
the same or any other covenant or condition of this Lease.
D. In the event any provision of this Lease shall be held invalid
or unenforceable by any court of competent jurisdiction or by any future
legislative action, such holding or such action shall not invalidate or render
unenforceable any other provisions hereof.
E. This Lease may be amended, changed, modified, altered or
terminated only with the written consent of the parties hereto.
F. This Lease may be executed in several counterparts, each of
which shall be an original and all of which shall constitute but one and the
same instrument.
G. This Lease shall be governed exclusively by the applicable laws
of the State of Tennessee.
H. No remedy herein conferred upon or reserved to Lessor is
intended to be exclusive of any other available remedy or remedies, but each
and every such remedy shall be cumulative and shall be in addition to every
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other remedy given under this Lease or now or hereafter existing at law or in
equity or by statute. No delay or omission to exercise any right or power
accruing upon default shall impair any such right or power or shall be
construed to be a waiver thereof, but any such right and power may be
exercised from time to time and as often as may be deemed expedient. In order
to entitle Lessor to exercise any remedy reserved to it in this Section, it
shall not be necessary to give any notice, other than such notice as may be
herein expressly required.
I. Intentionally Deleted.
J. Any controversy or claim arising out of, or relating to this
Agreement, the breach hereof, or coverage of this arbitration provision which
is not settled by the Parties, shall be settled by arbitration which shall be
conducted expeditiously and confidentially in accordance with the Commercial
Arbitration Rules of the American Arbitration Association ("AAA") in New York
City as such rules shall be in effect on the date of delivery of demand for
arbitration. Any such arbitration shall be heard and conducted in New York
City. Notwithstanding the rules of the AAA, the arbitration panel in any such
arbitration shall consist of three (3) persons. Within twenty (20) days of
any delivery of any demand of arbitration hereunder, Lessor and Lessee shall
each appoint one (1) arbitrator and the two (2) arbitrators so selected shall
appoint the third arbitrator within twenty (20) days of their appointment. In
the event the two (2) selected arbitrators are unable to agree upon the
selection of a third arbitrator after reasonable efforts, a panel of seven (7)
qualified persons, who do not reside or primarily do business in the States of
New Hampshire or Tennessee shall be requested from the AAA. The parties shall
alternately strike one (1) person with the last remaining person being the
third designated arbitrator. Any arbitrator so selected pursuant to this
Agreement may come from any state in the United States. Each party shall pay
the fees of his own attorneys, expenses of witnesses and all other expenses
connected with the presentation of such party's case. One-half (1/2) of any
remaining costs of any arbitration to which the Lessee is a party, including
the cost of the record or transcripts thereof, if any, administrative fees,
and all other fees involved, shall be paid by the Lessee, and the remaining
one-half (1/2) shall be paid by Lessor. All conclusions of law reached by the
arbitrators shall be made in accordance with the internal substantive laws of
the State of Tennessee without regard to conflict of law principles. Any
award rendered by the arbitrator(s) shall be accompanied by a written opinion
setting forth the findings of fact and conclusions of law relied upon in
reaching their decision and each party shall have the right to offset all
amounts due pursuant to an award from any amounts due to the other party under
any other agreement, arrangement or relationship between them. Judgment upon
the award rendered by the arbitrators may be entered by any court having
jurisdiction thereof. Lessee and Lessor agree that the existence, conduct and
content of any such arbitration shall be kept confidential and no party shall
disclose to any person any information about such arbitration, except as may
be required by law or for financial reporting purposes in each party's
financial statements.
k. All capitalized terms that are used but not defined herein shall
have the meanings assigned to them in the Asset and Stock Purchase Agreement
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dated as of December 20, 1994 between Lessor, certain of its affiliates and
Healthsource, Inc., as amended by the First, Second and Third Amendments
thereto.
IN WITNESS WHEREOF, the parties have executed this Lease this 31st day
of May, 1995.
WITNESS: LESSOR: PROVIDENT LIFE AND
ACCIDENT INSURANCE COMPANY
By: /s/ Thomas R. Watjen
- ------------------------ ---------------------------
Its: Executive Vice President
--------------------------
LESSEE: HEALTHSOURCE PROVIDENT
ADMINISTRATORS, INC.
By: /s/ Norman C. Payson, M.D.
- ------------------------ ---------------------------
Its: Duly authorized agent
--------------------------
STATE OF _________________
COUNTY OF ________________
On the _______ day of __________________, 1995, before me personally came
__________________________, who being duly sworn, did acknowledge
himself/herself to be the _____________________ of Provident Life and
Insurance Company, a Tennessee corporation, and that he/she/they as such
________________________, being authorized to do so, executed the foregoing
instrument on behalf of said corporation for the purpose therein contained.
Notary Public
----------------------------------
My Commission expires:
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STATE OF _________________
COUNTY OF ________________
On the _______ day of __________________, 1995, before me personally came
__________________________, who being duly sworn, did acknowledge
himself/herself to be the _____________________ of Healthsource Provident
Administrators, Inc. and that he/she/they as such ____________________, being
authorized to do so, executed the foregoing instrument on behalf of said
corporation for the purpose therein contained.
Notary Public
----------------------------------
My Commission expires:
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Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statements No.
33-43242, No. 33-49856, No. 33-76910 and No. 33-80456 of Healthsource, Inc. and
Subsidiaries on Form S-8 of our report dated May 12, 1995, with respect to the
statements of financial condition of Provident Life and Accident Insurance
Company of America and Subsidiaries' Medical Services Operations as of December
31, 1994 and 1993 and the related statements of income, owners' equity, and
cash flows for the year ended December 31, 1994.
/s/ Ernst & Young LLP
----------------------
ERNST & YOUNG LLP
Chattanooga, Tennessee
June 9, 1995
