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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 for the transition period from
_________ to _________
Commission File Number 1-11538
HEALTHSOURCE, INC.
(Exact name of registrant as specified in its charter)
New Hampshire 02-0387748
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Two College Park Drive, Hooksett, NH 03106
(Address of principal executive offices)
(603) 268-7000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.10 par value
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K [ ].
State the aggregate market value of the voting stock held by
non-affiliates of the registrant: $2,377,729,938 (based upon the
reported closing price of $40 1/8 on the New York Stock Exchange on
February 26, 1996).
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Title of Each Class: Common Stock, $.10 par value
Number of Shares Outstanding at February 26, 1996: 63,590,827
shares
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DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Definitive Proxy Statement in connection with
the Registrant's 1996 Annual Meeting of Shareholders are incorporated
by reference in Part III of this Form 10-K.
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<TABLE>
HEALTHSOURCE, INC.
FORM 10-K
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TABLE OF CONTENTS AND CROSS-REFERENCE SHEET
<CAPTION>
Reference by Page
to Information
Page of Incorporated
Item No. on Form 10-K Report by Reference
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<S> <C> <C>
PART I
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1. Business p. 1 N/A
2. Properties p. 10 N/A
3. Legal Proceedings p. 11 N/A
4. Submission of Matters to a Vote p. 12 N/A
of Security Holders
PART II
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5. Market for Registrant's Common p. 12 N/A
Equity and Related Shareholder
Matters
6. Selected Financial Data p. 13 N/A
7. Management's Discussion and p. 14 N/A
Analysis of Financial Condition
and Results of Operations
8. Financial Statements and p. F-1 N/A
Supplementary Data
9. Changes in and Disagreements with p. 35 N/A
Accountants on Accounting and
Financial Disclosure
PART III
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10. Directors and Executive Officers p. 35 1996 Proxy Statement
of the Registrant
11. Executive Compensation N/A 1996 Proxy Statement
12. Security Ownership of Certain N/A 1996 Proxy Statement
Beneficial Owners and Management
13. Certain Relationships and Related N/A 1996 Proxy Statement
Transactions
PART IV
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14. Exhibits, Financial Statements p. 39 N/A
Schedules, and Reports on Form 8-K
Exhibit Index p. 45 N/A
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PART 1
ITEM 1. BUSINESS
(a) General Development of Business. See (c) below.
(b) Financial Information about Industry Segments.
Not Applicable.
(c) Narrative Description of Business.
GENERAL
Healthsource, a New Hampshire corporation established in 1985
("Healthsource" or the "Company"), is a geographically diversified provider of
a broad range of managed healthcare services. Healthsource is a leading managed
care provider with health maintenance organizations ("HMOs") in North Carolina,
South Carolina, New Hampshire, Massachusetts, Indiana, Maine, Tennessee,
Arkansas, Syracuse, New York, Louisville, Kentucky, Georgia, north central
Texas, southwestern Ohio and Connecticut. In a joint venture with Chubb Life
Insurance Company, Healthsource also operates an HMO in the New York City and
northern New Jersey areas. Healthsource acquired the group health, HMO and
third party administration ("TPA") business of Provident Life and Accident
Insurance Company of America ("Provident") of Chattanooga, Tennessee in May
1995 (the "Provident Transaction"). The national indemnity insurance and TPA
business acquired from Provident (collectively referred to as "Healthsource
Provident") is concentrated in the Southeast and serves a total of over 2
million members. In February 1996, the Company completed the acquisition of
substantially all of the HMO assets of Central Massachussetts Health Care, Inc.
("CMHC"), an 83,400 member HMO in Worcester, Massachusetts. As a result of the
Provident Transaction and the membership of CMHC and strong enrollment gains in
its existing plans, on January 1, 1996 Healthsource provided or administered
healthcare benefits for over 3.5 million members. Healthsource also offers
point of service ("POS") plans, preferred provider organization ("PPOs") plans,
utilization review ("UR") services, managed workers' compensation services,
pharmacy benefit management services and other managed care consulting and
administrative services to other healthcare payors including Provident and
Liberty Mutual Insurance Company. The Company's executive offices are located
at Two College Park Drive, Hooksett, New Hampshire 03106; telephone number
(603) 268-7000.
THE MANAGED CARE INDUSTRY
The managed care industry has grown substantially in recent years. Total
HMO enrollment grew 13.1% in 1994 to approximately 51.1 million members at
December 31, 1994. Healthsource expects industry growth to continue because of
continued pressure from employers and state and federal governments to control
healthcare costs and the failure of unmanaged indemnity products to provide such
controls. Healthsource believes that managed care will continue to be a major
mechanism to control, finance and deliver healthcare in the United States in the
future and may replace the current indemnity healthcare financing system.
HEALTHSOURCE'S BUSINESS STRATEGY
Healthsource seeks to enhance its position as a leader in providing quality
and affordable healthcare in an expanding set of local markets. Healthsource's
business strategy has three components: (i) to expand the number of geographic
markets in which it offers HMOs and other services, (ii) to increase HMO
enrollment in its existing markets by capitalizing on the historically low HMO
penetration rate in most of those markets, emphasizing the conversion to HMO
membership of members currently being served in the Company's indemnity and
self-funded plans (especially those acquired in the Provident Transaction) and
continuing to develop and offer new products for different segments of the
population such as Medicare, and (iii) to continue positioning its HMOs to be
less vulnerable to declining average premiums by linking a large portion of
healthcare costs to premiums through global capitation arrangements or other
suitable arrangements with healthcare providers. When entering new markets,
Healthsource seeks to purchase existing plans or seeks strategic alliances
with local providers to support start-up HMOs thereby lowering the risk of entry
and enhancing the competitive position of such plans. In seeking to convert
existing members to HMO membership, Healthsource continues to maintain close
working relationships with local physicians and hospitals and, in certain
markets, to provide operating and financial support to primary care practices in
order to enhance the access to, and quality and cost effectiveness of, its
managed care products.
As part of its expansion strategy in all markets, Healthsource actively
seeks opportunities to acquire, make significant investments in, or provide
managed care services to HMOs, managed care companies, healthcare financing and
administrative companies, healthcare providers and related businesses. The
Company considers such opportunities in the ordinary course of its business.
HEALTHSOURCE HEALTH PLANS
Healthsource owns fourteen (14) operating HMOs as well as two (2) other
major operating subsidiaries: (i) Healthsource Provident Administrators, Inc.
("HPA"), which operates the 1.7 million member TPA business acquired in the
Provident Transaction and (ii) Healthsource Provident Insurance Company
("HPIC"), which operates the 390,000 member indemnity group health insurance
business acquired in the
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Provident Transaction. HPA and HPIC are headquartered in Chattanooga, Tennessee
and service a national client base.
Healthsource has organized its business into two geographic regions -- the
Northern and Southern Regions (as defined in the following chart). The Northern
Region is headquartered in Hooksett, New Hampshire. The Southern Region is
headquartered in Chattanooga, Tennessee.
The following table shows the membership by the Northern and Southern
Region plans at January 1, 1996:
MEMBERSHIP AS OF JANUARY 1, 1996
<TABLE>
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HMO/OTHER
FULLY SELF-INSURED
INSURED INDEMNITY --------------------------------------
PLANS HMO PRODUCTS INSURANCE TPA POS PPO OTHER TOTAL
- -------------------------------------- ------------ --------- --------- ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
NORTHERN REGION:
Healthsource New Hampshire............ 122,300 1,200 110,000 85,500 45,150 120,000 484,150
Healthsource CMHC(1).................. 83,400 -- -- -- -- -- 83,400
Healthsource Indiana.................. 67,000 4,900 -- -- 500 1,800 74,200
Healthsource Maine.................... 65,500 -- -- 30,800 2,000 3,700 102,000
ChubbHealth(2)
New York City....................... 30,750 -- -- -- -- -- 30,750
New Jersey.......................... 1,950 -- -- -- -- -- 1,950
Healthsource HMO of New York (Syracuse
NY)................................. 21,200 -- -- 1,300 6,800 -- 29,300
Healthsource Kentucky................. 11,200 -- -- -- -- -- 11,200
Healthsource Ohio..................... 1,000 -- -- -- -- -- 1,000
Healthsource Connecticut(3)........... -- -- -- -- -- -- --
------------ --------- --------- ------- ------ ------- ---------
SUBTOTAL -- NORTH..................... 404,300 6,100 110,000 117,600 54,450 125,500 817,950
------------ --------- --------- ------- ------ ------- ---------
SOUTHERN REGION:
Healthsource North Carolina........... 170,600 -- -- 68,000 -- 2,000 240,600
Healthsource South Carolina........... 143,700 900 -- 2,100 -- 11,400 158,100
Healthsource Tennessee................ 62,400 -- -- 6,100 8,400 4,100 81,000
Healthsource Arkansas(4).............. 32,800 -- 62,100 2,500 5,500 -- 102,900
Healthsource Georgia(5)............... 10,200 -- -- -- -- -- 10,200
Healthsource North Texas(4)........... 4,100 -- -- -- 100 1,500 5,700
HPIC (Chattanooga)(6)................. -- 59,600 -- -- -- 329,600(7) 389,200
HPA (Chattanooga)(6).................. -- -- 1,705,800 -- -- -- 1,705,800
------------ --------- --------- ------- ------ ------- ---------
SUBTOTAL -- SOUTH..................... 423,800 60,500 1,767,900 78,700 14,000 348,600 2,693,500
------------ --------- --------- ------- ------ ------- ---------
TOTAL ALL REGIONS..................... 828,100 66,600 1,877,900 196,300 68,450 474,100 3,511,450
============ ======== ========= ======== ====== ======== =========
<FN>
- ---------------------
(1) Acquired as of February 1, 1996.
(2) 15% owned with an option to own 50%.
(3) Recently licensed, not yet operational.
(4) 70% owned.
(5) 95% owned.
(6) Totals only -- Not separately categorized into POS and PPO plans, although
many of these members are in such plans.
(7) Consists of Experience-Rated Refundable Premium Insurance.
</TABLE>
MANAGED CARE PRODUCTS -- INNOVATION AND FLEXIBILITY
With the rise in healthcare costs, many private employers are encouraging
their employees to enroll in HMOs or other managed care options. Responding to
similar cost pressures, various federal and state
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government healthcare programs are adding more managed care options to their
healthcare plans. Healthsource seeks to meet these needs of employers and
government programs not only through its core offerings of traditional HMO
plans, but with a spectrum of other managed care options, including POS plans,
PPO plans and managed workers' compensation. Healthsource also offers UR
services, third-party claims administration and pharmacy benefit management
services to assist self-insured employers. Healthcare providers typically
participate in each of the Healthsource managed care plans that cover their
geographic area.
Healthsource's management philosophy is to emphasize strong local
management of its plans while providing assistance, leadership and oversight,
when necessary, from its Hooksett, New Hampshire and Chattanooga, Tennessee
headquarters. Assistance and leadership is often provided regarding negotiating
major provider contracts, important marketing assignments, product innovation,
expansion and other strategic initiatives. Corporate headquarters oversight
includes financial, treasury, accounting and systems functions.
HMO Products
Healthsource offers a variety of HMO products, enabling it to modify its
benefit structure and pricing to appeal to the varying needs of employers and
their employees. In an HMO plan, the HMO bears the underwriting risk that the
covered medical expenses of its members will exceed related premium revenues in
return for charging actuarially-determined premiums on a per member per month
("PMPM") basis to employers.
Healthsource's HMOs consist of individual practice association plans in
which each HMO maintains a network of primary care and specialist physicians,
most of whom contract directly with the HMO. Independent physicians are
generally reimbursed for their services by each HMO according to a fee schedule
(also known as fee-for-service) or under fixed fee PMPM arrangements (also known
as capitation). Both methodologies provide various incentives for quality and
cost-effective care. The Company is emphasizing its global capitation
arrangements with hospitals (discussed at greater length below) under which more
of the costs of physicians serving Healthsource members are borne by the
hospitals at risk for such members' healthcare costs.
The Company's contracts with hospital providers are a key element in its
efforts to control healthcare costs. While the Company routinely contracts with
hospitals on a discounted fee-for-service and per diem basis, the primary focus
of the Company's current contracting policy is to have global capitation
arrangements with major hospital providers. In such arrangements, the hospital
generally accepts as full payment for its services all monies remaining from the
global capitation amount after payment of all other covered medical and
healthcare expenses of assigned members; this global capitation amount is
generally linked to a fixed dollar amount PMPM or a percentage of the Company's
premiums collected for assigned members with certain negotiated variations.
Through these global capitation arrangements, hospitals and their affiliated
providers, such as owned physician practices, are incentivized to mitigate
inappropriate utilization and otherwise strive for efficiencies in patient care.
Generally, the global capitation rate in these contracts moves directly
proportional to premium pricing, which provides incentives for hospitals that
are parties to global capitation arrangements to assist in enhancing the
quality, value and perception of the Company's HMOs in the marketplace and
allows the Company more predictability in its medical loss ratio ("MLR") and
less exposure to reductions in premium pricing since any such reductions in
premium pricing would often be absorbed pro-rata by the hospitals that are
parties to global capitation arrangements. On January 1, 1996, approximately 40%
of the Company's members were covered by generally non-terminable global
capitation arrangements typically having terms of from five to ten years, with
many more such arrangements under active negotiation. The goal of the Company is
to obtain as many global capitation arrangements as reasonably possible.
Point of Service Plans
A POS plan incorporates greater flexibility than a traditional HMO plan,
typically containing some of the favored provider pricing and utilization
controls of an HMO while permitting the member to use providers outside the
prescribed network at an increased cost to the member. These plans may be
offered to employers on a fully-insured or self-insured basis depending upon the
preferences of the employer. The availability of the POS option has enabled
Healthsource to service various large national employers who have requested this
option.
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Preferred Provider Organization
A PPO is an indemnity healthcare plan which relies on a network of
physicians, hospitals and other providers to provide care on negotiated
financial terms (including discounts or other favorable pricing methodologies)
and which provides members with a greater level of coverage for using network
providers. In markets where the Company has its own HMO, it typically uses the
HMO providers as the preferred providers in the PPO network. To serve the
broader geographic base of members acquired in the Provident Transaction and
other national and regional accounts in other markets, the Company contracts
with third-party PPO providers for access to their networks. The Company
believes PPOs are a transitional product since gatekeeper health plans such as
HMOs and POS plans allow better utilization management and are more easily
supported by global capitation arrangements.
Third-Party Administration Services
Through its TPA services, Healthsource processes claims for medical and
dental services to members of employer-sponsored, self-funded plans and
reimburses the provider or member according to the terms of each plan. Employers
often purchase TPA services which are bundled with UR services and selected PPO
networks in an effort to apply managed care techniques to their self-funded
plans. Under its TPA arrangements, Healthsource does not generally bear any
healthcare cost risk and, accordingly, is not paid an underwriting premium.
Instead, Healthsource's TPA arrangements typically provide for the payment of
administrative fees which generally vary by the number of members covered.
Certain of these contracts contain performance guarantees as to timeliness and
accuracy and certain other risk features which can place compensation under such
contracts at risk. Of the total of 1.9 million members being provided TPA
services, more than 1.7 million are serviced by HPA from its headquarters in
Chattanooga, Tennessee, seven regional claim centers, and field sales offices in
13 states. Other significant TPA operations are administered by affiliates of
the New Hampshire and Arkansas plans.
Medicare Risk Products
The Company is actively developing HMO products for the Medicare market
using a task force headquartered in New Hampshire. The task force is designing
provider contracts, creating marketing materials and strategies and preparing
the Health Care Financing Administration ("HCFA") applications and documentation
on a centralized basis with the expectation that Medicare Risk contracts would
be sought in most of the Company's markets. The Company expects to support the
offering of Medicare HMO products in each market typically with a global
capitation arrangement with one or more local hospitals. The Company has found
that its hospital providers are often interested in providing care to Medicare
HMO plans and willing to consider healthcare risk assumption under global
capitation arrangements. The degree of customer acceptance of these products is
unknown and will depend upon various policy decisions by Congress and HCFA, as
well as upon successful marketing in each market inasmuch as Medicare HMO
membership is sold on an individual rather than group basis. The Company's
objective is to have Medicare risk contracts in six markets within 12 months;
one such plan is currently operational.
INDEMNITY INSURANCE PRODUCTS
Prior to the Provident Transaction, the Company owned three small indemnity
insurance companies. With the Provident Transaction, the Company chartered a new
Tennessee insurance company -- HPIC, headquartered in Chattanooga, Tennessee.
HPIC assumed the indemnity insurance portion of the Provident group health
business and provided healthcare insurance to approximately 390,000 members on
January 1, 1996 through two basic forms of coverage -- Experience Rated
Refundable Premium Insurance and Other Insurance Products.
Experience Rated Refundable Premium Insurance
Approximately 330,000 persons are covered under Experience Rated Refundable
Premium policies in which the employer generally bears most of the healthcare
claims risk and can receive a refund when claims
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experience is favorable. Premiums for this coverage are based on the actual
claims experience of the employer in prior periods, adjusted for projected
future experience, plus a charge for administrative expenses, certain risks and
profit. At the end of each policy year, an employer's account will show a
surplus or deficit balance depending on defined claims experience. Surplus
balances for a current year are first applied to prior deficits, if any, and
then, at the employer's election, either held in reserve to offset future
deficits or refunded. In years with deficit balances, premiums for future
periods are sought to be adjusted so that Healthsource may recover the deficit,
provided the employer maintains its relationship with Healthsource; there is no
assurance that any such deficit can ultimately be recovered. Operating results
fluctuate with claims experience since all claims are expensed, whether or not
currently recoverable from employers.
Other Insurance Products
In the Provident Transaction, Healthsource also acquired a book of
fully-insured group health policies which are marketed to small and medium sized
employers and which covered 60,000 members on January 1, 1996. The current
market for this 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 these types of plans. The majority of this
business includes the use of contracted PPO networks with premiums actuarially
based on the expected claims experience of pools of similar risks, together with
provision for administrative expenses and profit. Profitability of this 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 this product is primarily a
function of healthcare costs, morbidity rates and the effectiveness of
utilization controls and provider discounts available through contracted PPO
networks.
OTHER MANAGED CARE SERVICES
Utilization Review Services
UR services are provided to certain self-funded and insured plans by
Healthsource's healthcare professionals and may include pre-admission
certification and concurrent review of inpatient care, as well as other
utilization management services. As with TPA services, Healthsource does not
typically bear utilization risk in providing UR services; rather it receives
fees which are based on the level of services provided.
Managed Workers' Compensation
Healthsource also applies its managed care expertise to workers'
compensation programs of insurers and employers, both in the residual and
voluntary markets. Under these managed workers' compensation arrangements, the
insurer or employer retains the underwriting risk for healthcare and disability
costs while Healthsource furnishes access to provider networks and renders TPA
and case management services for a fee. Healthsource currently has a managed
workers' compensation program in New England including the residual market in
New Hampshire and Vermont but also for commercial accounts in New Hampshire,
Maine and Massachusetts.
Pharmacy Benefit Management Services
Through its subsidiary, Healthsource Rx, Healthsource provides pharmacy
benefit management services to its affiliated plans and to self-insured
employers. These services include network and claims administration services and
discount arrangements.
PHYSICIAN RELATIONSHIPS
Healthsource believes that physicians are a critical factor in managing
healthcare costs through their ability to control the quality and utilization of
services from hospitals, specialists and other providers. Therefore,
Healthsource has structured its business on the premise that physicians need to
be actively involved in its HMOs. Healthsource's HMOs typically have quality
assurance and UR committees comprised of local physicians, and physicians
currently constitute a majority of the Board of Directors of Healthsource and
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several of Healthsource's majority-owned HMOs. Healthsource has also found that
its policy of involving physicians is helpful as it seeks to enlist physician
support in new markets. Healthsource currently contracts with over 40,000
physicians.
QUALITY MANAGEMENT
The Company promotes quality healthcare for its members. Most initiatives
are performed at the local HMO level. Typical initiatives include programs to
increase preventive screening such as mammography testing, primary care
physician profiling for quality indicators ("report cards"), disease management
programs to improve certain disease outcomes (such as for asthma treatment),
consumer satisfaction surveys to assess member perceptions, and quality of
service indicators such as telephone waiting time.
The Company operates an organ transplant provider network from its
Chattanooga headquarters for the benefit of its HMOs and various other managed
care subsidiaries. The providers in this network are among the nation's leading
organ transplant centers, although individual HMOs and other subsidiaries are
not required to use it exclusively.
The Company has begun obtaining voluntary accreditations for its health
plans from the National Committee of Quality Assurance (NCQA), an independent
organization which reviews HMOs. The Company's HMOs in New Hampshire, North
Carolina and Maine have received provisional one year accreditations and the
Syracuse, New York plan has received a one year accreditation. The Company's
South Carolina HMO has been reviewed but has not been yet notified of the
results. The Company is planning to have its other HMOs reviewed as soon as
practicable.
MARKETING
The Company uses a variety of marketing strategies to sell its managed care
products. The Company, as with most HMOs, has relied upon an internal sales
force to pursue local markets. With additional opportunities in the small group
market, the Company's HMOs have often built relationships with independent
insurance brokers in their markets. The Company has also acquired two TPA firms
headquartered in New Hampshire and Arkansas whose contacts with self-insured
employers and brokers have led to substantial contracts in the New England and
Arkansas markets. These acquisitions have provided valuable experience in
integrating various distribution systems and multi-line products and have
assisted in the assimilation of the book of business acquired in the Provident
Transaction and the development of strategies to convert those members to HMO
products.
The Company is developing a coordinated approach to regional accounts in
New England and the Southeast across plan lines to improve effectiveness. As a
result of the Provident Transaction, a similar approach (using resources in New
Hampshire and Chattanooga) is being developed for national accounts. The Company
has a focused marketing effort on a cross-plan basis to seek HMO conversions
from its TPA membership. The Company's sales force is also cross-selling HMO,
POS, TPA, and indemnity products so as to seek total replacement coverage for
customer accounts.
STRATEGIC ALLIANCES
Healthsource believes that strategic alliances are an important way to
enter new markets on a start-up basis. Healthsource has forged strategic
alliances to enhance its competitiveness, reduce risks and accelerate market
penetration. These alliances have taken various forms and involved various
allies, including strong regional healthcare providers. Healthsource has
strategic hospital alliances for its HMOs in Arkansas, Savannah, Georgia, Fort
Worth, Texas, Worcester, Massachusetts and Dayton, Ohio. In addition,
Healthsource has joined with Liberty Mutual Insurance Company to provide managed
care services to the workers' compensation market in New Hampshire.
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MANAGEMENT INFORMATION SERVICES
All of the Company's HMOs and other products use extensive computer-based
management information systems ("MIS") for various purposes, including claims
processing, billing, utilization management and precertification of selected
healthcare services, underwriting, marketing and sales tracking, general
accounting, medical cost trending, managed care reporting and financial
planning. The MIS systems provide on-line support to member, group and provider
service functions. The Company's MIS systems and supporting hardware are
continually being enhanced and upgraded in order to increase efficiency,
capacity and flexibility of the system.
The Company maintains two major MIS centers in Hooksett, New Hampshire (120
employees) and Raleigh, North Carolina (70 employees) to service its HMOs and
related products. HPIC and HPA receive data services from Provident's main
computer system in Chattanooga under a comprehensive Computer Services Agreement
with a term through May 1, 1999 and containing an option by the Company to
terminate at any time after May 1, 1997. The Company has 140 MIS employees in
Chattanooga primarily working on software maintenance and development to support
the business needs of HPIC and HPA. As part of a comprehensive review of the
computer needs of the Company, the Company is evaluating opportunities to
outsource its data center operations in Chattanooga as well as other sites.
The Company has made substantial investments in MIS for healthcare cost,
utilization and quality management reporting. Assisting its healthcare providers
with their data needs is a major priority of the Company's MIS Department and
involves a large commitment of resources by the Company. The claims history of
managed care members is available on a separate computer system, the "Data
Warehouse," which utilizes a relational database to accomplish data analysis and
report generation by MIS personnel, financial analysts and plan personnel.
Healthsource's medical management subsidiary, Healthsource Innovative Medical
Management, Inc., is developing a proprietary set of reports, the Diagnostic
Medical Management Information System. Two components of this system will be (i)
the Network Performance Package which provides an analysis of the healthcare
utilization of members associated with the particular capitated hospital group
to support the development of customized, effective, medical management
improvement initiatives, and (ii) the PrimarySource which profiles a primary
care physician on the utilization of medical services associated with members
under the physician's care.
COMPETITION
The managed healthcare industry is highly competitive at both the local HMO
level and in the regional and national employer markets. The principal
competitive factors affecting the Company's products are premium rates and fees,
plan design and flexibility, and physician/hospital network and reputation. In
many historically under-penetrated markets such as the Carolinas, many new HMOs
have been recently licensed which is reflected in premium pressure for new and
renewal business. As a result of this competition, the Company experienced a
3.5% decline in average premium yield per member during 1995 and expects a
similar decline during 1996.
The Company competes in all of its markets with Blue Cross plans, indemnity
insurers, HMOs, TPAs, PPOs and other managed care companies, some of which have
greater financial resources than the Company. The Company also faces competition
in many of its markets from hospitals and other provider groups who have
organized their own networks to contract directly with employer groups. As
managed care has expanded generally, many more employers are offering both HMO
and indemnity options; thus the ability to offer a wide variety of HMO, POS, PPO
and other services has become an important competitive factor. The Company uses
its strategic alliance concept and selective contracts with key physician groups
to enhance its competitive position. The Company expects that competition for
all business may become even more intense during 1996.
In connection with start-up HMOs developed with strategic provider partners
and certain consulting arrangements, the Company often agrees to restrict its
activities in a defined area; the Company has made such agreements in connection
with Healthsource Arkansas, Healthsource Savannah, Healthsource North Central
Texas, ChubbHealth and Vermont Blue Cross. As part of the Provident Transaction,
the Company entered into a non-competition agreement with Provident under which
the Company agreed not to write for its
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own account certain types of medical stop-loss insurance, group long- and
short-term disability insurance or group life insurance for certain accounts and
areas and for certain restricted periods ending between 1998 and 2000 as
specified in the agreement. The non-competition agreement is subject to various
exceptions.
GOVERNMENTAL REGULATION
General. State and federal regulation of HMOs, managed care products and
indemnity insurance varies from jurisdiction to jurisdiction, is subject to
frequent change and generally gives responsible administrative agencies broad
discretion. Laws and regulations relating to Healthsource's businesses are
subject to amendment or interpretation in each jurisdiction and any such
amendments or interpretations could adversely affect Healthsource's operations,
products, profitability or business prospects or require Healthsource to change
some of its products, services, contracting policies or marketing plans.
Healthsource is unable to forecast which additional laws or regulations, if any,
affecting its business might be enacted in the future nor how existing or future
regulations might be interpreted.
New Restrictive Laws. A number of states have enacted small group
insurance and rating reforms which generally limit the ability of insurers or
HMOs to use risk selection or pre-existing condition exclusions as methods of
controlling costs. In addition, many states are considering (or have enacted)
specific limitations on the ability of insurers or HMOs to control admissions
and length of stay, to affect the provision of healthcare services through UR
procedures, to use certain capitation or other payment methodologies, to expend
less than a certain percentage of premium on healthcare costs, to contract
exclusively with physicians or other providers or to exclude certain providers
and other measures. The effect of widespread enactment of such laws might be to
reduce the Company's ability to control some major elements of its healthcare
expenses.
HMOs. All of the states in which the Company owns HMOs have enacted
comprehensive statutes regulating the activities of HMOs. Most states require
periodic financial reports from licensed HMOs and impose minimum capital and
specific reserve requirements. These capital requirements impose significant
restrictions on the ability of any affiliated HMO to pay dividends to the
Company and could require the Company to make additional capital contributions
to its HMOs. A significant portion of the Company's cash, marketable securities
and other assets is held by HPIC, Healthsource New Hampshire, Healthsource North
Carolina, Healthsource South Carolina, and other HMOs, and is restricted to use
within the operations of each of those entities. In addition, certain of the
Company's HMOs are required to maintain segregated cash reserves in
interest-bearing instruments held by bank trustees or state regulators. Some
regulations also enable state agencies to review all material contracts entered
into by HMOs, including management contracts, for reasonableness of fees charged
and other issues.
Governmental Programs. The Company currently has one Medicare risk
contract, but will be seeking approval of such contracts in many of the
Company's markets. The Company's HMOs which obtain Medicare risk contracts will
be subject to regulation by the HCFA, an agency of the United States Department
of Health and Human Services. HCFA has the right to audit HMOs operating under
Medicare risk contracts to determine compliance with HCFA contracts and
regulations as well as the quality of care rendered to plan members. Medicare
risk contracts also require an HMO to (i) be either a federally qualified HMO or
a Competitive Medical Plan (as defined by the Social Security Act) and (ii)
comply with requirements for independent review of member services by contracted
peer review organizations. The Company's HMOs which have Medicaid contracts are
subject to both federal and state regulation regarding services to be provided
to Medicaid enrollees and payment for those services. Both Medicare and Medicaid
have extensive laws and regulations relating to physician incentive plans and
provider referrals which may affect the Company's operations. Many of the
Company's HMOs have contracts with the Office of Personnel Management ("OPM")
for the Federal Employees Health Benefits Program; these contracts are subject
to extensive regulation, including complex rules relating to permissible
premiums that may be charged to employees. OPM has the authority to audit the
rates charged and often seeks refunds and other sanctions against participating
HMOs where premiums are claimed to have exceeded permissible levels. Many of the
Company's HMOs also have contracts with states permitting HMO products to be
offered to a broad range of governmental employees in such states and are
subjected to various operating and financial requirements as a condition of such
contracts.
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<PAGE> 12
Indemnity Insurance Regulation. The Company's indemnity insurance
subsidiaries are subject to regulation by the Department of Insurance in each
state in which the entity is licensed. Regulatory authorities exercise extensive
supervisory power over insurance companies with respect to the licensing of new
companies and products, the level of required capital and reserves, required
benefits, the approval of policy forms, limitations on investments, and periodic
examination of operations. The Company's insurance company subsidiaries are also
required to file periodic statutory financial statements in each licensed
jurisdiction and are restricted in their ability to pay dividends to, or
contract with, the Company and its affiliates to the same extent as HMOs.
Insurance Holding Company Regulation. The Company, by virtue of its
ownership of HMOs and insurance subsidiaries is subject to various state
insurance holding company laws; such insurance holding company laws and related
regulations generally require registration with the state Department of
Insurance and the filing of certain periodic reports describing the capital
structure, ownership, financial condition, certain intercompany transactions and
general business operations of the holding company system. Changes to the
capital structure of the Company and its subsidiaries or material inter-company
transfers or agreements may trigger notice or prior approval requirements,
depending on the size and nature of the transactions.
ERISA. The provision of goods and services to or through certain types of
employee health benefit plans is subject to the Employee Retirement Income
Security Act of 1974 ("ERISA") and regulations promulgated thereunder. ERISA is
administered by the United States Department of Labor ("DOL") and provides
various restrictions on the Company's administration of most self-funded and
other ERISA-governed plans exclusive of governmental plans. The DOL is engaged
in an active ERISA enforcement program, including litigation surrounding the
calculation of percentage co-insurance provisions on discounted services, which
enforcement activities may expand the potential liabilities associated with
administering ERISA plans. The provisions of ERISA have generally been
considered to preempt state regulation (other than insurance regulation) of
plans governed by ERISA and the Company thereby has been exempt from most
state-law based claims arising from the administration of ERISA plans; recent
judicial decisions, however, have weakened the ERISA preemption doctrine. There
have also been recent legislative attempts to limit ERISA's preemptive effect.
As a result, the Company could be exposed to greater threat of state law-based
claims relating to ERISA plans and services.
TPAs. HPA and certain other subsidiaries of the Company are also licensed
as TPAs in states where such licensing is required for their activities. TPA
regulations generally contain certain required claims procedures, periodic
reporting obligations and minimum financial requirements which vary by state.
PPOs. Certain of the Company's subsidiaries that offer PPO panels or
arrangements may be subject to regulation in various states. Such PPO
regulations generally contain certain network, contracting, financial and
reporting requirements which vary by state.
UR. A number of states have enacted laws or adopted regulations governing
the provision of UR activities. Generally, these laws and regulations require
compliance with specific standards for the delivery of services,
confidentiality, staffing and policies and procedures of private review
entities. Some of these laws and regulations may affect certain operations of
the Company's subsidiaries.
PERSONNEL
As of February 1, 1996, Healthsource and its majority-owned subsidiaries
employed approximately 5,200 employees. None of Healthsource's employees are
subject to collective bargaining agreements. Healthsource believes its
relationship with its employees is good.
PROVIDENT TRANSACTION
Effective May 1, 1995, Healthsource acquired the group health, HMO and TPA
business of Provident for $231 million in cash and securities. The business
acquired in such transaction had $76 million in tangible net equity. The Company
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
9
<PAGE> 13
value of $100 per share. The Preferred Stock pays an annual dividend of 6.25%
for an initial two-year period, during which the Company has the right to
redeem such stock for cash or by issuing a ten-year subordinated note bearing
a market interest rate, failing which the dividend rate on the Preferred Stock
is to be reset on May 1, 1997 to a market rate. The cash portion of the purchase
price was paid in part from cash on hand and in part from an advance under the
Company's revolving line of credit with Chase Manhattan Bank, as administrative
agent, and a syndicate of other banks (the "Chase Facility").
In conjunction with the Provident Transaction, the Company and Provident
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 and Provident's disability products. The Company also entered
into a Computer Services Agreement having a minimum term of two years by which
the services of Provident's main computer center are provided to the operations
of HPA and HPIC.
RECENT ACQUISITIONS
CMHC
Effective February 1, 1996, the Company acquired substantially all of the
operating assets of CMHC, a not-for-profit HMO with 83,400 members located in
Worcester, Massachusetts the ("CMHC Transaction"). The Company paid
approximately $46.5 million in cash for such HMO assets, which after post-
closing adjustments will have a closing net worth of approximately $7.2 million.
The Company will continue to operate this HMO under the name Healthsource CMHC
from the headquarters in Worcester and will provide additional support and
integration from the Company's corporate staff and HMO in New Hampshire.
PACC
On January 22, 1996, the Company entered into a definitive agreement to
purchase substantially all of the operating assets of PACC HMO and PACC Health
Plans (jointly "PACC") for a price of approximately $80 million in cash subject
to significant accounting adjustments (the "PACC Transaction"). PACC is a
110,000 member not-for-profit managed care provider serving the greater
Portland, Oregon area. The assets being acquired are required to have a
consolidated net worth at closing of approximately $41 million. The Company
intends to fund the PACC Transaction from borrowings under the Chase Facility
or other financial resources. Due to the not-for-profit status of PACC, the
transaction is subject to the approval of the Oregon Attorney General's Office.
The transaction is also subject to regulatory approvals and certain other
material closing conditions. Healthsource cannot predict when or if such
approvals will be obtained or such closing conditions will be satisfied.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995: The statements contained in this section concerning
future premium pricing levels, future MLR levels, the Company's
ability to control healthcare and SG&A costs and all other statements
that are not historical facts are forward looking statements; actual
results may differ materially from those projected in the forward
looking statements, which statements involve risks and uncertainties,
including but not limited to the following: that increased regulation
will increase healthcare expenses; that increased competition in the
Company's markets, changes in product mix or other factors will
unexpectedly reduce premium yield; that the Company will be unable to
close sufficient global capitation arrangements with key providers;
that healthcare costs in any given period may be greater than expected
due to unexpected incidence of major cases, natural disasters,
epidemics, changes in physician practices and new technologies; and
that the Company will be unable to close acquisitions of other HMOs
and healthcare financing companies on satisfactory terms in key
markets. Shareholders are also directed to the other risks discussed
in other documents filed by the Company with the Securities and Exchange
Commission (the "Commission").
ITEM 2. PROPERTIES
Healthsource's principal executive offices are located at Two College
Park Drive, Hooksett, New Hampshire 03106, where Healthsource owns a large
tract of land. Healthsource currently occupies a 97,600 square foot office
building on this site and has announced plans to ultimately construct two
additional buildings on the same site with approximately 200,000 square feet to
replace other leased facilities in New Hampshire.
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<PAGE> 14
Healthsource's health plans and other affiliates own or lease office space
in the following major locations, among others, to support their operations:
<TABLE>
<CAPTION>
FACILITY
(SQ. MONTHLY
LOCATION FT.) LEASED/OWNED BASE RENT
-------- -------- ------------ ---------
<S> <C> <C> <C>
Chattanooga, TN................................... 196,400 Leased $ 227,200
Concord, NH....................................... 89,000 Leased $ 43,200
Chattanooga, TN................................... 87,600 Owned N/A
Morrisville, NC................................... 63,100 Leased $ 72,500
Charleston, SC.................................... 45,300 Leased $ 54,900
Freeport, ME...................................... 44,700 Leased $ 38,000
Little Rock, AK................................... 30,500 Leased $ 21,600
Indianapolis, IN.................................. 30,000 Leased $ 21,600
</TABLE>
Healthsource Provident also maintains sales offices in 20 cities in leased
facilities.
Healthsource believes that the facilities which it currently owns or
leases, together with the expansion plans and options which it has arranged,
will be adequate to meet its current needs.
ITEM 3. LEGAL PROCEEDINGS
Healthsource is not a party to any material pending legal proceedings,
other than ordinary routine litigation incidental to its business.
11
<PAGE> 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on the New York Stock Exchange under
the symbol "HS." The approximate number of record holders of the Company's
Common Stock as of February 26, 1996 was 10,600. Such number does not reflect
the number of persons or entities who hold shares in nominee or "street" name
through various brokerage firms. The following table sets forth for the periods
indicated the high and low closing sales prices for the Company's Common Stock
as reported on the New York Stock Exchange Composite Tape, as adjusted for a
two-for-one stock split effective December 15, 1995 and a two-for-one stock
split effective March 14, 1994.
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
1994
First Quarter....................................................... 16 7/8 13 1/4
Second Quarter...................................................... 16 1/2 13 1/4
Third Quarter....................................................... 17 3/4 13 1/4
Fourth Quarter...................................................... 20 1/2 15 3/4
1995
First Quarter....................................................... 23 5/8 19 1/4
Second Quarter...................................................... 23 15 1/8
Third Quarter....................................................... 24 1/2 17 1/4
Fourth Quarter...................................................... 36 21
1996
First Quarter (through February 26, 1996)........................... 40 1/8 29 1/4
</TABLE>
The Company has not paid cash dividends on its Common Stock since its
inception and does not expect to pay cash dividends on the Common Stock in the
foreseeable future.
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<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial information should be read in conjunction
with the accompanying Consolidated Financial Statements and the related notes
thereto and Management's Discussion and Analysis of Financial Condition and
Results of Operations appearing elsewhere in this Report.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1995 1994 1993 1992 1991
---------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AND MEMBERSHIP DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Revenue:
HMO medical premiums.................................... $ 811,645 $515,639 $239,600 $135,861 $ 69,764
Other insured medical premiums.......................... 184,819 16,837 21,190 19,894 1,111
Administrative and managed care fees.................... 170,233 51,767 30,045 21,831 16,642
---------- -------- -------- -------- --------
Total operating revenue................................. 1,166,697 584,243 290,835 177,586 87,517
Expenses:
Cost of HMO medical premiums............................ 621,888 394,173 178,241 104,003 49,599
Cost of other insured medical premiums.................. 149,396 14,020 17,142 14,980 1,101
Selling, general and administrative:
HMO and other insured services(2)....................... 153,326 82,550 39,902 20,855 9,169
Administrative and managed care services................ 146,340 40,107 23,300 17,874 14,463
---------- -------- -------- -------- --------
Total selling, general and administrative(2)............ 299,666 122,657 63,202 38,729 23,632
Depreciation and amortization........................... 24,129 11,254 6,028 3,913 1,743
---------- -------- -------- -------- --------
Operating income........................................ 71,618 42,139 26,222 15,961 11,442
Interest income(3).......................................... 20,823 13,004 6,648 4,646 3,806
Interest expense............................................ (5,392) -- -- -- --
Equity in income of unconsolidated affiliates............... -- 1,670 3,544 3,006 2,098
Net income.................................................. 56,271 39,044 26,064 16,987 12,700
Preferred stock dividends(4)................................ (4,167) -- -- -- --
---------- -------- -------- -------- --------
Net income applicable to common shareholders................ $ 52,104 $ 39,044 $ 26,064 $ 16,987 $ 12,700
Net income per common share(5).............................. $ 0.81 $ 0.62 $ 0.48 $ 0.35 $ 0.29
Shares used in calculating net income per common share(5)... 64,195 62,818 54,332 48,888 44,796
OPERATING STATISTICS -- FULLY INSURED HMO(6):
Membership:
Northern region..................................... 273,000 200,300 175,800 152,900 83,700
Southern region..................................... 332,200 197,500 124,000 88,200 62,500
---------- -------- -------- -------- --------
Total............................................... 605,200 397,800 299,800 241,100 146,200
Average annual hospital bed days per 1,000 members(7):
Northern region..................................... 226 244 254 278 281
Southern region..................................... 248 248 283 287 300
Medical loss ratio(8):
Northern region..................................... 77.7% 76.9% 74.8% 76.6% 72.5%
Southern region..................................... 75.6% 76.1% 77.3% 77.6% 75.6%
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
1995 1994 1993 1992 1991
---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital......................................... $ 144,470 $100,411 $127,388 $ 51,772 $ 56,586
Total assets............................................ 873,039 424,275 294,924 146,568 115,240
Long term debt.......................................... 95,000 -- -- -- --
Total shareholders' equity(4)........................... 488,082 322,484 241,642 119,480 101,100
<FN>
- ---------------
(1) Acquisitions in all years presented affect the comparability of these
amounts. See Note 4 to the Consolidated Financial Statements.
(2) Includes premium tax of $4,265, $3,578, $2,837, $2,236 and $1,397 for 1995,
1994, 1993, 1992 and 1991, respectively which were previously separately
reported.
(3) Includes minority interest in (income) loss of consolidated entities of
$277, $397, $59, $(65) and $(133) for 1995, 1994, 1993, 1992 and 1991,
respectively which were previously separately reported.
(4) The Company paid cash dividends relating to its preferred stock of $4.2
million in 1995. No cash dividends were paid in any previous periods
presented.
(5) Healthsource declared a two-for-one stock split in the form of a 100% stock
dividend effective December 15, 1995, a two-for-one stock split in the form
of a 100% stock dividend effective March 14, 1994, and a three-for-two stock
split in the form of 50% stock dividend effective December 15, 1992. All
share and per share amounts have been restated for the stock splits.
(6) The Northern Region includes HMOs operating in New Hampshire, Indiana,
Syracuse, New York, Louisville, Kentucky and Maine. The Southern Region
includes HMOs operating in South Carolina, Tennessee, North Carolina,
Arkansas, Savannah, Georgia and north central Texas. Indiana, Tennessee, and
North Carolina are included since the ownership of investments therein were
acquired in May 1992, December 1991, and December 1990, respectively.
Arkansas, Savannah, Georgia, north central Texas and Louisville, Kentucky
are included since commencement of operations in January 1994, November
1994, January 1995 and July 1995, respectively. Syracuse, New York is
included since January 1991, which is the first full year that the Company
managed the plan.
(7) Calculated on the basis of average members during the period, excluding
mental health and substance abuse days.
(8) Cost of HMO medical premiums for the plans in each region divided by HMO
medical premium revenue.
</TABLE>
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<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
General -- The Company has experienced substantial growth in both revenues
and profitability since its formation in New Hampshire in 1985. Revenue growth
has been accomplished through increasing membership and medical premiums per
member and administrative and managed care fees from self-insured employers and
through acquisitions. The Company has made acquisitions of HMO companies
resulting in wholly-owned subsidiaries in South Carolina, Tennessee, Maine,
Indiana, North Carolina, and Syracuse, New York. The Company has formed
strategic alliances with hospitals to operate HMOs in Arkansas, Georgia, north
central Texas, Worcester, Massachusetts and southwestern Ohio and has formed
start-up HMOs in Connecticut and Louisville, Kentucky. It also formed a
strategic alliance with Chubb Life Insurance Company to operate an HMO
(ChubbHealth) in the metropolitan New York City and northern New Jersey areas.
Effective May 1, 1995, the Company acquired the group health, TPA and HMO
business from Provident for $231 million in cash and preferred stock. To conduct
the acquired businesses, the Company organized and capitalized HPIC to assume
the insured business and HPA to administer the self-insured business.
Many federal and state proposals have been made in the past to reform the
healthcare system. The Company anticipates that federal and state legislatures
will continue to assess alternative healthcare systems and payment
methodologies. The Company is unable to predict which, if any, of these
healthcare reform proposals may be adopted. While the Company does not believe
it would be materially adversely impacted by most of the proposed reforms,
certain proposals could have such an impact and the imposition of a single-payor
system in any state could potentially eliminate the Company's business in that
state. See "Business -- Governmental Regulation."
The premium pricing environment became much more competitive in the
Company's markets during 1995. The Company experienced a decline in average
premium of 3.5% PMPM. The Company expects a similar decline in 1996. This trend
may continue beyond 1996. As a result of this premium pricing pressure, the
Company's medical loss ratio and ultimately its profitability will depend on
its ability to control healthcare costs. Since the Company commits to provide
its services to members at prices fixed for one year, unexpected cost increases
during this period cannot be passed on to employers or to members. The Company
believes its continued profitability in 1995 can be attributed primarily to
increases in membership, increased revenue from administrative and managed care
services, its success in obtaining global capitation provider agreements and
other cost control efforts, the effects of the Provident Transaction in May
1995 and the acquisition of the remaining interest in Healthsource HMO of New
York (HSNY) in November 1994.
Fiscal Year 1995 Compared To Fiscal Year 1994 -- Revenue increased 100% to
$1.17 billion from $584 million. The majority of the increase was the result of
a 57% increase in HMO medical premium revenue to $812 million from $516 million.
The change in HMO medical premium revenue was attributable to: (1) a $131
million increase due to the effect of the acquisition of the remaining interests
in Healthsource North Carolina (HSNC) and HSNY and the acquisition of HMO
members in the Provident Transaction (2) the combined effect of a 44% increase
in average membership and a 3.5% decrease in average medical premium yield to
$130 PMPM from $135 PMPM at its subsidiaries, Healthsource New Hampshire (HSNH),
Healthsource Tennessee (HSTN), Healthsource Maine (HSME), Healthsource South
Carolina (HSSC), Healthsource Arkansas (HSAR), and Healthsource Indiana (HSIN)
("Existing Plans"); and (3) from the commencement of operations of Healthsource
Savannah (HSSV) and Healthsource Kentucky (HSKY).
In addition, there was a significant increase in other insured medical
premiums to $185 million from $17 million as a result of the acquisition of
Provident's fully-insured managed indemnity products and experience rated
refundable premium products.
The remaining revenue increase was due to a 229% increase in administrative
and managed care fee revenue to $170 million from $52 million which resulted
from the Provident Transaction, continued growth of the Company's self-funded,
POS business in various states, workers' compensation healthcare administration
14
<PAGE> 18
fees in New Hampshire, and the effect of the acquisition of the remaining
interest in Healthsource North Carolina Administrators, Inc. (HSNCA) during
1994.
Cost of HMO medical premiums increased 58% to $622 million from $394
million. This increase was due to the effect of the acquisition of the remaining
interests in HSNC and HSNY, the combined effect of the 44% increase in average
membership with a 3.7% decrease in average cost of medical premiums to $99 PMPM
from $103 PMPM at Existing Plans, and the commencement of operations of HSSV and
HSKY. This 3.7% decrease in costs resulted from lower inpatient and outpatient
hospital costs as a result of favored hospital pricing arrangements and global
capitation arrangements offsetting increases in diagnostic testing and
pharmaceutical costs.
The Company's cost of HMO medical premiums as a percent of HMO medical
premiums (HMO medical loss ratio or "MLR") increased to 76.6% from 76.4%.
Although the 3.5% decrease in the average premium yield was less than the 3.7%
decrease in average cost of medical premiums at Existing Plans, this positive
effect was offset by HSNC, HSNY, HSSV, and HSKY which combined had higher
medical loss ratios than the Existing Plans. The Company expects the premium
pricing environment to remain competitive during 1996 and possibly beyond. The
medical loss ratio may increase if the Company is unable to keep the cost of
medical premiums in line with premium yields.
The cost of other insured medical premiums increased to $149 million from
$14 million as a result of the acquisition of Provident's fully-insured managed
indemnity products and experience rated refundable premium products.
Total selling, general and administrative ("SG&A") expenses increased to
$300 million from $123 million due to acquisitions and the development of
existing and new businesses. As a percent of total revenue, SG&A increased to
25.7% from 21.0% as a result of the self-funded business acquired in the
Provident Transaction which has inherently higher levels of SG&A expense.
SG&A expenses related to HMO, fully-insured medical business and corporate
administration increased 86% to $153 million from $83 million. This increase was
primarily due to the effect of the acquisition of the remaining interests in
HSNC and HSNY and the Provident Transaction, the membership increases at
Existing Plans and start up of operations at HSSV and HSKY, and other business
development activities. SG&A expenses related to administrative and managed care
fees increased 265% to $146 million from $40 million due to the Provident
Transaction, the effect of the acquisition of the remaining interest in HSNCA
and increases in the Company's administrative service businesses serving
self-insured POS and managed workers' compensation membership.
Depreciation and amortization expense increased 114% to $24 million from
$11 million due to amortization expense associated with the acquisitions of
Provident and the remaining interests in HSNC and HSNY and depreciation
associated with increased capital purchases.
Interest and other income increased 60% to $21 million from $13 million.
This increase resulted primarily from the increase in cash, cash equivalents and
marketable securities associated with the Provident Transaction, the acquisition
of HSNC and continued increases in cash available from operations. The Company
incurred interest expense of $5 million in 1995 as a result of borrowings
associated with the Provident Transaction.
The Company had no equity in the income of unconsolidated affiliates for
the year ended December 31, 1995 as compared to $1.7 million in the same period
in 1994. This decrease occurred because of the Company's acquisition of the
remaining interests in HSNC and HSNY which were previously accounted for using
the equity method.
The Company's effective tax rate increased to 35.4% from 31.2% due to the
decline of non-taxable interest income as a percentage of total interest income
and as a percentage of total operating income.
Fiscal Year 1994 compared to Fiscal Year 1993 -- Revenue increased 101% to
$584 million from $291 million. The majority of the increase was due to a 115%
increase in HMO medical premium revenue which was attributable to: (1) $181
million in medical premium revenue due to the acquisition of the remaining
15
<PAGE> 19
interest in the parent companies of HSME, HSNC, and HSNY; (2) the combined
effect of an 11% increase in average membership and a 4% increase in average
medical premium yield to $145 PMPM from $140 PMPM at its wholly-owned
subsidiaries HSNH, HSIN, and HSTN; and (3) $12 million in medical premiums from
the commencement of operations of HSAR. The remaining revenue increase was due
to a 72% increase in administrative and managed care fees to $52 million from
$30 million resulting primarily from continued growth of the Company's
self-funded POS business in New Hampshire and Maine, managed workers'
compensation healthcare administration fees in New Hampshire, administrative
fees generated by the acquisition of a TPA business in Arkansas and the
acquisition of the remaining interest in HSNCA.
Cost of HMO medical premiums increased 121% to $394 million from $178
million. This increase was due to the acquisition of the remaining interests in
HSME, HSNC, and HSNY, the commencement of operations of HSAR, and the combined
effect of the 11% increase in average membership with an increase in average
costs of medical premiums of 6% to $110 PMPM from $104 PMPM at HSNH, HSIN, and
HSTN. This 6% increase was primarily attributable to HSIN, which experienced
unfavorable inpatient case mix and significantly higher diagnostic, physician
and pharmaceutical costs.
The Company's MLR increased to 76.4% from 74.4% because the 4% increase
in the average premium yield was less than the 6% increase in average cost of
medical premiums at HSNH, HSTN, and HSIN and because of the acquisition of the
remaining interest in HSME which had a higher MLR than the Company's 1993 MLR.
Total SG&A expenses increased to $123 million from $63 million due to
acquisitions and the development of existing and new business. As a percent of
total revenue, SG&A decreased to 21.0% from 21.7%.
SG&A expenses related to HMO, fully-insured medical business and corporate
administration increased 107% to $83 million from $40 million. The increase was
primarily due to the acquisition of the remaining interest in HSNC; the
inclusion of HSSC for a full year; higher levels of membership at HSNH, HSTN,
HSIN, and HSME; and the commencement of operations at HSAR. SG&A expense related
to administrative and managed care fees increased 72% to $40 million from $23
million due to increases in the Company's administrative services businesses,
such as its self-funded POS and managed workers' compensation businesses, the
acquisition of the TPA in Arkansas, and the acquisition of the remaining
interest in HSNCA.
Depreciation and amortization expense increased 87% to $11 million from $6
million primarily due to the amortization expense associated with the Company's
acquisitions of the remaining interests in HSNC, HSME, and HSNY.
Interest and other income increased 96% to $13 million from $6.6 million.
This increase resulted primarily from the increased funds available for
investment from the Company's $73 million public offering in August 1993, the
acquisition of the remaining interests in HSSC, HSME, HSNC, and HSNY and
continued increases in cash available from operations.
Equity in the income of unconsolidated affiliates decreased 53% to $1.7
million from $3.5 million. This decrease occurred because of the Company's
acquisition of the remaining interests in HSSC, HSME, HSNC, and HSNY which were
previously accounted for using the equity method.
16
<PAGE> 20
The following table shows certain income statement data expressed as a
percentage of total operating revenues and is not intended to be indicative of
margins earned on each revenue source:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Revenue:
HMO medical premiums......................................... 69.6% 88.3% 82.4%
Other insured medical premiums............................... 15.8 2.9 7.3
Administrative and managed care fees......................... 14.6 8.8 10.3
----- ----- -----
Total operating revenue........................................... 100.0 100.0 100.0
----- ----- -----
Expenses:
Cost of HMO medical premiums................................. 53.3 67.5 61.3
Cost of other insured medical premiums....................... 12.8 2.4 5.9
Selling, general and administrative:
HMO and other insured services............................. 13.2 14.1 13.7
Administrative and managed care fees....................... 12.5 6.9 8.0
----- ----- -----
Total selling, general and administrative............... 25.7 21.0 21.7
----- ----- -----
Depreciation and amortization................................ 2.1 1.9 2.1
----- ----- -----
Total operating expenses.......................................... 93.9 92.8 91.0
----- ----- -----
Operating income.................................................. 6.1 7.2 9.0
Interest income................................................... 1.8 2.2 2.3
Interest expense.................................................. (.5) -- --
----- ----- -----
Interest income, net.............................................. 1.3 2.2 2.3
----- ----- -----
Income before equity in income of unconsolidated affiliates and
provision for income taxes...................................... 7.4 9.4 11.3
Equity in income of unconsolidated affiliates..................... -- 0.3 1.2
Provision for income taxes........................................ (2.6) (3.0) (3.5)
----- ----- -----
Net income........................................................ 4.8% 6.7% 9.0%
===== ===== =====
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1995, cash, cash equivalents and marketable securities
totaled approximately $224 million, of which $203 million was held by regulated
operating subsidiaries and was largely restricted to use in those subsidiaries.
During 1995, the Company generated $51 million of cash from operations. The
Company liquidated approximately $118 million in marketable securities and
invested $55 million in property and equipment. The Provident Transaction
resulted in a net cash expenditure of approximately $154 million.
On February 22, 1996, the Company announced its intention to privately
offer to institutional investors $215 million principal amount of convertible
subordinated notes (the "Notes"). The Company intends to use $100
million of the net proceeds of the Note offering to redeem the $100 million
face amount of the Company's outstanding 6.25% Class A Cumulative Preferred
Stock. The Company intends to use the balance of the net proceeds of the
offering to repay a portion of the outstanding principal balance under the
Chase Facility.
The Company's Chase Facility is a $300 million unsecured revolving line of
credit, which is committed through March 15, 2000. At December 31, 1995, the
Company had $95 million outstanding. Subsequent to year end, the Company
borrowed an additional $50 million under the Chase Facility to fund the CMHC
Transaction in February 1996. Additionally, the Company has signed a definitive
agreement to purchase substantially all of the operating assets of PACC for
approximately $80 million in cash subject to significant adjustments. The
Company intends to fund the PACC Transaction from borrowings under the Chase
Facility or other financial resources.
Although the Company has no other present commitments for significant
capital expenditures, the Company's 1996 budget reflects capital expenditures in
excess of $40 million. The Company believes that its existing cash balances and
cash flow generated by its wholly-owned plans coupled with the proceeds of the
sale of the Notes and the amounts, if any, available for borrowing under the
Chase Facility, are adequate to fund its existing operations on a short-term
and long-term basis.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" (FAS 121) and Statement of
Financial Accounting Standards No. 123 "Accounting for Stock Based Compensation"
(FAS 123), which are effective for fiscal years beginning after December 15,
1995.
17
<PAGE> 21
Management believes that the adoption of FAS 121 and FAS 123 will not have a
material impact on the Company's consolidated financial statements, although a
detailed study has not been completed. In accordance with the provisions of FAS
123, the Company will elect to continue to account for stock based compensation
under the provisions of APB 25.
Effects of Inflation
Historically, medical premiums and the cost of medical premiums generally
have risen at a rate higher than that for consumer goods as a whole. Nationally,
the rate of inflation of premiums and costs of medical premiums slowed
substantially during 1995. The Company experienced a decrease of 3.7% in the
average cost of medical premiums during 1995 over 1994. There is no assurance
that the Company's cost of medical premiums will continue to decline.
The Company attempts to mitigate increases in the cost of medical premiums
through some or all of the following activities: (1) securing global capitation
arrangements with major hospital providers and improving its contracting
methodologies with other providers to achieve lower costs and to promote
risk-sharing; (2) reviewing and, as necessary, modifying benefit designs so as
to discourage inappropriate levels of consumer-driven utilization; (3) using
various UR techniques and technologies to mitigate inappropriate use of health
care resources by providers; and (4) communicating with the Company's primary
care physicians about the impact of clinically inappropriate utilization of
healthcare resources.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995: The statements contained in this Management's
Discussion and Analysis of Financial Condition and Results of
Operations concerning future premium pricing levels, future MLR
levels, the Company's ability to control healthcare and SG&A costs and
all other statements that are not historical facts are forward looking
statements; actual results may differ materially from those projected
in the forward looking statements, which statements involve risks and
uncertainties, including but not limited to, the following: that
increased regulation will increase healthcare expenses; that increased
competition in the Company's markets, changes in product mix or other
factors will unexpectedly reduce premium yield; that the Company will
be unable to close sufficient global capitation arrangements with key
providers; that healthcare costs in any given period may be greater
than expected due to unexpected incidence of major cases, natural
disasters, epidemics, changes in physician practices and new
technologies; and that the Company will be unable to close
acquisitions of other HMOs and healthcare financing companies on
satisfactory terms in key markets. Shareholders are also directed to the
other risks discussed in other documents filed by the Company with the
Commission.
18
<PAGE> 22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report................................................... F-2
Consolidated Balance Sheets.................................................... F-3
Consolidated Statements of Operations.......................................... F-4
Consolidated Statements of Cash Flows.......................................... F-5
Consolidated Statements of Changes in Shareholders' Equity..................... F-6
Notes to Consolidated Financial Statements..................................... F-7
</TABLE>
F-1
<PAGE> 23
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Healthsource, Inc.
Hooksett, New Hampshire
We have audited the accompanying consolidated balance sheets of
Healthsource, Inc. and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of operations, cash flows and changes in
shareholders' equity for each of the three years in the period ended December
31, 1995. 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, such consolidated financial statements present fairly, in
all material respects, the financial position of Healthsource, Inc. and
subsidiaries at December 31, 1995 and 1994, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1995 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 16, 1996
F-2
<PAGE> 24
<TABLE>
HEALTHSOURCE, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
<CAPTION>
1995 1994
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Note 2).............................. $121,467 $ 67,193
Marketable securities (Notes 2, 3 and 11)....................... 34,301 94,321
Premiums and administrative fees receivable (Note 11)........... 117,871 16,525
Restricted investments (Notes 2, 3, 8 and 11)................... 123,871 --
Other current assets............................................ 29,986 18,324
-------- --------
Total current assets....................................... 427,496 196,363
Long-term marketable securities (Notes 2, 3 and 11).................. 68,357 97,083
Property and leasehold improvements -- net (Notes 2 and 5)........... 103,611 39,686
Restricted investments (Notes 2, 3, 8 and 11)........................ 8,099 6,618
Intangible assets (Notes 2 and 4).................................... 254,886 76,760
Other assets......................................................... 10,590 7,765
-------- --------
Total...................................................... $873,039 $424,275
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Medical claims payable (Notes 2 and 11)......................... $152,649 $ 72,676
Accounts payable and accrued expenses........................... 85,678 17,536
Estimated liability under retrospective refund agreements (Note
2)............................................................. 35,623 --
Deferred revenue (Note 2)....................................... 7,489 3,388
Other current liabilities....................................... 1,587 2,352
-------- --------
Total current liabilities.................................. 283,026 95,952
Revolving note payable (Note 6)...................................... 95,000 --
Other liabilities.................................................... 6,931 5,839
-------- --------
Total liabilities.......................................... 384,957 101,791
-------- --------
Commitments and contingencies (Note 8)
Shareholders' equity (Notes 2 and 10):
Preferred stock -- 10,000 shares authorized, 1,000 issued and
outstanding -- $100 stated value (Note 4)...................... 100,000 --
Common stock -- $.10 par value -- 200,000 shares authorized,
63,581 and 31,280 issued and outstanding....................... 6,358 3,128
Additional paid-in capital...................................... 221,048 213,463
Retained earnings............................................... 159,547 107,443
Unrealized gain (loss) on marketable securities (Notes 2 and
3)............................................................. 1,129 (1,550)
-------- --------
Shareholders' equity....................................... 488,082 322,484
-------- --------
Total...................................................... $873,039 $424,275
======== ========
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE> 25
<TABLE>
HEALTHSOURCE, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<CAPTION>
1995 1994 1993
---------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenue (Note 2):
HMO medical premiums................................... $ 811,645 $515,639 $239,600
Other insured medical premiums......................... 184,819 16,837 21,190
Administrative and managed care fees................... 170,233 51,767 30,045
---------- -------- --------
Total operating revenue........................... 1,166,697 584,243 290,835
---------- -------- --------
Expenses (Note 2):
Cost of HMO medical premiums........................... 621,888 394,173 178,241
Cost of other insured medical premiums................. 149,396 14,020 17,142
Selling, general and administrative (Note 2):
HMO and other insured services....................... 153,326 82,550 39,902
Administrative and managed care services............. 146,340 40,107 23,300
---------- -------- --------
Total selling, general and administrative......... 299,666 122,657 63,202
---------- -------- --------
Depreciation and amortization.......................... 24,129 11,254 6,028
---------- -------- --------
Total operating expenses.......................... 1,095,079 542,104 264,613
---------- -------- --------
Operating income............................................ 71,618 42,139 26,222
Interest income........................................ 20,823 13,004 6,648
Interest expense....................................... (5,392) -- --
---------- -------- --------
Interest income, net......................... 15,431 13,004 6,648
---------- -------- --------
Income before equity in income of unconsolidated affiliates
and provision for income taxes............................ 87,049 55,143 32,870
Equity in income of unconsolidated affiliates............... -- 1,670 3,544
---------- -------- --------
Income before provision for income taxes............... 87,049 56,813 36,414
Provision for income taxes (Notes 2 and 7).................. 30,778 17,769 10,350
---------- -------- --------
Net income............................................. $ 56,271 $ 39,044 $ 26,064
========= ======== ========
Preferred stock dividends................................... 4,167 -- --
---------- -------- --------
Net income applicable to common shareholders................ $ 52,104 $ 39,044 $ 26,064
---------- -------- --------
Net income per common share (Note 2)........................ $ 0.81 $ 0.62 $ 0.48
Weighted average number of common and common equivalent
shares outstanding (Note 2)............................... 64,195 62,818 54,332
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE> 26
<TABLE>
HEALTHSOURCE, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<CAPTION>
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.............................................. $ 56,271 $ 39,044 $ 26,064
Adjustments to reconcile net income to net cash provided
by operating activities:
Non-cash items:
Depreciation and amortization...................... 24,129 11,254 6,028
Equity items, including minority interests......... (277) (2,067) (3,603)
Deferred income taxes.............................. 2,726 (1,844) (511)
Changes in assets and liabilities net of the effects of
acquisitions:
Premiums and administrative fees receivable........... (20,316) (3,778) (4,543)
Other current assets.................................. (11,605) (3,333) (2,744)
Medical claims payable................................ (5,062) 6,004 7,629
Accounts payable and accrued expenses................. 2,247 8,541 3,331
Deferred revenue...................................... 2,456 (1,570) 1,360
-------- -------- --------
Net cash provided by operating activities.......... 50,569 52,251 33,011
-------- -------- --------
Cash flows from investing activities:
Decrease (increase) in marketable securities............ 119,448 (29,545) (49,960)
Investment in affiliates, net of cash acquired.......... (159,165) 7,831 3,501
Additions to property and leasehold improvements........ (55,357) (23,253) (11,298)
Decrease (increase) in other assets and restricted
investments........................................... 2,162 (5,742) (1,289)
-------- -------- --------
Net cash used for investing activities............. (92,912) (50,709) (59,046)
-------- -------- --------
Cash flows from financing activities:
Net borrowings under revolving note payable............. 95,000 -- --
Issuance of common stock................................ 5,727 1,642 74,951
Preferred stock dividends............................... (4,167) -- --
Increase (decrease) in other liabilities................ 57 (220) 624
-------- -------- --------
Net cash provided by financing activities.......... 96,617 1,422 75,575
-------- -------- --------
Increase in cash and cash equivalents........................ 54,274 2,964 49,540
Balance, beginning of year................................... 67,193 64,229 14,689
-------- -------- --------
Balance, end of year......................................... $121,467 $ 67,193 $ 64,229
======== ======== ========
Supplemental disclosure of cash flow information:
Income taxes paid....................................... $ 23,955 $ 16,537 $ 9,655
Interest paid........................................... 5,331 -- --
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
In 1995, the Company issued $100 million in 6.25% cumulative preferred
stock in connection with the Provident Transaction (as defined in Note 1) (See
Note 4).
In 1994, the Company issued 1,242,000 shares of common stock, which were
valued at $39.2 million in connection with the Healthsource Health Plans, Inc.
acquisition (See Note 4).
In 1993, the Company issued 738,000 shares of common stock, which were
valued at $19.7 million in connection with the Physician's Health Systems, Inc.
("PHS") acquisition (See Note 4).
See notes to consolidated financial statements
F-5
<PAGE> 27
<TABLE>
HEALTHSOURCE, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<CAPTION>
UNREALIZED
GAIN
PREFERRED STOCK COMMON STOCK ADDITIONAL (LOSS) ON
----------------- ---------------- PAID-IN RETAINED MARKETABLE SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS SECURITIES EQUITY
------ -------- ------ ------- ---------- -------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance January 1, 1993............. -- $ -- 12,036 $1,204 $ 75,941 $ 42,335 $ -- $119,480
Stock issued in connection with PHS
acquisition....................... -- -- 738 74 19,662 -- -- 19,736
Exercise of stock options........... -- -- 139 14 3,053 -- -- 3,067
Stock issued in connection with
public offering................... -- -- 1,955 195 73,100 -- -- 73,295
Stock split......................... -- -- 14,868 1,487 (1,487) -- --
Net income.......................... -- -- -- -- -- 26,064 -- 26,064
----- -------- ------ ------ -------- -------- ------ --------
Balance, December 31, 1993.......... -- -- 29,736 2,974 170,269 68,399 -- 241,642
Stock issued in connection with HSHP
acquisition....................... -- -- 1,242 124 39,098 -- -- 39,222
Exercise of stock options........... -- -- 302 30 4,096 -- -- 4,126
Unrealized loss on marketable
securities........................ -- -- -- -- -- -- (1,550) (1,550)
Net income.......................... -- -- -- -- -- 39,044 -- 39,044
----- -------- ------ ------ -------- -------- ------ --------
Balance, December 31, 1994.......... -- -- 31,280 3,128 213,463 107,443 (1,550) 322,484
Stock issued in connection with
Provident Transaction............. 1,000 100,000 -- -- -- -- -- 100,000
Preferred stock dividends........... -- -- -- -- -- (4,167) -- (4,167)
Exercise of stock options........... -- -- 511 51 10,764 -- -- 10,815
Unrealized gain on marketable
securities........................ -- -- -- -- -- -- 2,679 2,679
Stock split......................... -- -- 31,790 3,179 (3,179) -- -- --
Net income.......................... -- -- -- -- -- 56,271 -- 56,271
----- -------- ------ ------ -------- -------- ------ --------
Balance, December 31, 1995.......... 1,000 $100,000 63,581 $6,358 $221,048 $159,547 $1,129 $488,082
===== ======== ====== ====== ======== ======== ====== ========
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE> 28
HEALTHSOURCE, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF BUSINESS
Healthsource, Inc. and its subsidiaries (together referred to as the
"Company") operate in a single business segment, managed healthcare, and provide
a broad range of managed healthcare products and services through various
subsidiaries. The Company owns health maintenance organizations (HMOs) in New
England, upstate New York, and the Central, Southeastern and South Central
United States and acquired the group health, HMO and third-party administration
business of Provident Life and Accident Insurance Company of America
("Provident") of Chattanooga, Tennessee in May 1995 (the "Provident
Transaction") (see Note 4). The Company also provides managed care and
administration services directly to other healthcare payors.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation The consolidated financial statements include
the accounts of Healthsource, Inc. and its majority-owned subsidiaries. All
significant intercompany accounts and transactions are eliminated in
consolidation. Investments in entities in which ownership interests range from
20% to 50% and in which the Company exercises significant influence are
accounted for by the equity method. Interests of other investors in the
Company's majority-owned entities are accounted for as minority interests and
are included in other liabilities for financial reporting purposes.
Cash and Cash Equivalents The Company considers all money market deposits
and instruments, repurchase agreements, remarketed preferred stock, certificates
of deposit and U.S. Government obligations with original maturities of three
months or less to be cash equivalents.
Marketable Securities Effective January 1, 1994, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" (FAS 115). The cumulative
effect of the adoption of FAS 115 was not material to the financial statements.
The Company's investment portfolio is comprised principally of debt securities.
In 1995, the Company has classified its securities as "available-for-sale" and
recorded them at market value. The difference between cost and market, net of
the related tax effect, has been reflected as a separate component of
shareholders' equity. In 1994, certain securities were classified as
"held-to-maturity" and recorded at amortized cost . The carrying value of
investments sold is determined on a specific identification basis.
Property and Leasehold Improvements Property and leasehold improvements
are stated at cost. Depreciation of property is computed using straight-line and
accelerated methods over the estimated useful lives of the related assets,
principally five to seven years. Depreciation of building and improvements is
computed using the straight-line method over the estimated useful life of forty
years. Amortization of leasehold improvements and assets under capital leases is
computed using the straight-line method over the shorter of the estimated useful
lives or the related lease terms.
Intangible Assets Intangible assets consist of costs in excess of net
assets acquired, covenants not to compete, hospital services agreements,
physician networks and acquired membership lists. The costs in excess of net
assets acquired are amortized over various periods not exceeding forty years
using a straight-line method. The other intangible assets are amortized using a
straight-line method over their estimated useful lives ranging from three to
fifteen years. The Company continually evaluates the recoverability of goodwill
using various methods and believes that no material impairment of goodwill
existed at December 31, 1995.
Medical Claims Payable Reported claims expected to be paid after the
balance sheet date for services provided to members prior to the balance sheet
date are recorded as liabilities. Claims for services provided to members during
the financial reporting period which are unreported at the balance sheet date
are also recorded as liabilities based on the Company's claims experience. The
amounts are based upon estimates of the ultimate net cost of such services
provided.
F-7
<PAGE> 29
HEALTHSOURCE, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Retrospective Refund Agreements The liability for retrospective refund
agreements and the retrospective refund credits due and accrued represent
estimated amounts to be either refunded to group contract holders or used to
adjust future premiums based on formulas which compare a group's claims
experience to premiums paid.
Physician Risk Withholding The cost of medical premiums (including the
portion of the physicians' fees withheld) are charged to expense as incurred,
and amounts withheld from physicians are recorded as liabilities. Amounts to be
returned to physicians are reviewed periodically, and any amounts not returned
under the risk-sharing arrangement are recorded as reductions of the cost of
medical premiums and corresponding reductions of the related liability for
physician risk withholding.
Revenue HMO medical premium revenue and other insured medical premium
revenue are recognized in the month in which members are entitled to receive
healthcare services and are reported net of retrospective refunds. Medical
premiums collected in advance are recorded as deferred revenue. Administrative
and managed care fees are recognized in the period that claims processing and
other managed care services are provided to self-funded clients. Revenue from
management service agreements is recognized in the period for which the Company
performs the services.
Cost of HMO Medical Premiums Cost of HMO medical premiums includes the
costs of all medical services delivered to enrolled members of the Company's
majority-owned HMOs and for whom the entities have recorded HMO medical premium
revenue during the reporting period. These costs include payments for specific
medical services and for capitation. The cost of specific medical services
include those paid to physicians, hospitals, and other healthcare providers on a
fee for service basis. These costs include claims paid, claims in process and
pending, estimates of unreported claims, estimates of contractual adjustments
pursuant to hospital and other provider contracts, and charges at the balance
sheet date for which the Company will be responsible. Adjustments to prior
period estimates are reflected in the current period and are not significant.
The costs of capitation (fixed monthly payments per member) include payments to
certain physicians, hospitals, laboratories, pharmaceutical and mental
healthcare providers. Adjustment to prior period estimates are reflected in the
current period and are not significant.
Cost of Other Insured Medical Premiums Cost of other insured medical
premiums includes the costs of all medical services delivered to enrolled
members of the Company's non-HMO medical plans for whom the entities have
recorded medical premium revenue during the reporting period. These costs
include claims paid, claims in process and claims pending, and estimates of
unreported claims and charges at the balance sheet date for which the Company
will be responsible. Adjustment to prior period estimates are reflected in the
current period and are not significant.
Reinsurance The Company's operating subsidiaries are covered under medical
reinsurance agreements that provide partial coverage for medical services in
excess of certain amounts. Reinsurance premiums, net of recoveries, are included
in the cost of medical premiums.
Selling, General & Administrative ("SG&A") Expense HMO and other insured
SG&A expense includes the costs recognized by the Company and its majority-owned
entities: (1) to market and administer the delivery of medical services for
which the Company is at risk and (2) to develop and administer its management
services agreements. Administrative and managed care fees SG&A expense includes
the costs recognized by the Company and its majority-owned entities to market
and administer the delivery of medical services for self-insured clients.
Corporate SG&A is included within HMO and other insured SG&A expense.
Income Taxes The Company and its majority-owned subsidiaries file
consolidated federal, New Hampshire, and Maine income tax returns. All other
state income tax returns are filed on a separate company basis.
F-8
<PAGE> 30
HEALTHSOURCE, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards No. 109. Deferred income tax assets
and liabilities are computed for differences between the financial statement and
tax bases of assets and liabilities that will result in taxable or deductible
amounts in the future based on enacted tax laws and rates applicable to the
periods in which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. Income tax expense is the tax
payable or refundable for the period plus or minus the change during the period
in deferred tax assets and liabilities.
Net Income Per Common Share Net income per common share for all periods
presented was computed by dividing net income less preferred dividends by the
weighted average number of shares outstanding during each respective period
after giving effect to a two-for-one stock split effected in the form of a 100%
stock dividend payable to shareholders, December 15, 1995. Preferred stock
dividends amounted to $4,167,000 in 1995. Stock options, which do not materially
dilute net income per common share, are included as common stock equivalents.
Risks and Uncertainties The Company's business could be impacted by
continuing price pressure on new and renewal business, the Company's ability to
effectively control healthcare costs, additional competitors entering the
Company's markets, federal and state legislation in the area of healthcare
reform and governmental licensing regulations of HMOs and insurance companies.
Changes in these areas could adversely impact the Company's operations in the
future.
Use of Estimates The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements. Estimates also affect the reported amounts of revenue
and expenses during the reporting period. Actual results could differ from those
estimates.
Accounting Pronouncements The Financial Accounting Standards Board has
issued Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
(FAS 121) and Statement of Financial Accounting Standards No. 123, "Accounting
for Stock Based Compensation" (FAS 123), which are effective for fiscal years
beginning after December 15, 1995. Management believes that the adoption of FAS
121 and FAS 123 will not have a material impact on the Company's consolidated
financial statements, although a detailed study has not been completed. In
accordance with the provisions of FAS 123, the Company will elect to continue to
account for stock based compensation under the provisions of APB 25.
Reclassifications Acquisitions in all years presented affect the
comparability of amounts. Other insured medical premiums, cost of other insured
medical premiums and a significant portion of SG&A are impacted and relate
primarily to the Provident Transaction. Accordingly, certain prior year amounts
have been reclassified to conform with the current year presentation.
F-9
<PAGE> 31
HEALTHSOURCE, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. MARKETABLE SECURITIES AND RESTRICTED INVESTMENTS
The Company's investment portfolio consisted of the following securities
which were classified as "available-for-sale" at December 31, 1995:
<TABLE>
<CAPTION>
MARKET UNREALIZED UNREALIZED AMORTIZED
VALUE GAIN LOSS COST
-------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Current Assets:
Marketable Securities:
Municipal Tax Exempt Bonds.................. $ 23,992 $ 136 $ 32 $ 23,888
Remarketed Preferred Stock.................. 10,309 -- 119 10,428
-------- ------ ---- --------
Total.................................. 34,301 136 151 34,316
-------- ------ ---- --------
Restricted Investments:
Taxable Municipal Bonds..................... 45,187 2 15 45,200
Municipal Tax Exempt Bonds.................. 48,208 579 -- 47,629
Remarketed Preferred Stock.................. 13,936 -- -- 13,936
Other....................................... 16,540 -- -- 16,540
-------- ------ ---- --------
Total.................................. 123,871 581 15 123,305
-------- ------ ---- --------
Non-Current Assets:
Marketable Securities:
US Government and Agencies.................. 2,852 7 -- 2,845
Municipal Tax Exempt Bonds.................. 62,072 1,104 57 61,025
Other....................................... 3,433 -- 44 3,477
-------- ------ ---- --------
Total.................................. 68,357 1,111 101 67,347
-------- ------ ---- --------
Restricted Investments:
US Government and Agencies.................. 4,503 119 2 4,386
Municipal Tax Exempt Bonds.................. 1,248 -- -- 1,248
Other....................................... 2,348 16 -- 2,332
-------- ------ ---- --------
8,099 135 2 7,966
-------- ------ ---- --------
Total Available-for-Sale......................... $234,628 $1,963 $269 $232,934
======== ====== ==== ========
</TABLE>
Proceeds from sales of "available-for-sale" securities during 1995 were
$27.5 million. Realized gains on these sales totalled $.4 million.
F-10
<PAGE> 32
HEALTHSOURCE, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's investment portfolio, which was recorded at market value for
"available-for-sale" and amortized cost for "held-to-maturity" investments,
consisted of the following at December 31, 1994:
<TABLE>
<CAPTION>
MARKET UNREALIZED UNREALIZED AMORTIZED
VALUE GAIN LOSS COST
-------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Available-for-Sale:
Current Assets:
Municipal Tax Exempt Bonds.............. $ 72,046 $ 57 $1,607 $ 73,596
======== ==== ====== ========
Held-to-Maturity:
Current Assets:
US Government and Agencies.............. $ 1,267 $ -- $ 12 $ 1,279
Municipal Tax Exempt Bonds.............. 20,635 57 134 20,712
Other................................... 277 -- 7 284
-------- ---- ------ --------
Total.............................. 22,179 57 153 22,275
-------- ---- ------ --------
Non-Current Assets:
US Government and Agencies.............. 519 -- 44 563
Municipal Tax Exempt Bonds.............. 94,057 284 2,447 96,220
Other................................... 296 1 5 300
-------- ---- ------ --------
Total.............................. 94,872 285 2,496 97,083
-------- ---- ------ --------
Total Held-to-Maturity........... $117,051 $342 $2,649 $119,358
======== ==== ====== ========
</TABLE>
Non-current restricted investments at December 31, 1994 consisted primarily
of US Government Agencies and Municipal Tax Exempt Bonds.
Maturities of investments are as follows at December 31, 1995:
<TABLE>
<CAPTION>
MARKET AMORTIZED
VALUE COST
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
Available-for-Sale:
Within One Year.................................................. $131,558 $131,486
One Through Five Years........................................... 92,578 91,209
After Five Through Ten Years..................................... 10,117 9,884
After Ten Years.................................................. 375 355
-------- --------
$234,628 $232,934
======== ========
</TABLE>
On December 31, 1995, the Company reclassified its "held-to-maturity"
investments to "available-for-sale," based on a one time assessment of the
portfolio. The impact of the transaction was to transfer securities with a
market value of $128.1 million and an amortized cost of $126.9 million from
"held-to-maturity" to "available-for-sale."
F-11
<PAGE> 33
HEALTHSOURCE, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. ACQUISITIONS
The Company's intangible assets were acquired as the result of various
acquisitions. At December 31, 1995 and 1994, the Company's intangible assets
consisted of the following:
<TABLE>
<CAPTION>
1995 1994
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Identifiable intangible assets.................................. $ 20,053 $17,227
Cost in excess of net assets acquired........................... 255,191 70,625
-------- -------
Total intangible assets......................................... 275,244 87,852
Less accumulated amortization................................... (20,358) (11,092)
-------- -------
Intangible assets, net.......................................... $254,886 $76,760
======== =======
</TABLE>
Identifiable intangible assets consist of covenants not to compete,
membership lists, hospital services agreements and physician networks which are
being amortized over estimated useful lives ranging from three to fifteen years
based on formal valuation studies. In connection with the Provident Transaction,
the formal valuation study to determine the allocation of purchase price among
tangible and intangible assets and the assignment of estimated lives to
intangibles has not yet been completed. Amortization expense for the years ended
December 31, 1995, 1994, and 1993 was $9.3 million, $4.7 million, and $3.1
million, respectively.
1995 Acquisition Effective May 1, 1995, the Company acquired the group
health, HMO and third party administration business of Provident for $231
million in cash and securities. The Company paid cash of $131 million and issued
to Provident non-voting non-convertible Class A Cumulative Preferred Stock with
a face value of $100 million. The Preferred Stock bears a 6.25% annual dividend
rate and through May 1, 1997 is redeemable at par only at the option of the
Company in cash or for a 10-year subordinated note with interest at a market
rate or, failing that, the dividend rate on the Preferred Stock will be reset to
a market rate on May 1, 1997. The transaction was accounted for as a purchase.
1994 Acquisitions On January 13, 1994, the Company acquired the remaining
60.2% interest in Healthsource Maine, Inc. (HSME). Under the terms of the
agreement, the Company made a cash payment of $11.5 million in exchange for all
of the shares of HSME which it did not already own. The transaction was
accounted for as a purchase.
On March 31, 1994, the Company acquired the remaining 69.9% of Healthsource
Health Plans, Inc. (HSHP), the parent company of Healthsource North Carolina,
Inc. (HSNC). Under the terms of the agreement, HSHP shareholders received
approximately 1.24 million shares of the Company's common stock. In addition,
certain existing options held by HSHP management were converted at the same
ratio to options to purchase approximately 153,000 shares of Healthsource common
stock with an exercise price of approximately $4.60 per share. The transaction
was accounted for as a purchase. The number of shares and option price per share
have not been adjusted for subsequent stock splits.
In November 1994, the Company completed a cash tender offer to purchase the
remaining 60% interest in Healthsource New York, Inc. (formerly CNY Patient's
Network, Inc.), the parent company of Healthsource HMO of New York (HSNY) which
resulted in a total purchase price of approximately $11 million. The transaction
was accounted for as a purchase.
1993 Acquisitions On March 31, 1993, the Company acquired the remaining
69.6% of PHS, the parent company of Healthsource South Carolina (HSSC). Under
the terms of the agreement, Healthsource, Inc. issued 737,775 shares of common
stock in exchange for all of the shares of PHS which it did not own.
Additionally, the Company cashed out the rights to future share grants and
options for approximately $1.2 million. The transaction was accounted for as a
purchase. The number of shares has not been adjusted for subsequent stock
splits.
F-12
<PAGE> 34
HEALTHSOURCE, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On August 31, 1993, the Company acquired 40.0% of Healthsource New York,
Inc. (formerly CNY Patient's Network, Inc.), the parent company of HSNY for $1.0
million.
The following unaudited pro forma consolidated statement of operations
information assumes the Provident Transaction and the HSME, HSHP and HSNY
acquisitions had occurred on January 1 of each year.
<TABLE>
<CAPTION>
1995 1994
---------- ----------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
Revenue............................................................. $1,312,462 $1,021,011
Operating income.................................................... 73,997 52,164
Net income.......................................................... 58,691 48,685
Net income per common share......................................... $0.82 $0.68
</TABLE>
5. PROPERTY AND LEASEHOLD IMPROVEMENTS
Property and leasehold improvements at December 31, 1995 and 1994 consisted
of the following:
<TABLE>
<CAPTION>
1995 1994
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Land............................................................ $ 5,913 $ 1,425
Building and improvements....................................... 13,886 5,022
Furniture, fixtures and equipment............................... 85,271 39,467
Purchased computer software..................................... 21,314 2,543
Leasehold improvements.......................................... 6,065 5,204
-------- -------
Total................................................. 132,449 53,661
Less accumulated depreciation and amortization.................. (28,838) (13,975)
-------- -------
Property and leasehold improvements -- net...................... $103,611 $39,686
======== =======
</TABLE>
Depreciation and amortization expense for the years ended December 31,
1995, 1994 and 1993 was $14.9 million, $6.5 million and $2.9 million,
respectively.
6. REVOLVING NOTE PAYABLE
The Company has a $300 million unsecured revolving credit agreement with a
bank syndicate which is committed through March 15, 2000. Interest under this
revolving credit facility may range between LIBOR plus .2% and LIBOR plus .45%
depending upon the Company's ratio of indebtedness to total capital. In
connection with the agreement, the Company is required to maintain certain
minimum financial ratios and other covenants. Management believes the Company to
be in compliance with all covenants under this agreement. At December 31, 1995
the Company had $95 million outstanding under this facility. The interest rate
at December 31, 1995 was approximately 6.0%. See Note 8 regarding the
acquisition of substantially all of the HMO assets of Central Massachusetts
Health Care, Inc. ("CMHC"). The revolving credit agreement contains restrictions
on the payment of cash dividends to 50 percent of consolidated net income (as
defined) plus $10 million.
F-13
<PAGE> 35
HEALTHSOURCE, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES
The provision for income taxes was comprised of the following:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal............................................. $25,190 $17,000 $ 9,461
State............................................... 2,862 2,613 378
------- ------- -------
Total current.................................. 28,052 19,613 9,839
------- ------- -------
Deferred:
Federal............................................. 2,640 (1,651) 407
State............................................... 86 (193) 104
------- ------- -------
Total deferred................................. 2,726 (1,844) 511
------- ------- -------
Total provision................................ $30,778 $17,769 $10,350
======= ======= =======
</TABLE>
Deferred income tax expense arose from differences between the reported
amounts of assets and liabilities and their tax bases provided for in accordance
with FAS 109.
Deferred tax assets and liabilities were not material individually or in
the aggregate and are included in other current assets, other assets, other
current liabilities, and other liabilities for financial reporting purposes.
The difference between the Company's effective income tax rate and the
federal statutory rate is reconciled below:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- -------
<S> <C> <C> <C>
Federal statutory rate................................. 35.0% 35.0% 35.0%
State income taxes..................................... 2.1 1.6 .9
Equity in income of unconsolidated affiliates.......... -- (1.0) (3.0)
Non-taxable income..................................... (3.9) (5.4) (5.2)
Non-deductible expenses and other...................... 2.2 1.3 .7
----- ----- ----
Effective income tax rate.............................. 35.4% 31.5% 28.4%
===== ===== ====
</TABLE>
8. COMMITMENTS AND CONTINGENCIES
Acquisitions In February 1996, the Company acquired substantially all of
the HMO assets of CMHC for approximately $46.5 million, subject to post closing
purchase price adjustments. The purchase price was funded with proceeds from its
revolving line of credit.
In January 1996, the Company announced that it had signed a definitive
agreement to purchase substantially all of the operating assets of PACC HMO and
PACC Health Plans for an estimated net price of $80 million in cash, subject to
certain adjustments. The definitive agreement is subject to regulatory and other
approvals.
Regulatory Requirements The Company's affiliated HMOs and insurance
companies are subject to various regulatory requirements including maintenance
of minimum statutory net worth. At December 31, 1995 the Company believes that
it was in compliance with all such requirements. Certain wholly-owned and
majority-owned subsidiaries are required to maintain restricted investments in
the amount of approximately $131 million which includes approximately $123
million placed in a temporary trust to cover claims payments associated with the
Provident Transaction until such time as the policies acquired are novated to
the Company from the Provident.
Legal Proceedings The Company is involved in legal actions in the ordinary
course of business. Although the outcome of any such legal actions cannot be
predicted, in the opinion of management there are
F-14
<PAGE> 36
HEALTHSOURCE, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
no legal proceedings pending against or involving the Company, the outcome of
which is likely to have a material adverse effect upon the consolidated
financial position or results of operations of the Company.
Employee Benefit Plans The Company sponsors defined contribution
retirement plans covering substantially all full-time employees. The Company
matches employee contributions to a maximum of 3% of compensation. Expense
related to this plan amounted to $1.7 million, $.4 million and $.2 million in
1995, 1994 and 1993, respectively.
Leases The Company leases certain equipment and premises under
noncancellable operating leases. Rent expense under all operating leases was
$10.9 million, $3.4 million, and $1.7 million for the years ended December 31,
1995, 1994 and 1993, respectively.
At December 31, 1995, future minimum annual lease payments under
noncancellable operating leases are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
--------------
(IN THOUSANDS)
<S> <C>
1996...................................................... $13,955
1997...................................................... 13,651
1998...................................................... 11,964
1999...................................................... 7,761
2000...................................................... 4,088
2001 and thereafter....................................... 13,765
</TABLE>
9. RELATED PARTY TRANSACTIONS
Under the terms of various management services agreements, the Company
provided services to previously unconsolidated affiliates. Additionally, several
members of the Board of Directors are also physicians who provide services to a
wholly-owned subsidiary under a standard agreement used for all physicians, and
three hospitals who are minority shareholders of each of three of the Company's
consolidated subsidiaries also provide services under standard provider
agreements.
10. STOCK OPTION PLANS
The Company, with the approval of the shareholders, has three Non-Qualified
Stock Option Plans for employees and one Non-Qualified Stock Option Plan for
non-employee directors (the "Plans"). Options granted to employees may be
designated by the Company as qualified or non-qualified at the date of grant.
Under the provisions of the Plans, the Company is currently entitled to grant up
to approximately 7 million options, plus annually an amount equal to 1 1/2% of
the number of outstanding shares on the preceeding December 31. Each option is
convertible into one share of common stock of the Company and may be awarded to
employees of the Company and its subsidiaries and non-employee directors of the
Company at a purchase price of at least 110% of the fair market value of the
stock as of the date of grant. Options may be
F-15
<PAGE> 37
HEALTHSOURCE, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
exercised in accordance with the terms and conditions of each grant. Information
concerning options outstanding for 1995, 1994 and 1993, is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ -----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Outstanding, beginning of year............. 4,538 2,754 2,460
Granted............................... 1,471 2,512 896
Exercised............................. (1,022) (604) (558)
Forfeited............................. (11) (124) (44)
----- ----- -----
Outstanding, end of year................... 4,976 4,538 2,754
===== ===== =====
Exercisable, end of year................... 1,884 946 1,046
Option price per share..................... $2.31 - $25.78 $2.31 - $19.83 $0.84 - $15.20
</TABLE>
11. CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of investments in marketable
securities, premiums receivable and hospital settlement receivables. The
Company's investments in marketable securities are managed by internal and
external investment managers within the guidelines established by the Board of
Directors, which, as a matter of policy, limit the amounts which may be invested
in any one issuer. Concentrations of credit risk with respect to premiums
receivable and hospital settlement receivables are limited due to the large
number of employer groups and hospital providers comprising the Company's
customer base and provider networks, respectively. Additionally, the Company has
a right of offset with respect to amounts due from and to the hospitals. As of
December 31, 1995, management believes that the Company had no significant
concentrations of credit risk.
12. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents selected quarterly financial information for
each of the four quarters of 1995 and 1994. Such information includes all
adjustments the Company considers necessary for a fair presentation thereof.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1995
Revenue.......................................... $208,107 $286,744 $328,211 $343,635
Operating income................................. 14,057 15,942 18,853 22,766
Net income....................................... 11,771 13,622 15,023 15,855
Net income per share............................. $ 0.19 $ 0.20 $ 0.21 $ 0.22
1994
Revenue.......................................... $109,256 $151,790 $155,587 $167,610
Operating income................................. 7,770 10,902 11,046 12,421
Net income....................................... 8,414 9,493 10,142 10,995
Net income per share............................. $ 0.14 $ 0.15 $ 0.16 $ 0.17
</TABLE>
The sum of the above quarterly amounts may not equal reported year to date
amounts due to rounding.
F-16
<PAGE> 38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(i) Directors. This information required for this item
regarding directors of Healthsource is incorporated by reference
to Healthsource's Definitive 1996 Proxy Statement.
(ii) Executive Officers. The following information
concerning executive officers is provided in response to Part
III, Item 10 of Form 10-K pursuant to Item 401 of the Regulation
S-K Integrated Disclosure Rules. Unless otherwise specified, the
specified positions are with Healthsource, Inc.
35
<PAGE> 39
<TABLE>
Name Age Position
---- --- --------
<S> <C> <C>
Norman C. Payson, M.D. 47 President and Chief Executive Officer
Sally W. Crawford 42 Chief Operating Officer
Charles M. Schneider 50 Executive Vice President
Francis G. Middleton, M.D. 56 President, Healthsource South, Inc.
Richard B. Salmon, M.D., Ph.D. 46 Corporate Medical Director
Robert Chin 36 Chief Information Officer
Thomas M. Congoran 52 Chief Financial Officer
</TABLE>
Norman C. Payson, M.D. has been a director and the President and Chief
Executive Officer of the Company since its founding in 1985. He has been in the
HMO field since 1975, first as a practicing physician and director of an HMO
quality program. By 1980, Dr. Payson had assumed a full-time position as Chief
Executive Officer of a large physician group practice and as Medical Director
for a related HMO company. Dr. Payson is a graduate of the Massachusetts
Institute of Technology and Dartmouth Medical School.
Sally W. Crawford has served as the Chief Operating Officer of the Company
since 1985. She served as the Chief Executive Officer of Healthsource New
Hampshire, Inc. from 1986 to 1993. Ms. Crawford is responsible for the Company's
Northern Region operations and marketing efforts. Ms. Crawford has been involved
in HMO management as the Director of Marketing of the Matthew Thornton Health
Plan from 1979 until 1982 and Beacon Health Plan from 1983 until 1985. Ms.
Crawford is a graduate of Smith College and has a Master of Science degree from
Boston University.
Charles M. Schneider has served as Executive Vice President of the Company
since October 1993. Mr. Schneider is responsible for the Company's Southern
Region operations and development activities. From February 1991 to October
1993, Mr. Schneider served as Vice President for Development of the Company and
from April 1990 to February 1991 served as Director of Business Development of
Healthsource New Hampshire, Inc. Before joining the Company in April 1990, Mr.
Schneider served as Chief Executive Officer of a New England hospital, and
previously held several senior healthcare management positions. He is a graduate
of Wayne State University where he also earned a Masters in Economics and
completed a doctoral program in Economics.
Francis G. Middleton, M.D. has served as President of Healthsource South,
Inc. since January 1995. In this capacity he is responsible for development
activities throughout the southern United States. Dr. Middleton served as
Medical Director of Healthsource South Carolina, Inc. from 1986 to January 1995.
Until July 1991, Dr. Middleton practiced medicine in Charleston, South Carolina
as a specialist in internal medicine and infectious disease. Dr. Middleton is a
graduate of the University of the South and received his
36
<PAGE> 40
M.D. from the Medical College of South Carolina. Dr. Middleton has also served
as a director of the Company since 1989.
Richard B. Salmon, M.D., Ph.D. has served as Corporate Medical Director of
the Company since October 1994. Dr. Salmon is responsible for medical management
policy issues on a company-wide basis. He also currently serves as an adjunct
assistant professor of Community and Family Medicine at Dartmouth Medical
School. Prior to his appointment as Corporate Medical Director, Dr. Salmon
served as Medical Director for Healthsource New Hampshire, Inc. from 1986 to
1994. Before joining the Company in 1986, Dr. Salmon served as medical director
for another New Hampshire HMO and was a family practice physician. He is a
graduate of Princeton University and received his M.D. and Ph.D. in Biomedical
Engineering from Case Western Reserve University.
Robert Chin has served as Chief Information Officer of the Company since
August 1993. Mr. Chin is responsible for the Company's information services and
technology development functions. Prior to joining Healthsource in August 1993,
Mr. Chin served as Chief Information Officer at Tufts Associated Health Plan
from 1985 to 1993 and as Systems Manager at Harvard Community Health Plan from
1977 to 1985. He is a graduate of Harvard College and holds a Master of Science
degree from Tufts University.
Thomas M. Congoran has served as the Chief Financial Officer of
Healthsource since July 1989 and served as the Director of Information Services
of the Company from 1987 to July 1989. Mr. Congoran was the Software/Product
Manager of Contel Business Systems, Inc., a computer systems company, from 1985
to 1987. He was the President of Suntax, Inc., a software contractor, from 1979
to 1985. Mr. Congoran is a graduate of Stanford University and earned an M.B.A.
from San Diego State University.
37
<PAGE> 41
There are no family relationships existing between or among any
of the above listed officers, nor is there any involvement in certain
legal proceedings for which disclosure is required under Item 401 of
Regulation S-K. The term of office of each of the foregoing officers
extends until the organizational meeting of the Board of Directors of
Healthsource following the annual meeting of shareholders or until
removed by the Board of Directors.
Information on certain matters relating to beneficial ownership
of directors, executive officers and ten percent shareholders of
Healthsource required for this item is incorporated by reference to
Healthsource's Definitive 1995 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION.
The information required for this item is incorporated by
reference to Healthsource's Definitive 1996 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information required for this item is incorporated by
reference to Healthsource's Definitive 1996 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required for this item is incorporated by
reference to Healthsource's Definitive 1996 Proxy Statement.
38
<PAGE> 42
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K.
(a) Documents Filed as Part of This Report.
(1) Financial Statements. The following financial
statements are filed herewith and appear in Item 8:
Independent Auditors Report
Consolidated balance sheets as of December 31, 1995
and 1994
Consolidated statements of operations for the years ended
December 31, 1995, 1994 and 1993
Consolidated statements of cash flows for the years ended
December 31, 1995, 1994 and 1993
Consolidated statements of changes in shareholders'
equity for the years ended December 31, 1995, 1994
and 1993
Notes to consolidated financial statements
(2) Financial Statement Schedules. Not applicable.
(3) Exhibits. Pursuant to Rule 12b-32 and General
Instruction G, the following Exhibits are
required to be filed with this Report under Item
14 and are incorporated by reference from
the reference source cited in the Exhibit Index
below, are filed herewith, or are not
applicable.
39
<PAGE> 43
<TABLE>
EXHIBIT INDEX
<CAPTION>
Reg. S-K
Item 601 Source or Consecutive
Exhibit No. Document Page of This Report
----------- -------- ---------------------
<S> <C> <C>
(3) Articles of Incorporation and By-Laws
3.1 Articles of Incorporation of Healthsource, Exhibit 3.1 to Form 10-K for the
Inc., as amended Fiscal Year Ended December 31, 1994
filed on March 19, 1995
3.2 By-Laws of Healthsource, Inc., as amended Exhibit 3.2 to Amendment No. 2 to
Form S-4 Registration Statement
No. 33-56446 dated February 19, 1993
3.3 Articles of Amendment to the Articles of Exhibit 4.1 to Form 8-K dated
Incorporation of Healthsource, Inc. June 14, 1995
designating the rights of the Class A
Cumulative Preferred Stock
(10) Material Contracts
10.1 Indemnity Agreement (form) dated September Exhibit 10.7 to Form S-1 Registration
11, 1989 between Healthsource, Inc. and Statement No. 33-31165 dated
September 20, 1989 each of its directors and
executive officers (compensatory contract)
10.2 Amendment to Healthsource, Inc. 1987 Exhibit 10 to Form 10-Q for the Quarter
Non-Qualified Stock Option Plan (compensatory Ended March 31, 1991 filed on May 3, 1991
plan)
10.3 Healthsource, Inc. 1991 Non-Qualified Stock Exhibit 10.21 to Form 10-K for the
Option Plan (compensatory plan) Fiscal Year Ended December 31, 1990
filed on March 28, 1991
</TABLE>
40
<PAGE> 44
<TABLE>
<CAPTION>
<S> <C> <C>
10.4 Healthsource, Inc. 1992 Director Exhibit 10.2 to Form 10-Q for the
Stock Option Plan (compensatory plan) Quarter Ended June 30, 1992 filed on
August 12, 1992
10.5 Healthsource, Inc. 1994 Stock Option Exhibit to Proxy Statement for the
Plan (compensatory plan) Annual Meeting of Shareholders held
on May 11, 1994 filed on April 11, 1994
10.6 Employment Agreement dated as of Exhibit 10.7 to Form 10-K for the Fiscal Year
January 1, 1995 between Healthsource, Ended December 31, 1994 dated March 17, 1995
Inc. and Francis G. Middleton,
M.D. (compensatory contract)
10.7 Employment Agreement dated November Exhibit 10.16 to Form 10-K for the
24, 1993 between Healthsource, Inc. Fiscal Year Ended December 31, 1993
filed on March 30, 1994 and David
W. Schall, M.D. (compensatory contract)
10.8 Formation Agreement dated July 28, Exhibit 10 to Form 8-K dated July 30,
1993 between Healthsource, Inc. and 1993
St. Vincent Infirmary Medical Center
10.9 Investment Agreement dated as of Exhibit 10.1 to Form 10-Q for
April 8, 1993 between Healthsource New the Quarter Ended March 30, 1993
York, Inc. and ChubbLife Insurance and filed May 1, 1993
Company of America
10.10 Agreement Regarding Formation of Exhibit 10 to Form 10-Q for the Quarter
Health Maintenance Organization in Ended June 30, 1993 filed July 20, 1993
Savannah, Georgia dated July 19,
1993 between Healthsource, Inc. and
Candler Health System, Inc.
10.11 Agreement Regarding Formation of Exhibit 10.1 to Form 8-K dated April 12,
Health Maintenance Organization in 1994
North Central Texas dated April
1, 1994 among Healthsource South
Central, Inc., All Care, Inc. and
All Saints Health Systems, Inc.
</TABLE>
41
<PAGE> 45
<TABLE>
<CAPTION>
<S> <C> <C>
10.12 Asset and Stock Purchase Agreement Exhibit 2.1 to Form 10-K for the Fiscal
dated as of December 20, 1994 among Year Ended December 31, 1994 dated March
Provident Life and Accident Insurance 17, 1995
Company of America, Provident Life Capital
Corporation, Provident Life and Accident
Insurance Company, Provident Life and
Casualty Insurance Company, Provident
Health Care Plans, Inc. and Healthsource,
Inc.
10.13 Third Closing Amendment to Asset and Exhibit 10.1 to Form 8-K dated June 14, 1995
Stock Purchase Agreement dated
May 31, 1995 among Provident Life and
Accident Insurance Company of America,
et al. and Healthsource, Inc.
10.14 Non-Competition Agreement dated May 31, Exhibit 10.3 to Form 8-K dated June 14, 1995
1995 between Healthsource, Inc. and
Provident Life and Accident Insurance
Company of America
10.15 Lease dated as of May 1, 1995 between Exhibit 10.4 to form 8-K dated June 14, 1995
Provident Life and Accident Insurance
Company and Healthsource Provident
Administrators, Inc. relating to a
certain property located at One
Fountain Square, Chattanooga, Tennessee
10.16 Asset Purchase Agreement dated Exhibit 10.2 to Form 10-Q for the Quarter
as of April 10, 1995 between Ended March 30, 1995 filed on May 10, 1995
Central Massachusetts Health Care,
Inc. and Healthsource Massachusetts,
Inc.
10.17 First Amendment dated November Exhibit 4.2 to Form 8-K dated February 23, 1996
9, 1995 to Asset Purchase Agreement
between Central Massachusetts
Health Care, Inc. and Healthsource
Massachusetts, Inc.
</TABLE>
42
<PAGE> 46
<TABLE>
<CAPTION>
<S> <C> <C>
10.18 Second Amendment dated December 11, 1995 Exhibit 4.3 to Form 8-K dated February 23, 1996
to Asset Purchase Agreement between
Central Massachusetts Health Care, Inc.
and Healthsource Massachusetts, Inc.
10.19 Asset Purchase Agreement dated as of Filed herewith
January 22, 1996 among PACC HMO, PACC
Health Plans and Healthsource Northwest, Inc.
(11) Computation of Per Share Earnings Filed herewith
(12) Computation of Historical Financial Ratios Filed herewith
(21) Subsidiaries of Healthsource, Inc. Filed herewith
(23) 23.1 Consent of Deloitte & Touche LLP regarding Filed herewith
incorporation of Healthsource, Inc.
Consolidated Financial Statements by
reference in Healthsource, Inc. Form S-8
Registration Statements No. 33-43242,
33-49856, 33-76910 and 33-80456 filed
October 9, 1991, July 23, 1992, March 25,
1994 and June 17, 1994
(27) Financial Data Schedule Filed herewith
</TABLE>
(b) Reports on Form 8-K.
The following reports on Form 8-K were filed with the
Securities and Exchange Commission during the quarter ended
December 31, 1995 and subsequently.
(i) On January 26, 1996, Healthsource filed a Form 8-K
reporting the signing of a definitive agreement on
January 23, 1996 with PACC HMO and PACC Health Plans,
affiliated Oregon nonprofit managed care companies, to
purchase substantially all of the operating assets of
those entities for an estimated net purchase price $80
million in cash.
(ii) On February 23, 1996, Healthsource filed a Form 8-K
reporting the closing on February 9, 1996 of its
previously-announced agreement to acquire the
operating assets of Central Massachusetts Health Care,
Inc., a Worcester, Massachusetts nonprofit HMO, for
$46.5 million in cash, subject to certain post-closing
adjustments.
(iii) On February 28, 1996, Healthsource filed a Form 8-K
announcing its intention to conduct a private offering
of $215 million principal amount of convertible
subordinated notes, with other terms to be agreed upon
43
<PAGE> 47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: February 27, 1996 HEALTHSOURCE, INC.
By: /s/ Norman C. Payson, M.D.
-----------------------------
Norman C. Payson, M.D.
President and Chief Executive
Officer
(Principal Executive Officer)
By: /s/ Thomas M. Congoran
-----------------------------
Thomas M. Congoran
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
Date Date
<S> <C>
2/27/96 /s/ Merwyn Bagan, M.D. 2/27/96 /s/ Norman C. Payson, M.D.
--------------------------- ---------------------------
Merwyn Bagan, M.D. Norman C. Payson, M.D.
Chairman of the Board President, Chief Executive
and Director Officer and Director
2/24/96 /s/ Daniel F. Eubank, M.D.
--------------------------- ---------------------------
Paul D. Baron, M.D. Daniel F. Eubank, M.D.
Director Director
2/27/96 /s/ Robert A. Leipold, M.D. 2/26/96 /s/ David W. Schall, M.D.
--------------------------- -------------------------
Robert A. Leipold, M.D. David W. Schall, M.D.
Director Director
2/27/96 /s/ Francis G. Middleton, M.D. 2/27/96 /s/ Robert S. Cathcart III, M.D.
--------------------------- -----------------------------------
Francis G. Middleton, M.D. Robert S. Cathcart III, M.D.
Director Director
2/27/96 /s/ J. Harold Chandler
--------------------------- -----------------------------------
Robert H. Bilbro, M.D. J. Harold Chandler
Director Director
</TABLE>
44
<PAGE> 48
<TABLE>
EXHIBIT INDEX
<CAPTION>
Reg. S-K
Item 601 Source or Consecutive
Exhibit No. Document Page of This Report
----------- -------- ---------------------
<S> <C> <C>
(3) Articles of Incorporation and By-Laws
3.1 Articles of Incorporation of Healthsource, Exhibit 3.1 to Form 10-K for the
Inc., as amended Fiscal Year Ended December 31, 1994
filed on March 19, 1995
3.2 By-Laws of Healthsource, Inc., as amended Exhibit 3.2 to Amendment No. 2 to
Form S-4 Registration Statement
No. 33-56446 dated February 19, 1993
3.3 Articles of Amendment to the Articles of Exhibit 4.1 to Form 8-K dated
Incorporation of Healthsource, Inc. June 14, 1995
designating the rights of the Class A
Cumulative Preferred Stock
(10) Material Contracts
10.1 Indemnity Agreement (form) dated September Exhibit 10.7 to Form S-1 Registration
11, 1989 between Healthsource, Inc. and Statement No. 33-31165 dated
September 20, 1989 each of its directors and
executive officers (compensatory contract)
10.2 Amendment to Healthsource, Inc. 1987 Exhibit 10 to Form 10-Q for the Quarter
Non-Qualified Stock Option Plan (compensatory Ended March 31, 1991 filed on May 3, 1991
plan)
10.3 Healthsource, Inc. 1991 Non-Qualified Stock Exhibit 10.21 to Form 10-K for the
Option Plan (compensatory plan) Fiscal Year Ended December 31, 1990
filed on March 28, 1991
10.4 Healthsource, Inc. 1992 Director Exhibit 10.2 to Form 10-Q for the
Stock Option Plan (compensatory plan) Quarter Ended June 30, 1992 filed on
August 12, 1992
10.5 Healthsource, Inc. 1994 Stock Option Exhibit to Proxy Statement for the
Plan (compensatory plan) Annual Meeting of Shareholders held
on May 11, 1994 filed on April 11, 1994
10.6 Employment Agreement dated as of Exhibit 10.7 to Form 10-K for the Fiscal Year
January 1, 1995 between Healthsource, Ended December 31, 1994 dated March 17, 1995
Inc. and Francis G. Middleton,
M.D. (compensatory contract)
10.7 Employment Agreement dated November Exhibit 10.16 to Form 10-K for the
24, 1993 between Healthsource, Inc. Fiscal Year Ended December 31, 1993
filed on March 30, 1994 and David
W. Schall, M.D. (compensatory contract)
10.8 Formation Agreement dated July 28, Exhibit 10 to Form 8-K dated July 30,
1993 between Healthsource, Inc. and 1993
St. Vincent Infirmary Medical Center
10.9 Investment Agreement dated as of Exhibit 10.1 to Form 10-Q for
April 8, 1993 between Healthsource New the Quarter Ended March 30, 1993
York, Inc. and ChubbLife Insurance and filed May 1, 1993
Company of America
10.10 Agreement Regarding Formation of Exhibit 10 to Form 10-Q for the Quarter
Health Maintenance Organization in Ended June 30, 1993 filed July 20, 1993
Savannah, Georgia dated July 19,
1993 between Healthsource, Inc. and
Candler Health System, Inc.
</TABLE>
<PAGE> 49
<TABLE>
<S> <C> <C>
10.11 Agreement Regarding Formation of Exhibit 10.1 to Form 8-K dated April 12,
Health Maintenance Organization in 1994
North Central Texas dated April
1, 1994 among Healthsource South
Central, Inc., All Care, Inc. and
All Saints Health Systems, Inc.
10.12 Asset and Stock Purchase Agreement Exhibit 2.1 to Form 10-K for the Fiscal
dated as of December 20, 1994 among Year Ended December 31, 1994 dated March
Provident Life and Accident Insurance 17, 1995
Company of America, Provident Life Capital
Corporation, Provident Life and Accident
Insurance Company, Provident Life and
Casualty Insurance Company, Provident
Health Care Plans, Inc. and Healthsource,
Inc.
10.13 Third Closing Amendment to Asset and Exhibit 10.1 to Form 8-K dated June 14, 1995
Stock Purchase Agreement dated
May 31, 1995 among Provident Life and
Accident Insurance Company of America,
et al. and Healthsource, Inc.
10.14 Non-Competition Agreement dated May 31, Exhibit 10.3 to Form 8-K dated June 14, 1995
1995 between Healthsource, Inc. and
Provident Life and Accident Insurance
Company of America
10.15 Lease dated as of May 1, 1995 between Exhibit 10.4 to form 8-K dated June 14, 1995
Provident Life and Accident Insurance
Company and Healthsource Provident
Administrators, Inc. relating to a
certain property located at One
Fountain Square, Chattanooga, Tennessee
10.16 Asset Purchase Agreement dated Exhibit 10.2 to Form 10-Q for the Quarter
as of April 10, 1995 between Ended March 30, 1995 filed on May 10, 1995
Central Massachusetts Health Care,
Inc. and Healthsource Massachusetts,
Inc.
10.17 First Amendment dated November Exhibit 4.2 to Form 8-K dated February 23, 1996
9, 1995 to Asset Purchase Agreement
between Central Massachusetts
Health Care, Inc. and Healthsource
Massachusetts, Inc.
10.18 Second Amendment dated December 11, 1995 Exhibit 4.3 to Form 8-K dated February 23, 1996
to Asset Purchase Agreement between
Central Massachusetts Health Care, Inc.
and Healthsource Massachusetts, Inc.
10.19 Asset Purchase Agreement dated as of Filed herewith
January 22, 1996 among PACC HMO, PACC
Health Plans and Healthsource Northwest, Inc.
(11) Computation of Per Share Earnings Filed herewith
(12) Computation of Historical Financial Ratios Filed herewith
(21) Subsidiaries of Healthsource, Inc. Filed herewith
(23) 23.1 Consent of Deloitte & Touche LLP regarding Filed herewith
incorporation of Healthsource, Inc.
Consolidated Financial Statements by
reference in Healthsource, Inc. Form S-8
Registration Statements No. 33-43242,
33-49856, 33-76910 and 33-80456 filed
October 9, 1991, July 23, 1992, March 25,
1994 and June 17, 1994
(27) Financial Data Schedule Filed herewith
</TABLE>
<PAGE> 1
EXHIBIT 10.19
-----------------------------------------------------------------------
ASSET PURCHASE AGREEMENT
AMONG
PACC HMO,
PACC HEALTH PLANS
AND
HEALTHSOURCE NORTHWEST, INC.
DATED AS OF
JANUARY 22, 1996
----------------------------------------------------------------------
<PAGE> 2
ASSET PURCHASE AGREEMENT
ASSET PURCHASE AGREEMENT dated as of the 22nd day of January, 1996, by
and between PACC HMO and PACC HEALTH PLANS, each a nonprofit corporation
organized under the laws of Oregon with a principal address at 12901 SE 97th
Avenue, Clackamas, Oregon 97015- 0286 (collectively referred to herein as the
"Sellers" and individually as a "Seller") and HEALTHSOURCE NORTHWEST, INC., a
corporation organized under the laws of New Hampshire with a principal office
at c/o Healthsource, Inc., Two College Park Drive, Hooksett, New Hampshire
03106 (the "Buyer").
WHEREAS, Sellers desire to form a new charitable foundation and to
sell to Buyer the health care service contractor ("HCSC") and health insurance
business of Sellers (and all operating assets of Sellers related thereto) with
the proceeds thereof to be paid to such charitable foundation for the future
benefit of the community;
WHEREAS, Healthsource, Inc. will deliver herewith an unconditional
guarantee of the full and complete payment and performance of all of the
obligations of Healthsource Northwest, Inc. under this Agreement;
WHEREAS, Buyer is a wholly-owned subsidiary of Healthsource, Inc.
("Healthsource") and will create an HCSC subsidiary to purchase and assume the
existing HCSC business of the Sellers, which HCSC subsidiary will be chartered
and licensed in Oregon and Washington with future expanded operations in Idaho
and Montana;
WHEREAS, Buyer recognizes that Sellers have significant management and
community leadership that are particularly knowledgeable about the local health
care and business community; Buyer believes in locally driven health plans; and
Buyer currently intends to utilize such management and leadership in developing
its HCSC business in Oregon and the Northwest;
WHEREAS, Buyer recognizes that Sellers have long-standing physician
relationships and Buyer has a similar culture of close physician relationships;
WHEREAS, Buyer recognizes that Sellers have invested significant time
and effort to develop and expand into rural markets and to form a strategic
alliance with a significant statewide provider network, and Buyer is committed
to the same general concepts and principles and currently intends to pursue
such a strategy;
WHEREAS, Buyer recognizes that Sellers have local employees who
operate the business to be acquired and Buyer currently intends to continue to
utilize such employees to operate the acquired business;
2
<PAGE> 3
WHEREAS, Buyer has simultaneously with the execution of the Agreement
filed a so-called Form A (Change in Control Application) with the Oregon
Department of Consumer and Business Services previously approved by Sellers;
and
WHEREAS, Sellers and Buyer desire to enter the transactions
contemplated in this Agreement.
NOW, THEREFORE, in consideration of the mutual promises herein set
forth, and subject to the terms and conditions hereof, the parties agree as
follows:
1. DEFINITIONS.
As used in this Agreement, terms defined in the preamble and recitals
of this Agreement shall have the meanings set forth therein and the following
terms shall have the meanings set forth below:
1.01 "AFFILIATE" shall mean the meaning set forth in Rule 12b-2 of
the regulations promulgated under the Securities Exchange Act of 1934,
as amended.
1.02 "AGREEMENT" shall mean this Asset Purchase Agreement and all
Schedules and Exhibits hereto.
1.03 "CLOSING" shall mean the simultaneous closing of the purchase
of certain assets and assumption of certain liabilities of Sellers
specified herein together with all other deliveries contemplated by
this Agreement; such Closing to be at the offices of Deloitte &
Touche, L.L.P., Portland, Oregon on a date and at a time to be
established by mutual agreement of the parties, no later than the
fifth business day of the first month after December, 1995 following
the month in which there is satisfaction or waiver of the conditions
to Closing as provided in Sections 9 and 10 (the "Closing Date");
provided that the Closing must occur, if at all, prior to termination
under Section 18.01(ii).
1.04 "CODE" shall mean the Internal Revenue Code of 1986 and all
regulations promulgated thereunder, including any amendments or any
substitute or successor provisions thereto.
1.05 "ERISA" shall mean the Employee Retirement Income Security Act
of 1974 (and any sections of the Code amended by it) and all
regulations promulgated thereunder, as the same have from time to time
been amended.
1.06 "GAAP" shall mean the United States generally accepted
accounting principles as in effect from time-to-time.
3
<PAGE> 4
1.07 "ESTIMATED BALANCE SHEET" shall mean the estimated balance
sheet as herein determined. Sellers shall, thirty (30) days prior to
the Closing Date, deliver to Buyer a proposed estimated consolidated
balance sheet for the Transferred Business as of the most recent month
end which presents fairly the financial condition of the Transferred
Business as of such date in accordance with GAAP consistently applied
and applying the Supplemental Accounting Principles described in
Section 1.10 . Deloitte & Touche, LLP shall be given a reasonable
opportunity to review the Estimated Balance Sheet in draft form
before it is finalized (including all work papers of Sellers' finance
department and of KPMG Peat Marwick, LLP, and related actuarial
assumptions and calculations) and to resolve any issues with Sellers.
In reviewing such Estimated Balance Sheet Buyer shall have the
opportunity to obtain new and updated computer reports from Sellers'
MIS Department or Finance Department. Any issues not resolved by
Closing shall be resolved with the final resolution of the Final
Balance Sheet pursuant to Section 4.02.
1.08 "HISTORICAL FINANCIALS" shall mean the consolidated balance
sheet as of December 31, 1994 and 1995 for the Transferred Business
and the consolidated statements of revenues and expenses, changes in
fund balances and cash flows of the Transferred Business for the years
ended December 31, 1993, 1994 and 1995 prepared so as to fairly
present the operations and financial condition of the Transferred
Business in accordance with GAAP, consistently applied together with
the unqualified opinion and report (with standard footnotes) upon such
statements prepared in accordance with generally accepted auditing
standards of KPMG Peat Marwick LLP and, with respect only to the
Estimated Balance Sheet and the Final Balance Sheet, the Supplemental
Accounting Principles. If then required to be filed with the SEC,
such Historical Financials shall be prepared in compliance with SEC
Rule S-X in form for filing with the SEC and coupled with the consent
of the respective audit firm to being named as experts and to the use
of their reports in such filing. All costs of preparing the
Historical Financials (other than in conforming them to SEC Rule S-X
if required) shall be borne by Sellers. Sellers shall cooperate in
permitting Buyer to prepare all such interim unaudited financial
statements for periods after December 31, 1995 as shall be required of
Buyer by SEC Rule S-X in form for filing by Buyer, the costs of which
shall be borne by Buyer.
1.09 "MATERIAL ADVERSE EFFECT" shall mean any event, occurrence or
matter since the date of the 1994 audit report having a material
adverse effect on the business, operations, property, results of
operations, or financial condition taken in the aggregate of the
Sellers or the Transferred Business (as the case may be) provided
normal seasonality or changes in general economic conditions in Oregon
and Washington shall not be considered as a Material Adverse Effect.
4
<PAGE> 5
1.10 "SUPPLEMENTAL ACCOUNTING PRINCIPLES" shall mean the following
Supplemental Accounting Principles which shall apply to the specific
balance sheets required by this Agreement: (i) all provider withholds
(including IBNR withholds) shall have been recorded as liabilities on
the applicable balance sheet; (ii) IBNR calculations on each balance
sheet shall include an accrual of all reported but unpaid claims,
incurred but unbilled services (including but not limited to a full
accrual for completion of hospitalization existing on the date of each
balance sheet and all projected future physician costs for all known
pregnancies existing on the date of each balance sheet) the full
actuarially determined amount of future expected claims (including
withholds) and (with respect to the Estimated Balance Sheet only) a
margin or "cushion" of 10% for unknown contingencies with respect to
health care expenses; (iii) all investments and financial assets
carried on the Estimated and Final Balance Sheets for the Transferred
Business shall be marked to market as of the Closing whether or not
FASB 115 technically applies to Sellers; (iv) the Estimated and Final
Balance Sheets shall include all accruals required by AICPA SOP 89-5
when applying SOP 89-5: (a) the accruals shall be irrespective of
Seller's right to terminate any such contract; (b) the medical loss
ratio will be measured using the aggregate loss ratio of contract
groups using community rated and demographically rated groupings for
groups that have less than 50 members; all other groups shall be
considered individual experience rated or partial experience rated;
and further for the purposes of this calculation, the individual
experience rated and partial experience rated groups will be evaluated
individually, Medicare members shall be aggregated and considered as a
group and Medicaid members shall be aggregated and considered as a
group; (c) the amount of the accrued loss on the Estimated Balance
Sheet shall be reduced by an estimate of the amounts which the Sellers
reasonably can establish will be recoverable from the policy holder in
the next contract period to the extent that such contract renewal
negotiations have been concluded and agreed to prior to Closing; (d)
an adjustment between the estimate referred to in (c) above and the
actual amount of the accrued loss which Sellers are able to recover
from the policy holder in the next renewal negotiations, to the extent
such negotiations are concluded by January 31, 1997, shall be made on
the Final Balance Sheet; (e) any group of contracts (as defined in (b)
above) with a medical loss ratio in excess of 92.5% will be subject to
an accrual if the medical loss ratio is expected to remain at 92.5%
for the contract year; (f) an administrative cost factor of 7.5% will
be used in the accrual and (g) the amount of the accrual will be equal
to the additional premium required to obtain a 100% combined medical
loss ratio and administrative cost factor; and (v) there shall be no
net assets (after related liabilities) recorded or other financial
reserves allocated to cover the cost of any individual employer
deficit from any experience-rated or minimum premium or similar
account relationship.
5
<PAGE> 6
1.11 "TAXES" shall mean all federal, state, local, foreign, and
other net income, gross income, gross receipts, sales, use, ad
valorem, transfer, franchise, profits, license, lease, service,
service use, withholding, payroll, employment, excise, severance,
stamp, occupation, premium, property, windfall profits, customs,
duties or other taxes, fees, assessments, or charges of any kind
whatever, together with any interest and any penalties, additions to
tax, or additional amounts with respect thereto.
1.12 "EXCLUDED LIABILITY" means any liability, no matter when or
how arising, of Sellers that is not expressly assumed under this
Agreement or the Assumption Reinsurance Agreements, including, without
limitation; (i) any liability for Taxes of Sellers (other than premium
Taxes to the extent accrued as liabilities on the Final Balance Sheet)
for periods ending on or prior to the Closing Date relating to or
arising in connection with the Transferred Business or any Assets;
(ii) any liability relating to or arising in connection with any
litigation or proceeding to which Sellers are or become a party (or to
which any of Buyer or Sellers or their Affiliates may become a party)
based on acts or omissions occurring on or prior to the Closing Date
for which Sellers are legally responsible; (iii) any liability to the
extent it is related to or arises in connection with any business or
operation of Sellers other than the Transferred Business; (iv) any
Extra-Contractual Obligations which arise from acts, errors or
omissions of Sellers which occur prior to the Closing or which arise
from the acts, errors or omissions of Sellers, their officers,
directors, employees, agents after Closing unless such actions are
taken at the direction of Buyer or its Affiliates; (v) any liability
or obligation for amounts payable for third-party assets which are, or
become, subject to escheat to any states or other jurisdictions, but
only to the extent that such third-party assets are not included in
the Transferred Assets and transferred to Buyer or Buyer's designees
pursuant to this Agreement; (vi) any liability arising from any
Employee Benefit Plan maintained by Sellers; (vii) any liability
relating to performance, risk or other guarantees or experience-rated
refunds or credits arising under Insurance Contracts or service or
administrative agreements relating to periods ending on or before the
Closing Date; (viii) any liability relating to Insurance Contracts
terminated or canceled by Sellers on or before the Closing Date; (ix)
any liability for commissions earned with respect to premiums received
prior to the Closing Date; (x) any liability arising in connection
with participation by Sellers or their Affiliates in any guaranty fund
established or governed by any state or jurisdiction or from any
assessment with respect to the Oregon Health Plan high risk pool, in
each case to the extent to which such liability arises on account of
premiums or charges received by Sellers or their Affiliates prior to
the Closing; and (xi) any liability of Sellers or any Affiliate of
Sellers for retrospective payments or adjustments under Reinsurance
Treaties allocable to any period prior to the Closing; (xii) any
liability resulting from any determination of any liability pursuant
to Medicare cost contracts to the extent not fully reserved
6
<PAGE> 7
on the Final Balance Sheet whether determined by audit or otherwise at
any time before or after Closing arising from Sellers' operation of the
Transferred Business prior to Closing.
1.13 "EXTRA-CONTRACTUAL OBLIGATIONS" means all liabilities for
consequential, exemplary, punitive or similar damages which arise from
any alleged or actual act, error or omission whether intentional or
otherwise of Sellers, or from any alleged or actual reckless conduct
or bad faith of Sellers, in connection with the handling of any claim
under any of the Insurance Contracts or the contracts assigned and
assumed under Sections 2.01 and 2.05 or in connection with the
issuance, delivery, cancellation, marketing or administration of any
of the Insurance Contracts or the assigned and assumed contracts,
except to the extent any such Extra Contractual Obligations are set
forth on and reserved as a liability on the Final Balance Sheet.
1.14 "INSURANCE CONTRACTS" means all policies, binders, slips,
certificates, and other agreements of insurance, whether HMO, health
care service contract, health insurance or other product and whether
individual or group, in effect on or after the Closing Date (including
all supplements, endorsements, riders and ancillary agreements in
connection therewith) which are issued by Sellers in connection with
the Transferred Business.
1.15 "REINSURANCE TREATIES" means contracts or other agreements
pursuant to which Sellers cede insurance in connection with the
Transferred Business.
1.16 "COVERED LIVES" shall mean those persons receiving medical
coverage in the Transferred Business (including Sellers' Medicare and
Medicaid plans, but excluding plans providing administration-only
services).
1A. GOVERNANCE, MANAGEMENT, BUSINESS COMMITMENTS
1A.01 BOARD OF DIRECTORS OF BUYER/BUYER'S SUBSIDIARIES. For a
period of seven (7) years from Closing, not less than 20% of the members of the
Board of Directors of Buyer and Buyer's HCSC subsidiary shall be local Oregon
physicians, consumers and business leaders. None of the directors of Buyer or
its HCSC subsidiary shall serve as Trustees of the Foundation created to
receive the purchase price.
1A.02 ARTICLES OF INCORPORATION AND BYLAWS OF BUYER'S HCSC
SUBSIDIARY. The Articles of Incorporation and/or Bylaws of Buyer's HCSC
subsidiary shall at all times require that the approval of a majority of the
outstanding common stock of such corporation will be required for the following
matters affecting such corporation:
(a) Approval of annual operating budget;
7
<PAGE> 8
(b) Issuance of material debt or equity securities;
(c) Sale of assets with a value in excess of $5 million;
(d) Substantial amendment of Articles of Incorporation or Bylaws;
(e) Hiring/firing of CEO;
(f) Any substantial change in operations;
(g) Acquisitions or mergers with a value in excess of $5 million;
(h) Dividends payable by the HCSC.
1A.03 PHYSICIAN NETWORK. In order to maintain continuity of service
to Sellers' subscribers, Buyer shall (a) use its best efforts to maintain under
Buyer's contracts, for a period of not less than one year, Sellers' current
network of physicians, consistent with the current credentialing, participation
and quality assurance policies, and (b) thereafter develop a network
enhancement plan consistent with Buyer's growth and subscriber needs.
1A.04 INFORMATION SERVICES AND TECHNOLOGY. After consulting with
management of Sellers, Buyer shall make available, and shall use its best
efforts to install within twelve (12) months following the Closing, information
services and technology to assist in quality assurance, medical management,
network development and management, financial reporting, claims processing and
such other processes as necessary to provide high quality, competitively priced
health care services to members of the Transferred Business.
1A.05 PRODUCTS. Subject to local law, Buyer shall make available,
and shall use best efforts to provide all product lines currently offered by
Healthsource and its Affiliates in other markets, including assistance in
developing a Medicare risk product for sale in Buyer's service area.
1A.06 BUYER'S COMMITMENT. Buyer notes its current intention to grow
the HCSC/managed care business in Oregon and Washington using its Oregon HCSC
subsidiary, as well as using such management resources to develop and expand
its health care business in the other Northwest States to become a market
leading health plan in the service area and region. Buyer shall make available
capital or other resources to expand the Oregon HCSC/managed care business as
justified by management's effectiveness and market conditions generally,
whether such expansion is through operations or acquisitions, subject to
Buyer's approval process, assessment of value in relation to acquisition costs,
and ongoing review of such capital or other requirements and subject to change
based on changed conditions as determined by Buyer.
1A.07 EQUITY PURCHASE BY HFEN OR OTHERS. If so requested by
Sellers, subject to compliance with applicable securities and other laws and
limited so as not to require registration under the Securities Act of 1934, as
amended, Buyer shall sell to HFEN or to HFEN's physician or hospital owners and
to Sellers' senior management employees, up
8
<PAGE> 9
to a total of five percent (5%) (or more if Buyer so elects) of the common
stock of Buyer at a price per share substantially equivalent to the per share
cost of Healthsource's investment in Buyer (including without limitation the
value of cash, expenses, assets and services contributed by Healthsource and
its Affiliates). Buyer shall only be required to offer such shares until three
years from Closing. Buyer shall be entitled to insert call provisions for any
shares sold to (i) providers allowing Buyer to repurchase such shares if the
holder ceases to be a participating provider in compliance with Buyer's
conditions of participation or (ii) employees of Buyer if any such employee's
employment with Buyer is terminated. At Buyer's option such equity may be in
Buyer's operating HCSC subsidiaries.
1A.08 CONTROL OF BUYER. The parties hereto acknowledge and agree
that Healthsource shall have the ultimate right to control the business and
operations of Buyer and Buyer's subsidiaries after Closing.
1A.09 CASCADIA HEALTH PLAN. Buyer shall continue to pursue after
Closing the development of competitive HMO and other managed care products
primarily in but not limited to areas of Oregon outside greater Portland, and
shall work to include as providers for such products all members of HFEN.
2. PURCHASE OF TRANSFERRED BUSINESS; RELATED MATTERS.
2.01 PURCHASE AND SALE OF THE TRANSFERRED BUSINESS. On and subject
to the terms and conditions of this Agreement, Sellers shall sell and assign,
and Buyer and its HCSC Subsidiary shall purchase and assume, as of Closing all
Insurance Contracts of Sellers which remain in force as of Closing, together
with all operating assets of Sellers used in the operation of Sellers' business
subject to the terms and conditions of this Agreement, including but not
limited to: (a) all accounts receivable of Sellers existing as of Closing,
including without limitation all uncollected servicing fees, premiums, and any
and all other amounts and accounts receivable due to Sellers; (b) subject to
Sections 2.04 and 2.05, assignments of all written contracts, agreements,
leases (including without limitation, leases of real, personal, or tangible
property), licenses, permits and other rights of Sellers; (c) all subscriber
and employer agreements, including all reinsurance or stop-loss policies, all
policy-related files, policy-related data, inventory of current forms, business
and personnel records, files and plans, separate telephone numbers, product and
brand names, and all transferable contractual rights of Sellers relating to the
operation of such business; (d) all intangible assets of Sellers including but
not limited to marks, names, trademarks, service marks, patents, patent rights,
assumed names, logos, trade secrets, proprietary rights, all computer software
(whether owned or licensed) with Sellers taking all actions necessary to
properly transfer all of Sellers' rights in software to Buyer (including
without limitation paying any additional necessary license fees to software
vendors for such assignment), subrogation rights (including without limitation,
assets realized as a result thereof), confidential or proprietary information,
prepayments (except
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prepaid insurance policies), deferred charges, refunds, credits, claims,
benefits and other rights and interest of Sellers including without limitation
the names PACC HMO and PACC Health Plans, (e) all tangible assets of Sellers
used in the operation of Sellers' business including, but not limited to, cash
and all investment assets qualifying as Acceptable Financial Assets as defined
herein, furniture, fixtures, equipment, supplies, computer hardware, and all
other tangible assets and personal property of Sellers, and (f) the cash or
Acceptable Financial Assets to be transferred to Buyer pursuant to Section
2.09, subject to changes in the ordinary course of business which do not
contravene Section 8.01 and to existing encumbrances listed on Schedule 2.01,
but not including any financial assets which do not qualify as Acceptable
Financial Assets, nor any assets excluded under Section 4.06, nor the portion
of the "Contingency Reserve and Stabilization Fund" retained by Sellers as
provided in Section 2.09, nor any assets resulting from Excluded Liability
matters (including without limitation any recovery from audits of prior years
Medicare cost contracts). Such business being acquired is herein defined as
the "Transferred Business" and the assets being transferred are defined as the
"Assets". Buyer's HCSC subsidiary shall assume the Insurance Contracts
included in the Transferred Business pursuant to various Assumption Reinsurance
Agreements approved by the Oregon and Washington Insurance Departments in the
forms attached hereto as Exhibits 2.01-1 and 2.01-2. A computer generated
schedule of all existing individual Assets has been separately delivered as
Schedule 6.08 and signed by the parties.
2.02 EMPLOYMENT MATTERS. In connection with the acquisition of the
Transferred Business, Buyer, at Closing, shall offer through its designees to
hire all of Sellers' employees then actively engaged in the conduct of
Sellers' business at the time of Closing (hereinafter the "Transferred
Employees") at salaries comparable to those disclosed under Section 6.14
subject to increase in the ordinary course of business and from an on-going
general salary review (such increases not to exceed $350,000 in total annual
effect exclusive of salaries for new positions). It is the current intention
of Buyer to retain Sellers' workforce after Closing, it being understood and
agreed that this representation does not confer any rights of continued
employment upon any such Transferred Employee other than that of an
employee-at-will, except for those senior employees who will have employment
contracts with Buyer. After Closing, employees of Sellers who accept
employment with Buyer shall be eligible to receive those salary and other
benefits as shall be applicable from time to time to other employees of Buyer
holding comparable positions.
2.03 EMPLOYEE BENEFITS; EMPLOYMENT CONTRACTS. Sellers' current
employees are presently participating in the benefit plans listed in Schedule
6.24 (collectively the "Employee Benefit Plans"). As of the day prior to
Closing, Sellers shall terminate the participation of the Transferred
Employees in all Employee Benefit Plans except Seller's Pension Plan and
Sellers shall be entirely responsible for administering and reporting each such
termination as well as providing such notices of vested rights or payments, if
any, to each such participant as are required by law and shall hold Buyer
harmless from
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any liability occasioned by such termination or arising from such employees'
prior participation in the Employee Benefit Plans. With respect to Sellers'
Pension Plan, the parties will cooperate to cause (i) Sellers' Pension Plan to
be "frozen" with no further pension benefits to accrue under Sellers' plan and
(ii) to merge Sellers' pension plan into, and transfer all of its liabilities
and assets to the Healthsource-Provident Retirement Plan. Sellers shall
continue contributions to Sellers' Pension Plan at current levels for all
periods prior to Closing. After Closing eligible employees will participate in
the Buyer's 401(k) plan with 50% matching of deferrals that do not exceed 6% of
salary. After Closing Sellers' employees who accept employment with Buyer (see
Section 2.02) shall participate in the benefit plans of Buyer with credit for
prior service with Sellers and with waiver of waiting periods and exclusions
for pre-existing conditions waived as to all such employees. A list of such
benefits plans is attached hereto as Schedule 2.03. Buyer hereby agrees to
assume all liability under the severance program approved by Buyer and
disclosed in Schedule 6.24 only for Sellers' employees who accept employment
with Buyer as well as all liability under Seller's pension plan provided
Sellers continue to make scheduled contributions at current levels through
Closing. Without intending any limitation, Sellers shall retain all
liabilities for retired employee health care coverage despite having canceled
such retiree health plan. Buyer or its designee shall offer an employment
contract to the President of Seller with a term of not less than one year in
the form of Exhibit 2.03(b)(i) and offer employment contracts to Vice
Presidents of Seller listed on Schedule 10.11 in the form of Exhibit
2.03(b)(ii).
2.04 HEADQUARTERS LEASE. Sellers currently lease office space in
Clackamas, Oregon under a lease expiring May 31, 1999. Sellers shall cause an
assignment of said lease to Buyer at Closing and shall deliver to Buyer an
estoppel certificate from the lessors of such property. Buyer shall assume
lease obligations at Closing, per Section 2.11 below.
2.05 ASSIGNMENT OF CONTRACTS. At Closing Sellers shall (i) assign
to Buyer or its Affiliates all contracts listed on Schedule 2.05 (except that
the assumption of any Cascadia Health LLC documents and agreements with HFEN
shall be conditioned upon compliance with Section 8.01(q)) and (ii) secure
consents to the assignment of such assigned and assumed contracts as are
reasonably believed and designated on such Schedule by Buyer as being material
to the continued operation of its business including without limitation the
consents of the United States Department of Health and Human Services, the
Oregon Department of Human Resources Office of Medical Assistance Programs, the
United States Office of Personnel Management, and the States of Oregon and
Washington, provided, however that Sellers shall not be required to obtain
consents to assignment of contracts that are (in the written opinion of
Sellers' counsel) assignable by their terms or by operation by law . Sellers
shall also deliver a general assignment of physician and other provider
agreements and a general assignment of all insurance or other contracts with
employers or insureds, together with the consents in Sections 10.08 and 10.15.
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2.06 PURCHASE OF TRANSFERRED BUSINESS - GENERAL. Buyer shall
purchase the Assets and assume the Assumed Liabilities of the Transferred
Business as further described in this Agreement by causing a newly chartered
Oregon corporation (licensed as an HCSC) to acquire such portions of the
Transferred Business as Buyer shall designate. Buyer's HCSC subsidiary shall
be capitalized to meet the requirements of the Oregon Insurance Department,
shall accept sufficient Acceptable Financial Assets to create such capital
structures and shall assume the Insurance Contracts under the Assumption
Reinsurance Agreements. The investment assets transferred to Buyer by Sellers
shall include only: (i) direct obligations of the U.S. Government or its
agencies maturing in 90 days or less from the date of issuance; (ii)
certificates of deposit maturing not more than 90 days from the date of
issuance issued by a bank whose long term debt is rated AA by Moody's Investors
Services, Inc. and AA or better by Standard and Poor's Corporation; (iii)
publicly traded investment grade "NAIC 1" money market and fixed income
securities; and (iv) cash (hereinafter referred to collectively as "Acceptable
Financial Assets"). Assets to be conveyed by Sellers may be allocated by Buyer
prior to Closing to Buyer's HCSC subsidiary. At Closing Sellers shall transfer
the sale proceeds (except for such reasonable amount as PACC determines it is
prudent to retain temporarily to resolve outstanding debts or obligations of
PACC in winding up its affairs) to the Foundation and/or, subject to regulatory
approval and indemnification satisfactory to Buyer, to other charitable
corporations for the benefit of the community.
2.07 DELIVERY OF ESTIMATED BALANCE SHEET AND HISTORICAL FINANCIALS.
At Closing, Sellers shall at their sole expense deliver the Estimated Balance
Sheet and the Historical Financials for the Transferred Business.
2.08 MATERIAL THIRD PARTIES GENERALLY. Except as otherwise
provided in this Agreement, Sellers shall obtain consents in a form reasonably
acceptable to Buyer from any third party with whom Sellers have a contractual
relationship that is material to Sellers' business, so that such contractual
relationship shall remain in effect after Closing, provided that Sellers shall
have no obligation to obtain such consents if they are not required under the
terms of such contractual relationship.
2.09 CONTINGENCY RESERVES AND STABILIZATION FUND. Buyer
acknowledges that Sellers currently maintain in segregated accounts certain
assets ("CRSF Assets") which secure Sellers' obligations for Contingency
Reserves and Stabilization Funds (collectively the "CRSF Reserves"),
representing Sellers' obligation to pay monies to, and to return initial
capital of, certain present or former participating physicians in accordance
with policies and procedures previously established by the respective Boards of
Directors of Sellers. For participating physicians with CRSF accounts of
$10,000 or less, Sellers shall distribute cash in settlement of such accounts
promptly after the Closing. For participating physicians with CRSF balances in
excess of $10,000, Sellers shall notify such physicians promptly after the date
hereof, offering them the option of receiving a cash distribution in settlement
of their CRSF account or leaving their CRSF
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account in place to be transferred to and assumed by Buyer at Closing. Sellers
shall retain sufficient CRSF Reserves to make the cash distributions described
above and shall make the cash distributions described above. Sellers shall
also transfer to Buyer cash or Acceptable Financial Assets necessary for Buyer
to pay and administer those CRSF accounts to be transferred to and assumed by
Buyer at Closing. Buyer shall administer the CRSF accounts transferred to it
at Closing in accordance with Sellers' past practice and the terms of the CRSF,
insofar as they are applicable with such amendments to such terms as are
consented to by the parties hereto.
2.10 SELLER'S RETAINED LIABILITIES. Sellers shall assume, bear and
seasonably satisfy all of the Excluded Liabilities. It is agreed that Buyer
assumes none of the Excluded Liabilities whether known or unknown nor however
arising. Moreover and without intending any limitation, Buyer shall not assume
any liabilities for (i) office building, rental properties and like investments
held by the Contingency Reserves and Stabilization Funds none of which assets
shall be transferred to Buyer; (ii) the federal or state tax-exempt status of
Sellers prior to Closing; or (iii) the non-qualified supplemental executive
retirement plan (SERP) established in 1990 and subsequently terminated or any
other Employee Benefit Plan of Seller terminated or frozen pursuant to Section
2.03.
2.11 ASSUMPTION OF LIABILITIES. At and as of the Closing, Buyer
shall assume the liabilities and obligations of Sellers for the following
liabilities (the "Assumed Liabilities"):
(a) Sellers' liabilities as set forth in the Proposed
Final Balance Sheet, subject to the modifications in the Final
Balance Sheet;
(b) The stated obligations for the period after Closing
under the headquarters lease described in Section 2.04 above,
but not any counterclaims or claims of breach;
(c) The obligations for the period after closing under
all contracts assigned to Buyer pursuant to Section 2.05
above, but not any counterclaims or claims of breach;
(d) Sellers' obligations under the Insurance Contracts
only to the extent provided in the Assumption Reinsurance
Agreements as contemplated in Sections 2.01 and 2.06 above and
specifically excluding Extra-Contractual Liabilities;
provided, moreover, that Buyer shall not assume or have responsibility for any
of the Excluded Liabilities or any other liabilities described in Section 2.10
above. All liabilities (other than Excluded Liabilities) arising from Buyer's
acts or omissions in the
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operation of the Transferred Business after the Closing shall be the
responsibility of the Buyer.
2.12 WASHINGTON CONTRACTS. A portion of the HCSC and HMO contracts
within the Transferred Business are written in and governed by the State of
Washington (the "Washington Contracts"). If all regulatory approvals from the
State of Washington necessary to transfer the Washington Contracts to Buyer are
not received by the Closing Date, then Sellers agree to retain the Washington
Contracts pending receipt of such Washington approvals and to maintain
sufficient capital (if any) to continue writing the Washington Contracts.
Buyer shall cause its HCSC Subsidiary to indemnity reinsure the Washington
Contracts at Closing (under an Indemnity Reinsurance Agreement in standard form
reasonably acceptable to the parties) such that 100% of the economic risk of
gain or loss on the Washington Contracts is borne by Buyer's HCSC Subsidiary.
Once regulatory approvals are obtained, the Washington Contracts shall be
conveyed to Buyer's HCSC Subsidiary, and Buyer's HCSC Subsidiary shall assume
such contracts, on the terms of the Washington Assumption Reinsurance Agreement
in form substantially identical to the agreements in Exhibit 2.01-2 save for
changes prescribed by the Washington Insurance Department. If any element of
the foregoing is legally impermissible, the parties shall adopt the most
similar and legally permissible course of action which preserves the relative
rights and benefits of the parties described above.
2.13 RETIREE MEDICAL COVERAGE. Sellers represent that they have
effectively terminated their retiree medical plan prior to the date of this
Agreement and agree to hold Buyer harmless from any claims related to such
terminated plan. Sellers nonetheless recognize that eight former employees
retain permanent coverage under the former plan and Sellers (through the
Foundation) shall assume all costs and expenses under such plan with respect to
such eight employees and hold Buyer harmless against all claims with respect to
such employees.
3. PURCHASE PRICE; METHOD OF PAYMENT; ALLOCATION.
3.01 PURCHASE PRICE. In consideration of the transfer of the
Assets to Buyer and Sellers' Non-Competition Covenant referred to in Section 11
and subject to Section 10.18, Buyer shall pay to Sellers at Closing an amount
equal to the base purchase price of Eighty Million Dollars ($80,000,000) (the
"Base Purchase Price) as adjusted in accordance with the provisions of Section
4. The purchase price after the net worth adjustment in Sections 4.01 or 4.02,
is defined as the "Adjusted Purchase Price".
3.02 METHOD OF PAYMENT. Buyer shall make payment at Closing of the
net amount due Sellers after any adjustments, credits and pro-rations by wire
transfer to Sellers' bank. Notwithstanding the above, Buyer may elect to
retain a portion of the Adjusted Purchase Price to offset Sellers' obligation
to deliver the Acceptable Financial
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Assets at book value and such cash retained by Buyer shall be deemed to be part
of the Acceptable Financial Assets delivered by Sellers to Buyer.
3.03 ALLOCATION OF PURCHASE PRICE. The final purchase price for
the Assets shall be allocated by Buyer in its sole discretion; Sellers shall
cooperate with Buyer in the filing of all forms and reports necessary to effect
such allocation.
4. PURCHASE PRICE REDUCTIONS AND POST-CLOSING ADJUSTMENTS; PRO-RATIONS.
4.01 CLOSING NET WORTH PURCHASE PRICE ADJUSTMENT. It is expected
that at Closing, Sellers will transfer all or a substantial portion of the
proceeds to a charitable corporation for the benefit of the community under
arrangements acceptable to Buyer and regulatory authorities. To the extent the
Adjusted Net Worth (defined below) as reflected on the Estimated Balance Sheet
for the Assets and liabilities to be transferred to Buyer as delivered at
Closing is less than $41.194 million the Base Purchase Price shall be reduced
by an amount equal to the difference between such Adjusted Net Worth and
$41.194 million. If such Adjusted Net Worth as reflected on such Estimated
Balance Sheet delivered at Closing is greater than $41.194 million, such excess
shall be added to the Base Purchase Price. "Adjusted Net Worth" is defined as
the Assets (excluding Non-Transferred Assets as defined in Section 4.06, the
asset value of any asset having an individual cost of less than $1000, all
other assets retained by Sellers and intangible assets such as software
development) shown on the applicable Closing Balance Sheet minus the sum of the
liabilities assumed by Buyer under this Agreement (including capitalized lease
obligations) and liability for CRSF accounts assumed by Buyer pursuant to
Section 2.09, but in each case only to the limited extent reflected on the
Estimated or Final Balance Sheet.
4.02 FINAL BALANCE SHEET ADJUSTMENT. Buyer shall, prior to
February 28, 1997, deliver to Sellers a proposed consolidated final balance
sheet for the Transferred Business as of the Closing Date ("Proposed Final
Balance Sheet") which presents fairly the financial condition of the
Transferred Business as of the Closing Date in accordance with GAAP and
actuarial reserving practices consistently applied (and applying the
Supplemental Accounting Principles), together with a review letter from
Deloitte & Touche, LLP, prepared in accordance with generally accepted
standards for such a letter. In preparing such Final Balance Sheet, actual
health care claims paid through December 31, 1996 together with the full
actuarially determined amount for future expected claims for services properly
accruable as of the Closing Date shall be used to calculate the appropriate
IBNR Reserve on the Final Balance Sheet. Sellers' independent accountants,
KPMG Marwick, LLP, shall be given a reasonable opportunity to review the
Proposed Final Balance Sheet in draft form before it is finalized (including
all work papers of Buyer's financial department, Deloitte & Touche, LLP and
related actuarial assumptions and calculations). In reviewing such Proposed
Final Balance Sheet Sellers shall have the
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opportunity to obtain new and updated computer reports from Buyer's MIS
Department or Finance Department. In the event Sellers and Sellers'
independent accountants dispute the Proposed Final Balance Sheet, they shall
notify Buyer and Deloitte & Touche, LLP within two weeks of the receipt of all
such papers and shall attempt to resolve such dispute. If the parties are
unable to resolve the dispute within fifteen (15) business days after Sellers'
receipt of all papers from Deloitte & Touche, LLP, the firm of Arthur Andersen,
LLP (using firm personnel not located in Oregon, New Hampshire or Washington)
shall act as arbitrator of such dispute and such firm shall resolve the dispute
within fifteen (15) business days after such dispute is heard by such
arbitrator. The decision of such arbitrator shall be final and binding on
Sellers and Buyer. Sellers and Buyer shall share equally the fees and expenses
of such arbitrator. The resulting balance sheet as determined by such
arbitrator shall be binding on both parties and shall be the "Final Balance
Sheet." To the extent that the Final Balance Sheet reflects Adjusted Net Worth
of the Transferred Business as of the Closing Date of less than that shown on
the Estimated Balance Sheet, Sellers shall pay to Buyer the difference
(adjusted for any prior adjustment to the purchase price received by Buyer or
Sellers pursuant to Section 4.01 above). If the Adjusted Net Worth of the
Transferred Business as of the Closing Date as reflected on the Final Balance
Sheet is greater than that shown on the Estimated Balance Sheet, such
difference will be paid by Buyer to Sellers (adjusted for any prior adjustment
to the purchase price received by Buyer or Sellers pursuant to Section 4.01
above).
4.03 POST-CLOSING PRICE PROTECTION. To the extent that within the
nine (9) month period after the Closing Sellers' employer customers terminate
their coverages with the Buyer (other than at normal renewal dates, and
terminations of some Buyer plans while continuing in others) (hereinafter
"Terminating Employers"), then Buyer shall receive a post-closing credit to the
Purchase Price (to be paid by Sellers on settlement of the Final Balance Sheet)
in an amount equal to $400 for each covered member in a Terminating Employer's
group; provided that no credit shall be given for the first 5,000 members in
the aggregate within all Terminating Employer groups.
4.04 PAYMENTS; INTEREST. Any post-closing payments pursuant to
Section 4.02 shall be paid by wire transfer of immediately available funds
within five (5) days of determination of any amount due Buyer or Sellers
together with interest thereon from the Closing Date at the Prime Rate as
defined in Section 13.05.
4.05 CLOSING PRO-RATIONS. The following items shall be adjusted at
Closing:
(a) To the extent that such amounts have not been reflected
as liabilities on the Estimated Balance Sheet, Sellers shall pay to
Buyer at Closing those amounts representing unearned prepaid premiums
on all health care benefits under Insurance Contracts provided by
Sellers.
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(b) Final payroll for all Transferred Employees shall be
pro-rated between Sellers and Buyer based upon the working days
attributable to each to Closing. Based upon Sellers' vacation policy
now in effect, an appropriate accrual shall be made for all vacation
leave earned through Closing and Sellers shall pay such amount to
Buyer at Closing and Buyer shall assume Sellers' obligations for such
vacation. Sellers shall have adopted a policy granting employees a
right to a certain portion of sick leave accumulated through the
Closing Date; may pay cash to employees for part of such sick leave;
and shall accrue the remaining value of such sick leave on the
Estimated and Final Balance Sheets; and shall set aside such amount
from the proceeds of Closing in a Sick Leave Reserve Account
administered by the Foundation. Employees of Seller who become
employees of Buyer will be entitled to sick leave under Buyer's leave
policy as new hires with credit for prior service, plus such credit
with respect to each employee as has been accrued by Sellers prior to
Closing. As such employees use sick leave, Buyer shall be paid from
the Sick Leave Reserve Account the value of such sick leave, up to the
limit of the total amount in the Sick Leave Reserve Account.
(c) Standard Oregon real estate pro-rations of taxes, rent,
escalation and other items related to Seller's real estate and office
space shall be pro-rated at Closing.
4.06 EXCLUSION OF NON-TRANSFERRED ASSETS. As provided in Section
2.10, Sellers and Buyer agree that all assets held for the CRSF Reserves (and
any operational responsibilities or liabilities relating thereto), except for
certain cash and Acceptable Financial Assets to be transferred to Buyer
pursuant to Section 2.09 (the "Non-Transferred Assets") will be retained by
Sellers. The Adjusted Purchase Price shall in all cases be determined by
excluding the book value of the Non-Transferred Assets from the Estimated and
Final Balance Sheets.
5. SELLERS' OR BUYER'S DELIVERIES; FURTHER ASSURANCES.
5.01 SELLERS' DELIVERIES. At Closing, Sellers shall deliver to
Buyer:
(a) a bill of sale in the form of Exhibit 5.01(a) attached
hereto;
(b) certified copies of all corporate action evidencing
Sellers' authorization of this Agreement and the transactions
contemplated hereunder;
(c) copies of the Articles of Incorporation, and any
amendments thereto, of Sellers certified by the Secretary of
State of Oregon, and the Bylaws (with any amendments thereto)
of Sellers, certified by the Secretary of Sellers;
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(d) a certificate dated as of Closing and executed on behalf
of Sellers by a duly authorized officer of each stating that:
(i) all of the representations and warranties made by Sellers
in this Agreement and in any Schedule hereto (as the same have
been amended) are true and correct on and as of Closing with
the same effect as though such representations and warranties
had been made as of such Closing, except with respect to the
transactions and matters required or contemplated by this
Agreement; and, (ii) Sellers have performed and complied with
all of their obligations under this Agreement which are to be
performed or complied with prior to or on Closing;
(e) such other instrument or instruments of transfer, in such
form as shall be necessary or appropriate to vest in Buyer
marketable title to the assets conveyed hereunder;
(f) certificates issued by appropriate governmental
authorities evidencing: (i) the corporate existence of
Sellers as nonprofit corporations in the State of Oregon; and
(ii) the appropriate licensure and good standing of Sellers
with Oregon's and Washington's Insurance Departments as of a
date not more than ten (10) days prior to Closing;
(g) the Assumption Reinsurance Agreements between each of
Sellers and Buyer in the form of Exhibits 2.01-1 and 2.01-2;
(h) an opinion from Messrs. Lane Powell Spears Lubersky,
counsel to Sellers, in the form of Exhibit 10.05;
(i) evidence of all of Sellers' approvals referred to in
Schedule 6.17 and Section 6.18;
(j) the Non-Competition Agreements referred to in and
required by Section 11, in the form of Exhibit 11;
(k) the assignments of contracts referred to in Section 2.05;
(l) transfers and assignments of all of Sellers' owned and
leased computer software including, without limitation, the
software listed on Schedule 6.10;
(m) the Comfort Letter in the form of Exhibit 10.10;
(n) the Estimated Balance Sheet and Historical Financials as
required by Section 2.07;
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(o) assignments of the lease to Sellers' offices with
appropriate estoppel certificates of the lessors of such
property and assignments of all computer leases and other
material operating leases; and
(p) documents implementing the security interest in the "A
Account" described in Schedule 10.18.
5.02 BUYER'S DELIVERIES. At Closing, Buyer shall deliver to
Sellers:
(a) wire transfer funds in the amount of the Adjusted Purchase
Price due in accordance with Sections 3 and 4 hereof;
(b) a certificate dated as of Closing and executed on behalf
of Buyer by a duly authorized officer, stating that: (i) all
of the representations and warranties made by Buyer in this
Agreement are true and correct on and as of Closing with the
same effect as though such representations and warranties had
been made and given on Closing; and, (ii) Buyer has performed
and complied with all of its obligations under this Agreement
which are to be performed or complied with prior to or on
Closing;
(c) the Assumption and Reinsurance Agreements in the form of
Exhibits 2.01-1 and 2.01-2;
(d) an opinion from Sheehan Phinney Bass + Green,
Professional Association in the form of Exhibit 9.03;
(e) certificates issued by appropriate government authorities
evidencing: (i) the corporate existence and good standing of
Buyer as a foreign corporation qualified to transact business
in Oregon as of a date not more than ten (10) days prior to
Closing and (ii) the corporate existence of Buyer's HCSC
subsidiary as a corporation in Oregon as of a date not more
than ten (10) days prior to Closing (iii) the appropriate
licensure as an HCSC and a health maintenance organization
("HMO") of Buyer's HCSC subsidiary in Oregon and Washington;
(f) evidence of all of Buyer's approvals referred to in
Section 7.03 and Schedule 7.03.
5.03 FURTHER ASSURANCES. Following Closing, at the request of the
other party, Buyer or Sellers shall deliver such further documents and take
such reasonable action (not including litigation) as may be necessary or
appropriate: (i) to confirm the sale, transfer, assignment, conveyance, and
delivery of the Transferred Business and Assets purchased by Buyer pursuant to
this Agreement; (ii) to vest in Buyer marketable right, title, and
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interest in and to the Transferred Business and the Assets; and (iii) to fully
and completely consummate the transactions as set forth herein.
6. REPRESENTATIONS AND WARRANTIES OF SELLERS.
Sellers jointly and severally represent and warrant to Buyer as
follows:
6.01 CORPORATE ORGANIZATION; ETC. Sellers are nonprofit
corporations duly organized, validly existing and in good standing under the
laws of the State of Oregon and have all requisite corporate power and
authority to carry on their businesses as they are now being conducted and to
own, operate and lease their properties.
6.02 CAPITALIZATION. Each Seller is a non-stock, nonprofit
corporation. There are no shares of capital stock of each Seller outstanding
and there are no outstanding options, warrants or other rights to purchase or
acquire any capital stock.
6.03 SUBSIDIARIES. Except as set forth on Schedule 6.03, Sellers
have no subsidiaries.
6.04 FINANCIAL STATEMENTS. The audited consolidated balance sheets
of Sellers as of December 31, 1994 and 1995 and the audited consolidated
statements of operations, changes in reserves and cash flows of Sellers for the
years ended December 31, 1993, 1994 and 1995 each have been or will be (in the
case of the 1995 financials) prepared in accordance with GAAP applied on a
consistent basis and do or will fairly present the financial position of
Sellers as of said dates and the results of its operations and cash flows for
the periods then ended. The Estimated Balance Sheet, when delivered, will have
been prepared in accordance with GAAP applied on a consistent basis using the
Supplemental Accounting Principles and will fairly present the financial
position of Sellers as of the dates reflected thereon and the results of
Sellers' operations and cash flows for the periods then ended. Except as shown
on Schedule 6.04, there are no pre-paid expense items or other assets of any
character carried on the books of Sellers as of December 31, 1994 or 1995 or on
the Estimated Balance Sheet which will have to be written off (in whole or in
part) within the four year period following Closing.
6.05 ABSENCE OF UNDISCLOSED LIABILITIES. Except to the extent
specifically reflected, reserved against or disclosed in the Estimated Balance
Sheet or shown on a Schedule hereto, (but excluding claims fully and adequately
covered by insurance), each Seller does not as of the date of such Estimated
Balance Sheet or schedule (and will not as of Closing) have any indebtedness,
liabilities, or obligations of any nature, whether accrued, absolute, or
contingent, and whether due or to become due, including, but not limited to,
unearned premiums, prepaid commissions, disputed or contingent liabilities, or
taxes ("Liabilities"). Except as set forth in Schedule 6.05 hereto, there are
no Liabilities of any nature in any amount not fully reflected or reserved
against in the Estimated
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Balance Sheet. Except as set forth in Schedule 6.05 hereto, each Seller has
not guaranteed or assumed any debt or obligation of any other person,
partnership, corporation, or other entity.
6.06 ABSENCE OF CERTAIN CHANGES. Except as set forth in Schedule
6.06 hereto, since December 31, 1994, there has not been (i) any Material
Adverse Effect on either Seller or (ii) any damage, destruction, or loss to any
of the properties or assets of each Seller, whether or not covered by
insurance, resulting in an aggregate loss of $100,000 or more, or (iii) any
labor trouble (including, without intending any limitation, any negotiation, or
request for negotiation, for any representation or any labor contract)
affecting each Seller.
6.07 CORPORATE RECORD BOOKS, ETC. Each Seller's minute books, all
of which have been shown to Buyer, are in good order and with all necessary
signatures, set forth all meetings and actions taken by the respective members
and directors of each Seller and properly record all corporate action which
should be reflected therein. Complete and correct copies of the Articles of
Incorporation of Sellers and the Bylaws of each Seller, as amended to the date
hereof (certified by its Secretary), have been delivered to Buyer by Sellers.
6.08 TITLE TO ASSETS; LIENS. A true, correct and complete list and
description of all machinery, equipment, vehicles and personal property owned
by each Seller are set forth in Schedule 6.08 separately delivered to Buyer and
signed by representatives of all parties. Each Seller owns no real property.
Except as set forth in Schedule 6.08, each Seller has good and marketable title
to all its owned or leased properties and assets, tangible, and intangible,
including all assets reflected in the December 31, 1994 financial statements,
(except as disposed of after December 31, 1994, in the ordinary course of
business) and in the Estimated Balance Sheet, free and clear of any mortgage,
pledge, lien, security interest, lease, charge, easement, encumbrance,
conditional sale, or other title retention agreement. Except as set forth and
identified in Schedule 6.08, all of the Assets, tangible and intangible,
necessary for the conduct of the Transferred Business as now conducted are
owned or leased by each Seller, and except as set forth in Schedule 6.08,
Sellers' rights, title and interest to all property or assets owned or leased
by Sellers will in no way be affected by this Agreement or the transactions
contemplated herein. Except as set forth in Schedule 6.08, there are no
outstanding commitments of Sellers relative to the purchase, sale, mortgage, or
lease of any real property.
6.09 LEASES OF REAL AND PERSONAL PROPERTY. A true, correct, and
complete list and brief description of all leases of real property, and leases
of any personal property, to which each Seller is a party, either as lessor or
lessee, are set forth in Schedule 6.09 hereto. All such leases are valid and
effective in accordance with their respective terms. Except as set forth in
Schedule 6.09, the continuation, validity, and effectiveness of each such lease
will in no way be affected by this Agreement or the transactions contemplated
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herein. Sellers have furnished to Buyer complete and correct copies of each
such lease to which each Seller is a party. Except as set forth in Schedule
6.09, each Seller's interest in such leases as either lessor or lessee is
subject to no mortgage, pledge, lien, security interest, lease, charge,
easement, encumbrance, conditional sale, or other agreement. Except as set
forth in Schedule 6.09, to each of Seller's knowledge there are no existing,
claimed, purported, or alleged defaults or events of default or state of facts
which with notice or lapse of time, or both, would constitute defaults
thereunder. Except as set forth in Schedule 6.09, each Seller has not received
notice and it is not otherwise aware of any claimed or purported or alleged
default or state of facts which with notice or lapse of time, or both, would
constitute a default on the part of any party in the performance of any
material obligation to be performed or paid by any party with respect to any
such lease. Except as set forth in Schedule 6.09, at Closing, Sellers shall
have the legal right (without further consent or other approval of any other
party) to possession and quiet enjoyment of such premises and properties under
such leases.
6.10 COMPUTER SYSTEMS. Except as set forth in Schedule 6.10,
Sellers' computer systems are presently serving Sellers adequately with no
unusual equipment failure or lack of response time; to each Sellers' knowledge
no equipment or programming upgrades are required to efficiently operate such
systems through 1996. Schedule 6.10 hereto sets forth a true and complete
listing of all computer hardware and computer software programs used in the
conduct of the Transferred Business which were licensed primarily for such use
and which will be transferred to Buyer hereunder, except for commercially
available programs that may be licensed for a fee of less than $1,000.
Schedule 6.10 hereto sets forth whether each such computer software program is
(i) licensed by Sellers from a third party or (ii) licensed by a third party
and assigned by such third party to Sellers in accordance with the terms of
such licenses (collectively referred to herein as the "Licensed Software").
With respect to Licensed Software (i) there are no infringement suits, actions
or proceedings pending or, to the knowledge of each Seller, threatened against
Sellers, with respect to the software and (ii) each Seller has the full right,
power and authority to assign the Licensed Software to Buyer as contemplated in
this Agreement, subject to the prohibitions against assignment set forth in the
agreements evidencing the license and sublicense of the Licensed Software to
Sellers. Schedule 6.10 also includes all of the computer software programs
owned by Sellers that are used to support the Transferred Business (the "Owned
Software"). The computer hardware and computer software described on Schedule
6.10 (together with those commercially available items that would have been
required to have been described on such schedule but for the established
materiality threshold), include all of the computer hardware and computer
software used by Sellers to conduct the Transferred Business in the manner it
is presently conducted.
6.11 INSURANCE. A true, correct and complete list and brief
description (including annual premiums, insurer, agent, coverage, expiration
date) of each Seller's insurance policies (including reinsurance and stop-loss
arrangements) in effect during the
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period subsequent to December 31, 1993 are set forth in Schedule 6.11 hereto.
Except as set forth in Schedule 6.11 to each Sellers' knowledge, there is no
default or claimed, purported or alleged material default or state of facts
which with notice or lapse of time, or both, would constitute a default on the
part of any party in the performance of any obligation to be performed or paid
by any party under any policy referred to in or submitted as a part of Schedule
6.11 and each Seller has not received or given notice of any default or
claimed, purported or alleged default or state of facts which with notice or
lapse of time, or both, would constitute a default on the part of any party in
the performance or payment of any obligation to be performed or paid by any
party under any policy referred to in or submitted as a part of Schedule 6.11.
6.12 TRADEMARKS, COPYRIGHTS, ETC. Except as shown on Schedule
6.12, each Seller does not own or employ in its business any trademarks,
copyrights or similar rights.
6.13 LICENSES, FRANCHISES AND PERMITS. A true, correct and
complete list and brief description of (i) the licenses, and other regulatory
authorizations necessary for the conduct of the Transferred Business as
presently being conducted and necessary for the conduct of the duties of its
employees on behalf of Sellers (including without limitation, agent's and
broker's licenses of its sales agents and employees) (collectively the
"Licenses") and (ii) all conditions, limitations and restrictions (oral or
written) imposed by any regulatory authority on the Transferred Business are
set forth in Schedule 6.13 hereto. Except as set forth in Schedule 6.13, each
Seller has all Licenses necessary for the conduct of its business as now
conducted. All such Licenses are valid and in full force and effect. Except
as set forth in Schedule 6.13, there are no agreements with or orders by any
regulatory authorities prohibiting or restricting the conduct of the Sellers'
Transferred Business. To the best of Seller's knowledge, each Seller and its
employees have not breached any provision of, are not in default of the terms
of, and have not engaged in any activity which would cause revocation or
suspension of, any such Licenses and no action or proceeding looking to or
contemplating the revocation or suspension of any thereof is pending or, to the
best of Sellers' knowledge, threatened. To the best of Sellers' knowledge, no
such Licenses issued by any governmental authority to each Seller or to any of
its present employees who presently holds such a license and uses it in the
Transferred Business has ever been revoked, suspended or rescinded.
6.14 EMPLOYEE RELATIONS. Separately delivered (and signed by the
parties) as Schedule 6.14 is a true, correct and complete payroll roster of all
employees of each Seller as of January 1, 1996, showing the rate of pay for
each such person entitled to receive compensation from each Seller, and the
gross payments made to each such person for the periods set forth above. No
increases in such salaries have been given since June 30, 1995, except for
increases in the ordinary course of business and from Seller's current
compensation review program (such increases not to have a total annual effect
exceeding $350,000 exclusive of salaries for new positions). Each Seller is
not a party to any contract with any of its employees, agents, consultants,
officers, salespeople, sales
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representatives, distributors, or dealers that is not cancelable by such Seller
without penalty or premium on not more than thirty (30) days notice, except as
set forth in Schedule 6.14 or attached thereto. Except as set forth in Schedule
6.14, each Seller has not promulgated any policy or entered into any agreements
relating to the payment of severance pay to employees whose employment is
terminated or suspended, voluntarily or otherwise, and each Seller has not
promulgated any profit sharing, retirement, workers' compensation, disability,
stock purchase, bonus, deferred compensation, health care, life insurance, or
other similar plans, agreements, policies or arrangements providing benefits
for its employees. Each Seller is not a party to any collective bargaining
agreement covering or relating to any of its employees and has not recognized,
has not been required to recognize, and has not received a demand for
recognition by any collective bargaining representative, except as set forth on
Schedule 6.14. Each Seller has or will have accrued (in accordance with GAAP,
consistently applied) in the Historical Financials and the Estimated and Final
Balance Sheets all liability for all employee bonus, vacation, sick time,
compensatory time, deferred compensation, disability, health care, profit
sharing, retirement, or any other similar benefit for its employees which would
be payable to such employees upon their termination from employment. Each
Seller has to its knowledge, complied with all applicable domestic laws, rules,
or regulations relating to employment, including those relating to wages,
hours, collective bargaining and the withholding and payment of taxes and
contributions. Each Seller has withheld all amounts required by law or
agreement to be withheld from the wages or salaries of its employees and there
are no arrearages of wages or any tax or penalty for failure to comply with the
foregoing owed by it with respect to employees. Except as set forth on
Schedule 6.14, there are no controversies pending or to each Seller's
knowledge, threatened between each Seller and any of its employees, any labor
unions or other collective bargaining agents representing or purporting to
represent its employees. Except as set forth on Schedule 6.14, none of the
senior management of each Seller has resigned or to each Seller's knowledge
threatened to resign since January 1, 1995.
6.15 LITIGATION, COMPLIANCE WITH LAWS. Except to the extent set
forth in Schedule 6.15 hereto (which Schedule contains a true, correct and
complete list and description), there is no suit, action, litigation,
administrative action, arbitration, or other proceeding pending or to Sellers'
knowledge threatened in writing involving each Seller (either individually or
as a member of a group) involving more than $10,000 individually or $100,000 in
the aggregate. Each Seller is in material compliance with, and is not in
default in any material respect under, any federal, state or local laws,
regulations, ordinances, requirements, or orders applicable to its business,
operations, or properties. Each Seller has not received notice and it has no
knowledge of any claimed violation or default with respect to any of the
foregoing. Except as set forth on Schedule 6.15, there is no investigation or
review pending or to each of Seller's knowledge threatened by any governmental
entity with respect to each Seller relating to the Transferred Business, nor
has any governmental entity indicated to Sellers an intention to conduct the
same. Except as set forth on Schedule 6.15, there are no filed grievances,
disputes, or litigation pending
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(or threatened in writing) against each Seller involving claims from accounts,
clients, covered persons, or members of each Seller relating to coverage of
health claims or any claim for punitive, exemplary or other extra-contractual
damages which could result in any liability in excess of $25,000.
6.16 CAPACITY; AUTHORIZATION AND EFFECT. Each Seller has all
requisite corporate power and authority to enter into this Agreement and the
agreements referred to herein (for the purpose of this Section 6.16
collectively referred to as the "Agreements"), and to perform all of its
obligations hereunder. The Board of Directors of each Seller has duly
authorized the execution and delivery of the Agreements and the consummation
and performance by each Seller of its obligations thereunder and no other
corporate proceedings other than as shown on Schedule 6.16 on the part of each
Seller are necessary to authorize the Agreements and the performance by each
Seller of its obligations thereunder. The Agreements, when executed and
delivered by Sellers will be legal, valid and binding agreements of each
Seller, enforceable against each Seller in accordance with their terms, except
that: (i) the enforceability thereof may be subject to bankruptcy, insolvency,
fraudulent conveyance, equity of redemption, reorganization, moratorium or
other similar laws now or hereafter in effect relating to creditors' rights
generally; and (ii) the remedy of specific performance and injunctive and other
forms of equitable relief may be subject to equitable defenses and to the
discretion of the court before which any proceedings therefor may be brought.
6.17 COMPLIANCE WITH OTHER INSTRUMENTS, ETC. Subject to obtaining
the consents listed in Schedules 6.09, 6.16 and 6.17 hereto, neither the
execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereby, will: (i) conflict with or result in any
violation of or constitute a default under any term of the Articles of
Incorporation or Bylaws of each Seller (each as amended), or any material
agreement, loan or credit agreement, mortgage, indenture, franchise, license,
permit, authorization, lease, or other instrument, writ, injunction,
determination, award, judgment, decree, order, law, rule, or regulation by
which each Seller is bound; (ii) result in the creation or imposition of any
material lien, security interest, charge, encumbrance, restriction, or claim of
any nature upon, or give to others any material interest or rights, including
rights of termination or cancellation, in or with respect to, any of the
properties, assets, businesses, or prospects of each Seller sold herein or
(iii) violate or conflict with any other material restriction to which each
Seller is subject.
6.18 CONSENTS AND APPROVALS OF GOVERNMENTAL AUTHORITIES. Except
for: (i) the filing of appropriate documents to effect the transactions
contemplated herein as required by the laws of the State of Oregon, (ii) the
approval of the Oregon and Washington Insurance Departments, (iii) the approval
of the Attorney General of Oregon and (iv) the filing of a Pre-Merger
Notification pursuant to the Hart-Scott-Rodino Anti-Trust Improvements Act of
1976 ("Hart-Scott"), and the consents and approvals listed in Schedule 6.18, no
consent, approval or authorization of, or declaration, filing or
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registration with, any governmental or regulatory authority is required to be
obtained or made by each Seller in connection with the execution, delivery and
performance of this Agreement and the transactions contemplated herein by
Sellers.
6.19 ADVERSE RESTRICTIONS, ETC. Except as set forth in Schedule
6.19 and except for restrictions in its Articles of Incorporation, as amended,
each Seller is not subject to any charter or other corporate agreement or any
foreign or domestic judgment, order, writ, injunction, or decree which results
in a Material Adverse Effect to each Seller.
6.20 AGREEMENTS, ETC. Except for agreements cancelable on not more
than 90 days' notice without penalty or involving total payments under each
agreement of less than $10,000, set forth in Schedule 6.20 is a true, correct
and complete list and brief description as to the following: (i) all bonus,
incentive compensation, profit-sharing, retirement, pension, group insurance,
death benefit, severance or other fringe benefit plans, deferred compensation
and post-termination obligations and trust agreements relating to each Seller,
in effect or under which any amounts remain unpaid on the date hereof or are to
become effective after the date hereof; (ii) all collective bargaining
agreements of each Seller with any labor union or other representative of
employees, including local agreements, amendments, supplements, letters, and
memoranda of understanding of all kinds and all employment and consulting
contracts; (iii) any agreements, contracts, arrangements, commitments, or
obligations, oral or written, limiting each Seller's freedom to compete in any
line of business or with any person, or in any way providing for a joint
venture, partnership or other joint enterprise; (iv) all contracts with
participating employers, trusts or other groups which have employees covered or
benefits administered by each Seller; (v) all agreements, contracts,
arrangements, commitments, or obligations, oral or written with all physicians,
hospitals and other health care providers rendering services to each Seller;
and (vi) all other agreements, contracts, arrangements, commitments, or
obligations, oral or written, relating to each Seller, its business,
operations, prospects, properties, assets, or condition (financial or
otherwise) in which each Seller or any officer or director of each Seller, has
any interest, direct or indirect, including a description of any transactions
between each Seller and any entities in which such officers or directors have
any interest; and (vii) all agreements, contracts, arrangements, commitments,
or obligations, oral or written, of each Seller (not otherwise required to be
listed here) which could have a Material Adverse Effect on the Transferred
Business. Except as set forth in Schedule 6.20, the continuation, validity and
effectiveness of the contracts, plans, or other instruments set forth in
Schedule 6.20 will in no way be affected by this Agreement or by the
transactions described herein. Except as set forth in Schedule 6.20, for any
payment defaults by insured subscribers or employers, and for other payment
defaults not exceeding $10,000 in the aggregate: (i) to each Seller's
knowledge, there is no default or state of facts which with notice or lapse of
time, or both, would constitute a default on the part of each Seller (or to
each Seller's knowledge on the part of any party other than each Seller) in the
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performance of any obligation to be performed or paid by any party under any
contracts, plans, or other instruments or arrangements referred to in or
submitted as a part of Schedule 6.20; (ii) each Seller has not received or
given notice of any material default or claimed or purported or alleged
material default or state of facts which with notice or lapse of time, or both,
would constitute a material default on the part of any party in the performance
or payment of any obligation to be performed or paid by any party under any
contracts, plans, or other instruments or arrangements referred to in or
submitted as a part of Schedule 6.20; (iii) no contracts, agreements,
arrangements, or obligations required to be disclosed as part of Schedule 6.20
between each Seller and any director, officer or Affiliate of each Seller are
on terms other than at arms-length and at usual and customary rates.
6.21 POWERS OF ATTORNEY. Except as set forth on Schedule 6.21,
each Seller does not have any power of attorney (whether general or special)
outstanding with respect to any matter.
6.22 PREPAID COMMISSIONS. Except as set forth on Schedule 6.22,
there are no liabilities for prepaid commissions due sales agents or brokers in
connection with any products written by each Seller.
6.23 BANK, MONEY MARKET AND BROKERAGE ACCOUNTS. Set forth in
Schedule 6.23 hereto is a true, correct and complete list showing the name and
address of each banking institution, mutual fund or stock brokerage firm in
which each Seller has accounts or safe deposit boxes, the account numbers or
box numbers relating thereto, and the name of each person authorized to draw
thereon or to have access thereto. There are no credit cards issued to each
Seller, any employees, officers or agents of each Seller, any employee of each
Seller or any other person or entity under which Sellers have any current or
potential future liability except as listed on Schedule 6.23.
6.24 ERISA/BENEFITS. Schedule 6.24 contains a true, correct and
complete list and brief description of "employee pension benefit plans" (as
defined in "ERISA"), "employee welfare benefit plans" (as defined in Section
3(1) of ERISA) and all other employee benefit plans maintained by each Seller
(all the foregoing being herein called "Employee Benefit Plans") maintained or
contributed to by each Seller. Each Employee Benefit Plan has been
administered in all respects in accordance with its terms and is in compliance
in all respects with the currently applicable provisions of ERISA and the
Internal Revenue Code of 1986, as amended (the "Code"). All reports, returns
and similar documents with respect to the Employee Benefit Plans required to be
filed with any government agency or distributed to any Employee Benefit Plan
participant have been duly and timely filed or distributed. To the knowledge
of each Seller, there are no investigations by any government agency, and no
termination proceedings or other claims, suits or proceedings against or
involving any Employee Benefit Plan or asserting any rights or claims to
benefits under any Employee Benefit Plan that could give rise to
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any liability to each Seller or such Employee Benefit Plan. Except as
disclosed on Schedule 6.24, all the Employee Benefit Plans that are intended to
be qualified under Section 401(a) of the Code have received determination
letters from the Internal Revenue Service to the effect that such Employee
Benefit Plans are qualified and the Plans and the trusts related thereto are
exempt from Federal income taxes, no such determination letter has been revoked
and revocation has not been threatened, and no such Employee Benefit Plan has
been amended since the date of its most recent determination letter or
application therefor in any respect that would adversely affect its
qualification or increase its cost. Except as disclosed on Schedule 6.24, no
Employee Benefit Plans have been terminated and to each Seller's knowledge,
there have not been any "reportable events" (as defined in Section 4043 of
ERISA and the regulations there) with respect thereto and no Employee Benefit
Plan has an "accumulated funding deficiency" within the meaning of Section
412(a) of the Code or any unfunded liability of any kind, and no liability
under Title IV of "ERISA" has been incurred by the Sellers (or by any trade or
business, whether or not incorporated, that would be deemed a "single employer"
with a Seller within the meaning of Section 4001 of ERISA) that has not been
satisfied in full, and no condition exists that presents a material risk to the
Sellers or any such trade or business of incurring a liability under Title IV
of ERISA, other than liability for premiums due the Pension Benefit Guaranty
Corporation (which premiums have been paid when due).
6.25 ACCOUNTS RECEIVABLE. All of the net accounts receivable on
the books of each Seller are valid accounts arising in the ordinary course of
business and, to each Seller's knowledge, none is subject to any defense,
counterclaim or off-set of any kind. Each Seller has no accounts receivable
from any director, officer or Affiliate of each Seller, except as set forth on
Schedule 6.25.
6.26 DEBT OBLIGATIONS. Set forth on Schedule 6.26 is a true,
complete and accurate list setting forth each instrument defining the terms on
which debts for borrowed funds (not including trade debt) of, or guarantees of
the debts of third parties by, each Seller have been issued, and the name of
the lender and the current amount outstanding on all such obligations,
including, without limitation, term loans, revolving credit agreements, notes,
or other financing vehicles, but excepting contracts with providers and
insurance policies.
6.27 ENVIRONMENTAL MATTERS. Each Seller has stored, handled and
disposed of all hazardous waste in compliance in all material respects with all
applicable federal, state and local laws, regulations and ordinances. To each
Seller's knowledge, each Seller's leased real property, or any portion thereof,
is not in violation of any law regarding environmental matters, and no event
has occurred or is occurring which could give rise to any such action, order,
proceeding, violation. Each Seller has obtained all material permits, licenses
and other authorizations which are required under federal, state and local laws
relating to pollution or protection of the environment, including laws relating
to emissions, discharges, releases or threatened releases of pollutants,
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contaminants, or hazardous or toxic materials or wastes into ambient air,
surface water, ground water, or land, or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport, or
handling of pollutants, contaminants or hazardous or toxic materials or wastes.
Each Seller is in material compliance with all terms and conditions of the
required permits, licenses and authorizations, and is also in material
compliance with all other limitations, restrictions, conditions, standards,
prohibitions, requirements, obligations, schedules and timetables contained in
those laws or contained in any regulation, code, plan, order, decree, judgment,
notice or demand letter issued, entered, promulgated or approved thereunder.
6.28 TAXES. Each Seller is a tax-exempt organization as defined in
Section 501(c)(4) of the Code and except as noted in Schedule 6.28: (i) each
Seller is in full compliance with all applicable federal and state laws,
regulations, rulings and orders pertaining to the operation of a tax-exempt
entity, such as Sellers, including without limitation, requirements as to
private benefit, inurement, self-dealing, conflicts of interest and other
applicable requirements; (ii) there have been properly completed and filed on a
timely basis and in correct form all tax returns, information returns or other
required information or filings required to be filed by each Seller on or prior
to the date hereof (the "Returns"); (iii) as of the time of filing, the
foregoing Returns correctly reflected all information regarding the income,
business, assets, operations, activities or status of each Seller or any other
information required to be shown thereon; (iv) with respect to all amounts in
respect of taxes imposed on or for which each Seller is or could be liable,
whether to taxing authorities (as, for example, law) or to other persons or
entities (as, for example, tax allocation agreements), with respect to all
taxable periods or portions of periods ending on or before Closing, all
applicable tax laws and agreements have been fully complied with, and all such
amounts required to be paid by each Seller to taxing authorities or others on
or before the date hereof have been paid; (v) no notices of deficiency have
been issued by (or are currently pending before), and no proceedings are
currently pending before, any taxing authority in connection with any of the
Returns relating to each Seller; (vi) no waivers of statutes of limitation with
respect to the Returns have been given by or requested from each Seller.
Consummation of the transactions pursuant to this Agreement will in no way have
any affect on the Assets or the Buyer after Closing.
6.29 BOOKS AND RECORDS. Except as shown on Schedule 6.29, all of
the corporate, financial and business records of each Seller are located at
12901 SE 97th Avenue, Clackamas, Oregon.
6.30 PENDING PROPOSALS. Each Seller has made available to Buyer
for inspection a complete list and brief description of all material pending
proposals for new business or renewals of existing accounts.
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6.31 CERTAIN FEES AND EXPENSES. Neither Sellers nor any of their
respective officers, directors or employees has incurred any claims for any
brokerage fees, commissions or finders' fees in connection with the
transactions contemplated hereby nor any other obligations for professional
services of any kind except to Shamrock Investments.
6.32 MANAGEMENT LETTER(S). Except as set forth on Schedule 6.32,
each Seller has received no management letters from KPMG Peat Marwick in
relation to its financial statements. All of the matters noted in any such
management letters have been complied with or totally resolved.
6.33 ARRANGEMENTS FOR STOP-LOSS INSURANCE. Shown on Schedule 6.33
is a true, correct and complete list and brief description of all contracts,
agreements or arrangements, oral or in writing, in any way related to the
provision of so-called stop-loss health insurance or re-insurance maintained by
each Seller for itself or for the benefit of any self-funded employer accounts
for which it administers claims. To the knowledge of each Seller, each Seller
has no liability under any such stop-loss or re-insurance arrangements, except
as to defined retentions.
6.34 SUBSCRIBER CONTRACTS. Each Seller has provided to Buyer
copies of its standard employer and other group agreements and the form numbers
for such contracts are listed on Schedule 6.34. Except as shown on Schedule
6.34 (which Schedule contains a true, correct and complete list and brief
description), there are no agreements with employers or other groups on terms
materially different than as provided in such standard employer agreements.
6.35 COVERED LIVES/SUBSCRIBERS. As of September 30, 1995, Sellers
had a total of 109,575 Covered Lives of which PACC HMO had 33,217 HMO members
and 25,358 other Covered Lives and PACC Health Plans had -0- HMO members and
50,950 other Covered Lives. A deficiency in any of these numbers up to 1,000
lives shall be deemed immaterial.
6.36 PHYSICIAN AND HOSPITAL AGREEMENTS AND RELATIONSHIPS; OTHER
HEALTH CARE PROVIDER AGREEMENTS AND RELATIONSHIPS.
(a) Each Seller has in effect standard physician agreements in
the forms which have been provided by each Seller to Buyer and which
are listed in Schedule 6.36(a); all such physicians have entered into
the agreements in the forms provided and no physician has any
materially different arrangement with Sellers. All previous payments
from the PACC HMO and PACC Health Plans CRSF Reserves have been in
full compliance with the policies establishing such CRSF Reserves and
to each Seller's knowledge, are in compliance in all material respects
with all requirements of law, regulation or administrative order or
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approval governing same and all returns of physician current year
withholds (or so-called "supplementary payments") have been made in
accordance with any applicable regulatory requirements.
(b) Each Seller has in effect hospital agreements in the forms
which have been provided by each Seller to Buyer and which are listed
in Schedule 6.36(b); no hospital has entered into an agreement in any
form other than those which have been provided to Buyer and no hospital
has any different arrangement with Sellers.
(c) Each Seller has in effect health care provider agreements
(other than physician and hospital agreements shown above) in the
forms which have been provided by each Seller to Buyer and which are
listed in Schedule 6.36(c); no health care provider has entered into
an agreement in any form other than those which have been provided to
Buyer and no such provider has any different arrangement with Sellers.
6.37 BROKERS AND AGENTS. Schedule 6.37 lists all persons through
which each Seller places or sells products with premium volume in excess of
$100,000 per year. To each Seller's knowledge, no such broker/agent has
indicated any unwillingness to participate with Buyer in connection with the
Transferred Business. Each Seller has no financial obligations to any person
with respect to existing or future Transferred Business, except as recorded as
a liability on the 1995 financial statements and the Estimated Balance Sheet
and as described in Schedule 6.37. Except as indicated in Schedule 6.37, each
Seller is not a party to any fronting, quota-sharing or similar agreement to
place or sell insurance for the full or partial benefit of any other insurance
company.
6.38 AUTHORITY. The delivery to Buyer of the Agreement and the
documents referred to therein including, without limitation, the Assumption
Reinsurance Agreements, will transfer valid title to the HCSC and other
contracts comprising the Transferred Business, and all of the Assets of the
Transferred Business as defined in Section 2.01, free and clear of any options,
liens, trusts, encumbrances, security interests, charges and claims of any kind
other than the rights of policyholders and other matters specifically set forth
herein and in schedules appended hereto.
6.39 REINSURANCE. Attached as Schedule 6.39 is a list of every
policy of reinsurance or other agreement allocating insurance risk which
relates to existing or future policies written as part of (or related to) the
Transferred Business.
6.40 MATERIAL ADVERSE CHANGES OR EFFECT. Except as set forth on
Schedule 6.40, each Seller has no knowledge of any matter which may result in a
Material Adverse Effect on each Seller or the Transferred Business.
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6.41 OPERATION OF THE TRANSFERRED BUSINESS. All of the activities
and operations and all of the assets related to the Transferred Business have
been at all times and now are owned or conducted only by Sellers and by no
other legal entity in whole or in part. Except as set forth in Schedule 6.41,
all HCSC, insurance and other healthcare contracts included in the Transferred
Business as now in force are in all material respects, to the extent required
under applicable law, on forms approved by applicable insurance regulatory
authorities or which have been filed and not objected to by such authorities
within the period provided for objection, and such forms comply in all material
respects with the insurance statutes, regulations and rules applicable thereto.
True, complete and correct copies of such forms have been furnished or made
available to Buyer, the reference numbers of such forms are listed on Schedule
6.41 hereto and there are no other forms of insurance contracts used in
connection with the Transferred Business. Except as set forth in Schedule
6.41, premium rates established in connection with the Transferred Business
which are required to be filed with or approved by insurance regulatory
authorities have been so filed or approved, the premiums charged conform
thereto in all material respects, and such premiums comply in all material
respects with the insurance statutes, regulations and rules applicable thereto.
6.42 GOVERNMENT CONTRACTS. Except as set forth in Schedule 6.42
hereto, each Seller is and has operated in full compliance in all material
respects with all contractual, statutory, regulatory and other requirements
applicable to each Seller as a provider of HCSC or other insurance coverage to
employees of the federal, state and local governments and subdivisions and to
beneficiaries under programs sponsored or administered by any such governments
or subdivisions thereof (collectively "Government Contracts") and is subject
to no claim for a penalty, fine, return of premium, repayment of costs charged,
renegotiation of charges or fees, change in claims or billings as a result of
audit, adjustment, charge, retroactive restatements of costs or charges, or
other liability in respect of any Government Contract.
6.43 MEDICARE SECONDARY PAYOR. Without in any way limiting the
generality of other representations and warranties made herein by Sellers, all
actions taken or failed to have been taken by each Seller or its Affiliates or
agents in connection with the insuring or administration of healthcare plans
maintained for each Seller's employer clients or other clients have been taken
or omitted in complete compliance in all material respects with the so-called
"Medicare Secondary Payor Rules" all applicable federal laws, as supplemented
by the regulations of the Department of Health and Human Services concerning
Medicare Secondary Payor liability ("Secondary Payor Rules"); no healthcare
plan administered or insured by each Seller has any liability of any nature
(including but not limited to, any liability under the Internal Revenue Code,
ERISA, the Social Security Act and Age Discrimination in Employment Act) to the
United States of America or to any other person or entity with respect to the
Secondary Payor Rules. Neither Sellers nor their Affiliates or agents have
incurred any liability with respect to acts taken or omitted prior to Closing
under existing or prior contracts with their
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employer clients or other clients for any excise tax liability under Section
5000 of the Internal Revenue Code.
6.44 FAIRNESS OPINION. Sellers have received a written opinion
from Shamrock Investments dated as of the date of this Agreement which confirms
that the terms of this Agreement are fair to both Sellers and such opinion has
not been modified or withdrawn.
6.45 LEASED PREMISES. Except as set forth in Schedule 6.45 hereto,
in connection with the headquarters premises at Clackamas, Oregon (the "Leased
Premises") (i) Sellers have occupied, maintained and operated, and made any
improvements on, the Leased Premises in compliance with all material applicable
laws (including but not limited to building codes, life safety codes and ADA
requirements) regulations, insurance requirements, contracts, leases, permits,
licenses, ordinances, restrictions, covenants, reservations and easements, and
the Sellers have not received any notice, written or verbal, claiming any
material violation of any of the same or requesting or requiring the
performance of any repairs, alterations, or other work in order to so comply;
(ii) to each Seller's knowledge, all improvements, if any, made by Sellers to
the Leased Premises have been constructed in a good and workmanlike manner, are
free from defects in workmanship and material, are structurally sound and do
not require any repair or replacement other than minor routine maintenance;
(iii) to each Seller's knowledge, any and all permits, approvals and licenses
required for the current use or occupation of the Leased Premises for the
operation of the Transferred Business have been obtained by Sellers and Sellers
are in material compliance with same; such permits, approvals and licenses
(including but not limited to any certificates of occupancy with regard to any
improvements located on the Leased Premises) are in full force and effect and
have no material conditions that are unsatisfied, are freely transferable to
Buyer, have no termination dates or provisions and true copies of all of same
have been delivered to Buyer; (iv) to each Seller's knowledge, there are no
zoning or other land use restrictions presently in effect or to each Seller's
knowledge, proposed by any governmental authority which would impair the use of
the Leased Premises for the purposes for which they are now being used; (v) to
each Seller's knowledge, none of the improvements on the Leased Premises, if
any, are non-conforming uses or structures; and (vi) to each Seller's
knowledge, there are no actual, potential or alleged health hazards affecting
the Leased Premises such as radon gas, lead paint, hazardous insulation, insect
or animal infestation, inadequate air circulation/quality, methane gas or other
unhealthy condition prohibited or regulated by any environmental law, and no
employee has made any claims in connection therewith.
6.46 MEMBERS/ACCOUNT HOLDERS. A list of all record owners of all
accounts within the CRSF Reserves to be assumed by Buyer (together with account
balances on a date not more than 30 days prior to date of this Agreement) is
attached as Schedule 6.46. A mistake in individual balances which does not
affect ultimate total CRSF Reserves to
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be assumed by Buyer by more than $10,000 shall be deemed immaterial under this
Agreement. To the best knowledge of Sellers, no other person has any interest
in the CRSF Reserves to be assumed by Buyer, except for persons as may make a
claim by or through such designated record owners. The CRSF Reserves have been
administered in compliance with the policies and procedures applicable to such
Reserves.
7. REPRESENTATIONS AND WARRANTIES OF BUYER.
Buyer represents and warrants to Sellers as follows:
7.01 ORGANIZATION; GOOD STANDING. Buyer is a corporation duly
organized, validly existing, and in good standing under the laws of the State
of New Hampshire.
7.02 AUTHORITY. Buyer has full corporate authority to execute and
deliver this Agreement and to consummate the transactions contemplated hereby.
The Board of Directors of Buyer has duly authorized the execution and delivery
of the Agreement and the consummation and performance by Buyer of its
obligations thereunder and no other corporate proceedings on the part of Buyer
are necessary to authorize the Agreement and the performance by Buyer of its
obligations thereunder. This Agreement has been duly executed and delivered by
Buyer and constitutes the legal, valid, and binding obligation of Buyer,
enforceable against Buyer in accordance with its terms, except that (i) the
enforceability thereof may be subject to bankruptcy, insolvency, fraudulent
conveyance, equity of redemption, reorganization, moratorium or other similar
laws now or hereafter in effect relating to creditors' rights generally; and
(ii) the remedy of specific performance and injunctive and other forms of
equitable relief may be subject to equitable defenses and to the discretion of
the court before which any proceedings therefor may be brought.
7.03 GOVERNMENTAL AND OTHER CONSENTS, ETC. Except for the
approvals referred to in Section 6.18 and the approvals referred to on Schedule
7.03, no consent, approval, or authorization of, or designation, declaration,
or filing with, any governmental authority or other persons or entities on the
part of Buyer or Healthsource is required in connection with the execution or
delivery of this Agreement or the consummation of the transactions contemplated
hereby.
7.04 COMPLIANCE WITH OTHER INSTRUMENTS, ETC. Neither the execution
and delivery of this Agreement nor the consummation of the transactions
contemplated hereby, will (i) conflict with or result in any violation of or
constitute a default under any term of the Articles of Incorporation or Bylaws
of Buyer (each as amended) or any agreement, loan or credit agreement,
mortgage, indenture, franchise, license, permit, authorization, lease, or other
instrument, writ, injunction, determination, award, judgment, decree, order,
law, rule or regulation to which Buyer is bound; (ii) result in the creation or
imposition of any lien, security interest, charge, encumbrance, restriction, or
claim of any nature upon, or give to others any interest or rights, including
rights of
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termination or cancellation in or with respect to, or otherwise adversely
affect, any of the properties, assets, businesses, or prospects of Buyer, or
(iii) violate or conflict with any other restriction of any kind or character
to which Buyer is subject.
7.05 FINANCING. At the Closing and pursuant to the Healthsource,
Inc. guaranty attached hereto, Buyer shall have sufficient funds to purchase
the Transferred Business and the Assets under this Agreement.
8. COVENANTS OF SELLERS AND BUYER PENDING CLOSING.
8.01 COVENANTS OF SELLERS. For purposes of this Section 8.01, the
term "reasonable best efforts" shall mean an undertaking reasonably calculated
to achieve the intended result by action or expenditure not unduly burdensome
in the circumstances, and specifically excludes any obligation to institute
litigation. Sellers agree that from the date of this Agreement to Closing:
(a) COOPERATION. Each Seller shall use its reasonable best efforts
to cause the sale contemplated by this Agreement to be consummated,
and without limiting the generality of the foregoing, to obtain all
required consents, approvals and authorizations of third parties, to
make all necessary filings with and give all necessary notices to
third parties and to take all actions which may be necessary or
reasonably required in order to effect the transactions contemplated
hereby and to otherwise satisfy all of the conditions set forth in
this Agreement. Without limiting the generality of the foregoing,
promptly following the execution and delivery of this Agreement, each
Seller shall (together with Buyer) present the transactions
contemplated by this Agreement to the Insurance Departments of the
States of Oregon and Washington and the Attorney General of the State
of Oregon and shall use its reasonable best efforts to resolve any
objections of such regulatory authority thereto to the satisfaction of
such regulatory authority. All data and information concerning the
business of Sellers shall be made available to Buyer on reasonable
terms subject to the maintenance of confidentiality by Buyer.
(b) MAINTENANCE OF PROPERTIES, ETC. Each Seller shall maintain all
of its properties in customary repair, order, and condition,
reasonable wear excepted, and shall maintain insurance upon all of its
properties in such amounts and of such kinds and against such risks
usually maintained and insured against by each Seller.
(c) MAINTENANCE OF BOOKS. Each Seller shall maintain its books,
accounts and records in the usual manner on a basis consistent with
prior years.
(d) ACCESS TO PROPERTIES, ETC. Subject to the assurance by Buyer
regarding confidentiality and to Buyer's use of reasonable procedures
to avoid undue
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disturbance of each Seller's operations, each Seller shall give or
cause to be given to Buyer and to Buyer's counsel, accountants,
investment advisors and other representatives full access during
normal business hours to all of the properties, books, tax returns,
contracts, commitments and records of each Seller, or copies of the
same, which are related to the transactions contemplated by this
Agreement, and shall furnish to Buyer copies of all such documents,
certified if requested, and all such information as Buyer may from
time to time reasonably request with respect to the affairs of each
Seller.
(e) CERTAIN PROHIBITED TRANSACTIONS. Prior to termination of this
Agreement, each Seller shall not, without the prior written consent of
Buyer (which shall not be unreasonably withheld in connection with
requests under clauses (vi) through (xviii) below only): (i) discuss,
solicit, encourage, or respond to any proposal for the acquisition,
merger or consolidation of all or any significant part of each Seller's
assets or business; (ii) provide any information to any party in
connection with any such proposal; (iii) negotiate with respect to, or
enter into, any contract to merge or consolidate with any other
corporation or entity; (iv) negotiate with respect to, or change, the
character of their businesses, or sell, transfer, or otherwise dispose
of or encumber all or any substantial part of each Seller's assets; (v)
negotiate with respect to, or issue or contract to issue, any debt or
guarantees of debt (other than trade debt incurred in the ordinary
course of business) which exceed in the aggregate Ten Thousand Dollars
($10,000) at any one time outstanding; (vi) negotiate with respect to,
or enter into, any joint venture or partnership, for the conduct of
each Seller's business or involving any part of the Transferred
Business; (vii) pay any distribution of each Seller's assets or
earnings, except for required dispositions of CRSF Funds pursuant to
Section 2.09; (viii) sell, assign, or transfer any patents, trademarks,
trade names, copyrights, or other intangible assets of each Seller;
(ix) adopt any plan of liquidation; (x) directly or indirectly dispose
of or encumber any of each Seller's assets except in the ordinary
course of business; (xi) waive any right of significant value, except
in the ordinary course of business; (xii) change in any material
respect the method or timing on the payment of the liabilities of each
Seller; (xiii) file any new license applications; (xiv) expand any
existing service area; (xv) enter into any new reinsurance and
stop-loss insurance agreement covering Sellers' business; (xvi) enter
into any new contracts or agreements with health care providers (except
for standard agreements with participating providers and the contracts
required to be entered into under this Agreement); (xvii) enter into
any non- competition or other agreement which may restrict in any way
the conduct of the Transferred Business; (xviii) generally engage in
any business practice or take any action which is not in the ordinary
course of business of each Seller. If any acquisition, merger or
consolidation proposal is received by Sellers, Sellers shall promptly
notify Buyer of such fact and shall provide Buyer copies or a summary
(if oral) of any such offers or proposals.
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(f) COMPLIANCE WITH LAWS. Each Seller shall duly comply in all
material respects with all laws, regulations, and decrees applicable
to it and to the conduct of its businesses.
(g) INCONSISTENT ACTS. From the date of this Agreement to Closing,
except as otherwise permitted by this Agreement, each Seller will not
engage in any activity or enter into any transaction which would be
inconsistent in any material respect with any representation, warranty
or covenant set forth in this Agreement if such representations and
warranties were made at a time subsequent to such activity or
transaction and all references to the date of this Agreement were
deemed to be such later date.
(h) UNDERWRITING NEW AND RENEWAL BUSINESS. Prior to Closing each
Seller shall not make any proposal or commitment for new or renewal
HMO, health insurance or other health care coverage either lasting
more than one year or affecting more than 1,000 lives or members with
an average group premium more than 5% below the budgeted yield per
member/per month for the period, without first consulting with Buyer.
In addition, Sellers agree that so-called Medicare risk contracts will
not be written unless supported by full capitation (as a % of Medicare
premium received) contracts with hospitals covering all health care
expenses payable under such contracts. Sellers also agree that no
agreements with respect to the Cascadia venture or the HFEN hospitals
will be signed which are not satisfactory to Buyer. A procedure to
handle the foregoing items will be worked out between the Presidents
of Sellers and Buyer.
(i) CLOSING CORRECTIONS. Sellers shall update their various
disclosure schedules to reflect transactions occurring after the date
of this Agreement and pursuant to and in conformity with this Section
8.01. To facilitate Closing, Sellers will provide Buyer with drafts of
any changes and copies of any documents referred to therein at least
two business days prior to Closing in order that Buyer may confirm the
fact that such changes did in fact occur in conformity with this
Section 8.01. No such disclosure shall have any effect for the
purpose of determining the satisfaction of the conditions set forth in
Section 10 hereof.
(j) NO NEW CONTRACTS. Each Seller shall not enter into or assume any
new contract, lease, license or commitment which by its terms requires
performance subsequent to April 30, 1996 except for such matters which
are within the normal and ordinary course of business or which are
limited to 12 months and involve an annual monetary commitment or
exposure of not more than $20,000 each or $100,000 in the aggregate;
provided, however, that each Seller may inform Buyer of any proposed
new contracts that it believes will be in Buyer's best interest and
Buyer will not unreasonably withhold its prompt approval of such new
contracts. Designees of Dr. Payson and Mr. Preizler will perform this
function.
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(k) SELLERS' AGENTS. Buyer may contact insurance agents or brokers
selling HCSC, insurance or other healthcare contracts, or other
products issued by Sellers for the purpose of engaging such agents or
brokers to act on behalf of Buyer and its Affiliates to sell contracts
and products in the same lines as such HCSC, insurance or other
healthcare contracts after the Closing Date. Sellers shall (i)
encourage each of the agents and brokers listed on Schedule 6.37
hereto, on or prior to the Closing Date, to execute and deliver to
Buyer an agency agreement in form mutually acceptable to Buyer and
Sellers, and (ii) issue to each such agent or broker a waiver in form
mutually acceptable to Buyer and Sellers providing for the waiver by
Sellers of any rights arising pursuant to existing agency agreements
prohibiting any such agents or brokers from selling contracts and
products in the same lines as such HCSC or insurance contracts on
behalf of Buyer and its Affiliates.
(l) INTERIM FINANCIAL INFORMATION. Sellers shall provide Buyer
promptly with copies of all monthly and other interim financial
statements, projections, budgets and other similar information
prepared by Sellers between the date of this Agreement and the
Closing.
(m) PHYSICIAN CONTRACTS. Each Seller shall continue to use its best
efforts to cause its primary care and specialist physicians to enter
into updated participating physician services agreements (in the form
of Exhibits 10.08-1 and 10.08-2 attached hereto) as it is currently
doing.
(n) HOSPITAL CONTRACTS. Each Seller shall attempt (with Buyer's
guidance) to establish or modify existing contractual arrangements
with its participating hospitals to meet the structural design that
Buyer customarily seeks in hospital arrangements.
(o) FOUNDATION. Sellers shall establish, with the consent of the
Oregon Attorney General, a charitable foundation (the "Foundation")
with articles of incorporation, and bylaws substantially in the form
of Exhibit 8.01(o).
(p) PROVIDER WITHHOLDS. Sellers agrees to pay on or before January
31, 1996 all monies withheld from providers for services rendered
during 1995, to record such payments as a liability on Sellers'
December 31, 1995 Balance Sheet and, commencing with the January 1996
financial statements to accrue monthly on such statements as a
liability for health care expense an amount equal to all monies then
withheld to date from providers for services during 1996. Buyer shall
cause all such 1995 withholds as accrued to be promptly paid if for
any reason they are not paid by Seller by Closing.
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(q) CASCADIA HEALTH LLC. Sellers shall not obligate or expose
Sellers or Buyer to any liabilities exceeding $250,000 in the
aggregate with respect to Cascadia Health LLC or related agreements
with HFEN without the prior written consent of Buyer which may be
withheld in Buyer's absolute discretion. Sellers shall use their best
efforts to postpone the scheduled closing under the agreement with
HFEN concerning Cascadia Health LLC until the Closing under this
Agreement and shall not permit the Cascadia LLC closing to occur until
Buyer has approved in its sole discretion the Cascadia business plan
and roster of providers.
8.02 COVENANTS OF BUYER. Buyer agrees that from the date of this
Agreement to Closing:
(a) COOPERATION. Buyer shall use its reasonable best efforts
to cause the sale contemplated by this Agreement to be consummated, and
without limiting the generality of the foregoing, to obtain all
necessary consents and authorizations of third parties, including
regulatory approvals, to make all necessary filings with and give all
necessary notices to third parties which may be necessary or reasonably
required in order to effect the transactions contemplated hereby, and
to offer Employment Agreements with the current President and Vice
Presidents of each Seller in accordance with Section 2.03.
9. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF SELLERS.
The obligation of Sellers to consummate the transactions to be
performed by them in connection with the Closing is subject to satisfaction of
the following conditions:
9.01 BUYER'S REPRESENTATIONS AND WARRANTIES. There shall be no
breach of the representations and warranties of Buyer contained herein for
which purpose the same shall be deemed applicable as of the Closing with the
same force and effect as though made on and as of said date except as affected
by transactions contemplated hereby.
9.02 BUYER'S COVENANTS. Buyer shall have performed all of its
obligations and agreements and complied with all its covenants contained in
this Agreement to be performed and complied with by it prior to Closing.
9.03 BUYER'S COUNSEL'S OPINION. Sheehan Phinney Bass + Green,
Professional Association, counsel to Buyer, shall have delivered to Sellers an
opinion, dated as of Closing, in the form of Exhibit 9.03. In giving such
opinion such counsel may rely, as to matters of fact, upon certificates of
officers of Buyer, and as to matters governed by the laws of Oregon and
Washington, such counsel may rely upon the opinions of local counsel.
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9.04 BUYER'S CLOSING CERTIFICATE. Sellers shall have received a
certificate of Buyer dated as of Closing, in form and substance reasonably
satisfactory to counsel to Sellers certifying as to the fulfillment of the
matters mentioned in Sections 9.01 and 9.02.
9.05 SUBSIDIARY AGREEMENTS. Buyer shall have caused its
subsidiaries to have executed the various agreements required to be executed
pursuant to this Agreement including, without limitation, the Assumption
Reinsurance Agreements in the form of Exhibits 2.01-1 and 2.01-2.
9.06 CONSENTS AND REGULATORY APPROVALS. Sellers shall have
received evidence, reasonably satisfactory to Sellers and counsel for Sellers,
that all of the approvals and consents disclosed in Schedules 6.16 and 6.18 and
Sections 6.16, 6.17 (to the extent not waived by Buyer), 6.18 and 7.03 have
been duly obtained. Without in any way limiting the generality of the
foregoing, Sellers shall have received (i) approval for Sellers to sell the
Transferred Business to Buyer, approval of the Assumption Reinsurance
Agreements and other necessary approvals from the Insurance Departments of the
States of Oregon and Washington; (ii) all required approvals from the Attorney
General of Oregon including approval of the transfer of the Adjusted Purchase
Price to the Foundation, and (iii) evidence from Buyer that Buyer has received
the approvals of the States of Oregon and Washington Insurance Departments of
the transactions contemplated herein.
9.07 NO LITIGATION. No action, suit, or proceeding before any
court or any governmental or regulatory authority shall have been commenced, no
investigation by any governmental or regulatory authority shall have been
commenced, and no action, suit, or proceeding by any governmental or regulatory
authority shall have been threatened against Sellers or Buyer: (i) seeking to
challenge the transactions contemplated hereby or questioning the validity or
legality of any such transactions which would, if resolved adversely, severally
or in the aggregate, result in a Material Adverse Effect on the Transferred
Business; (ii) which might restrict or affect the right of Buyer to acquire the
Assets and the Transferred Business of Sellers or to exercise any rights in
respect thereto or under this Agreement or any agreement referred to herein
subsequent to Closing; or, (iii) which seeks to subject Sellers or any of their
directors, officers or Affiliates to any liability, fine, forfeiture, or
penalty by reason of the transactions contemplated by this Agreement. There
shall not have been issued any injunction or order restraining or otherwise
preventing the transactions contemplated by this Agreement.
9.08 HEALTHSOURCE GUARANTEE. The Healthsource Guarantee attached
hereto shall be effective and enforceable in accordance with its terms.
9.09 SCOPE OF CERTAIN ACCRUALS. If the Estimated Balance Sheet as
delivered under Section 1.07 reflects an accrual pursuant to AICPA SOP 89-5
(together with the supplemental principles of Section 1.10(iv) of this
Agreement) (herein the "89-5
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Accrual"), such 89-5 Accrual shall not exceed $4.0 million; provided that this
condition shall be null and void and the Closing shall not be thereby affected
if within 30 days after receipt of both the Estimated Balance Sheet and written
notice from Seller electing not to close this transaction pursuant to this
Section 9.09, Buyer waives the amount of such 89-5 Accrual in excess of $4.0
million.
10. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF BUYER.
The obligation of Buyer to consummate the transactions to be performed
by it in connection with the Closing is subject to satisfaction of the
following conditions:
10.01 SELLERS' REPRESENTATIONS AND WARRANTIES. There shall be no
breach of the representations and warranties of Sellers herein contained for
which purpose the same shall be deemed applicable as of Closing with the same
force and effect as though made on and as of said date, except as affected by
the transactions contemplated hereby.
10.02 SELLERS' COVENANTS. Sellers shall have performed all of their
obligations and agreements and complied with all of their covenants in this
Agreement to be performed and complied with by Sellers prior to Closing.
10.03 CLOSING CERTIFICATE. Buyer shall have received a certificate
of each Seller executed on behalf of such Seller by its appropriate officers
dated as of Closing, in form reasonably satisfactory to counsel to Buyer,
certifying as to the fulfillment of the matters mentioned in Sections 10.01 and
10.02.
10.04 CONSENTS AND REGULATORY APPROVALS. Buyer shall have received
evidence, reasonably satisfactory to Buyer and counsel for Buyer, that all of
the consents disclosed in Sections 6.16, 6.17, 6.18 and 7.03 and Schedules 6.18
and 7.03 have been duly obtained (including a specific approval of
Healthsource, Inc.'s normal method of calculating IBNR Reserves), have been
issued with no conditions or only with conditions affecting Buyer or the
Transferred Business after Closing that are satisfactory to Buyer in its sole
discretion.
10.05 SELLERS' OPINION OF COUNSEL. Lane Powell Spears Lubersky,
special counsel to Sellers, shall have delivered to Buyer an opinion, dated as
of Closing, in the form of Exhibit 10.05. In giving such opinion such counsel
may rely, as to matters of fact, upon certificates of officers of each Seller.
10.06 NO LITIGATION. No action, suit, or proceeding before any
court or any governmental or regulatory authority shall have been commenced, no
investigation by any governmental or regulatory authority shall have been
commenced, and no action, suit, or proceeding by any governmental or regulatory
authority shall have been threatened against Sellers or Buyer: (i) seeking to
challenge the transactions contemplated hereby or
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questioning the validity or legality of any such transactions which would, if
resolved adversely, severally or in the aggregate, result in a Material Adverse
Effect on the Transferred Business; (ii) which might restrict or affect the
right of Buyer to acquire the Transferred Business or to exercise any rights in
respect thereto or under this Agreement or any agreement referred to herein
subsequent to Closing; or, (iii) which seeks to subject Buyer or any of its
directors, officers or Affiliates to any liability, fine, forfeiture, or
penalty by reason of the transactions contemplated by this Agreement. There
shall not have been issued any injunction or order restraining or otherwise
preventing the transactions contemplated by this Agreement.
10.07 LOSS OF COVERED LIVES AND PRINCIPAL EMPLOYER ACCOUNTS. At
Closing there shall not be fewer than 95,000 Covered Lives.
10.08 MAINTENANCE OF PRIMARY CARE AND SPECIALTY PHYSICIANS. Each
Seller shall have participating physician services agreements in the form of
Exhibit 10.08 with (i) 75% of those primary care physicians accounting for at
least $5,000 of physician payments during 1994 and (ii) at least 70% of the
specialist physicians receiving at least $5,000 in physician payments during
1994.
10.09 FINANCIAL STATEMENTS. Sellers shall have delivered to Buyer:
(i) all interim unaudited financial statements of Sellers from the date of this
Agreement through any month ending at least thirty (30) days prior to Closing;
and (ii) the Estimated Balance Sheet and Historical Financials as required in
Section 2.07.
10.10 COMFORT LETTER. Buyer shall have received at Closing a
Comfort Letter covering the matters specified in Exhibit 10.10 dated as of
Closing from KPMG Peat Marwick LLP, Sellers' independent auditors, in form and
substance reasonably acceptable to Buyer verifying that as of a date no more
than 5 days prior to Closing there has been no material change in the financial
condition of each Seller from that reflected in the 1995 financial statements.
Buyer shall reimburse Sellers up to $5,000 towards the cost of the Comfort
Letter.
10.11 EMPLOYMENT AGREEMENT. Buyer shall have entered into an
Employment Agreement in the form of Exhibit 2.03 (b)(i) with the President of
Sellers and Employment Agreements in the form of Exhibit 2.03(b)(ii) with the
officers listed on Schedule 10.11.
10.12 NON-COMPETITION AGREEMENT. Sellers and any Foundation to
which Sellers' assets are transferred, shall have entered into the
Non-Competition Agreement with Buyer in the form of Exhibit 11.
10.13 ASSUMPTION REINSURANCE AGREEMENTS. Sellers shall have entered
into the Assumption Reinsurance Agreements in the form of Exhibits 2.01-1 to
2.01-2.
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<PAGE> 43
10.14 NO MATERIAL ADVERSE CHANGE. There shall have occurred no
event or events having a Material Adverse Effect on the Transferred Business.
10.15 INTENTIONALLY OMITTED.
10.16 HOSPITAL CONTRACTS. Each Seller shall have entered into a
participating hospital agreement meeting the requirements set forth in Schedule
10.16.
10.17 HEADQUARTERS LEASE. Sellers' lease for the headquarters
premises at Clackamas, Oregon with 205 Corporate Center Limited dated August
21, 1987 as amended through No. 6 dated January 20, 1995, shall have been
assigned to Buyer (or its designee) and Buyer shall have received an estoppel
certificate from such landlord and the holder of any mortgage therein
satisfactory to Buyer.
10.18 SELLERS' FOUNDATION. Sellers shall have formed the Foundation
using organizational documents substantially in the form of Exhibit 8.01(o) as
approved by the Attorney General of Oregon and the Oregon Department of
Consumer and Business Services and to which the remaining assets of Sellers,
including without limitation the Adjusted Purchase Price (except for such
reasonable amount as PACC determines it is prudent to retain temporarily to
resolve outstanding debts or obligations of PACC in winding up its affairs),
shall be transferred and such Foundation shall have (i) discharged or assumed
all obligations (including indemnification obligations) of Sellers pursuant to
this Agreement and all documents and other agreements referred to herein or
delivered by or on behalf of Sellers at Closing (and there shall be no
unresolved legal challenge by any third-party to such discharge or assumption),
and (ii) given reasonable assurance that no substantial transfer of Foundation
capital will occur other than pursuant to the indemnification provisions of
this Agreement or the distribution of Foundation income, or the distribution of
Foundation capital not exceeding amounts set forth on Schedule 10.18.
11. SELLERS' NON-COMPETITION COVENANT.
Each Seller and any Foundation to which Seller's assets are
transferred shall enter into the Non-Competition Agreement in the form of
Exhibit 11.
12. TRADEMARKS, ETC.
Each Seller agrees for itself and any of its present or future
affiliates not to use any name, trade name, trademark, brand name, or service
mark similar thereto listed in Schedule 12 and transferred to Buyer.
13. INDEMNIFICATION.
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<PAGE> 44
13.01 INDEMNIFICATION BY SELLERS. Sellers shall indemnify, defend
and hold harmless Buyer and its respective shareholders, officers, directors,
employees, subsidiaries, agents, successors, and affiliates (hereinafter the
"Buyer Indemnified Parties") from, against, and with respect to, any and all
loss, damage, claim, action, suit, proceeding (civil or criminal), deficiency
or expense arising or resulting from, or attributable to, any of the following:
(a) any loss, damage, claim, action, suit, proceeding,
litigation, judgment, decision, decree, injunction, or ruling
affecting Sellers, Buyer Indemnified Parties or the Transferred
Business which results from the Excluded Liabilities.
(b) any misrepresentation or breach of any representation or
warranty of Sellers made in Sections 6.08, 6.24, 6.28, 6.42, 6.43 and
6.46 contained herein or in any schedule related thereto;
(c) any misrepresentation or breach of any representation or
warranty of Sellers (excluding those representations or warranties
referred to in Section 13.01(b)) contained herein or in any report,
schedule, agreement or document attached hereto, or any closing
document delivered in connection with the transactions contemplated by
such documents;
(d) any breach or default by Sellers of any covenant,
obligation or undertaking on their part contained herein or in any
report, schedule, agreement, or document attached hereto, or any
closing document delivered in connection with the transactions
contemplated by such documents;
(e) all undisclosed or disclosed liabilities, debts,
obligations and commitments of Sellers, fixed or contingent, known or
unknown, arising from any statement of fact, occurrence or
circumstance existing prior to or at the Closing Date;
(f) any cost, expense or liability incurred by Buyer
Indemnified Parties as a result of a claim for investment banker's
fees, brokerage, transactional or similar fees by any person asserting
it was engaged by Sellers or any of their affiliates;
(g) any reasonable and necessary out-of-pocket costs of any
nature including without limitation, legal, accounting, fines,
penalties, compliance costs, financial assurance requirements, capital
equipment and maintenance costs, investigation and remediation costs,
engineering, contractor, consultants, expert and other professional
fees, resulting from or attributable to any matter or thing mentioned
or described in clauses (a) through (f) above, and all such reasonable
and necessary expenses incurred by Buyer Indemnified Parties in
seeking enforcement against Sellers with respect to any matter or
thing mentioned or
44
<PAGE> 45
described in clauses (a) through (f) above (if it is ultimately
determined that any of Buyer Indemnified Parties is entitled to
indemnification).
13.02 INDEMNIFICATION BY BUYER. Buyer shall indemnify, defend and
hold harmless each Seller and each of its shareholders, officers, directors,
employees, subsidiaries, agents, successors, and affiliates (the "Sellers
Indemnified Parties") from, against and with respect to any and all loss,
damage, claim, action, suit, proceeding (civil or criminal), deficiency or
expense arising or resulting from, or attributable to, any of the following:
(a) any loss, damage, claim, action, suit, proceeding,
litigation, judgment, decision, decree, injunction, or ruling
affecting Buyer, Sellers Indemnified Parties or the Transferred
Business which results from acts omissions after the Closing Date for
which Buyer is legally responsible.
(b) any misrepresentation or breach of any representation or
warranty of Buyer contained herein or in any report, agreement,
schedule or document attached hereto, or any closing document
delivered in connection with the transactions contemplated by such
documents;
(c) any breach or default by Buyer of any covenant,
obligation or undertaking on its part contained herein or in any
report, schedule, agreement or document attached hereto or any Closing
document delivered in connection with the transactions contemplated by
such documents;
(d) any cost, expense or liability incurred by Sellers
Indemnified Parties as a result of a claim for investment banker's
fees, brokerage, transactional or similar fees by any person asserting
it was engaged by Buyer or any of its affiliates; and
(e) any reasonable and necessary out-of-pocket costs,
including without limitation, legal, accounting, engineering and other
professional fees, fines, penalties, compliance costs, financial
assurance requirements, capital equipment and maintenance costs,
investigation and remediation costs, engineering, contractors,
consultants experts and other professional fees, resulting from or
attributable to any matter or thing mentioned or described in clauses
(a) through (d) above, and all such reasonable and necessary expenses
incurred by Sellers Indemnified Parties in seeking enforcement against
Buyer with respect to any matter or thing mentioned or described in
clauses (a) through (d) above (if it is ultimately determined that
Sellers Indemnified Parties are entitled to indemnification).
13.03 NOTICE AND MANAGEMENT OF CLAIMS. If any action, suit, or
proceeding shall be commenced against, or any claim or demand be asserted
against, a party in
45
<PAGE> 46
respect of which such party proposes to demand indemnification hereunder, such
party seeking indemnification (the "Indemnified Party") shall promptly (and in
any event within ten business days after receiving notice from a third party of
a claim known to be subject to indemnification) notify in writing the party
from whom the Indemnified Party seeks indemnification (the "Indemnifying
Party") and furnish such Indemnifying Party with copies of all claims, demands,
documents, pleadings or other writings or information in connection therewith
and such Indemnifying Party will assume the defense of such complaint, claim,
action or proceeding, and the payment of expenses and costs with respect
thereto as described in Sections 13.01 or 13.02. The Indemnified Party shall
have the right to employ its own separate counsel, but the fees and expenses of
such separate counsel shall be at its sole expense unless either of the
following provisions shall apply: (a) the employment of such counsel shall have
been authorized in writing by the Indemnifying Party in connection with the
defense of such complaint, claim, action or proceeding; or (b) the Indemnified
Party's legal counsel (whether retained separately by such Indemnified Party or
selected by the Indemnified Party) shall reasonably advise the Indemnified
Party in writing, with a copy to the Indemnifying Party, that there is a
conflict of interest that would make it inappropriate under applicable
standards of professional conduct to have such selected counsel. If clause (a)
or (b) in the immediately preceding sentence is applicable, then the
Indemnified Party may employ separate counsel at the expense of the
Indemnifying Party to represent or defend him, her or it, but in no event shall
such Indemnifying Party be obligated to pay the costs and expenses of more than
one such separate counsel for all Indemnified Parties that are party to or
otherwise subject to such complaint, claim, action or proceeding in any one
jurisdiction. The Indemnifying Party shall not be liable to indemnify the
Indemnified Party for any amount paid in settlement of any claim, action or
proceeding, effected without the written consent of the Indemnifying Party
which consent shall not unreasonably be withheld. The parties each agree to
render to each other such assistance, information, documents and access to
personnel and records as may be reasonably be requested in order to insure the
proper and adequate defense of any Third-Party Claim.
13.04 RESOLUTION OF RESPONSIBILITY FOR CLAIMS. In the event that
any dispute arises as to either party's responsibility with respect to a claim
for indemnification, the parties hereto agree to resolve such differences by
following the dispute resolution procedure set forth in Section 15 hereof all
of the terms and conditions of which are incorporated herein by reference.
13.05 INTEREST. In the case of any payments made or costs or
damages incurred and paid by a party, interest on the amount thereof shall
accrue beginning thirty (30) days after written notice of the claim is given,
provided, that such notice is accompanied by documentation describing the basis
of such claim in reasonable detail for evaluation; provided further, however,
that the claiming party shall only be entitled to receive such interest to the
extent that it is determined that such party is entitled to indemnification
hereunder. Interest shall accrue until the claim is paid in full at a variable
rate equal to
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<PAGE> 47
the prime interest rate (as published in the Money Rates column of the Wall
Street Journal) (the "Prime Rate") plus two percent (2%) compounded monthly.
13.06 LIMITATIONS ON DOLLAR AMOUNT OF INDEMNIFICATION.
(a) Full Indemnification Matters. Sellers shall have
complete, full and first dollar liability without regard to time with
respect to all matters covered by the indemnification of Sections
13.01(a) and 13.01(b), and Section 13.01(g) to the extent incurred in
connection with Section 13.01(a) or Section 13.01(b).
(b) Deductible. With respect to all matters giving rise to
indemnification liability pursuant to this Section 13 (except as to
matters covered by Section 13.06(a)), there shall be an aggregate
deductible of One Million Dollars ($1,000,000) such that Sellers shall
have no liability for the first $1,000,000 in claims by Buyer and
Sellers shall have complete liability for loss in excess of $1,000,000
subject to the limitations in Section 13.06(c) below, provided also
that under the indemnity in Section 13.01, Sellers shall have first
dollar liability subject to no deductible for: (i) claims in which it
is proven that Sellers engaged in fraud or any intentional breach or
violation of any representation, warranty, covenant or indemnity
contained herein; (ii) any obligations or liability of Sellers with
regard to any pre or post Closing adjustments, credits, pro-rations,
reimbursements or settlements pursuant to this Agreement, (iii) any
liability for a third-party claim not expressly assumed by Buyer
pursuant to this Agreement including, without limitation, any Excluded
Liability, or (iv) any liability of Sellers to the extent provided in
any other agreement by either of Sellers with Buyer or any of Buyer's
affiliates.
(c) Limit on Indemnification. Notwithstanding the other
provisions of this Agreement, the aggregate liability of Sellers for
indemnification under this Section 13 shall be limited to the Adjusted
Purchase Price.
13.07 TIME LIMIT ON INDEMNIFICATION CLAIMS. Notwithstanding any
other provisions of this Agreement to the contrary, no Indemnifying Party shall
be liable to any Indemnified Party for any claim for which the Indemnifying
Party has not received written notice within three years after the Closing
(except in the case of claims relating to matters covered in Sections 6.24 and
6.28 and Section 6.42, as to which the time limitation shall be six years after
the Closing).
14. NATURE AND SURVIVAL OF REPRESENTATIONS AND
WARRANTIES.
All statements contained in any certificate, Exhibit, Schedule, or
other instrument delivered by or on behalf of Sellers pursuant to this
Agreement, or in connection with the
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<PAGE> 48
transactions contemplated hereby, shall be true and correct as of both the date
hereof and Closing. All representations, warranties and covenants made by
Sellers and Buyer shall survive Closing and the consummation of the
transactions contemplated hereby for a period expiring on the third anniversary
of the Closing Date (the "Survival Period") except that the representations and
warranties made in Sections 6.24, 6.28 and 6.42 shall survive for six years
from the Closing Date. The covenants and agreements set forth in any part of
this Agreement contemplating or requiring action or performance after Closing
shall survive the execution and delivery hereof and the Closing hereunder
indefinitely. All representations, warranties, covenants or obligations of a
party under any other agreement or instrument between them shall survive the
Closing in accordance with the terms of each such agreement or instrument
without regard to the Survival Period set forth herein and all such
representations, warranties or covenants shall be fully applicable and
effective whether or not any of the parties relies in fact thereon or has
knowledge (acquired either before or after the date hereof, and whether from
the other parties hereto or from its own investigation) of any fact at variance
with, or of any breach of, any such representation, warranty, or covenant.
15. DISPUTE RESOLUTION.
All controversies or claims arising out of or relating to this
Agreement or any agreement referred to or contemplated herein shall be settled
in the first instance by non-binding mediation between the parties using
mutually agreeable professional mediation services and, failing a resolution
through mediation within thirty (30) days of demand for same, thereafter by
arbitration in accordance with the Commercial Arbitration Rules of the American
Arbitration Association in Seattle, Washington. All such arbitration shall
take place in Seattle, Washington. No member of the arbitration panel shall be
a resident of or have a principal place of business in Oregon. Judgment upon
the award rendered by the arbitrator(s) may be entered in any court having
jurisdiction thereof. The results of arbitration shall be binding upon both
parties. The prevailing party in such arbitration proceeding shall be entitled
to recover its reasonable attorneys' fees and costs. Until such arbitration is
finally concluded, the provisions of this Agreement shall remain in full force
and effect.
16. BROKERAGE.
Sellers agree to indemnify Buyer and to hold it harmless from and
against any and all claims for any broker's or finder's fee or commission
arising out of or based on any act or omission of Sellers and Sellers
specifically agree to pay all of the fees of their investment bankers, Shamrock
Investment of Los Angeles, California. Buyer agrees to indemnify Sellers and
to hold them harmless from and against any and all claims for any broker's or
finder's fee or commission arising out of or based on any act or omission of
Buyer or its directors, officers or Affiliates.
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<PAGE> 49
17. PAYMENT OF EXPENSES.
Buyer and Sellers shall each pay all of their own expenses in
connection with this Agreement and the transactions and deliveries contemplated
hereby, including without limitation any expenses incurred in connection with
any claims made by any third party calling into question the transactions
contemplated hereby.
18. TERMINATION; BREAKUP FEE.
18.01 TERMINATION. This Agreement may be terminated at any time
prior to Closing by mutual written consent of Buyer and Sellers. This
Agreement also may be terminated either by Buyer or Sellers, without liability
on the part of the terminating party to the other party, if (i) the condition
specified in Schedule 10.16 has not been satisfied after 75 days from the date
of this Agreement (or after 45 days from the date of this Agreement if Sellers
have received a written refusal from both specified parties to continue
negotiations towards an agreement meeting the requirements of Schedule 10.16)
and Buyer, in either instance, has not otherwise waived such condition; or (ii)
the transactions contemplated by this Agreement have not been consummated on or
prior to April 15, 1996 unless such failure to consummate is due solely to the
failure to obtain regulatory approvals required by this Agreement and it is
reasonably anticipated that such regulatory approvals can be obtained no later
than July 31, 1996, in which case the operational date of this subsection shall
be July 31, 1996; provided that either Buyer or Sellers may extend such July
31, 1996 date to December 31, 1996; and provided further that in any event the
failure to consummate said purchase and sale by said date is not due to the
refusal or failure of the terminating party to perform any act required to be
performed under this Agreement.
18.02 BREAKUP FEE. If Buyer terminates this Agreement for any
reason other than: (i) failure of conditions to Closing contained in Section 10
or (ii) breach by Sellers of the terms of this Agreement, Buyer shall pay to
Sellers $2,000,000 as liquidated damages for such failure to close. Sellers
and Buyer expressly agree that substantial damages will be suffered by Sellers
if Buyer terminates this Agreement pursuant to the first sentence of this
Section 18.02, and that it would be extremely difficult and impracticable, if
not impossible, to ascertain with any degree of certainty the amount of damages
which would be suffered by Sellers in each such event. Therefore, the parties
have agreed that the foregoing represents a reasonable estimate of damages and
payment by Buyer to the Sellers of such liquidated damages shall terminate all
of Sellers' rights and remedies at law or in equity against the Buyer in
respect of such damages.
19. MISCELLANEOUS.
19.01 WAIVERS. No action taken pursuant to this Agreement,
including, without limitation, proceeding with Closing, shall be deemed to
constitute a waiver by any party
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<PAGE> 50
taking such action or compliance with any representations, warranties,
covenants, or agreements contained in this Agreement. The waiver by any of the
parties of a breach of any provision of this Agreement shall not operate or be
construed as a waiver of a breach of any other provision of this Agreement.
19.02 AMENDMENTS, SUPPLEMENTS, TERMINATION, ETC. Subject to
applicable law, this Agreement may be amended, modified and supplemented only
by written agreement of Buyer and Sellers at any time prior to Closing with
respect to any of the terms contained herein.
19.03 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 Sellers:
PACC HMO
12901 SE 97th Avenue
Clackamas, Oregon 97015-0286
Attn: Martin A. Preizler, President
and
PACC Health Plans
12901 SE 97th Avenue
Clackamas, Oregon 97015-0286
Attn: Martin A. Preizler, President
with a copy to:
Hogan & Hartson, L.L.P.
555 13th Street, N.W.
Washington, DC 20004-1109
Attn: Clifford D. Stromberg, Esq.
(ii) If to Buyer:
Healthsource Northwest, Inc.
c/o Healthsource, Inc.
Two College Park Drive
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<PAGE> 51
Hooksett, New Hampshire 03106
Attn: Norman C. Payson, M.D., President
with a copy to:
Sheehan Phinney Bass + Green, Professional Association
1000 Elm Street
P.O. Box 3701
Manchester, New Hampshire 03105-3701
Attn: Daniel N. Gregoire, 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.
19.04 ENTIRE AGREEMENT. This Agreement, together with the other
writings delivered in connection herewith, embodies the entire agreement and
understandings of the parties hereto with respect to the subject matters hereof
and thereof and supersedes any prior agreement and understanding between the
parties.
19.05 PRONOUNS. All pronouns and any variations thereof shall be
deemed to refer to masculine, feminine, neuter, singular, or plural as the
identity of the person or persons may require.
19.06 GOVERNING LAW AND BINDING EFFECT. This Agreement shall be
governed by the laws of the State of Oregon without regard to principles of
conflicts of law thereof and shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and assigns.
19.07 SEVERABILITY. Any provision of this Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction, provided such
prohibited or unenforceable provision does not affect the essence of this
Agreement.
19.08 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
19.09 CAPTIONS. The captions and headings throughout this Agreement
are for convenience and reference only, and shall in no way be deemed to
define, modify, or add to the construction of any provision of, or to the scope
or intent of, this Agreement.
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19.10 NO THIRD-PARTY BENEFICIARIES. Except for the rights of
policyholders pursuant to the Assumption Reinsurance Agreements, each party
hereto intends that this Agreement shall not benefit or create any right or
cause of action in or on behalf of any person other than the parties executing
this Agreement; nor shall any statement herein be deemed an admission against
interest by any party in proceedings with any third person.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
WITNESS: PACC HMO
/s/ Theodore C. Falk By: /s/ C. Edward Skeeters, M.D.
- -------------------- --------------------------------------
C. Edward Skeeters, M.D., Chairman
PACC HEALTH PLANS
/s/ Theodore C. Falk By: /s/ C. Edward Skeeeters, M.D.
- -------------------- --------------------------------------
C. Edward Skeeters, M.D., Chairman
HEALTHSOURCE NORTHWEST, INC.
/s/ Jon S. Richardson By: /s/ Norman C. Payson, M.D.
- -------------------- --------------------------------------
Norman C. Payson, M.D., President
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<PAGE> 53
GUARANTY
Healthsource, Inc. hereby agrees to unconditionally guaranty the full
and complete payment and performance of all of the obligations of Healthsource
Northwest, Inc. under this Agreement and represents that such guaranty is an
enforceable obligation of Healthsource, Inc.
WITNESS: HEALTHSOURCE, INC.
/s/ Jon S. Richardson By: /s/ Norman C. Payson, M.D.
- ------------------------- -------------------------------------------
Norman C. Payson, M.D., President
53
<PAGE> 1
EXHIBIT 11
<TABLE>
HEALTHSOURCE, INC.
COMPUTATION OF NET INCOME PER SHARE
(amounts in thousands, except per share data)
<CAPTION>
Years Ended December 31,
------------------------
1995 1994 1993
---- ---- -----
<S> <C> <C> <C>
1. Net Income $56,271 $39,044 $26,064
2. Preferred dividends (4,167)
-------- -------- --------
3. Net income applicable to common shareholders 52,104 39,044 26,064
======== ======== ========
COMPUTATION OF SHARES OUTSTANDING
---------------------------------
4. Average weighted common shares outstanding 62,983 61,696 53,312
5. Dilutive effect of stock options issued 1,212 1,122 1,020
-------- -------- --------
6. Average weighted common shares and share
equivalents outstanding 64,195 62,818 54,332
======== ======== ========
NET INCOME PER SHARE (3/6): $ 0.81 $ 0.62 $ 0.48
- ---------------------------
</TABLE>
<PAGE> 1
EXHIBIT 12
<TABLE>
HEALTHSOURCE, INC.
COMPUTATION OF HISTORICAL FINANCIAL RATIOS
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
AVERAGE ANNUAL HMO HOSPITAL
BED DAYS PER 1000 MEMBERS (A):
NORTHERN REGION:
(1) HOSPITAL BED DAYS.............. 47,700 42,600 37,500 33,800 22,700
(2) AVERAGE NUMBER OF MEMBERS...... 211,100 174,500 147,700 121,500 80,900
------- ------- ------- ------- -------
(3) AVERAGE (1/2) X 1,000.......... 226 244 254 278 281
======= ======= ======= ======= =======
SOUTHERN REGION:
(1) HOSPITAL BED DAYS.............. 64,000 42,700 34,600 23,500 13,500
(2) AVERAGE NUMBER OF MEMBERS...... 257,900 172,500 122,300 81,800 45,000
------- ------- ------- ------- -------
(3) AVERAGE (1/2) X 1,000.......... 248 248 283 287 300
======= ======= ======= ======= =======
MEDICAL LOSS RATIO (A):
NORTHERN REGION:
(1) COST OF MEDICAL PREMIUM
REVENUE........................ 304,475 250,527 205,754 168,763 83,055
(2) MEDICAL PREMIUM REVENUE........ 391,703 325,813 275,058 220,199 114,634
------- ------- ------- ------- -------
(3) MEDICAL LOSS RATIO (1/2) ...... 77.7% 76.9% 74.8% 76.6% 72.5%
======= ======= ======= ======= =======
SOUTHERN REGION:
(1) COST OF MEDICAL PREMIUM
REVENUE........................ 317,414 203,615 128,689 85,142 56,670
(2) MEDICAL PREMIUM REVENUE........ 419,941 267,440 166,487 109,683 74,957
------- ------- ------- ------- -------
(3) MEDICAL LOSS RATIO (1/2) ...... 75.6% 76.1% 77.3% 77.6% 75.6%
======= ======= ======= ======= =======
<FN>
(A) THE NORTHERN REGION INCLUDES NEW HAMPSHIRE, INDIANA, SYRACUSE, NY, LOUISVILLE, KY AND MAINE. THE SOUTHERN REGION INCLUDES
SOUTH CAROLINA, NORTH CAROLINA, TENNESSEE, ARKANSAS, SAVANNAH, GA AND NORTH CENTRAL TEXAS. INDIANA, TENNESSEE AND NORTH
CAROLINA ARE INCLUDED SINCE THEIR ACQUISITION OR INVESTMENT IN MAY 1992, DECEMBER 1991, AND DECEMBER 1990, RESPECTIVELY. ARKANSAS,
SAVANNAH, GA, NORTH CENTRAL TEXAS AND LOUISVILLE, KY ARE INCLUDED SINCE COMMENCEMENT OF OPERATIONS IN JANUARY 1994, NOVEMBER
1994, JANUARY 1995 AND JULY 1995, RESPECTIVELY. SYRACUSE, NY IS INCLUDED SINCE JANUARY 1991, WHICH IS THE FIRST FULL YEAR THAT THE
COMPANY MANAGED THE PLAN.
</TABLE>
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF HEALTHSOURCE, INC.
<TABLE>
<CAPTION>
Name/Doing Business As
(if applicable) State of Incorporation Ownership
- ---------------------- ---------------------- ---------
<S> <C> <C>
Healthsource New Hampshire, Inc. NH 100%
Healthsource Indiana Insurance IN 100%
Company
Healthsource Indiana Managed Care IN 100%
Plan, Inc.
Healthsource Insurance Group, Inc. NH 100%
Healthsource South Carolina, Inc. SC 100%
Healthsource Insurance Services, Inc. SC 100%
Healthsource Tennessee Preferred, TN 100%
Inc.
Healthsource Tennessee, Inc. TN 100%
Healthsource North Carolina NC 100%
Administrators, Inc.
Coordinated Health Care, Inc. NC 100%
Healthsource North Carolina, Inc. NC 100%
Healthsource HMO of New York, Inc. NY 100%
Healthsource Preferred, Inc. NH 100%
Healthsource Maine, Inc. ME 100%
Healthsource Employer Services, NH 100%
Inc./Jobcare
Healthsource Maine Preferred, Inc. ME 100%
Employee Benefit Plan NH 100%
Administration, Inc.
</TABLE>
<PAGE> 2
ChubbHealth, Inc. NY 15%
Rehabilitation Consultants, Inc. NH 100%
Healthsource Arkansas, Inc. AR 100%
Healthsource Arkansas Preferred, Inc. AR 100%
Coordinated Arkansas Preferred AR 100%
Provider Organizations, Inc.
Healthsource Provident TN 100%
Administrators, Inc.
Healthsource Provident TN 100%
Insurance Company
Healthsource North Texas, Inc. TX 70%
Provident Health Care Plan, Inc. TN 100%
of Tennessee
Healthsource Ohio, Inc. OH 100%
Healthsource Kentucky, Inc. KY 100%
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
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 February 16, 1996, appearing in
this Annual Report on Form 10-K of Healthsource, Inc. and Subsidaries for the
year ended December 31, 1995.
/s/ DELIOTTE & TOUCHE LLP
Boston Massachusetts
February 28, 1996
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK>
<NAME> HEALTHSOURCE, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 121,467
<SECURITIES> 102,658
<RECEIVABLES> 117,871
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 427,496
<PP&E> 103,611
<DEPRECIATION> 0
<TOTAL-ASSETS> 873,039
<CURRENT-LIABILITIES> 283,026
<BONDS> 95,000
<COMMON> 6,358
0
100,000
<OTHER-SE> 381,724
<TOTAL-LIABILITY-AND-EQUITY> 873,039
<SALES> 1,166,697
<TOTAL-REVENUES> 1,187,520
<CGS> 917,624
<TOTAL-COSTS> 1,095,079
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,392
<INCOME-PRETAX> 87,049
<INCOME-TAX> 30,778
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 56,271
<EPS-PRIMARY> .81
<EPS-DILUTED> .81
</TABLE>
