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REGISTRATION NO. 333-5223
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-3/A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
HEALTHSOURCE, INC.
(Exact Name of Registrant as Specified in Its Charter)
NEW HAMPSHIRE 02-0387748
(State or Other Jurisdiction of Incorporation or (I.R.S. Employer
Organization) Identification No.)
TWO COLLEGE PARK DRIVE
HOOKSETT, NEW HAMPSHIRE 03106
(603) 268-7000
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
NORMAN C. PAYSON, M.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
HEALTHSOURCE, INC.
TWO COLLEGE PARK DRIVE
HOOKSETT, NEW HAMPSHIRE 03106
(603) 268-7000
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent For Service)
Copy to:
DANIEL N. GREGOIRE, ESQ.
SHEEHAN PHINNEY BASS + GREEN
PROFESSIONAL ASSOCIATION
1000 ELM STREET
MANCHESTER, NH 03105-3701
(603) 668-0300
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: FROM
TIME TO TIME AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box: ( )
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: (X)
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering: ( )
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: ( )
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: ( )
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SUBJECT TO COMPLETION, DATED AUGUST 16, 1996
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
HEALTHSOURCE, INC.
$247,250,000
5% CONVERTIBLE SUBORDINATED NOTES DUE 2003
The 5% Convertible Subordinated Notes Due 2003 (the "Notes") of
Healthsource, Inc., a New Hampshire corporation ("Healthsource" or the
"Company"), and the shares of the Company's Common Stock, par value $.10 per
share (the "Common Stock" and together with the Notes, the "Securities"),
issuable upon conversion thereof, may be offered for sale from time to time for
the account of certain holders of the Securities (the "Selling Holders") as
described under "Selling Holders." The Selling Holders may from time to time
sell the Securities offered hereby directly to other purchasers or through
agents in ordinary brokerage transactions, in negotiated transactions or
otherwise, at market prices prevailing at the time of sale, at prices related to
then prevailing market prices or at negotiated prices. See "Plan of
Distribution."
The Notes will mature on March 1, 2003, unless previously redeemed or
converted. Interest on the Notes is payable semi-annually on March 1 and
September 1 of each year commencing September 1, 1996. The Notes bear interest
from March 6, 1996. Holders of the Notes (the "Holders") are entitled through
March 1, 2003, subject to prior redemption, to convert any Notes or portions
thereof into Common Stock at a conversion price of $46.965 per share, subject to
certain adjustments. See "Description of the Notes - Conversion of Notes." The
Notes have been designated for trading in the Private Offerings, Resales and
Trading through Automated Linkages ("PORTAL") market and listed for trading on
the New York Stock Exchange (the "NYSE") under the symbol "HSO3". The Common
Stock is traded on the NYSE under the symbol "HS." On August 14, 1996, the last
reported sale price of the Common Stock on the NYSE was $13 3/8 per share.
The Notes are redeemable, in whole or in part, at the option of the
Company, at any time on or after March 1, 1999, at the declining redemption
prices set forth herein plus accrued interest. In the event of a Change of
Control (as defined herein), each Holder of Notes may require the Company to
repurchase such Holder's Notes in whole or in part at a repurchase price of 101%
of the principal amount thereof plus accrued interest. See "Description of Notes
- - Change of Control."
The Notes represent unsecured obligations of the Company and will be
subordinated in right of payment to all existing and future Senior Indebtedness
(as defined herein) of the Company. In addition, because the Company's
operations are conducted primarily through its operating subsidiaries, including
regulated insurance companies and health maintenance organizations ("HMOs"),
claims of regulators, creditors and holders of indebtedness of such subsidiaries
will have priority with respect to the assets and earnings of such subsidiaries
over the claims of creditors of the Company, including Holders of the Notes.
The Notes were originally issued by the Company on March 6 and 8, 1996
to the Initial Purchasers (as defined herein) and were simultaneousy sold by the
Initial Purchasers in transactions exempt from registration under the Securities
Act of 1933, as amended (the "Securities Act"), in the United States to persons
reasonably believed to be "qualified institutional buyers" as defined in Rule
144A under the Securities Act, to certain qualified institutional buyers acting
on behalf of institutional "accredited investors" (as defined in Rule 501(a)(1),
(2), (3) or (7) under the Securities Act) and outside the United States to
non-U.S. persons in offshore transactions in reliance on Regulation S under the
Securities Act.
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The Company will not receive any of the proceeds from the sale of any
of the Notes or the Common Stock issuable upon conversion thereof offered by the
Selling Holders hereunder.
SEE "RISK FACTORS" ON PAGE 7 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SECURITIES
OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
AUGUST 16, 1996
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company can be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's
Regional Offices at Seven World Trade Center, Suite 1300, New York, New York
10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material also can be obtained from the Public
Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. The Commission maintains a Web site
that contains reports, proxy statements and other information regarding
registrants, like the Company, that file electronically with the Commission.
Such reports, proxy statements and other information may be found at the
Commission's Web site address http://www.sec.gov. The Common Stock is listed on
the New York Stock Exchange and, in connection with such listing, the Company
also files reports, proxy statements and other information with the NYSE. Such
reports, proxy statements and other information filed by the Company can be
inspected at the offices of the NYSE, 20 Broad Street, New York, NY 10005.
The Company has filed with the Commission a Registration Statement on
Form S-3 (together with any amendments or supplements thereto, the "Registration
Statement") under the Securities Act with respect to the Securities to be
offered and sold by means of this Prospectus. This Prospectus omits certain of
the information contained in the Registration Statement and the exhibits and
schedules thereto in accordance with the rules and regulations of the
Commission. For further information regarding the Company and the Securities
offered hereby, reference is made to the Registration Statement and the exhibits
and schedules filed therewith, which may be inspected without charge at the
offices of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and
copies of which may be obtained from the Commission at prescribed rates.
Statements contained in this Prospectus as to the contents of any contract or
other document referred to herein are not necessarily complete, and in each
instance reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement, each such statement being qualified
in all respects by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents heretofore filed with the Commission by the
Company are incorporated by reference in their entirety in this Prospectus:
1. The Company's Annual Report on Form 10-K for the year ended
December 31, 1995.
2. The Company's Quarterly Reports on Form 10-Q for the quarters
ended March 31 and June 30, 1996.
3. The Company's Current Reports on Form 8-K dated June 14,
1995, as amended August 4, 1995, January 26, 1996, February
23, 1996, February 27, 1996, March 20, 1996, April 17, 1996,
June 4, 1996, June 28, 1996 and August 2, 1996.
4. The Company's Proxy Statement for the Annual Meeting held on
May 14, 1996.
5. The Company's Form 8-A Registration Statement dated August 2,
1996.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14
or 15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the offering of the Securities shall be deemed to be incorporated
by reference in this Prospectus and to be a part of this Prospectus from the
date of filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference in this Prospectus shall
be deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference in this
Prospectus modifies or supersedes such statement. Any statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
The Company hereby undertakes to provide without charge to each person
to whom this Prospectus is delivered, upon the request of such person, a copy of
any or all of the documents referred to above, other than exhibits to such
documents unless such exhibits are specifically incorporated by reference herein
or any incorporated document. Requests should be directed to Healthsource, Inc.,
Two College Park Drive, Hooksett, New Hampshire 03106, attention: Chief
Financial Officer, telephone (603) 268-7000.
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SUMMARY
The following summary does not purport to be complete and is qualified
in its entirety by the more detailed information and consolidated financial
statements and related notes included in and incorporated by reference in this
Prospectus. In addition to other information in this Prospectus, the factors
set forth under "Risk Factors" below should be considered carefully in
evaluating an investment in the Securities offered hereby.
THE OFFERING
Issuer........................... Healthsource, Inc.
Securities Offered............... $247,250,000 of 5% Convertible Subordinated
Notes Due 2003 issued under an indenture
(the "Indenture") between Healthsource and
The Bank of New York, as trustee (the
"Trustee"), and Common Stock issuable upon
conversion thereof.
Interest Payment Dates........... March 1 and September 1 of each year. The
Notes bear interest from March 6, 1996.
Maturity......................... March 1, 2003
Conversion Price................. Convertible into Common Stock, par value
$.10 per share, of the Company at $46.965
per share, subject to adjustment as set
forth herein.
Redemption....................... The Notes are redeemable, in whole or in
part, at the option of the Company, at any
time on or after March 1, 1999, at the
declining redemption prices set forth herein
plus accrued interest.
Change of Control................ In the event of a Change of Control (as
defined herein), Holders of the Notes will
have the right to require that the Company
repurchase the Notes in whole or in part at
a redemption price of 101% of the principal
amount thereof plus accrued interest. See
"Description of the Notes -- Change of
Control."
Ranking......................... The Notes are general unsecured obligations
of the Company and are subordinated in right
of payment to all existing and future Senior
Indebtedness (as defined herein) of the
Company. As of June 30, 1996, the Company
had approximately $15 million of Senior
Indebtedness outstanding. In addition,
because the Company's operations are
conducted primarily through its operating
subsidiaries, including regulated insurance
companies and HMOs, claims of holders of
indebtedness of such subsidiaries, as well
as claims of regulators and creditors of
such subsidiaries, have priority with
respect to the assets and earnings of such
subsidiaries over the claims of creditors of
the Company, including Holders of the Notes.
As of June 30, 1996, the aggregate
liabilities of such subsidiaries were
approximately $312 million. The Indenture
does not limit the amount of additional
indebtedness which the Company can create,
incur, assume or guarantee, nor does the
Indenture limit the amount of indebtedness
which any subsidiary can create, incur,
assume or guarantee. See "Description of the
Notes -- Subordination."
Use of Proceeds................. The Company will not receive any of the
proceeds from the sale of any of the Notes
or the Common Stock issuable upon conversion
thereof.
Trading......................... The Notes have been designated for trading
in the PORTAL market and listed for trading
on the NYSE under the symbol "HSO3." The
Common Stock issuable upon conversion of the
Notes has been listed for trading on the
NYSE. The Common Stock is traded on the NYSE
under the symbol "HS." On August 14, 1996,
the last reported sale price of the Common
Stock on the NYSE was $13 3/8 per share.
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THE COMPANY
Healthsource, a New Hampshire corporation established in 1985, is a
geographically diversified provider of a broad range of managed healthcare
services. Healthsource is a leading managed care provider with 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 of Chattanooga, Tennessee ("Provident") 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 Massachusetts 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
approximately 3.5 million members. Healthsource also offers point of service
("POS") plans, preferred provider organization ("PPO") 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 principal executive offices are located at Two
College Park Drive, Hooksett, New Hampshire 03106; telephone number (603)
268-7000.
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 to seek 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.
RECENT DEVELOPMENTS
On August 5, 1996, the Company announced the mutual termination of
negotiations with Advocate Health Care, an eight-hospital system, to acquire
Health Direct, Inc., a 25,000 member HMO operating in the Chicago area. The
Company had announced in April 1996 the signing of a letter of intent to
acquire Health Direct and to enter into a long-term provider agreement with
Advocate Health Care for an aggregate consideration of $27 million.
On June 26, 1996, the Company announced that it had terminated its
previously-reported agreement to acquire substantially all of the assets of
PACC Health Plans and PACC HMO (together "PACC"), a 113,000 member HMO and
managed care company based in the Portland, Oregon area. In January 1996, the
Company signed an agreement to purchase PACC for an estimated cash purchase
price of $80 million. Completion of the acquisition was subject to certain
closing conditions which were not met. No further discussions with respect to
such acquisition are expected.
On May 31, 1996, the Company entered into an asset purchase agreement
with Chubb Life Insurance Company of America ("Chubb Life") and various of its
affiliates to acquire the remaining 85% interest in ChubbHealth, Inc.
("ChubbHealth"), a 45,000 member HMO operating in the New York City and
northern New Jersey areas. The Company will acquire the stock of ChubbHealth
for an estimated purchase price of $25 million, subject to adjustments. As part
of the transition process, the Company will continue to manage ChubbHealth's
operations and to plan the conversion to Healthsource systems. The Company has
also agreed to provide certain guaranties relating to ChubbHealth's operating
results during the transition period. Chubb Life and various of its affiliates
have agreed to continue to write POS products for the benefit of ChubbHealth
and to provide certain MIS and other services to ChubbHealth during the
transition period. The transaction remains subject to the receipt of
regulatory approvals and there can be no assurance as to when such approvals
will be obtained.
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Effective February 1, 1996, the Company acquired substantially all of
the HMO assets of CMHC, a not-for-profit HMO with 83,400 members located in
Worcester, Massachusetts. 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 "CMHC Transaction"). The Company
continues to operate this HMO under the name Healthsource CMHC from the
headquarters in Worcester and provides additional support and integration from
the Company's corporate staff and HMO in New Hampshire.
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RISK FACTORS
Prospective purchasers of the Securities should carefully consider the
following factors, in addition to other information contained or incorporated by
reference in this Prospectus.
Control and Predictability of Healthcare Costs. The Company's
profitability depends in large part on predicting and maintaining effective
control of the healthcare costs of its HMOs. The future profitability of the
Company's HMOs is dependent upon controlling future healthcare costs in part
through appropriate benefit design, utilization control and negotiation of
favorable provider contracts, including global capitation arrangements with
hospitals which generally link healthcare costs for assigned members to
the premiums received for such members. The Company may be unable to predict
accurately or to control healthcare costs because of many factors, including the
inherent unpredictability of rates of utilization of services in any given
period and the volatility of such use particularly in quarterly periods; major
epidemics; undetected increases in costs of units of services (in some cases
implemented by providers without prior notice); changes in risk profile of a
rapidly increasing membership due to pre-existing medical conditions, changing
demographics and other factors; and increased utilization driven by changes in
physician practice patterns and new techniques (e.g., use of bone marrow
transplants for an increasing number of diagnostic categories). There can be no
assurance that the Company will be successful in predicting or mitigating the
effect of any of these factors nor that its global capitation agreements will
be able to effectively buffer these factors or costs for assigned members.
Competition and Premium Pricing. 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. The Company competes in all of its
markets with Blue Cross plans, indemnity insurers, HMOs, TPAs, PPOs and other
managed care companies. 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.
The cost of providing benefits is in many instances the controlling
factor in obtaining and retaining employer groups, and in certain markets some
competitors are underpricing the Company's products. 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 6.0% decline in average
premium yield per member during the first six months of 1996. The Company
expects the difficult premium pricing environment to continue and the Company's
attempts to reverse the 1996 premium decline may not be successful.
Accounting; MIS and Network Disruption Issues. Reserves for incurred
but not reported claims ("IBNR") are a large component of the Company's medical
claims payable reserve and are based upon an estimation of future claims using
traditional actuarial techniques heavily influenced by historical claims
experience; rapid growth and changing risk profiles could render the Company's
IBNR estimates inaccurate and there can be no assurance as to the ultimate
accuracy of such estimates or that subsequent adjustments will not cause
fluctuations in the Company's operating results. The ability to predict IBNR,
control costs in general and to manage increasingly complicated global
capitation arrangements depends upon the use of sophisticated customized MIS
systems; there can be no assurance that such systems can be developed quickly
enough to effectively manage the increasing complexity of the Company's
contractual arrangements nor that facility or equipment problems will not
disrupt the Company's ability to effectively provide such MIS support. With the
increasing complexity of contractual arrangements comes the potential for
disagreements with major hospital providers over the reimbursement under such
contracts, which disagreements (if not resolved) could disrupt relations with
affiliated physician providers and could potentially affect the perception of
the Company's plans in the affected markets.
Acquisitions and New Products. A significant part of the Company's
business strategy is to diversify into new geographic markets through
acquisitions or start-up plans and to develop new products. Identifying and
pursuing acquisition opportunities, integrating acquired businesses and managing
growth requires a significant
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amount of management time and skill. The Company may be unable to (i) negotiate
acceptable terms with suitable acquisition candidates or ensure that, if
negotiated, such acquisitions will be either approved by all relevant regulatory
authorities or concluded, (ii) assimilate such acquired companies free from
hidden risks undetected at the time of closing or (iii) manage future growth
effectively. Until start-up HMOs reach a critical mass of membership, they
generally produce operating losses (despite capitated provider contracts) and
failure to generate sufficient membership in start-up markets could adversely
affect operating results. The Company is expanding its product offerings, most
notably by developing and seeking a license for Medicare risk products in most
of its markets. The Company will expend approximately $5 million in 1996 in
developing such Medicare products which will still require a substantial
marketing program before the Company generates revenues from such products in
any market; the failure to achieve Medicare membership quickly in various
markets may further impact operating results as such development expenses are
relatively fixed. There can be no assurance that the Company will successfully
mitigate any of the foregoing risks.
Impact of Healthcare Reform. 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 as well as mandated coverages, capitation
limits, underwriting constraints and other measures that could affect the
Company's business. 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; for example the imposition of a
single-payor system in any state could potentially eliminate the Company's
business in that state. See "Business - Governmental Regulation" in the
Company's Form 10-K.
Governmental Regulation. The Company's HMOs, insurance companies and
certain of its other subsidiaries are licensed by and subject to periodic
examination and extensive regulation by the states in which they operate and by
the federal government. Such state and federal statutes and regulations are
subject to change and such changes could adversely impact the Company's
operations in the future. There can be no assurance that the Company will be
able to obtain any regulatory approvals required to enter new markets or to
offer new products. See "Business - Governmental Regulation" in the Company's
Form 10-K.
Subordination of Notes; Restricted Subsidiaries. The indebtedness
evidenced by the Notes is subordinate to the prior payment in full of all Senior
Indebtedness (as defined herein). As of June 30, 1996, the Company had
approximately $15 million of Senior Indebtedness outstanding. In addition,
because the Company's operations are conducted primarily through its operating
subsidiaries, including regulated insurance companies and HMOs, claims of
holders of indebtedness of such subsidiaries, as well as claims of regulators
and creditors of such subsidiaries, have priority with respect to the assets and
earnings of such subsidiaries over the claims of creditors of the Company,
including Holders of the Notes. As of June 30, 1996, the aggregate liabilities
of such subsidiaries were approximately $312 million. The Indenture does not
limit the amount of additional indebtedness, including Senior Indebtedness,
which the Company or any of its subsidiaries can create, incur, assume or
guarantee. During the continuance beyond any applicable grace period of any
default in the payment of principal, premium, interest or any other payment due
on the Senior Indebtedness, no payment of principal or interest on the Notes may
be made by the Company. In addition, upon any distribution of assets of the
Company upon any dissolution, winding up, liquidation or reorganization, the
payment of the principal and interest on the Notes is subordinated to the extent
provided in the Indenture to the prior payment in full of all Senior
Indebtedness and structurally subordinated to claims of regulators and creditors
of each HMO and insurance subsidiary. By reason of these subordinations, in the
event of the Company's dissolution, holders of Senior Indebtedness may receive
more, ratably, and Holders of the Notes may receive less, ratably, than the
other creditors of the Company. The Company's cash flow and ability to service
debt, including the Notes, are heavily dependent upon the earnings of its
subsidiaries and the distribution of those earnings to, or upon payments by
those subsidiaries to, the Company. The subsidiaries are in many cases regulated
HMO and insurance companies and the ability to make such distributions or
payments may be substantially limited by, or subject to continuing approval of,
the respective state insurance departments. See "Description of the Notes --
Subordination."
Repurchase of Notes at the Option of Holders Upon a Change of Control;
Availability of Funds. In the event of a Change of Control (as defined herein),
each Holder will have the option to require the Company to
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repurchase all or any part of the Holder's Notes for a purchase price equal to
101% of the principal amount thereof, plus accrued interest to the date of
purchase. If a Change of Control were to occur, there can be no assurance that
the Company would have sufficient funds to pay the Change of Control purchase
price for all Notes tendered by the Holders thereof. See "Subordination of
Notes; Restricted Subsidiaries" above. The Company's ability to pay the Change
of Control purchase price is, and may in the future be, limited by the terms of
the Company's bank credit facility or other agreements relating to borrowings
which constitute Senior Indebtedness.
Absence of Public Market; Volatility of Prices. The Notes have
been designated for trading in the PORTAL market and listed for trading on the
NYSE; and the Common Stock is traded on the NYSE. There can be no assurance that
an active trading market will develop for the Notes and, as a result, there can
be no assurance as to the liquidity of investments in the Notes. Also, there can
be no assurance as to the price Holders may realize upon the sale of the Notes
and the Common Stock into which the Notes are convertible. These prices are
determined in the marketplace and may be influenced by many factors, including
the depth and liquidity of the market for the Notes and Common Stock, the market
price of the Common Stock, interest rates, investor perception of the Company,
general economic and market conditions, fluctuations in quarterly earnings,
general trends in the healthcare market, and by regulatory developments
especially at the federal level. Accordingly, the market price of the Notes and
Common Stock has been and in the future may be highly volatile.
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SELECTED PRO FORMA CONSOLIDATED FINANCIAL DATA
(UNAUDITED)
In June 1996, the Company announced that it had signed an asset purchase
agreement with Chubb Life to acquire the remaining 85% interest in ChubbHealth
(the "Chubb Transaction"). The Company will acquire the stock of ChubbHealth
for an estimated purchase price of $25 million, subject to adjustments. The
agreement is subject to regulatory approvals.
In February 1996, the Company acquired substantially all of the HMO
assets of CMHC for approximately $46.5 million cash, subject to post-closing
purchase price adjustments. The purchase price was funded with borrowings
under the Company's revolving credit facility with Chase Manhattan Bank as
administrative agent.
Effective as of May 1, 1995, the Company acquired the medical services
operations of Provident for $231 million in cash and newly issued preferred
stock. The Company has formed two subsidiaries, Healthsource Provident
Administrators, Inc. and Healthsource Provident Insurance Company to operate the
acquired business.
The following pro forma financial information has been prepared giving
effect to the Provident Transaction, the CMHC Transaction and the pending Chubb
Transaction as if each acquisition had taken place as of January 1, 1995 for
the pro forma consolidated income statements and as if the pending Chubb
Transaction had taken place as of June 30, 1996 for the pro forma condensed
consolidated balance sheet. All three acquisitions have been accounted for as
purchases. The carrying values of assets and liabilities for each entity have
been estimated to approximate fair market value. Accordingly, no pro forma
adjustments to these amounts were made to reflect the allocation and amount of
the purchase price, the determination of which will be based upon final
appraisals and valuations of all transferred assets and liabilities. Any
adjustments to the allocation of the purchase price have been or will be made
within one year from the acquisition date and are not expected to be material to
the pro forma financial information taken as a whole.
<TABLE>
The pro forma financial information is not necessarily indicative of the
results of operations or the financial position which would have been attained
had the acquisitions been consummated at either of the foregoing dates or which
may be attained in the future. The pro forma financial information should be
read in conjunction with the historical consolidated financial statements of
Healthsource.
HEALTHSOURCE, INC.
Pro Forma Condensed Consolidated Balance Sheet (unaudited)
June 30, 1996
(all amounts in thousands)
<CAPTION>
Historical Pro Forma
------------ 1 Pro Forma Financial
Healthsource ChubbHealth Adjustments Statements
------------ ----------- ----------- ----------
<S> <C> <C> <C> <C>
Cash & cash equivalents $ 99,395 $ 3,375 $ 102,770
Marketable securities 26,475 0 26,475
Premiums and administrative fees
receivable 113,380 1,499 114,879
Restricted investments 116,711 116,711
Other current assets 65,551 134 65,685
-------- ------- ----------
Total current assets 421,512 5,008 426,520
-------- ------- ----------
Long term marketable securities 118,813 7,026 125,839
Property & leasehold improvements, net 122,962 699 123,661
Restricted investments 8,797 2,800 11,597
Intangible assets, net 306,666 23,020 (A) 329,686
Other assets 16,957 1,869 (2,250)(C) 16,576
-------- ------- ------- ----------
Total assets 995,707 17,402 20,770 1,033,879
======== ======= ======= ==========
Medical claims payable $172,415 $ 4,099 $ 176,514
Accounts payable & accrued expenses 129,290 8,702 137,992
Deferred revenue 16,549 1,358 17,907
Other current liabilities 716 32 748
-------- ------- ----------
Total current liabilities 318,970 14,191 333,161
-------- ------- ----------
Revolving note payable 15,000 25,750 (B) 40,750
Convertible subordinated notes 247,250 247,250
Other liabilities 5,826 0 5,826
-------- ------- ----------
Total liabilities 587,046 14,191 626,987
-------- ------- ----------
Common stock 6,377 1,000 (1,000) (C) 6,377
Additional paid in capital 224,724 16,500 (16,500) (C) 224,724
Retained earnings 180,479 (14,289) 12,520 (C) 178,710
Unrealized loss on marketable securities (2,919) 0 (C) (2,919)
-------- ------- ----------
Total equity 408,661 3,211 406,892
-------- ------- ------- ----------
Total liabilities & equity 995,707 17,402 20,770 1,033,879
======== ======= ======= ==========
<FN>
1
INFORMATION DERIVED FROM INTERNAL FINANCIAL STATEMENTS. CHUBBHEALTH IS INCLUDED WITHIN A LARGE CONSOLIDATED
GROUP. A SIGNIFICANT PORTION OF ITS OPERATING EXPENSES ARE ALLOCATED FROM THE PARENT. THESE FINANCIAL
STATEMENTS ARE NOT NECESSARILY INDICATIVE OF A STAND ALONE ORGANIZATION.
</TABLE>
SEE NOTES TO THE PROFORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) ON PAGE 12.
10
<PAGE> 13
HEALTHSOURCE, INC.
<TABLE>
Pro Forma Condensed Consolidated Statement of Operations (unaudited)
For the Year to Date Period Ended June 30, 1996
(all amounts in thousands, except per share data)
<CAPTION>
Historical Pro Forma Pro Forma
---------- ProForma Financial 1 Pro Forma Financial
Healthsource CMHC Adjustments Statements ChubbHealth Adjustments Statements
------------ ------- ----------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Medical premiums $730,806 $10,423 $741,229 $27,107 $768,336
Administrative and managed
care fees 118,406 0 118,406 118,406
-------- ------- -------- ------- --------
Total Revenue 849,212 10,423 859,635 27,107 886,742
Expenses:
Cost of medical premiums 590,935 10,638 (750)(D) 600,823 22,152 622,975
Selling, general &
administrative 212,790 1,721 214,511 8,441 222,952
Depreciation & amortization 17,906 0 111 (D) 18,017 678 384 (A) 19,079
-------- ------- -------- ------- --------
Total Expenses 821,631 12,359 833,351 31,271 865,006
Operating Income 27,581 (1,936) 26,284 (4,164) 21,736
Interest & Other Income 12,032 127 12,159 380 12,539
Interest expense (5,854) (241)(D) (6,095) (773)(B) (6,868)
-------- ------- -------- ------- --------
Income before taxes 33,759 (1,809) 32,348 (3,784) 27,407
Provision for taxes (11,699) 0 564 (D) (11,135) 1,316 462 (E) (9,357)
-------- ------- -------- ------- --------
Net Income $ 22,060 $(1,809) $ 21,213 $(2,468) $ 18,050
-------- ------- -------- ------- --------
Preferred dividends (1,128) 0 (1,128) 0 (1,128)
-------- ------- -------- ------- --------
Net income applicable to
common shareholders $ 20,932 $(1,809) $ 20,085 $(2,468) $ 16,922
======== ======= ======== ======= ========
Shares used to compute
Net Income per share: 65,953 65,953
Net income per share: $ 0.32 $ 0.26
<FN>
1
INFORMATION DERIVED FROM INTERNAL FINANCIAL STATEMENTS. CHUBBHEALTH IS INCLUDED WITHIN A LARGE CONSOLIDATED GROUP. A SIGNIFICANT
PORTION OF ITS OPERATING EXPENSES ARE ALLOCATED FROM THE PARENT. THE FINANCIAL STATEMENTS ARE NOT NECESSARILY INDICATIVE OF A
STAND ALONE ORGANIZATION.
</TABLE>
SEE NOTES TO THE PROFORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) ON PAGE 12.
11
<PAGE> 14
HEALTHSOURCE, INC.
NOTES TO THE PROFORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
(A) - Represents the recording of the excess of purchase price over the
fair value of the net assets acquired along with the related amortization for
the acquisition:
<CAPTION>
ChubbHealth
-----------
<S> <C>
Total purchase price: 25,000
Estimated acquisition costs: 750
------
25,750
Net assets acquired 2,730
------
23,020
Estimated useful life: 30
------
Annual amortization: 767
Pro-rated for year to date 384
</TABLE>
<TABLE>
(B) - Represents the amount borrowed in conjunction with the purchase and the
related interest expense calculated as follows:
<CAPTION>
ChubbHealth
-----------
<S> <C>
Amount borrowed: 25,750
Interest rate: 6.00%
------
Annual interest expense 1,545
Pro-rated for year to date 773
</TABLE>
(C) - Represents the elimination of existing ChubbHealth
equity in connection with the transaction.
(D) - Represents pro-forma adjustments for the one month during the first
quarter that Healthsource did not own CMHC.
<TABLE>
(E) - Represents the tax impact of adjustments calculated as follows:
<CAPTION>
ChubbHealth
-----------
<S> <C>
Adjustment A 384
Adjustment B 773
-----
1,157
Effective tax rate: 40%
-----
462
</TABLE>
12
<PAGE> 15
HEALTHSOURCE, INC.
<TABLE>
Pro Forma Condensed Consolidated Statement of Operations (unaudited)
For the Year Ended December 31, 1995
(all amounts in thousands, except per share data)
<CAPTION>
Historical
----------- Proforma
Healthsource Provident Adjustments
------------ --------- -----------
<S> <C> <C> <C>
Medical premiums $ 996,464 $ 94,768
Administrative and managed
care fees 170,233 48,887
---------- --------
Total Revenue 1,166,697 143,655
Expenses:
Cost of medical premiums 771,284 76,519
Selling, general &
administrative 299,666 57,052 (1,729)(A)
Depreciation & amortization 24,129 11,305 1,896 (A)
(3,717)(A)
---------- --------
Total Expenses 1,095,079 144,876
Operating Income 71,618 (1,221)
(880)(A)
Interest & Other Income 20,823 4,897 (700)(A)
Interest expense (5,392) (2,266)(A)
---------- --------
Income before taxes 87,049 3,676
Provision for taxes (30,778) (1,170) 48 (A)
---------- --------
Net Income $ 56,271 $ 2,506
---------- --------
Preferred dividends (4,167) 0 (2,083)(A)
---------- --------
Net income applicable to
common shareholders $ 52,104 $ 2,506
========== ========
Shares used to compute
Net Income per share: 64,195
Net income per share: $ 0.81
</TABLE>
<TABLE>
<CAPTION>
Proforma
Financial Pro Forma
Statements CMHC Adjustments
---------- ---- -----------
<S> <C> <C> <C>
Medical premiums $1,091,232 $129,389
Administrative and managed
care fees 219,120 0
---------- --------
Total Revenue 1,310,352 129,389
Expenses:
Cost of medical premiums 847,803 112,056 3,200 (B)
Selling, general &
administrative 354,989 16,384 (403)(C)
Depreciation & amortization 33,613 1,682 1,333 (D)
---------- --------
Total Expenses 1,236,405 130,122
Operating Income 73,947 (733)
Interest & Other Income 24,140 2,223
Interest expense (7,658) (2,898)(E)
---------- --------
Income before taxes 90,429 1,490
Provision for taxes (31,900) 0 2,213 (F)
---------- --------
Net Income $ 58,529 $ 1,490
---------- --------
Preferred dividends (6,250) 0
---------- --------
Net income applicable to
common shareholders $ 52,279 $ 1,490
========== ========
Shares used to compute
Net Income per share:
Net income per share:
</TABLE>
<TABLE>
Pro Forma Pro Forma
Financial 1 Pro Forma Financial
Statements ChubbHealth Adjustments Statements
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Medical premiums $1,220,621 $35,788 $1,256,409
Administrative and managed
care fees 219,120 219,120
---------- ------- ----------
Total Revenue 1,439,741 35,788 1,475,529
Expenses:
Cost of medical premiums 963,059 29,572 992,631
Selling, general &
administrative 370,970 14,942 385,912
Depreciation & amortization 36,628 2,098 767 (D) 39,493
---------- ------- ----------
Total Expenses 1,370,657 46,612 1,418,036
Operating Income 69,084 (10,824) 57,493
Interest & Other Income 26,363 942 27,305
Interest expense (10,556) (1,545)(E) (12,101)
---------- ------- ----------
Income before taxes 84,891 (9,882) 72,697
Provision for taxes (29,687) 3,447 925 (F) (25,315)
---------- ------- ----------
Net Income $ 55,204 $(6,435) $ 47,382
---------- ------- ----------
Preferred dividends (6,250) 0 (6,250)
---------- ------- ----------
Net income applicable to
common shareholders $ 48,954 $(6,435) $ 41,132
========== ======= ==========
Shares used to compute
Net Income per share: 64,195
Net income per share: $ 0.64
<FN>
1
INFORMATION DERIVED FROM INTERNAL FINANCIAL STATEMENTS. CHUBBHEALTH IS INCLUDED WITHIN A
LARGE CONSOLIDATED GROUP. A SIGNIFICANT PORTION OF ITS OPERATING EXPENSES ARE ALLOCATED
FROM THE PARENT. THESE FINANCIAL STATEMENTS ARE NOT NECESSARILY INDICATIVE OF A STAND ALONE
ORGANIZATION.
</TABLE>
SEE NOTES TO THE PROFORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) ON PAGE 14.
13
<PAGE> 16
HEALTHSOURCE, INC.
NOTES TO THE PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(A)-Effective May 1, 1995, Healthsource acquired the group health, HMO and
third party administration business of Provident Life and Accident Insurance
Company of America, Inc. In connection with the agreement, Healthsource paid
$131 million in cash and issued $100 million in preferred stock. Proforma
adjustments include savings expected from economies of scale ($1,729);
amortization of goodwill created in the transaction ($1,896); interest expense
associated with debt incurred as a result of the transaction ($2,266);
elimination of amortization expense associated with goodwill eliminated in the
transaction ($3,717); lost interest ($880); the incremental reduction in
interest income due to Provident's historical return being higher than
Healthsource's expected return ($700); and the related tax impact of these
adjustments. Additionally, an adjustment of $2,083 was made to reflect the
preferred stock dividend for the entire year.
(B)-Represents the payment of certain physician withholds in accordance
with the terms of the purchase and sale agreement which was not reflected in
the CMHC financial statements.
(C)-Represents the elimination of non-recurring acquisition related expenses.
<TABLE>
(D)-Represents the recording of the excess of purchase price over the fair
value of the net assets acquired along with the related amortization for each
acquisition:
<CAPTION>
CMHC CHUBBHEALTH
------ -----------
<S> <C> <C>
Total purchase price: 46,800 25,000
Estimated acquisition costs: 1,500 750
------ ------
48,300 25,750
Net assets acquired: 8,320 2,730
------ ------
39,980 23,020
Estimated useful life: 30 30
------ ------
Annual amortization: 1,333 767
</TABLE>
<TABLE>
(E)-Represents the amount borrowed in conjunction with the purchase and the
related interest expense calculated as follows for each acquisition:
<CAPTION>
CMHC CHUBBHEALTH
------ -----------
<S> <C> <C>
Amount borrowed: 48,300 25,750
Interest rate: 6.00% 6.00%
------ ------
Annual interest expense 2,898 1,545
</TABLE>
<TABLE>
(F)-Represents the tax impact of adjustments calculated as follows for each
acquisition:
<CAPTION>
CMHC CHUBBHEALTH
------ -----------
<S> <C> <C>
Adjustment B 3,200
Adjustment C (409)
Adjustment D 1,333 767
Adjustment E 2,898 1,545
CMHC income (1,490)
------ -----
5,532 2,312
Effective tax rate: 40% 40%
------ -----
2,213 925
</TABLE>
14
<PAGE> 17
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the Company's ratio of earnings to fixed
charges on a historical basis in each of the five years in the period ended
December 31, 1995, and for the six month periods ended June 30, 1996 and 1995.
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
------------------------------------------------ ----------------
1995 1994 1993 1992 1991 1996 1995
------------------------------------------------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges 7.8 -- -- -- -- 5.3 13.1
</TABLE>
The following table sets forth the Company's ratio of earnings to fixed
charges on a pro forma basis for the year ended December 31, 1995 and the
six month period ended June 30, 1996:
<TABLE>
<CAPTION>
December 31, 1995 June 30, 1996
----------------- -------------
<S> <C> <C>
Ratio of earnings to fixed charges 3.9 4.0
</TABLE>
For purposes of computing the ratio of earnings to fixed charges,
earnings include pre-tax income and fixed charges include the total of interest
expense and preferred stock dividends. For periods prior to June 30, 1995, the
Company had no fixed charges.
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Notes or
the Common Stock issuable upon conversion thereof by the Selling Holders.
DESCRIPTION OF THE NOTES
The Notes were issued under an Indenture dated as of March 6, 1996, as
amended by the First Supplemental Indenture dated as of June 3, 1996 (the
"Indenture"), between the Company and The Bank of New York, as trustee (the
"Trustee"). Copies of the Indenture and the First Supplemental Indenture have
been filed with the Commission as an exhibit to the Registration Statement. The
following summaries of certain provisions of the Notes and the Indenture do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to, the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act"), and all the provisions of the Notes and the Indenture,
including the definitions therein of certain terms which are not otherwise
defined in this Prospectus. Wherever particular provisions or defined terms of
the Indenture (or of the form of Notes which is a part thereof) are referred to,
such provisions or defined terms are incorporated herein by reference. As used
in this "Description of the Notes," the "Company" refers to Healthsource, Inc.
and does not, unless the context otherwise indicates, include its subsidiaries.
15
<PAGE> 18
GENERAL
The Notes are general unsecured subordinated obligations of the Company
and are convertible into Common Stock as described below under the subheading
"Conversion of Notes." The Notes are limited to $247,250,000 aggregate principal
amount, have been issued in fully registered form only in denominations of
$1,000 in principal amount or any multiple thereof, and will mature on March 1,
2003, unless earlier redeemed at the option of the Company or at the option of
the Holder upon a Change of Control.
The Indenture does not contain any financial covenants or any
restrictions on the payment of dividends, the repurchase of securities of the
Company or the incurrence of debt by the Company or any of its subsidiaries.
The Notes bear interest from March 6, 1996 at the annual rate set forth
on the cover page hereof, payable semi-annually on March 1 and September 1,
commencing on September 1, 1996, to Holders of record at the close of business
on the preceding February 15 and August 15, respectively. Interest is computed
on the basis of a 360-day year composed of twelve 30-day months.
Unless other arrangements are made, interest will be paid by check
mailed to Holders entitled thereto. Principal will be payable, and the Notes may
be presented for conversion, registration of transfer and exchange, without
service charge, at the office of the Trustee in New York, New York. Reference is
made to the information set forth below under the subheading "Form, Denomination
and Registration" for information as to Notes held by "qualified institutional
buyers" or by Holders outside of the United States in reliance upon Regulation
S.
The Notes are issued in fully registered form, without coupons, in
denominations of $1,000 in principal amount and integral multiples thereof.
CONVERSION OF NOTES
The Holders of Notes are entitled at any time through the close
of business on March 1, 2003, subject to prior redemption, to convert any Notes
or portions thereof (in denominations of $1,000 in principal amount or multiples
thereof) into Common Stock at a conversion price of $46.965, subject to
adjustment as described below; provided that in the case of Notes called for
redemption, conversion rights will expire at the close of business on the last
Trading Day prior to the date fixed for redemption, unless the Company defaults
in payment of the redemption price. A Note (or portion thereof) in respect of
which a Holder is exercising its option to require redemption upon a Change of
Control may be converted only if such Holder withdraws its election to exercise
such redemption option in accordance with the terms of the Indenture. Except as
described below, no adjustment will be made on conversion of any Notes for
interest accrued thereon or for dividends paid on any Common Stock issued. If
Notes not called for redemption are converted after the close of business on a
record date for the payment of interest and prior to the opening of business on
the next succeeding interest payment date, such Notes must be accompanied by
funds equal to the interest payable on such succeeding interest payment date on
the principal amount so converted. The interest payment with respect to a Note
called for redemption on a date during the period from the close of business on
or after any record date to the opening of business on the business day
following the corresponding payment date will be payable on the corresponding
interest payment date to the registered Holder at the close of business on that
record date (notwithstanding the conversion of such Note before the
corresponding interest payment date) and a Holder of Notes who elects to convert
need not include funds equal to the interest paid. The Company is not required
to issue fractional shares of Common Stock upon conversion of Notes and, in lieu
thereof, will pay a cash adjustment based upon the closing price of the Common
Stock on the last business day prior to the date of conversion.
The conversion price is subject to adjustment (under formulae set forth
in the Indenture) upon the occurrence of certain events, including: (i) the
issuance of Common Stock as a dividend or distribution on the outstanding Common
Stock, (ii) the issuance to all holders of Common Stock of certain rights or
warrants to purchase Common Stock at less than the current market price, (iii)
certain subdivisions, combinations and reclassifications of Common Stock, (iv)
distributions to all holders of Common Stock of capital stock of the
16
<PAGE> 19
Company (other than Common Stock) or evidences of indebtedness of the Company or
assets (including securities, but excluding those dividends, rights, warrants
and distributions referred to above and dividends and distributions in
connection with the liquidation, dissolution or winding up of the Company and
dividends and distributions paid exclusively in cash), (v) distributions
consisting exclusively of cash (excluding any cash portion of distributions
referred to in clause (iv) or in connection with a consolidation, merger or sale
of assets of the Company as referred to in clause (ii) of the second paragraph
below) to all holders of Common Stock in an aggregate amount that, together with
(x) all other such all-cash distributions made within the preceding 12 months in
respect of which no adjustment has been made and (y) any cash and the fair
market value of other consideration payable in respect of any tender offers by
the Company or any of its subsidiaries for Common Stock concluded within the
preceding 12 months in respect of which no adjustment has been made, exceeds 20%
of the Company's market capitalization (being the product of the then current
market price of the Common Stock times the number of shares of Common Stock then
outstanding) on the record date for such distribution and (vi) the purchase of
Common Stock pursuant to a tender offer made by the Company or any of its
subsidiaries which involves an aggregate consideration that, together with (x)
any cash and the fair market value of any other consideration payable in any
other tender offer by the Company or any of its subsidiaries for Common Stock
expiring within the 12 months preceding such tender offer in respect of which no
adjustment has been made and (y) the aggregate amount of any such all-cash
distributions referred to in clause (v) above to all holders of Common Stock
within the 12 months preceding the expiration of such tender offer in respect of
which no adjustments have been made, exceeds 20% of the Company's market
capitalization on the expiration of such tender offer. No adjustment of the
conversion price will be made for shares issued pursuant to a plan for
reinvestment of dividends or interest.
Except as stated above, the conversion price will not be adjusted for
the issuance of Common Stock or any securities convertible into or exchangeable
for Common Stock or carrying the right to purchase any of the foregoing. No
adjustment in the conversion price will be required unless such adjustment would
require a change of at least 1% in the conversion price then in effect; provided
that any adjustment that would otherwise be required to be made shall be carried
forward and taken into account in any subsequent adjustment.
In the case of (i) any reclassification or change of the Common Stock
(other than changes in par value or from par value to no par value or resulting
from a subdivision or a combination) or (ii) a consolidation or merger involving
the Company or a sale or conveyance to another corporation of the property and
assets of the Company as an entirety or substantially as an entirety, in each
case as a result of which holders of Common Stock shall be entitled to receive
stock, other securities, other property or assets (including cash) with respect
to or in exchange for such Common Stock, the Holders of the Notes then
outstanding will be entitled thereafter to convert such Notes into the kind and
amount of shares of stock, other securities or other property or assets which
they would have owned or been entitled to receive upon such reclassification,
change, consolidation, merger, sale or conveyance had such Notes been converted
into Common Stock immediately prior to such reclassification, change,
consolidation, merger, sale or conveyance assuming that a Holder of Notes would
not have exercised any rights of election as to the stock, other securities or
other property or assets receivable in connection therewith.
In the event of a taxable distribution to holders of Common Stock (or
other transaction) which results in any adjustment of the conversion price, the
Holders of Notes may, in certain circumstances, be deemed to have received a
distribution subject to the United States income tax as a dividend; in certain
other circumstances, the absence of such an adjustment may result in a taxable
dividend to the holders of Common Stock. See "Certain Tax Considerations - U.S.
Holders - Adjustments to Conversion Price."
The Company from time to time may to the extent permitted by law reduce
the conversion price by any amount for any period of at least 20 days, in which
case the Company shall give at least 15 days' notice of such decrease, if the
Board of Directors has made a determination that such decrease would be in the
best interests of the Company, which determination shall be conclusive. The
Company may, at its option, make such reductions in the conversion price, in
addition to those set forth above, as the Company deems advisable to avoid or
diminish any income tax to its stockholders resulting from any dividend or
distribution of stock (or rights to acquire stock) or from any event treated as
such for income tax purposes. See "Certain Tax Considerations."
SUBORDINATION
17
<PAGE> 20
The payment of principal of, premium, if any, and interest on the Notes
is, to the extent set forth in the Indenture, subordinated in right of payment
to the prior payment in full of all Senior Indebtedness. Upon any distribution
to creditors of the Company in a liquidation or dissolution of the Company or in
a bankruptcy, reorganization, insolvency, receivership or similar proceeding
related to the Company or its property, in an assignment for the benefit of
creditors or any marshalling of the Company's assets and liabilities, the
holders of all Senior Indebtedness will first be entitled to receive payment in
full of all amounts due or to become due thereon before the Holders of the Notes
will be entitled to receive any payment in respect of the principal of, premium,
if any, or interest on the Notes (except that Holders of Notes may receive
securities that are subordinated at least to the same extent as the Notes to
Senior Indebtedness and any securities issued in exchange for Senior
Indebtedness).
The Company also may not make any payment upon or in respect of the
Notes (except in such subordinated securities) if (a) a default in the payment
of the principal of, premium, if any, or interest on Senior Indebtedness occurs
and is continuing beyond any applicable period of grace or (b) any other default
occurs and is continuing with respect to Senior Indebtedness that permits
holders of the Senior Indebtedness as to which such default relates to
accelerate its maturity and the Trustee receives a notice of such default (a
"Payment Blockage Notice") from the representative or representatives of holders
of at least a majority in principal amount of Senior Indebtedness then
outstanding. Payments on the Notes may and shall be resumed (i) in the case of a
payment default, upon the date on which such default is cured or waived, or (ii)
in the case of a non-payment default, 179 days after the date on which the
applicable Payment Blockage Notice is received, unless the maturity of any
Senior Indebtedness has been accelerated. No new period of payment blockage may
be commenced within 360 days after the receipt by the Trustee of any prior
Payment Blockage Notice. No nonpayment default that existed or was continuing on
the date of delivery of any Payment Blockage Notice to the Trustee shall be, or
be made, the basis for a subsequent Payment Blockage Notice unless such default
shall have been cured or waived for a period of not less than 180 days.
"Senior Indebtedness" with respect to the Notes means the principal of,
premium, if any, and interest on, and any fees, costs, expenses and any other
amounts (including indemnity payments) related to the following, whether
outstanding on the date of the Indenture or thereafter incurred or created: (a)
indebtedness, matured or unmatured, whether or not contingent, of the Company
for money borrowed evidenced by notes or other written obligations, (b) any
interest rate contract, interest rate swap agreement or other similar agreement
or arrangement designed to protect the Company or any of its subsidiaries
against fluctuations in interest rates, (c) indebtedness, matured or unmatured,
whether or not contingent, of the Company evidenced by notes, debentures, bonds
or similar instruments or letters of credit (or reimbursement agreements in
respect thereof), (d) obligations of the Company as lessee under capitalized
leases and under leases of property made as part of any sale and leaseback
transactions, (e) indebtedness of others of any of the kinds described in the
preceding clauses (a) through (d) assumed or guaranteed by the Company and (f)
renewals, extensions, modifications, amendments and refundings of, and
indebtedness and obligations of a successor person issued in exchange for or in
replacement of, indebtedness or obligations of the kinds described in the
preceding clauses (a) through (f), unless the agreement pursuant to which any
such indebtedness described in clauses (a) through (f) is created, issued,
assumed or guaranteed expressly provides that such indebtedness is not senior or
superior in right of payment to the Notes; provided, however, that the following
shall not constitute Senior Indebtedness: (i) any indebtedness or obligation of
the Company in respect of the Notes; (ii) any indebtedness of the Company to any
of its subsidiaries or other affiliates; (iii) any indebtedness that is
subordinated or junior in any respect to any other indebtedness of the Company
other than Senior Indebtedness; and (iv) any indebtedness incurred for the
purchase of goods or materials in the ordinary course of business.
In the event that the Trustee (or paying agent if other than the
Trustee) or any Holder receives any payment of principal or interest with
respect to the Notes at a time when such payment is prohibited under the
Indenture, such payment shall be held in trust for the benefit of, and shall be
paid over and delivered to, the holders of Senior Indebtedness or their
representative as their respective interests may appear. After all Senior
Indebtedness is paid in full and until the Notes are paid in full, Holders shall
be subrogated (equally and ratably with all other Indebtedness pari passu with
the Notes) to the rights of holders of Senior Indebtedness to receive
distributions applicable to Senior Indebtedness to the extent that distributions
otherwise payable to the Holders have been applied to the payment of Senior
Indebtedness.
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<PAGE> 21
As of June 30, 1996, the Company had approximately $15 million in
principal amount of indebtedness that would be considered Senior Indebtedness
under its unsecured revolving line of credit with Chase Manhattan Bank, as
administrative agent, and a syndicate of other banks (the "Chase Facility"). The
Company does not have any other material Senior Indebtedness outstanding as of
such date. Pursuant to the recently amended terms of the Chase Facility, the
Company will not be able to make aggregate borrowings under the Chase Facility
in excess of $200 million. Such borrowings would constitute Senior
Indebtedness and would rank prior in right of payment to the Holders of the
Notes, notwithstanding that it is incurred subsequent to the issuance of the
Notes. The Indenture does not prohibit or limit the incurrence of such Senior
Indebtedness.
In addition, because the Company's operations are conducted primarily
through its operating subsidiaries, including regulated insurance companies and
HMOs, claims of holders of indebtedness of such subsidiaries, as well as claims
of regulators and creditors of such subsidiaries, have priority with respect to
the assets and earnings of such subsidiaries over the claims of creditors of the
Company, including Holders of the Notes. As of June 30, 1996, the aggregate
liabilities of such subsidiaries were approximately $312 million. Such HMO and
insurance subsidiaries are subject to certain minimum capital requirements
imposed by state insurance authorities. In addition, state insurance authorities
have the power to disapprove of the payment of dividends and other intercompany
payments by regulated HMO and insurance subsidiaries. Under certain
circumstances, state insurance authorities have the power to impose increased
minimum capital requirements and prohibit the payment of dividends and other
upstream payments by such HMO and insurance subsidiaries, which could adversely
affect the Company's ability to repurchase Notes whose Holders elect to cause
the Company to repurchase their Notes upon a Change of Control, repay the Notes
at maturity or make interest payments on the Notes. The Indenture does not limit
the amount of additional indebtedness which any of the Company's subsidiaries
can create, incur, assume or guarantee.
Because of these subordination provisions, in the event of a
liquidation or insolvency of the Company or any of its subsidiaries, Holders of
Notes may recover less, ratably, than the holders of Senior Indebtedness.
The Company expects from time to time to incur indebtedness
constituting Senior Indebtedness other than debt under the Chase Facility. The
Indenture does not prohibit or limit the incurrence of additional indebtedness,
including Senior Indebtedness, by the Company or its subsidiaries.
OPTIONAL REDEMPTION BY THE COMPANY
The Notes are not redeemable at the option of the Company prior to
March 1, 1999. At any time on or after that date, the Notes may be redeemed at
the Company's option on at least 30 but not more than 60 days' notice, in whole
at any time or in part from time to time, at the following prices (expressed in
percentages of the principal amount), together with accrued interest to the date
fixed for redemption if redeemed during the 12-month period beginning March 1:
<TABLE>
<CAPTION>
REDEMPTION
DATE PRICE
---- -----
<S> <C> <C>
1999 102.5%
2000 101.7%
2001 100.8%
and 100% on or after March 1, 2002
</TABLE>
If fewer than all the Notes are to be redeemed, the Trustee will select
the Notes to be redeemed in principal amounts of $1,000 or integral multiples
thereof by lot or, in its discretion, on a pro rata basis. If any Note is to be
redeemed in part only, a new Note or Notes in principal amount equal to the
unredeemed principal portion thereof will be issued. If a portion of a Holder's
Notes is selected for partial redemption and such Holder converts a portion of
such Notes, such converted portion shall be deemed to be taken from the portion
selected for redemption. No
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<PAGE> 22
sinking fund is provided for the Notes.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of Notes shall
have the right to require that the Company repurchase such Holder's Notes in
whole or in part in integral multiples of $1,000, at a purchase price in cash in
an amount equal to 101% of the principal amount thereof, together with accrued
and unpaid interest to the date of purchase, pursuant to an offer (the "Change
of Control Offer") made in accordance with the procedures described below and
the other provisions in the Indenture.
A "Change of Control" means an event or series of events in which (i)
any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of
the Exchange Act) acquires "beneficial ownership" (as determined in accordance
with Rule 13d-3 under the Exchange Act), directly or indirectly, of more than
50% of the total Voting Stock of the Company at an Acquisition Price (each term
as defined herein) less than the conversion price then in effect with respect to
the Notes and (ii) the holders of the Common Stock receive consideration which
is not all or substantially all common stock that is (or upon consummation of or
immediately following such event or events will be) listed on a United States
national securities exchange or approved for quotation on the NASDAQ National
Market or any similar United States system of automated dissemination of
quotations of securities' prices; provided, however, that any such person or
group shall not be deemed to be the beneficial owner of, or to beneficially own,
any Voting Stock tendered in a tender offer until such tendered Voting Stock is
accepted for purchase under the tender offer. "Voting Stock" means stock of the
class or classes pursuant to which the holders thereof have the general voting
power under ordinary circumstances to elect at least a majority of the board of
directors, managers or trustees of a corporation (irrespective of whether or not
at the time stock of any other class or classes shall have or might have voting
power by reason of the happening of any contingency). "Acquisition Price" means
the weighted average price paid by the person or group in acquiring the Voting
Stock.
Within 30 days following any Change of Control, the Company shall send
by first-class mail, postage prepaid, to the Trustee and to each Holder of
Notes, at such Holder's address appearing in the security register, a notice
stating, among other things, that a Change of Control has occurred, the purchase
price, the purchase date, which shall be a business day no earlier than 30 days
nor later than 60 days from the date such notice is mailed, and certain other
procedures that a Holder of Notes must follow to accept a Change of Control
Offer or to withdraw such acceptance.
The Company will comply, to the extent applicable, with the
requirements of Rule 13e-4 under the Exchange Act and other securities laws or
regulations in connection with the repurchase of the Notes as described above.
The occurrence of certain of the events that would constitute a Change
of Control may constitute a default under the Chase Facility. Future
indebtedness of the Company may contain prohibitions of certain events which
would constitute a Change of Control or require the Company to offer to redeem
such indebtedness upon a Change of Control. Moreover, the exercise by the
Holders of Notes of their right to require the Company to purchase the Notes
could cause a default under such indebtedness, even if the Change of Control
itself does not, due to the financial effect of such purchase on the Company.
Finally, the Company's ability to pay cash to Holders of Notes upon a purchase
may be limited by the Company's then existing financial resources. There can be
no assurance that sufficient funds will be available when necessary to make any
required purchases. Furthermore, the Change of Control provisions may in certain
circumstances make more difficult or discourage a takeover of the Company and
the removal of the incumbent management.
MERGER, CONSOLIDATION AND SALE OF ASSETS
The Company shall not consolidate with or merge with or into, or
convey, transfer or lease all or substantially all its assets to any person
unless: (i) either the Company is the resulting, surviving or transferee person
(the "Successor Company") or the Successor Company is a person organized and
existing under the laws of the United States or any State thereof or the
District of Columbia, and the Successor Company (if not the Company)
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<PAGE> 23
expressly assumes by a supplemental indenture, executed and delivered to the
Trustee, in form satisfactory to the Trustee, all the obligations of the Company
under the Indenture and the Notes, including the conversion rights described
above under "Conversion of Notes," (ii) immediately after giving effect to such
transaction no Event of Default has happened and is continuing and (iii) the
Company delivers to the Trustee an Officers' Certificate and an opinion of
counsel, each stating that such consolidation, merger or transfer and such
supplemental indenture (if any) comply with the Indenture.
EVENTS OF DEFAULT AND REMEDIES
An Event of Default is defined in the Indenture as being: default in
payment of the principal of or premium, if any, on the Notes when due at
maturity, upon redemption or otherwise, including failure by the Company to
purchase the Notes when required as described under "Change of Control" (whether
or not such payment shall be prohibited by the subordination provisions of the
Indenture); default for 30 days in payment of any installment of interest on the
Notes (whether or not such payment shall be prohibited by the subordination
provisions of the Indenture); default by the Company for 90 days after notice in
the observance or performance of any other covenants in the Indenture; or
certain events involving bankruptcy, insolvency or reorganization of the
Company. The Indenture provides that the Trustee may withhold notice to the
Holders of Notes of any default (except in payment of principal, premium, if
any, or interest with respect to the Notes) if the Trustee considers it in the
interest of the Holders of Notes to do so.
The Indenture provides that if any Event of Default shall have occurred
and be continuing, the Trustee or the Holders of not less than 25% in principal
amount of the Notes then outstanding may declare the principal of and premium,
if any, on the Notes to be due and payable immediately, but if the Company shall
cure all defaults (except the nonpayment of interest on, premium, if any, and
principal of any Notes which shall have become due by acceleration) and certain
other conditions are met, such declaration may be canceled and past defaults may
be waived by the Holders of a majority in principal amount of Notes then
outstanding.
The Holders of a majority in principal amount of the Notes then
outstanding shall have the right to direct the time, method and place of
conducting any proceedings for any remedy available to the Trustee, subject to
certain limitations specified in the Indenture. The Indenture provides that,
subject to the duty of the Trustee following an Event of Default to act with the
required standard of care, the Trustee will not be under an obligation to
exercise any of its rights or powers under the Indenture at the request or
direction of any of the Holders, unless the Trustee receives satisfactory
indemnity against any associated loss, liability or expense.
SATISFACTION AND DISCHARGE; DEFEASANCE
The Indenture will cease to be of further effect as to all outstanding
Notes (except as to (i) rights of registration of transfer and exchange and the
Company's right of optional redemption, (ii) substitution of apparently
mutilated, defaced, destroyed, lost or stolen Notes, (iii) rights of Holders of
Notes to receive payments of principal of, premium, if any, and interest on, the
Notes, (iv) rights of Holders of Notes to convert to Common Stock, (v) rights,
obligations and immunities of the Trustee under the Indenture and (vi) rights of
the Holders of Notes as beneficiaries of the Indenture with respect to the
property so deposited with the Trustee payable to all or any of them), if (A)
the Company will have paid or caused to be paid the principal of, premium, if
any, and interest on the Notes as and when the same will have become due and
payable or (B) all outstanding Notes (except lost, stolen or destroyed Notes
which have been replaced or paid) have been delivered to the Trustee for
cancellation or (C) (x) the Notes not previously delivered to the Trustee for
cancellation will have become due and payable or are by their terms to become
due and payable within one year or are to be called for redemption under
arrangements satisfactory to the Trustee upon delivery of notice and (y) the
Company will have irrevocably deposited with the Trustee, as trust funds, cash,
in an amount sufficient to pay principal of and interest on the outstanding
Notes, to maturity or redemption, as the case may be. Such trust may only be
established if such deposit will not result in a breach or violation of, or
constitute a default under, any agreement or instrument pursuant to which the
Company is a party or by which it is bound and the Company has delivered to the
Trustee an Officers' Certificate and an opinion of counsel, each stating that
all conditions related to such defeasance have been complied with.
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<PAGE> 24
The Indenture will also cease to be in effect (except as described in
clauses (i) through (vi) in the immediately preceding paragraph) and the
indebtedness on all outstanding Notes will be discharged on the 123rd day after
the irrevocable deposit by the Company with the Trustee, in trust, specifically
pledged as security for, and dedicated solely to, the benefit of the Holders of
Notes, of cash, U.S. Government Obligations (as defined in the Indenture) or a
combination thereof, in an amount sufficient, in the opinion of a nationally
recognized firm of independent public accountants expressed in a written
certification thereof delivered to the Trustee, to pay the principal of,
premium, if any, and interest on the Notes then outstanding in accordance with
the terms of the Indenture and the Notes ("legal defeasance"). Such legal
defeasance may only be effected if (i) such deposit will not result in a breach
or violation of, or constitute a default under, any agreement or instrument to
which the Company is a party or by which it is bound, (ii) the Company has
delivered to the Trustee an opinion of counsel stating that (A) the Company has
received from, or there has been published by, the Internal Revenue Service a
ruling or (B) since the date of this Indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that, based
thereon, the Holders of the Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such deposit, defeasance and
discharge by the Company and will be subject to federal income tax on the same
amount and in the same manner and at the same times as would have been the case
if such deposit, defeasance and discharge had not occurred, (iii) the Company
has delivered to the Trustee an opinion of counsel to the effect that after the
123rd day following the deposit, the trust funds will not be subject to the
effect of any applicable bankruptcy, insolvency, reorganization or similar laws
affecting creditors' rights generally and (iv) the Company has delivered to the
Trustee an Officers' Certificate and an opinion of counsel stating that all
conditions related to the defeasance have been complied with.
The Company may also be released from its obligations under the
covenants described above under "Change of Control" and "Merger, Consolidation
and Sale of Assets" with respect to the Notes outstanding on the 123rd day after
the irrevocable deposit by the Company with the Trustee, in trust, specifically
pledged as security for, and dedicated solely to, the benefit of the Holders of
Notes, of cash, U.S. Government Obligations or a combination thereof, in an
amount sufficient in the opinion of a nationally recognized firm of independent
public accountants expressed in a written certification thereof delivered to the
Trustee, to pay the principal of, premium, if any, and interest on the Notes
then outstanding in accordance with the terms of the Indenture and the Notes
("covenant defeasance"). Such covenant defeasance may only be effected if (i)
such deposit will not result in a breach or violation of, or constitute a
default under, any agreement or instrument to which the Company is a party or by
which it is bound, (ii) the Company has delivered to the Trustee an Officers'
Certificate and an opinion of counsel to the effect that the Holders of Notes
will not recognize income, gain or loss for federal income tax purposes as a
result of such deposit and covenant defeasance by the Company and will be
subject to federal income tax on the same amount, in the same manner and at the
same times as would have been the case if such deposit and covenant defeasance
had not occurred, (iii) the Company has delivered to the Trustee an opinion of
counsel to the effect that after the 123rd day following the deposit, the trust
funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights generally
and (iv) the Company has delivered to the Trustee an Officers' Certificate and
an opinion of counsel stating that all conditions related to the covenant
defeasance have been complied with. Following such covenant defeasance, the
Company will no longer be required to comply with the obligations described
above under "Merger, Consolidation and Sale of Assets" and will have no
obligation to repurchase the Notes pursuant to the provisions described under
"Change of Control."
Notwithstanding any satisfaction and discharge or defeasance of the
Indenture, the obligations of the Company described under "Conversion of Notes"
will survive to the extent provided in the Indenture until the Notes cease to be
outstanding.
MODIFICATIONS OF THE INDENTURE
The Indenture contains provisions permitting the Company and the
Trustee, with the consent of the Holders of not less than a majority in
principal amount of the Notes at the time outstanding, to modify the Indenture
or any supplemental indenture or the rights of the Holders of Notes, except that
no such modification shall (i) extend the fixed maturity of any Note, reduce the
rate or extend the time of payment of interest thereon, reduce the principal
amount thereof or premium, if any, thereon, reduce any amount payable upon
redemption thereof, change the obligation of the Company to make redemption of
any Note upon the happening of a Change of Control, impair
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<PAGE> 25
or affect the right of a Holder to institute suit for the payment thereof,
change the currency in which the Notes are payable, modify the subordination
provisions of the Indenture in a manner adverse to the Holders of Notes or
impair the right to convert the Notes into Common Stock subject to the terms set
forth in the Indenture, without the consent of the Holder of each Note so
affected or (ii) reduce the aforesaid percentage of Notes, without the consent
of the Holders of all of the Notes then outstanding.
REGISTRATION RIGHTS
The Company agreed, under the terms of a registration rights agreement
(the "Registration Rights Agreement") with the Initial Purchasers, for the
benefit of the Holders of Notes, that the Company would use its best efforts to
file with the Commission within 90 days after the original issuance date of the
Notes a shelf registration statement (the "Shelf Registration Statement") on
such form as the Company deems appropriate covering resales by the Holders of
Notes and the shares of Common Stock issuable upon conversion of the Notes and
would use all reasonable efforts to cause the Shelf Registration Statement to
become effective as promptly as practicable and keep such Shelf Registration
Statement effective until such date that is three years after the latest date of
original issuance of the Notes. The Company will be permitted to suspend the use
of the prospectus that is a part of such Shelf Registration Statement during
certain periods of time and under certain circumstances relating to pending
corporate developments and public filings with the Commission and similar
events. A Holder who sells the Notes and the Common Stock issued upon conversion
of the Notes pursuant to the Shelf Registration Statement generally will be
required to be named as a selling stockholder in the related prospectus and to
deliver a prospectus to purchasers and will be bound by the provisions of the
Registration Rights Agreement which are applicable to such Holder (including
certain indemnification provisions).
At any time during the three-year period following the date of latest
date of original issuance of the Notes when a registration statement under the
Securities Act covering the Notes and the Shares is not effective or the Company
has suspended use of the prospectus that is part of such registration statement,
neither the Notes nor the Shares may be sold or otherwise transferred except in
accordance with certain transfer restrictions set forth in the Indenture.
CONCERNING THE TRUSTEE
The Bank of New York, the Trustee under the Indenture, has been
appointed by the Company as the paying agent, conversion agent, registrar and
custodian with regard to the Notes. The Bank of New York also serves as the
transfer agent and registrar of the Common Stock. The Trustee and/or its
affiliates may in the future provide banking and other services to the Company
in the ordinary course of their respective businesses.
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 800,000,000 shares
of Common Stock, par value $.10 per share, and 10,000,000 shares of Preferred
Stock (the "Preferred Stock"). As of August 6, 1996, 63,770,957 shares of Common
Stock were issued and outstanding and no shares of Preferred Stock were issued
and outstanding.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share in the
election of directors and on all other matters to be voted upon by the
stockholders. The Company's Board of Directors is divided into three classes,
with the directors in each class holding office for a term of three years
following election. Subject to the rights of holders of outstanding Preferred
Stock, if any, the holders of Common Stock are entitled to receive such
dividends, if any, as may be declared by the Board of Directors out of funds
legally available therefor. 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. In the event of a liquidation,
dissolution, or winding up of the Company, the holders of Common Stock have the
right to a ratable portion of the assets remaining after payment to the
Company's
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<PAGE> 26
creditors, subject to any preferential payments required to be made to holders
of outstanding Preferred Stock, if any. Holders of Common Stock do not have
cumulative voting, preemptive, redemption or conversion rights. All outstanding
shares of Common Stock are, and the shares issuable upon conversion of the Notes
sold in this offering will be, fully paid and nonassessable. The preferences and
rights of holders of shares of Common Stock may become subject to those of
holders of shares of any series of Preferred Stock which the Company may issue
in the future.
The Company adopted a Rights Agreement (the "Rights Agreement") with
The Bank of New York, as Rights Agent, as of July 29, 1996. Pursuant to the
Rights Agreement, each holder of Common Stock outstanding as of August 12, 1996
and thereafter (subject to certain exceptions) will receive rights ("Rights") to
purchase additional shares of Common Stock at a price of $70 per share. The
Rights Agreement provides that, upon any person or group acquiring, or
announcing a bid which could result in the acquisition of, beneficial ownership
of 20% or greater of the outstanding Common Stock, the Rights will be
distributed to stockholders other than the acquiring person or group and will
become exercisable. Upon the happening of certain further events, the purchase
price of the Rights will be adjusted so that the holders of the Rights, other
than the acquiring person or group, will be entitled to purchase Common Stock
with a market value of twice the $70 purchase price. The Rights will remain
outstanding until August 12, 2006, unless earlier redeemed by the Company. If
exercised, the Rights will cause substantial dilution to a person or group that
attempts to acquire the Company on terms not approved by the Company's Board of
Directors. The existence of the Rights may have the effect of discouraging a
person or group from taking a substantial equity interest in the Company or
seeking to obtain control of the Company without negotiating with the Board of
Directors. The terms and effects of the Rights Agreement are further described
in the Company's Form 8-A Registration Statement dated August 2, 1996, which
description is incorporated by reference herein.
PREFERRED STOCK
The Board of Directors has the authority, without further stockholder
approval, to issue the shares of Preferred Stock in one or more series from time
to time and to fix the powers, designations, preferences, and rights, and the
qualifications, limitations, or restrictions of such preferences and/or rights.
While the issuance of Preferred Stock could provide needed flexibility in
connection with possible acquisitions and for other corporate purposes, such
issuance could also make it more difficult for a third party to acquire a
majority of the outstanding voting stock of the Company or discourage an attempt
to gain control of the Company, and might adversely affect the holders of Common
Stock. Among other things, the Preferred Stock may be issued with extraordinary
voting, dividend, redemption or conversion rights.
TRANSFER AGENT AND REGISTRAR
The Bank of New York has been appointed by the Company as the transfer
agent and registrar of the Common Stock.
CERTAIN TAX CONSIDERATIONS
GENERAL
The following is a discussion of certain U.S. federal income tax and estate
tax consequences of the purchase, ownership and disposition of the Notes as of
the date hereof. For purposes of this discussion, a "U.S. Holder" is a Holder
that is an individual who is a citizen or resident of the United States, a
corporation or a partnership that is organized under the laws of the United
States or any state thereof or an estate or trust whose income is includible in
gross income regardless of its source. A "Non-U.S. Holder" is a Holder that is
not a U.S. Holder. This summary applies only to Notes and Common Stock held as
capital assets within the meaning of Section 1221 of the Internal Revenue Code
of 1986, as amended (the "Code"). It does not discuss all of the tax
consequences that may be relevant to a Holder in light of its particular
circumstances or to Holders subject to special rules, such as dealers in
securities or foreign currencies, financial institutions, life insurance
companies, or regulated investment companies, or to Holders whose functional
currency is not the United States dollar or who hold the Notes or the Common
Stock as part of a synthetic security, conversion transaction, or certain
"straddle" or hedging transactions.
The U.S. federal income tax and estate tax considerations set forth below
are based upon the Code and regulations, rulings and judicial decisions
thereunder as of the date hereof, and such authorities may be repealed, revoked
or modified, possibly with retroactive effect, so as to result in U.S. federal
income tax consequences different from those presented below.
U.S. HOLDERS
Interest. Interest on a Note should be taxable to a U.S. Holder as ordinary
interest income in accordance with the U.S. Holder's method of accounting for
U.S. federal income tax purposes.
Sale, Exchange or Redemption of a Note. A U.S. Holder should recognize gain
or loss, if any, on the sale, redemption or other taxable disposition of a Note
in an amount equal to the difference, if any, between the U.S. Holder's adjusted
tax basis in the Note and the amount received therefor (other than amounts
attributable to accrued and unpaid interest on the Notes, which should be
treated as interest for U.S. federal income tax purposes). Subject to the market
discount rules noted under "U.S. Holders -- Market Discount and Bond Premium"
below, gain or loss,
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<PAGE> 27
if any, recognized on the sale, redemption or other taxable disposition of a
Note generally should be long-term capital gain or loss if the Note was held for
more than one year as of the date of disposition.
Market Discount and Bond Premium. If a U.S. Holder acquires a Note
subsequent to its original issuance and the Note's stated redemption price at
maturity exceeds the U.S. Holder's initial tax basis in the Note by more than a
de minimis amount, the U.S. Holder should generally be treated as having
acquired the Note at a "market discount" equal to such excess. In addition, if a
U.S. Holder's initial tax basis in a Note exceeds the stated redemption price at
maturity of the Note, the U.S. Holder should generally be treated as having
acquired the Note with "bond premium" in an amount equal to such excess. U.S.
Holders should consult their tax advisers regarding the existence, if any, and
tax consequences of market discount and bond premium.
Conversion of the Notes. A U.S. Holder should not recognize gain or loss
upon conversion of the Notes into Common Stock. The U.S. Holder's tax basis in
shares of Common Stock received upon conversion should be the same as the U.S.
Holder's adjusted tax basis of the Notes converted (reduced by the portion of
such basis allocable to any fractional Common Stock interest for which the U.S.
Holder receives a cash payment from the Company). The holding period of the
Common Stock received in the conversion should include the holding period of the
Notes that were converted. A U.S. Holder generally should recognize gain (or
loss) upon a conversion to the extent that any cash paid in lieu of a fractional
share of Common Stock exceeds (or is less than) its tax basis allocable to such
fractional share.
Dividends. Dividends paid on Common Stock received upon conversion will be
taxable to a U.S. Holder as ordinary income, to the extent paid out of the
Company's current or accumulated earnings and profits. Subject to certain
restrictions, dividends received by a corporate U.S. Holder generally should be
eligible for the 70% dividends received deduction.
Sale of Common Stock. A U.S. Holder of Common Stock received on conversion
who sells or otherwise disposes of such stock in a taxable transaction will
recognize capital gain or loss equal to the difference between the cash and the
fair market value of any property received on such sale and the U.S. Holder's
tax basis in such stock. Such gain or loss will be long term gain or loss if the
holding period for such Common Stock was more than one year.
Redemption of Common Stock. A redemption by the Company of some or all of a
U.S. Holder's Common Stock will be treated as a dividend to the redeeming U.S.
Holder to the extent of the Company's current and accumulated earnings and
profits unless the redemption meets one of the tests under Section 302(b) of the
Code. If one of the tests under Section 302(b) is met, the redemption will be
treated as an exchange giving rise to capital gain or loss, except to the extent
of declared but unpaid dividends. Such gain or loss will be long term capital
gain or loss if the holding period for such Common Stock was more than one year.
U.S. Holders should consult their tax advisors as to the application of Section
302(b) to their particular circumstances.
Adjustments to Conversion Price. Pursuant to Treasury Regulations
promulgated under Section 305 of the Code, a U.S. Holder of a Note should be
treated as having received a constructive distribution from the Company upon an
adjustment in the conversion price of the Notes if (i) as a result of such
adjustment, the proportionate interest of such U.S. Holder in the assets or
earnings and profits of the Company is increased and (ii) the adjustment is not
made pursuant to a bona fide, reasonable, anti-dilution formula. An adjustment
in the conversion price would not be considered made pursuant to such a formula
if the adjustment were made to compensate for certain taxable distributions with
respect to the Common Stock into which the Notes are convertible. Thus, under
certain circumstances, a decrease in the conversion price of the Notes may be
taxable to a U.S. Holder of a Note as a dividend to the extent of the current or
accumulated earnings and profits of the Company. In addition, the failure to
adjust fully the conversion price of the Notes to reflect distributions of stock
dividends with respect to the Common Stock may result in a taxable dividend to
the U.S. Holders of the Common Stock.
Backup Withholding and Information Reporting. A U.S. Holder of a Note, or of
Common Stock issued upon conversion of a Note, may be subject to information
reporting and possible backup withholding. If applicable, backup withholding
would apply at a rate of 31% with respect to dividends or interest on, or the
proceeds of a sale,
25
<PAGE> 28
exchange, redemption, retirement, or other disposition of, such Note or Common
Stock, as the case may be, unless (i) such U.S. Holder is a corporation or comes
within certain other exempt categories and, when required, demonstrates this
fact, or (ii) provides a taxpayer identification number, certifies as to no loss
of exemption from backup withholding, and otherwise complies with applicable
backup withholding rules.
NON-U.S. HOLDERS
The Notes. The payment of interest on a Note should generally not be subject
to U.S. federal withholding tax, if (1) the interest is not effectively
connected with the conduct of a trade or business within the United States, (2)
the Non-U.S. Holder does not actually or constructively own 10% or more of the
total combined voting power of all classes of stock of the Company entitled to
vote, (3) the Non-U.S. Holder is not a controlled foreign corporation that is
related to the Company actually or constructively through stock ownership and
(4) either (i) the beneficial owner of the Note certifies to the Company or its
agent, under penalties of perjury, that it is not a U.S. Holder and provides its
name and address on U.S. Treasury Form W-8 (or on a suitable substitute form) or
(ii) a securities clearing organization, bank or other financial institution
that holds customers' securities in the ordinary course of its trade or business
(a "financial institution") and holds the Note certifies under penalties of
perjury that such a Form W-8 (or suitable substitute form) has been received
from the beneficial owner by it or by a financial institution between it and the
beneficial owner and furnishes the payer with a copy thereof.
A Non-U.S. Holder should generally not be subject to U.S. federal income tax
on any gain or income realized in connection with the sale, exchange,
retirement, or other disposition of a Note, including the exchange of a Note for
Common Stock, unless the Non-U.S. Holder is an individual who is present in the
United States for 183 days or more in the taxable year of the disposition, and
either (a) has a tax home in the United States and the gain from the disposition
is not attributable to an office of other fixed place of business maintained by
such non-U.S. Holder in a foreign country or (b) the gain from the disposition
is attributable to an office or other fixed place of business maintained by such
non-U.S. Holder in the United States.
A Note held directly by an individual who, at the time of death, is not a
citizen or resident of the United States should not be includible in such
individual's gross estate for U.S. estate tax purposes as a result of such
individual's death if the individual does not actually or constructively own 10%
or more of the total combined voting power of all classes of stock of the
Company entitled to vote and, at the time of the individual's death, if payments
with respect to such Note would not have been effectively connected with the
conduct by such individual of a trade or business in the United States. Even if
the Note is includible in the gross estate under the foregoing rules, the Note
may be excluded under the provisions of an applicable estate tax treaty.
The Common Stock. In general, dividends (including any amounts that are
treated as dividends as described above) paid to a Non-U.S. Holder of the Common
Stock should be subject to U.S. federal income tax withholding at a 30% rate
unless such rate is reduced by an applicable income tax treaty. Dividends that
are effectively connected with such Non-U.S. Holder's conduct of a trade or
business in the United States or, if a tax treaty applies, attributable to a
permanent establishment, or, in the case of an individual, a "fixed base," in
the United States ("U.S. trade or business income") are generally subject to
U.S. federal income tax at regular rates, but are not generally subject to the
30% withholding tax if the Non-U.S. Holder files the appropriate form with the
payer. Any U.S. trade or business income received by a Non-U.S. Holder that is a
corporation may also, under certain circumstances, be subject to an additional
"branch profits tax" at a 30% rate or such lower rate as may be applicable under
an income tax treaty.
Dividends paid to an address in a foreign country are presumed (absent
actual knowledge to the contrary) to be paid to a resident of such country for
purposes of the withholding tax discussed above and, under the current
interpretation of Treasury Regulations, for purposes of determining the
applicability of a tax treaty rate. However, on April 22, 1996, the Internal
Revenue Service (the "Service") proposed regulations (the "Proposed
Regulations") which would generally be effective for payments made after
December 31, 1997, under which a Non-U.S. Holder of the Common Stock who wishes
to claim the benefit of an applicable tax treaty rate would be required to
satisfy applicable certification and other requirements. Prospective investors
who would be Non-U.S. Holders should consult their tax advisors regarding the
possible application of these rules.
26
<PAGE> 29
A Non-U.S. Holder of the Common Stock that is eligible for a reduced rate of
U.S. federal withholding tax pursuant to an income tax treaty may obtain a
refund of any excess amounts withheld by filing an appropriate claim for refund
with the IRS.
A Non-U.S. Holder of the Common Stock should generally not be subject to
U.S. income or withholding tax on gain realized on the sale, exchange or
redemption (provided that the redemption is treated as the sale or exchange of
the stock) of such stock, unless the Non-U.S. Holder is an individual who is
present in the United States for 183 days or more in the taxable year of the
disposition, and either (a) has a tax home in the United States and the gain
from the disposition is not attributable to an office or other fixed place of
business maintained by such Non-U.S. Holder in a foreign country or (b) the gain
from the disposition is attributable to an office or other fixed place of
business maintained by such Non-U.S. Holder in the United States. Common Stock
held directly by an individual who at the time of death is not a citizen or
resident of the United States will nevertheless generally be includible in the
gross estate of such individual for U.S. estate tax purposes, subject to
contrary provisions of an applicable estate tax treaty.
Backup Withholding and Information Reporting. Payments on the Notes made by
the Company or any paying agent of the Company and payments of dividends on the
Common Stock to certain noncorporate Non-U.S. Holders generally should be
subject to information reporting and possibly to "backup withholding" at a rate
of 31%. Information reporting and backup withholding do not apply, however, to
payments made outside the United States by the Company or a paying agent on a
Note or to payments of dividends on the Common Stock if the certification
described under "Non-U.S. Holders -- The Notes" above is received, provided in
each case that the payer does not have actual knowledge that the Holder is a
U.S. Holder.
Payment of proceeds from a sale of a Note or the Common Stock to or through
the U.S. office of a broker is subject to information reporting and backup
withholding unless the Non-U.S. Holder certifies as to its non-U.S. status or
otherwise establishes an exemption from information reporting and backup
withholding. Payment outside the United States of the proceeds of the sale of a
Note or the Common Stock to or through a foreign office of a "broker" (as
defined in applicable U.S. Treasury Regulations) should not be subject to
information reporting or backup withholding, except that if the broker is a U.S.
person, a controlled foreign corporation for U.S. federal income tax purposes or
a foreign person 50% or more of whose gross income is from a U.S. trade or
business, information reporting should apply to such payment unless the broker
has documentary evidence in its records that the beneficial owner is not a U.S.
Holder and certain other conditions are not met or the beneficial owner
otherwise establishes an exemption.
The Proposed Regulations could affect the procedures to be followed by
a Non-U.S. Holder or a financial institution in establishing such Non-U.S.
Holder's non-United States status. Each Non-U.S. Holder should consult its tax
advisor regarding the effect, if any, of the Proposed Regulations on its
purchase, ownership, conversion, and disposition of the Notes, and its ownership
and disposition of the Common Stock obtained as a result of any such conversion.
THE U.S. FEDERAL INCOME TAX AND ESTATE TAX DISCUSSION SET FORTH ABOVE IS
INTENDED FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE TO A
PARTICULAR HOLDER'S SITUATION. PERSONS CONSIDERING A PURCHASE OF THE NOTES
SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE PARTICULAR TAX
CONSEQUENCES OF PURCHASING, OWNING AND DISPOSING OF THE NOTES AND THE COMMON
STOCK, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL OR FOREIGN LAWS AND
OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES (POSSIBLY INCLUDING
RETROACTIVE CHANGES) IN U.S. FEDERAL AND OTHER TAX LAWS.
SELLING HOLDERS
The Notes were initially issued and sold to Bear, Stearns & Co., Inc.,
Goldman, Sachs & Co., Merrill Lynch & Co., Morgan Stanley & Co. Incorporated,
Robertson, Stephens & Company and Smith Barney Inc.
27
<PAGE> 30
(together, the "Initial Purchasers"). The Selling Holders acquired the Notes (a)
from the Initial Purchasers in transactions complying with Rule 144A, Regulation
D or Regulation S under the Securities Act or (b) in other permitted resale
transactions exempt from registration under the Securities Act from the Initial
Purchasers or holders who acquired the Notes from the Initial Purchasers or
other prior holders thereof. The Company agreed to indemnify and hold the
Initial Purchasers harmless against certain liabilities under the Securities Act
that would arise in connection with the sale of the Notes by the Initial
Purchasers. The Selling Holders may from time to time offer and sell pursuant to
this Prospectus any or all of the Notes or Common Stock issued upon conversion
thereof.
Except as otherwise indicated, the table below sets forth certain
information with respect to the Selling Holders and the Securities as of August
15, 1996. The term Selling Holders includes the beneficial owners of the
securities listed below and their transferees, pledgees, donees or other
successors. Unless otherwise noted, the nature of beneficial ownership is sole
voting and/or investment power. Other than as a result of the ownership of
Securities indicated below, none of the Selling Holders has had any material
relationship with the Company or any of its affiliates within the past three
years.
<TABLE>
<CAPTION>
Aggregate Principal Number of Shares
Amount of Notes of Common Stock
Name That May Be Sold That May Be Sold*
- ---- -------------------------- ------------------
<S> <C> <C>
1. San Diego City Employees Retirement
System 540,000 11,497
2. Occidental College 160,000 3,406
3. San Diego County Convertible 1,840,000 39,178
4. Boston Museum of Fine Arts 60,000 1,277
5. Wake Forest University 460,000 9,794
6. Presbyterian Healthcare 330,000 7,026
7. Equity Portfolio(1) 15,000,000 319,386
8. South Dakota Retirement System 3,500,000 74,523
9. The TCW Group, Inc. on behalf of the
following accounts:(2)
(a) TCW Convertible Value Fund 2,230,000 47,482
(b) General Motors Salaried Employees
Convertible Fund 5,600,000 119,237
(c) State of Michigan Employees
Retirement Fund 1,440,000 30,661
(d) TCW Convertible Securities Fund 3,325,000 70,797
(e) Cincinnati Bell Telephone
Convertible Value Fund 625,000 13,307
(f) Massachusetts Mutual Life Insurance
Company 590,000 12,562
(g) North Dakota State Workers
Compensation Fund 845,000 17,992
(h) TCW/DW Income & Growth Fund 415,000 8,836
(i) Medical Malpractice Insurance
Association 130,000 2,768
(j) TCW Convertible Strategy Fund 890,000 18,950
(k) TCW Convertible Value L.P. 340,000 7,239
(l) North Dakota State Land Dept. 310,000 6,600
10. Oppenheimer Bond Fund for Growth(3) 6,000,000 127,754
11. Allstate Insurance Co. 1,500,000 31,938
12. KD Offshore Fund, C.V. 500,000 10,646
13. Oppenheimer Main Street Funds, Inc.
for the account of: Oppenheimer
Main Street Income & Growth Fund 20,000,000 425,849
14. Kellner, Dileo & Co. 4,100,000 87,299
15. Fidelity Financial Trust:(4)
Fidelity Convertible Securities Fund 3,000,000 63,877
16. Fidelity Management Trust Company
on behalf of an account managed by it(5) 2,000,000 42,584
17. Franklin Investors Securities Trust,
Convertible Securities Fund 2,250,000 47,908
18. ALCAN Corp. Master Retirement Trust 75,000 1,596
19. Benjamin Moore & Co. Retirement Income 85,000 1,809
20. Nestle USA 40,000 851
21. Fairfax County Supplemental Retirement 420,000 8,942
22. Fluor Corp. Master Retirement Trust-BEA 90,000 1,916
23. Halliburton Company Employee Benefit 1,000,000 21,292
24. Holton-Arms School Pooled Investment FD 30,000 638
25. C.I. American Fund 260,000 5,536
26. Taliac Inv. TRAF 8,500,000 180,985
27. General Motors Corp. LAMG 17,000,000 361,971
28. GM JP Morgan Covertible 10,000,000 212,924
29. Boston Harbor Trust Co., N.A. (6) 400,000 8,516
30. Goldman Sachs International 1,000,000 21,292
31. Goldman, Sachs & Co. 17,510,000 372,830
32. Lord Abbett Bond Debenture Trust 1,200,000 25,550
33. Lord Abbett Bond Debenture
Fund Agreement 6,000,000 127,754
34. Elisabeth Ingalls Gillet Trust 89,000 1,895
35. General Motors Foundation Inc. 700,000 14,904
36. Lipco Partners, L.P. 8,000,000 170,339
37. Multi Commercial Bank 50,000 1,064
Any other Selling Holder or future
transferee from any such Selling Holder 96,821,000 2,061,623
------------ ---------
Total $247,250,000 5,264,600
============ =========
</TABLE>
*Rounded to nearest whole share. Assumes a conversion price of $46.965
per share, and a cash payment in lieu of fractional share interest.
(1) Equity Portfolio is a portfolio in the Preferred Master Trust Group (the
"Trust Group") and is a series of a registered investment company. American
Express Financial Corporation ("AEFC"), formerly known as IDS Financial
Corporation, a registered investment adviser, provides investment advisory
services to the Trust Group and to certain other registered investment
companies. AEFC is a wholly-owned subsidiary of American Express Company. The
information set forth in the table with respect to the portfolio and the
information set forth in this footnote was provided by AEFC.
(2) TCW Brokerage Services, Inc., an affiliate of the TCW Group, Inc., is a
registered broker-dealer.
(3) Oppenheimer Funds Distributor, Inc. ("OFDI"), the general distributor of
the open-end Oppenheimer mutual funds (including Oppenheimer Bond Fund for
Growth) is a registered broker-dealer. OFDI is a wholly-owned subsidiary of
Oppenheimer Funds, Inc. the registered investment adviser to the Oppenheimer
mutual funds (including Oppenheimer Bond Fund for Growth).
(4) Fidelity Financial Trust is a portfolio of a registered investment company
or a private investment account advised by Fidelity Management & Research
Company ("FMR Co."). FMR Co. is a Massachusetts corporation and a registered
investment adviser and provides investment advisory services to such entity
above. FMR Co. is a wholly-owned subsidiary of FMR Corp. ("FMR"), a
Massachusetts corporation.
(5) The indicated securities are owned directly by a private employee benefit
plan for which Fidelity Management Trust Company ("FMTC") serves as trustee or
managing agent. FMTC is a wholly-owned subsidiary of FMR and a bank as
defined under the Exchange Act.
(6) The indicated figure for Common Stock does not include 323,725 shares
currently held by Boston Harbor Trust Co., N.A. which are not included in the
Registration Statement and Prospectus.
The preceding table has been prepared based upon information furnished
to the Company by the Depository Trust Company and by or on behalf of the
Selling Holders. Additional information concerning ownership of the Securities
offered hereby rests with certain holders of the Securities who are not named in
the preceding table, with whom the Company believes it has no affiliation and
from whom the Company has received no response to its request for such
information.
In view of the fact that Selling Holders may offer all or a portion of
the Notes or shares of Common Stock held by them pursuant to the offering
contemplated by this Prospectus, and because this offering is not being
underwritten on a firm commitment basis, no estimate can be given as to the
amount of Notes or the number of shares of Common Stock that will be held by the
Selling Holders after completion of the offering made hereby. In addition, the
Selling Holders may have sold, transferred or otherwise disposed of all or a
portion of their Notes and/or Common Stock since the date on which they provided
the information set forth above, in transactions exempt from the registration
requirements of the Securities Act.
Information concerning the Selling Holders may change from time to time
and any such changed information will be set forth in supplements to this
Prospectus if and when necessary. In addition, the per share conversion price,
and therefor the number of shares issuable upon conversion of the Notes, is
subject to adjustment under certain circumstances. Accordingly, the aggregate
principal amount of Notes and the number of shares of Common Stock issuable
upon conversion of the Notes offered hereby may increase or decrease.
PLAN OF DISTRIBUTION
The Securities covered hereby may be offered and sold from time to time
by the Selling Holders. The Selling Holders will act independently of the
Company in making decisions with respect to the timing, manner and size of each
sale. Sales of the Securities are, in general, expected to be made at the market
price prevailing at the time of each such sale; however, prices in negotiated
transactions may differ considerably. Such sales may be made
28
<PAGE> 31
on the NYSE or otherwise, at market prices prevailing at the time of sale, at
prices related to the then prevailing market prices or in negotiated
transactions, including without limitation pursuant to one or more of the
following methods: (a) purchases by a broker-dealer as principal and resale by
such broker or dealer for its account pursuant to this Prospectus; (b) ordinary
brokerage transactions and transactions in which a broker solicits purchasers;
and (c) block trades in which a broker-dealer so engaged will attempt to sell
the Securities as agent but may take a position and resell a portion of the
block as principal to facilitate the transaction. The Selling Holders have
agreed that they will not participate in any underwritten offering of the
Securities and the Company has no obligation to conduct or cooperate in such an
offering for their benefit.
The Company has been advised that, as of the date hereof, the Selling
Holders have made no arrangement with any broker for the offering or sale of the
Notes or the shares of Common Stock issuable upon conversion thereof. Brokers,
dealers or agents may participate in such transactions as agents and may, in
such capacity, receive brokerage commissions from the Selling Holders or
purchasers of such securities. Such brokers, dealers or agents may also purchase
the Notes or shares of Common Stock issuable upon conversion thereof and resell
such securities for their own account. The Selling Holders and such brokers,
dealers or agents may be considered "underwriters" as that term is defined by
the Securities Act, although the Selling Holders disclaim such status. Any
commissions, discounts or profits received by such brokers, dealers or agents in
connection with the foregoing transactions may be deemed to be underwriting
discounts and commissions under the Securities Act.
To comply with the securities laws of certain jurisdictions, if
applicable, the Notes and Common Stock issuable upon conversion thereof will be
offered or sold in such jurisdictions only through registered or licensed
brokers or dealers. In addition, in certain jurisdictions, the Notes and Common
Stock issuable upon conversion thereof may not be offered or sold unless they
have been registered or qualified for sale in such jurisdictions or unless an
exemption from such registration or qualification is available and is complied
with.
Under applicable rules and regulations under the Exchange Act, any
person engaged in a distribution of the Notes or the shares of Common Stock
issuable upon conversion thereof may be limited in its ability to engage in
market activities with respect to such Notes or the shares of Common Stock
issuable upon conversion thereof. In addition and without limiting the
foregoing, each Selling Holder will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, including, without
limitation, Rules 10b-2, 10b-5, 10b-6 and 10b-7, which provisions may limit the
timing of purchases and sales of any of the Notes and shares of Common Stock
issuable upon conversion thereof by the Selling Holders. All of the foregoing
may affect the marketability of the Notes and shares of Common Stock issuable
upon conversion thereof.
The Company may suspend the use of this Prospectus and any supplements
hereto in certain circumstances due to pending corporate developments, public
filings with the Commission or similar events. The Company is obligated in the
event of such suspension to use its reasonable efforts to ensure that the use of
the Prospectus may be resumed as soon as practicable.
The Company has agreed to pay substantially all of the expenses
incident to the registration, offering and sale of the Notes or the shares of
Common Stock issuable upon conversion thereof to the public other than
commissions and discounts of brokers, dealers or agents and other than the fees
and disbursements of counsel to the Holders, which shall be paid by the Initial
Purchasers of the Notes. Such expenses (excluding such commissions and discounts
and fees and disbursements of counsel to the Holders) are estimated to be
approximately $275,300. The Company has also agreed to indemnify the Selling
Holders against certain liabilities, including certain liabilities under the
Securities Act.
LEGAL MATTERS
The validity of the Securities offered hereby and certain additional
legal matters will be passed upon for the Company by Sheehan Phinney Bass +
Green, Professional Association, Manchester, New Hampshire. Certain members of
Sheehan Phinney Bass + Green, Professional Association beneficially own an
aggregate of 60,840 shares of Common Stock as of the date hereof.
29
<PAGE> 32
EXPERTS
The consolidated financial statements and the related financial statement
schedules incorporated in this prospectus by reference from the Company's Annual
Report on Form 10-K for the year ended December 31, 1995 have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report, which is
incorporated herein by reference, and have been so incorporated in reliance upon
the report of such firm given upon their authority as experts in accounting and
auditing.
With respect to the unaudited interim financial information for the period
ended June 30, 1996 and 1995 which is incorporated herein by reference,
Deloitte & Touche LLP have applied limited procedures in accordance with
professional standards for a review of such information. However, as stated in
their report included in the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996 and incorporated by reference herein, they did not
audit and they do not express an opinion on that interim financial information.
Accordingly, the degree of reliance on their report on such information should
be restricted in light of the limited nature of the review procedures applied.
Deloitte & Touche LLP are not subject to the liability provisions of Section 11
of the Securities Act for their report on the unaudited interim financial
information because such report is not a "report" or a "part" of the
registration statement prepared or certified by an accountant within the meaning
of Sections 7 and 11 of the Securities Act.
30
<PAGE> 33
No dealer, sales representative, or any other person has been authorized to
give any information or to make any representation not contained in this
Prospectus, and, if given or made, such information or representation must not
be relied upon as having been authorized by the Company or any Selling Holder.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any of the securities offered hereby in any jurisdiction to any
person to whom it is unlawful to make such offer in such jurisdiction. Neither
the delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that the information herein is correct as
of any time subsequent to the date hereof or that there been no change in the
affairs of the Company since such date.
----------------------
TABLE OF CONTENTS
Page
----
Available Information................. 3
Incorporation of Certain Documents
by Reference...................... 3
Summary............................... 4
Risk Factors.......................... 7
Selected Pro Forma Consolidated
Financial Data.................... 10
Ratio of Earnings to Fixed Charge..... 15
Use of Proceeds....................... 15
Description of the Notes.............. 15
Description of Capital Stock.......... 23
Certain Tax Considerations............ 24
Selling Holders....................... 27
Plan of Distribution.................. 28
Legal Matters......................... 29
Experts............................... 30
HEALTHSOURCE, INC.
$247,250,000
5% CONVERTIBLE
SUBORDINATED
NOTES DUE 2003
AND
COMMON STOCK
- -------------------------------------
PROSPECTUS
- -------------------------------------
AUGUST 16, 1996
31
<PAGE> 34
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses in connection with the distribution of the Securities
being registered are estimated as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee $ 85,300
Legal Fees and Expenses 75,000
Accounting Fees and Expenses 75,000
State Securities Laws Registration Fees and Expenses 10,000
Trustee and Registrar Fees and Expenses 10,000
Miscellaneous 20,000
--------
Total $275,300
========
</TABLE>
All such expenses will be borne by the Company, other than the fees and
expenses of counsel to the Selling Holders, which will be borne by the Initial
Purchasers of the Notes.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The By-Laws of the Company and the New Hampshire Business Corporation
Act provide that the Company shall indemnify any person who is or was a party to
any pending or completed action, other than an action by or in the right of the
Company, by reason of the fact that he is or was a director, officer, employee
or agent of the Company, against expenses, judgments, fines and amounts paid in
settlement if he acted in good faith and he reasonably believed, (i) in the case
of conduct in his official capacity that his conduct was in the best interests
of the Company, or (ii) in all other cases, that his conduct was not opposed to
its best interests; or, in the case of a criminal proceeding, he had no
reasonable cause to believe his conduct was unlawful. Any such director,
officer, employee or agent shall be indemnified by the Company in an action by
or in the right of the Company to the same extent and under the same
circumstances, except that no indemnification may be made for any claim as to
which the person shall have been adjudged to be liable to the Company. The
Company may not indemnify any such director, officer, employee or agent in
connection with any proceeding charging improper personal benefit to him if he
is adjudged liable on that basis. Prior to and as a condition of any
indemnification by the Company of any such director, officer, employee or agent,
the Board of Directors must make a determination that under the facts of the
matter, the person seeking indemnification met the applicable standard of
conduct. However, the Company must indemnify a director who is wholly
successful, on the merits or otherwise, in the defense of any proceeding to
which he was a party because he is or was a director of the Company. In the case
of the advancement by the Company of expenses before the final disposition of a
proceeding involving any such person, such person must affirm his good faith
belief that his conduct met the applicable standard of conduct and must
undertake to repay the advance if it is ultimately determined that he did not
meet the applicable standard of conduct, and the Board of Directors must make a
determination that the facts then known would not preclude indemnification of
such person. The Company is obligated pursuant to indemnity agreements with its
directors and executive officers to indemnify them to the full extent permitted
by law.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that, in
II-1
<PAGE> 35
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
16. EXHIBITS
<TABLE>
<CAPTION>
Exhibit Source or Page
No. Document of This Report
- ------- -------- --------------
<S> <C> <C>
(2) Plan of Acquisition
2.1 Asset Purchase Agreement dated as of Filed herewith
May 31, 1996 among Chubb Life Insurance
Company of America, ChubbHealth Holdings, Inc.,
Healthsource Metropolitan New York Holding
Company, Inc., ChubbHealth, Inc. and The Chubb
Corporation.
(4) Instruments Defining the Rights of Security Holders
4.1 Indenture dated as of March 6, 1996 by and Exhibit 4.1 to Form S-3
between Healthsource, Inc. and The Bank of New Registration Statement,
York as Trustee and the form of First No. 333-5223
Supplemental Indenture dated as of June 3, 1996
4.2 Note Resale Registration Rights Agreement dated Exhibit 4.2 to Form 10-Q for
as of March 6, 1996 by and between the Quarter Ended March 31,
Healthsource, Inc. and Bear, Stearns & Co., 1996
Inc. for itself and on behalf of the Initial
Purchasers
(5) Opinion regarding Legality
5.1 Opinion of Sheehan Phinney Bass + Green, Exhibit 5 to Form S-3
Professional Association Registration Statement,
No. 333-5223
(12) Computation of Historical Financial Ratios Exhibit 12 to Form S-3
Registration Statement,
No. 333-5223
(15) Letter regarding Unaudited Interim Financial Information Filed herewith
(23) Consents of Experts and Counsel
23.1 Consent of Deloitte & Touche LLP Filed herewith
23.2 Consent of Sheehan Phinney Bass + Green, Included in Exhibit 5.1 above
Professional Association
(24) Power of Attorney Signature page to Form S-3
Registration Statement,
No. 333-5223
(25) Statement of Eligibility of Trustee
25.1 Statement of The Bank of New York Exhibit 25.1 to Form S-3
Registration Statement,
No. 333-5223
</TABLE>
ITEM 17. UNDERTAKINGS
The Company hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement to include any
material information with respect to the plan of distribution not previously
II-2
<PAGE> 36
disclosed in the registration statement or any material change to such
information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered herein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof; and
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
The Company hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the Company's annual
report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act
of 1934 that is incorporated by reference in this registration statement shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to the provisions described in Item 15 above, or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable. In the event that a claim of
indemnification against such liabilities (other than the payment by the Company
of expenses incurred or paid by a director, officer or controlling person of the
Company in a successful defense of any action, suit or proceeding) is asserted
by such director, officer, or controlling person in connection with the
securities being registered, the Company will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question of whether such indemnification by it
is against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The Company hereby undertakes to file an application for the purpose of
determining the eligibility of the trustee to act under subsection (a) of
Section 310 of the Trust Indenture Act in accordance with the rules and
regulations prescribed by the Commission under Section 305(b)(2) of the Act.
II-3
<PAGE> 37
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933,
Healthsource, Inc. has duly caused this Amendment to Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized,
in the Town of Hooksett, State of New Hampshire, on August 16, 1996.
HEALTHSOURCE, INC.
/s/ Norman C. Payson, M.D.
By:________________________________
Norman C. Payson, M.D.
President and Chief Executive
Officer (Principal Executive Officer)
/s/ Joseph M. Zubretsky
By:________________________________
Joseph M. Zubretsky
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to Registration Statement has been signed by the following persons
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Date Title Signature
- ---- ----- ---------
<S> <C> <C>
August 16, 1996 Director /s/ Norman C. Payson, M.D.
__________________________
Norman C. Payson, M.D.
August 16, 1996 Director and Chairman /s/ Merwyn Bagan, M.D.*
of the Board __________________________
Merwyn Bagan, M.D.
</TABLE>
II-4
<PAGE> 38
<TABLE>
<S> <C> <C>
August 16, 1996 Director /s/ Paul D. Baron, M.D.*
______________________________
Paul D. Baron, M.D.
August 16, 1996 Director /s/ Daniel F. Eubank, M.D.*
______________________________
Daniel F. Eubank, M.D.
Director
______________________________
Robert A. Leipold, M.D.
August 16, 1996 Director /s/ Robert S. Cathcart, M.D.*
______________________________
Robert S. Cathcart, M.D.
August 16, 1996 Director /s/ Francis G. Middleton, M.D.*
______________________________
Francis G. Middleton, M.D.
August 16, 1996 Director /s/ Robert H. Bilbro, M.D.*
______________________________
Robert H. Bilbro, M.D.
August 16, 1996 Director /s/ David W. Schall, M.D.*
_______________________________
David W. Schall, M.D.
August 16, 1996 Director /s/ J. Harold Chandler*
_______________________________
J. Harold Chandler
*By /s/ Norman C. Payson, M.D.
----------------------------
Norman C. Payson, M.D.
Attorney-in-Fact
</TABLE>
II-5
<PAGE> 39
EXHIBIT INDEX
<TABLE>
<CAPTION> Sequentially
Exhibit Source or Page Numbered
No. Document of This Report Pages
- ------- -------- -------------- ---------------
<S> <C> <C> <C>
(2) Plan of Acquisition
2.1 Asset Purchase Agreement dated as of Filed herewith
May 31, 1996 among Chubb Life Insurance Company
of America, ChubbHealth Holdings, Inc.,
Healthsource Metropolitan New York Holding
Company, Inc., ChubbHealth, Inc. and The
Chubb Corporation.
(4) Instruments Defining the Rights of Security Holders
4.1 Indenture dated as of March 6, 1996 by and Exhibit 4.1 to Form S-3
between Healthsource, Inc. and The Bank of New Registration Statement,
York as Trustee and the form of First No. 333-5223
Supplemental Indenture dated as of June 3, 1996
4.2 Note Resale Registration Rights Agreement dated Exhibit 4.2 to Form 10-Q for
as of March 6, 1996 by and between the Quarter Ended March 31,
Healthsource, Inc. and Bear, Stearns & Co., 1996
Inc. for itself and on behalf of the Initial
Purchasers
(5) Opinion regarding Legality
5.1 Opinion of Sheehan Phinney Bass + Green, Exhibit 5 to Form S-3
Professional Association Registration Statement,
No. 333-5223
(12) Computation of Historical Financial Ratios Exhibit 12 to Form S-3
Registration Statement,
No. 333-5223
(15) Letter regarding Unaudited Interim Financial Information Filed herewith
(23) Consents of Experts and Counsel
23.1 Consent of Deloitte & Touche LLP Filed herewith
23.2 Consent of Sheehan Phinney Bass + Green, Included in Exhibit 5.1 above
Professional Association
(24) Power of Attorney Signature page to Form S-3
Registration Statement,
No. 333-5223
(25) Statement of Eligibility of Trustee
25.1 Statement of The Bank of New York Exhibit 25.1 to Form S-3
Registration Statement,
No. 333-5223
</TABLE>
<PAGE> 1
Exhibit 2.1
ASSET PURCHASE AGREEMENT
ASSET PURCHASE AGREEMENT dated as of the 31st day of May, 1996
("Agreement") by and between CHUBB LIFE INSURANCE COMPANY OF AMERICA, an
insurance corporation organized under the laws of New Hampshire with a principal
address at One Granite Place, Concord, New Hampshire 03301 (referred to herein
as "Chubb Life"), CHUBBHEALTH HOLDINGS, INC., a New Hampshire Corporation with a
principal address at One Granite Place, Concord, New Hampshire 03301 (referred
to herein as "Seller"), HEALTHSOURCE METROPOLITAN NEW YORK HOLDING COMPANY,
INC., (formerly Healthsource New York, Inc.) a New Hampshire corporation with a
principal office at Two College Park Drive, Hooksett, New Hampshire 03106
("Buyer"), and CHUBBHEALTH, INC., a corporation duly organized as a health
maintenance organization under the laws of the State of New York ("Plan"), and
only for purposes of Section 8(e), THE CHUBB CORPORATION, a New
Jersey corporation with a principal office at 15 Mountain View Road, Warren New
Jersey 07061.
WHEREAS, Chubb Life is the owner of 85% and Buyer is the owner of 15%
of the outstanding stock of Seller, a New Hampshire corporation which in turn
owns 100% of the stock of Plan;
WHEREAS, Chubb Life and Buyer are parties to an Investment Agreement
dated as of April 8, 1993 (the "Investment Agreement") relating to the formation
of the Seller and Plan and a Shareholders Agreement dated as of April 23, 1993
(the "Shareholder Agreement") which the parties desire to terminate at Closing;
WHEREAS, Plan is a party to (i) the Management Services Agreement with
Buyer dated as of April 23, 1993 (the "Management Agreement") which the parties
desire to terminate at Closing and (ii) the Administrative Services Agreement
with Chubb Life dated as of April 23, 1993 (the "Administrative Services
Agreement"), which the parties desire to terminate at Closing; and
WHEREAS, Seller wishes to sell its assets (consisting of a 100% stock
interest in the Plan) and Buyer wishes to purchase such assets
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:
(a) "Closing" shall mean the closing of the purchase of the Assets
(as defined
<PAGE> 2
below) contemplated by this Agreement on the Closing Date.
(b) "Closing Date" shall mean a date not more than ten (10) days
after the satisfaction of all conditions precedent to the
obligations of Buyer, Seller and Chubb Life as defined in
Sections 9 and 10.
(c) "Tax" or "Taxes" means all forms of taxation, whether of the
United States or elsewhere and whether imposed by a local,
municipal, state, federal body or instrumentality, and shall
include, without limitation, income, flat, sales, use, ad
valorem, gross receipts, value added, privilege, franchise,
license, transfer, recording, withholding, payroll,
employment, excise, occupation, premium and property taxes,
together with any related interest, penalties and additional
amounts imposed by any taxing authority.
(d) "Asset Sale Net After-Tax Proceeds" means $20,229,000 as
illustrated in Schedule 2, Line 12, representing an amount
equal to the Purchase Price less Taxes resulting from both (1)
the Plan's deemed sale of assets as a result of an election
under Internal Revenue Code Section 338(h)(10) and, where
applicable, related to the Seller's sale of Assets to Buyer
and (2) the Plan's other income, gain, losses and deductions.
(e) "Distribution Proceeds to Chubb Life" means 85% of Asset Sale
Net After-Tax Proceeds or $17,195,000 as illustrated in
Schedule 2, Line 13.
2. SALE OF ASSETS; PURCHASE PRICE; REDEMPTION OF BUYER STOCK IN SELLER;
TIMING
(a) Sale of Assets. At the Closing, Seller shall sell and assign
to Buyer the assets of Seller consisting of all of the
outstanding Common Stock of the Plan (the "Assets") and the
Buyer shall purchase and accept from Seller the Assets.
(b) Purchase Price; Payment. The purchase price (currently
estimated to be $28,681,000 as illustrated in Schedule 2, Line
1) for the Assets at the Closing ("Purchase Price") shall be
an amount which will result in Distribution Proceeds to Chubb
Life of $17,195,000. The final Purchase Price will be
determined in accordance with the calculation presented in
Schedule 2 and will guarantee Distribution Proceeds to Chubb
Life of $17,195,000. The Purchase Price shall be paid to
Seller at the Closing by certified or bank check payable to
Seller or by wire transfer of funds to
2
<PAGE> 3
Seller's account.
(c) Redemption of Buyer's Stock in Seller. After transfer of the
Assets to Buyer at Closing, both Chubb Life and Buyer shall
vote their shares in Seller to cause a redemption of Buyer's
15,000 shares of Common Stock of Seller (which shall
constitute Buyer's entire stock holdings of Seller) in return
for payment of 15% of Asset Sale Net After-Tax Proceeds and
Seller shall complete such redemption at Closing.
(d) Closing Efforts. Buyer, Seller and Chubb Life hereby
acknowledge that each desires the earliest possible Closing
and each agree to use their best efforts, and to fully
cooperate with each other and the regulatory authorities and
any other parties, to close this transaction as soon as
possible.
3. PLAN OF INTERIM OPERATIONS
From the date of this Agreement until the Closing Date, Chubb Life and
Buyer each agree to work together to position the Plan to withstand potential
market dislocation caused by the announcement of this transaction, to permit the
Plan to continue to aggressively market its products in the New York and New
Jersey markets and to permit Plan to continue to develop and extend Plan's
provider networks. The parties specifically agree as follows:
(a) to implement the communication plan for communications by both
Chubb Life and Buyer/Plan as separately agreed to by the
parties; provided that the parties shall keep the fact of this
Agreement and the transactions contemplated herein strictly
confidential until the open of business on Monday, June 3,
1996;
(b) to recognize that protecting the value of the Plan during the
transition process requires that Plan have competitive
products in the marketplace and in support of such
recognition, that, until Closing, Chubb life shall permit
Plan, after discussions with Chubb Life, to propose
competitive rates for each Plan product based on Buyer's
assessment of Plan's competition (and the latest competitor
rates) and shall cooperate with Plan to make such rates
effective by making all necessary regulatory filings therefor.
If Chubb Life objects to a specified product rate proposed by
Buyer as non-competitive, then all other proposed Plan rates
will be filed with the appropriate regulators and the disputed
rate shall be resolved by mediation (using a mutually
acceptable mediation service in New York City) or, failing a
resolution through mediation within 10 days, by binding
3
<PAGE> 4
arbitration under Section 14 in which arbitration, Chubb Life
shall have the burden of showing that the proposed Plan rate
is not competitive with the identified competitors. Chubb Life
or Colonial, as the case may be, shall use its best efforts to
keep Plan products in full compliance with applicable law by
making all necessary regulatory filings and, moreover, will
make new policy filings required to allow Plan to create
POS/SCA products to meet the terms of any POS/SCA product
offering by Plan's major competitors. After Closing, Chubb
Life or Colonial, as the case may be, shall file rates
specified by Buyer which are consistent with law and
regulations.
(c) to allow Plan to continue to develop its business, prospects
and products and otherwise not impede Plan's progress by, for
example, permitting the recruiting of additional Plan
managers, and the planning and pre-implementation work related
to the ultimate conversion of Plan's MIS system to a
Healthsource, Inc. system and the reassessment (and
replacement with third-parties, if necessary) of Plan's levels
of stop-loss insurance coverage for all lines;
(d) to allow Buyer and Plan to develop Plan's provider networks by
the negotiation of new provider contracts containing
capitation and other payment methodologies for various lines
of business;
(e) that Chubb Life shall continue to provide MIS support (as well
as conversion assistance) both through Closing under the
Administrative Services Agreement and thereafter until
services are withdrawn under the Transitional Services
Agreement and specifically Chubb Life shall not reassign any
personnel now working substantially full-time on Plan MIS
matters and shall further permit Buyer to make current
employment offers to the Concord-based MIS personnel and to
any other Chubb employees assigned in whole or in part to Plan
matters effective only at Closing;
(f) that Chubb Life shall continue to provide treasury, actuarial,
compliance and financial reporting services to Plan under the
Administrative Services Agreement and shall share all such
detailed financial and accounting information promptly and
fully with Plan and Plan's accounting staff;
(g) to cause Plan and Seller's Board of Directors to (i) take all
action from time-to-time necessary or desirable to give full
effect to the operational goals of this Agreement and (ii)
recognizing the indemnifications and protections afforded
Seller under Sections 4(a) and 13, permit Buyer to
4
<PAGE> 5
exercise the maximum authority under the Management Agreement
to implement all terms of this Agreement including, at Buyer's
discretion, any and all services Buyer customarily provides
its other HMO affiliates and, subject to the limits of Section
4 below, the customary corporate service charges it makes to
such affiliates.
(h) in calculating Plan expense or the amount of any charge-back
to Plan by Chubb Life, except for specific exceptions provided
for in this Agreement, Chubb Life agrees to make no change in
the assumptions supporting the allocation of costs now
absorbed by Chubb Life/Colonial for at least until September
30, 1996 and thereafter to continue as part of its
transitional status with Plan to (whenever reasonably
requested by Buyer) mitigate the services it provides, and the
charges it therefore makes, to Plan and not to have Plan
directly or indirectly pay more for services resulting from
Chubb Life's contemplated exit from the Group Health and
Ancillary Business and, by way of example only, not to have
Plan absorb a higher proportion of the facility costs of
Plan's field offices at 100 Williams Street and in Plainville,
New York, until Closing whether or not the Chubb Life/Colonial
field support staff remain located in such field offices.
Chubb Life shall bear the cost of all support staff on Plan's
payroll providing support to Chubb Life/Colonial products
until that function is re-assumed by Chubb Life. Chubb Life
shall be responsible for the cost of severance of any field
office employee currently on Plan payroll and terminated in
connection with Chubb Life's plan to cease performing sales
and service of the group indemnity health insurance and
Ancillary Business products in the field offices.
4. 1996 OPERATING RESULTS; CAPITAL
(a) Operating Results. In order to protect the Plan from adverse
effects of the transition process leading to Closing and
recognizing that the Plan will necessarily need to incur
additional costs to secure its membership and provider
networks, to the extent that Plan's cumulative 1996 net income
before federal income taxes is less than the cumulative net
income before federal income taxes of Plan as shown on
Schedule 4, two receivables due from the Buyer shall be
accrued as follows:
(i) On a calendar quarterly basis, a Schedule
4(a) will be prepared by Chubb Life in the
form of Schedule 4, showing only the results
of health care claims payments under the
Colonial SCA products for New Jersey
members. If
5
<PAGE> 6
Schedule 4(a) shows a net income before
Federal Income Tax (without any allocation
of overhead or indirect costs to such line
of business) that is less than zero, then
Colonial shall accrue a receivable due from
the Buyer in an amount sufficient to cover
such shortfall.
(ii) Also on a calendar quarterly basis, a
Schedule 4(b) will be created by Chubb Life
in the form of Schedule 4, showing the
combined results of all products utilizing
the Plan's managed care network (whether
underwritten by the Plan directly or
underwritten or reinsured by Colonial)
eliminating any duplicate expenses and
including the effect of any receivable
accrued by Colonial under clause (i) above.
If Schedule 4(b) shows a net income before
Federal Income Tax result that is less than
that which is shown in Schedule 4, then the
Plan shall accrue a receivable due from the
Buyer sufficient to cover such shortfall.
(iii) Should any taxing authority deem the receipt
of the receivables under clauses (i) and
(ii) ("Receivables") to create income not
fully offset in Plan's or Colonial's Returns
by the expenses giving rise to the
Receivables, Buyer covenants and agrees to
reimburse Chubb Life on an after-tax basis
for any Taxes resulting from such lack of
offset.
(iv) Settlement in full of the receivables under
clauses (i) and (ii) shall occur as of the
earlier of December 31, 1996, or Closing. In
the event that Closing does not occur by
December 31, 1996, and the Plan and Colonial
continue operations as shown in Schedule 4
beyond 1996, the Buyer, Seller, Plan, Chubb
Life and Colonial agree to create a
mechanism whereby the Buyer shall cause the
after-tax net income effect to Chubb Life of
all Plan and Plan-related Colonial managed
care operations to be not less than zero.
(b) Capital. In addition, if New York or New Jersey regulatory
authorities require additional capital to support Plan's
business, Buyer will loan such capital to Plan on a note
meeting regulatory requirements for a surplus note.
5. REPRESENTATIONS AND WARRANTIES OF CHUBB LIFE AND SELLER
6
<PAGE> 7
Chubb Life and Seller represent and warrant to Buyer as follows:
(a) Organization; Good Standing. The Seller and the Plan are each
corporations, duly organized and incorporated, validly
existing, and in good standing under the laws of their
respective states of incorporation, with all requisite power
and authority, corporate or otherwise, and legal right to own,
operate, and lease their properties, to carry on their
business as now being conducted and, to enter into this
Agreement, and perform their obligations hereunder. The Seller
(except for the Plan) and the Plan, each has no subsidiary or
any other equity interest in any other corporation, Company,
firm, association, trust, partnership, joint venture,
enterprise, or other entity.
(b) Capitalization and Share Ownership of the Seller and Plan. The
number of authorized shares, stated value, and number of
issued and outstanding shares of the Seller and the Plan are
set forth in Schedule 5(b) hereto. All of the issued and
outstanding shares of the Seller and the Plan are owned,
beneficially and of record, by those persons listed on
Schedule 5(b). The issued and outstanding shares of Plan have
been duly authorized and validly issued and are fully paid and
non-assessable. All of the issued and outstanding shares of
Plan and the shares of Seller owned by Chubb Life are owned,
respectively, free and clear of any options, liens, trusts,
encumbrances, security interests, charges, or claims of any
kind. Neither the Seller nor the Plan holds any shares of its
own stock in its treasury. Except for the Buyer's rights under
this Agreement and as disclosed in Schedule 5(b), no person
has any agreement, subscription, option, or warrant, or any
other right or commitment, entitling him or it to acquire from
the Seller or the Plan any shares of capital stock of any
class of the Seller or the Plan, whether outstanding or
unissued or any securities or other instruments, whether
outstanding or unissued, convertible into or exchangeable for
shares of capital stock of any class of the Seller or the
Plan. All of the officers and directors of the Seller and the
Plan are listed on Schedule 5(b).
(c) Corporate Record Books, etc. The corporate records and minute
books of the Plan containing the minutes of all board meetings
of the Plan and copies of all minute books and corporate
records of
7
<PAGE> 8
Seller have been furnished to the Buyer.
(d) Title to Property and Assets; Liens. Except as set forth in
Schedule 5(d), the Seller and the Plan each have good and
marketable title to all their respective properties and
assets, real, personal, and intangible, including all property
and assets reflected in the December 31, 1995 Financial
Statements contained in Appendix I (except as disposed of
thereafter in the ordinary course of business) subject to no
mortgage, pledge, lien, security interest, lease, charge,
easement, encumbrance, conditional sale, or other title
retention agreement. Except as set forth in Schedule 5(d), the
Seller has no assets other than the Assets.
(e) Real Property. Neither the Seller nor the Plan now owns or has
ever owned any real property.
(f) Agreements with Affiliates. Other than agreements listed on
Schedule 5(f), neither the Seller nor the Plan is a party to
any written contract (or any enforceable oral contract) with
Chubb Life or any affiliate. Complete copies of all agreements
listed on Schedule 5(f) have been provided to Buyer. Plan
shall not have any further liability whatsoever after the date
of this Agreement for rent under the lease for space at the
100 Williams Street building in New York City owned by a Chubb
Life affiliate. Plan shall, however, bear its proportionate
share of the costs of the space occupied by its employees
servicing Plan products and located at 100 Williams Street
under existing charge-back allocation agreements.
(g) Financial Statements. The audited consolidated financial
statements of the Seller and the Plan for the year ended
December 31, 1994 and December 31, 1995 contained in Appendix
I have each been prepared in accordance with general accepted
accounting principles and fairly present the financial
position of the Seller and the Plan and the results of their
operations and cash flow for such periods.
(h) Agreements. All agreements executed by employees of Chubb Life
or Colonial or any of their affiliates (whether or not such
person
8
<PAGE> 9
serves as an employee or officer of Plan) to which Seller or
Plan are parties or by which Seller or Plan are contractually
bound and which involve more than $5,000 in total payments or
are not terminable on less than 45 days notice are listed on
Schedule 5(h); provided that Plan shall not deemed an
"affiliate" for the purpose of this representation.
(i) Tax Return and Payments. All federal, state and local tax
returns and reports (collectively, "Returns") which either
include or are filed separately by the Seller and the Plan
have been filed in a timely manner, or timely extension of the
filing thereof has been secured. All information provided in
such Returns and extensions is true, complete and accurate in
all material respects and all taxes shown in such Returns have
been paid or adequate reserves for the payment of Taxes have
been established, assuming that all such information furnished
by Buyer acting under the Management Agreement is true,
complete and accurate.
(j) Books and Records. All of the business records of the Seller
and the Plan are located at Issuer's principal offices at 380
Madison Avenue, New York City, New York, except for certain
financial and claim records located at Chubb Life's offices in
Parsippany, New Jersey, and corporate and financial records
located in Concord, New Hampshire.
(k) Seller's Assets. Other than those disclosed on Schedule 5(k),
Seller has no assets other than stock in Plan and no
liabilities of any kind and will have no other assets nor any
such liabilities at Closing.
(l) Protection of Existing Tax Status. Seller shall be maintained
solely as a holding company from the date hereof through the
Closing Date with no assets or liabilities added to its
balance sheet nor shall Seller be permitted to enter into any
transaction or agreement which would alter the contemplated
tax status of Seller for the purpose of the Purchase Price and
related tax calculations under Section 2.
6. REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer hereby represents and warrants to Chubb Life as follows:
9
<PAGE> 10
(a) Organization; Good Standing. Buyer is a corporation duly
organized and incorporated, validly existing and in good
standing under the laws of its state of incorporation hereto,
with all requisite corporate power and authority to execute
and deliver this Agreement, to perform its obligations
hereunder and to consummate the transactions contemplated
hereby.
(b) Authority. The Buyer has full corporate authority to execute
and deliver this Agreement and to consummate the transactions
contemplated hereby. This Agreement has been duly executed and
delivered by the Buyer and constitutes the legal, valid and
binding obligation of the Buyer.
7. POINT OF SERVICE RISKS
(a) New York - To the extent that Plan as a New York licensed HMO desiring
to offer a Point of Service ("POS") plan is effectively barred (as
defined) from providing such out-of-network benefits except through
separate POS contracts issued by a New York licensed indemnity accident
and health insurer, or by reinsuring some of the POS risk with a
third-party indemnity accident and health insurer, Chubb Life agrees to
cause its affiliate, Colonial Life Insurance Company of America
("Colonial") to continue to write directly or reinsure such New York
POS risk for the benefit of the Plan on the following terms:
(i) all such New York POS risk will, to the maximum
extent feasible under New York regulations, be
transferred from Colonial to any other entity which
may bear or share that risk; this may be done by any
method or methods legally acceptable, including, but
not limited to, indemnity reinsurance of such risk to
the maximum extent possible with Buyer's Tennessee
affiliate; any such reinsurance shall be pursuant to
forms and/or agreements which comply with New York
law, shall be on the terms which permit Colonial to
take full credit for such reinsurance on its
financial statements, and are on terms reasonably
acceptable to Colonial and Buyer;
(ii) Plan shall pay Colonial for writing or reinsuring
such New York POS risk as follows:
10
<PAGE> 11
(aa) during the first year after Closing,
Colonial shall be reimbursed for its direct
and indirect actual costs and paid an
additional amount of $20,000 per month.
(bb) during the second year, in addition to being
reimbursed for its direct and indirect
actual costs, Colonial shall also be paid in
the amount of $40,000 per month unless Plan
POS/SCA membership shall exceed 100,000
members (including New Jersey members) at
the end of the first year after Closing, in
which event Colonial shall be paid in the
amount of $60,000 per month.
(cc) during the third and subsequent years after
Closing, in addition to being reimbursed for
its direct and indirect actual costs,
Colonial shall also be paid in the amount of
$80,000 per month unless Plan POS/SCA
membership shall exceed 200,000 members
(including New Jersey members) at the end of
the second year after Closing, in which
event Colonial shall be paid in an amount of
$120,000 per month.
(dd) "direct and indirect actual costs" shall
mean Colonial or affiliates' actual direct
and indirect costs of providing such New
York POS Contracts or reinsuring such New
York POS risk, including but not limited to,
actuarial and compliance, commissions,
overrides, policy benefits, premium taxes,
demographic pool charges, SMC pool payments,
third-party reinsurance payments; provided
such costs shall be determined without
commingling or averaging with other Chubb
business and solely with respect to Plan's
New York POS Contracts; and otherwise
without causing such costs to be higher due
to allocations resulting from the closing
down, discontinuation or
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<PAGE> 12
reduction in size of Chubb Life's other
businesses.
(iii) Colonial shall have no continuing obligation to
provide POS contracts or reinsurance after December
31, 1999. If, at the end of such period, an
arrangement contemplated by Section 7(a)(iv) is not
in place, Buyer, Chubb Life and Colonial will
cooperate to quickly arrange, at Buyer's cost, to
substitute POS reinsurance or contracts from
third-party carriers so as not to disrupt Plan's
business.
(iv) The parties agree that the arrangement described in
this subsection (a) of Section 7 shall continue only
for the minimum period of time required, and that the
Plan shall use its best efforts to implement one or
more alternative arrangements under which such
out-of-network risk may be (i) partially borne by the
Plan under subdivision 2 of Section 4406 of the New
York Public Health Law or (ii) insured or reinsured
by, shared with, transferred to, or otherwise borne
by another entity affiliated with Buyer. Buyer or an
affiliate shall provide the indemnification described
in Section 13 of this Agreement. When such
alternative arrangement(s) have become fully
implemented, Chubb Life's obligation to provide such
New York POS Contracts or reinsure such New York POS
risk shall cease.
(v) Buyer will seek to charter a new indemnity accident
and health insurance company in New York or will seek
to license or redomesticate its New Hampshire
indemnity affiliate to New York. Chubb Life agrees
that it shall provide such assistance, good will, and
resources as Chubb Life determines will best
facilitate the regulatory approval of such
applications, as well as policy forms, rate
approvals, and other approvals necessary to permit
such Buyer's affiliate to fully substitute for
Colonial on all Plan POS plans in New York. In
addition, Colonial and Chubb Life agree to provide
assistance in the substitution of any third-party
insurer for Colonial on all POS contracts in New
York.
(vi) The term "effectively barred" means New York law does
not permit Plan to write directly any specific form
of POS
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<PAGE> 13
coverage sought to be written or that any permission
granted by New York law to directly write POS
coverage contains uneconomic conditions, percentage
limitations on POS benefits, penalties, taxes or
other costs or restraints which render a permitted
POS product non-competitive with a separately insured
POS rider. Section 4406 of New York Public Health Law
is agreed to effectively bar Plan from now offering
POS products directly.
(b) New Jersey - The parties recognize that POS plans are currently offered
in New Jersey by Colonial, on its own paper, via an approved Selective
Contracting Arrangement ("SCA plans"), and that Colonial's SCA plans
permit access to the ChubbHealth network. The parties further note the
adoption of new regulations (N.J. ADC 8:38-14) by the New Jersey
Department of Health (the "regulations"), which appear to permit New
Jersey licensed HMOs to directly write POS plans on their own paper.
Chubb Life agrees to cause its affiliate Colonial to continue to write
directly, or to reinsure, all New Jersey POS risk on the following
terms:
(i) Plan shall, upon execution of this agreement, take
such necessary steps and make such necessary
applications and filings to obtain the authority
under the regulations to write POS coverage on its
own paper without supporting indemnity reinsurance,
such that Chubb Life and its affiliate will no longer
have to write such coverage on their paper and
ultimately will bear no risk on POS coverage at the
earliest practicable time.
(ii) to the extent any Colonial SCA plans or reinsurance
arrangements for POS risk remain in effect in New
Jersey on and after Closing, Buyer shall cause one or
more of its affiliated insurance companies to 100%
reinsure all Colonial risk under such New Jersey POS
coverage as soon as possible, on terms which comply
with New Jersey law, which permit Colonial to take
full reinsurance credit on its financial statements
and which provide that Colonial is reimbursed for all
of its direct and indirect actual costs in
conjunction with such POS risk ("acceptably
reinsure"). If Buyer is not able to acceptably
reinsure all New Jersey POS risk, then Buyer shall
indemnify and hold harmless Colonial from any
underwriting losses incurred by Colonial on such POS
risks
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<PAGE> 14
and all of its direct and indirect actual costs in
conjunction with such POS risks; such reimbursement
and indemnification shall be as provided in Section
13 of this Agreement.
(iii) the parties shall develop reasonable methods for
moving groups having coverage under Colonial SCA
contracts to POS contracts issued by Plan at Closing
or (if Plan's POS plans are not then approved) at the
earliest practical date or dates following Closing.
(iv) subject to clause (f) below, the obligations of the
parties under this Subsection 7(b) shall cease after
December 31, 1999, (except for any obligations which
arose prior to such termination date). If, at the end
of such period, an arrangement of the type
contemplated by Section 7(a)(iv) is not in place,
Buyer, Chubb Life and Colonial will cooperate to
quickly arrange, at Buyer's cost, to substitute POS
reinsurance or SCA contracts from third-party
carriers so as not to disrupt Plan's business.
(c) Buyer hereby acknowledges that Chubb Life desires to cease providing
the POS Contracts or reinsuring any POS risk as soon as possible and
Buyer hereby assures Chubb Life it will use its best efforts to
accomplish this replacement at the earliest possible date.
(d) Chubb Life hereby acknowledges that until alternative arrangements are
arrived at in accordance with this Agreement, Plan is totally dependent
on Colonial providing such POS Contracts or reinsuring such POS risk
for Plan's products in the marketplace; therefore Chubb Life agrees to
use its best efforts to cooperate with Buyer and to use its best
efforts to continue to keep Colonial's POS/SCA Contracts or reinsurance
commitments in force and fully accessible to Plan without interruption
until December 31, 1999 consistent with the language in Section
7(a)(ii) of this Agreement and to use its best efforts to keep such
products in regulatory compliance. If due to unforseen regulatory
changes or for whatever reason Plan's products and Colonial's POS/SCA
Contracts or reinsurance agreements need modification, Buyer and Chubb
Life agree to use their best efforts to re-paper or otherwise amend
such arrangements to comply with regulatory requirements and to avoid
any disruption or interruption of Plan's growth in the market. In any
such circumstances, Buyer agrees to
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<PAGE> 15
pay Chubb Life any additional costs it incurs for any such revised
arrangements or modifications. The mutual commitment to support Plan
shall not detract from Buyer's obligation in clause (c) above.
(e) Chubb Life warrants to Buyer that neither it, Colonial nor any other
affiliate of either of them shall make any profit, directly or
indirectly, on the writing of POS/SCA contracts or reinsuring of POS
/SCA risk except for the agreed monthly fixed dollar payments specified
in clause (a)(ii). Buyer, in turn, warrants that there shall be no
expense or underwriting loss to Colonial or Chubb Life as a result of
activity contemplated by Section 7.
(f) Medicare POS Plans. Buyer represents that it has no current intention
to cause Plan to offer POS options on any Medicare product which Plan
develops, but the parties recognize that competitive forces might
require the offering of such options in Plan's market. Thus, Chubb Life
agrees that Colonial will write all necessary riders for or reinsure
such Medicare POS products on the same terms as provided in clauses (a)
and (b) subject to the following additional terms:
(i) Plan will not offer Medicare POS options requiring
Colonial riders or reinsurance unless one of Plan's
principal competitors announces its intent to offer,
or files for regulatory approval of, such a Medicare
POS/SCA option; and
(ii) If Plan elects to write Medicare POS-type coverage,
it will not use Colonial riders or reinsurance for
more than twelve (12) months under any circumstance.
(g) Change of Control in Healthsource, Inc. If there occurs at any time
during the period of Chubb Life's and Colonial's obligations under this
Section 7 a Change of Control in Healthsource, Inc. (parent company of
Buyer) then Colonial's obligations to offer POS/SCA riders or
reinsurance under this Section 7 shall cease on July 1, 1999. If any
action occurs which results, directly or indirectly, in less than 50%
ownership in Plan being held by Healthsource, Inc., and all other
companies which, directly or indirectly, are wholly-owned by
Healthsource, Inc., then Colonial's obligations to offer POS/SCA riders
or reinsurance under this Section 7 shall, notwithstanding any other
language herein, cease 90 days after such action occurs. The term
"Change in Control" shall mean an event by which any "person" or
"group" acquires "beneficial ownership" (as such
15
<PAGE> 16
terms are defined in Securities Exchange Act of 1934 and regulations
thereunder) directly or indirectly of more than 50% of the voting stock
of Healthsource, Inc., but shall exclude any merger or reorganization
in which Healthsource, Inc., is the surviving or resulting entity.
Buyer shall immediately notify Chubb Life as soon as it becomes aware
of any event which might or would result in a Change of Control.
8. COVENANTS OF CHUBB LIFE, SELLER AND BUYER. Unless stated otherwise,
all covenants in this Section 8 shall survive the Closing:
(a) Change of Name. Buyer agrees to change the name of the Plan to remove
the name "Chubb" at Closing; promotional and contract materials which
contain the Chubb or Colonial names shall be discarded or stickered
appropriately on or before the Closing Date, in the case of Chubb, and
on or before the date Colonial ceases to provide POS riders or SCA
Plans under Section 7, in the case of Colonial.
(b) Interim Conduct. Except as otherwise provided in this Agreement, Chubb
Life and Seller agree that neither the Seller nor the Plan shall,
without Buyer's consent (i) declare or pay any dividends on its common
stock or make any distribution of assets to the holders of its common
stock, (ii) incur any indebtedness exceeding fifty thousand dollars
($50,000) other than routine trade debt, (iii) enter into any agreement
with an affiliate of Chubb Life, (iv) issue or sell any shares of stock
of the Seller or the Plan or any option or right with respect thereto,
or (v) make any change to its capital structure. Buyer agrees that it
shall not permit Plan to enter into any agreement prior to Closing with
any affiliate of Buyer which is not terminable in the event that
regulatory approvals necessary for the Closing are not received.
(c) Tax Sharing Agreements. All tax sharing/tax allocation agreements in
effect between the Seller and the Plan, on the one hand, and The Chubb
Corporation, on the other hand, shall be canceled effective on the
Closing Date. In the interim, the existing agreement shall remain in
effect and Chubb Life shall pay to the Seller the net tax benefit of
losses incurred by the Seller and Plan prior to Closing. Taxes related
to the Plan's deemed sale of assets as a result of an election under
Internal Revenue Code Section 338(h)(10) and, where applicable, related
to the Seller's sale of Assets to Buyer, shall be paid by the Plan or
the Seller, as the case may be.
(d) Settlement of Inter-entity Accounts. The parties will conduct an
16
<PAGE> 17
accounting wherein the tax receivable from Chubb Life carried on the
books of the Seller and Plan shall be applied to the balance on the
Seller's or Plan's accounts payable to Chubb Life and the remaining
balance of such account payable and any other inter-entity arrangements
shall be settled and any amount owed between the parties shall be paid
at Closing.
(e) Section 338(h)(10) Election; Allocation. The Chubb Corporation as the
common parent of an affiliated group (as that term is defined under
Internal Revenue Code Section 1504) which files a consolidated federal
income tax return and which includes the Plan, and Buyer covenant and
agree to make the election pursuant to Internal Revenue Code Section
338(h)(10) and the Department of Treasury regulations promulgated
thereunder, and to cooperate with each other in preparing, executing
and filing, and each will file, any Tax forms and other documents
required under Internal Revenue Code Section 338 and the Department of
Treasury regulations thereunder to be filed by the respective party. In
particular, and not by way of limitation, in order to effect such
election, on or prior to the Closing, The Chubb Corporation and Buyer
shall jointly execute necessary copies of Internal Revenue Service Form
8023 and all attachments required to be filed therewith, pursuant to
applicable Department of Treasury regulations. In connection therewith,
Seller and Buyer covenant and agree that the allocation among the
assets of the Plan shall be as determined by Buyer (acting reasonably
and in good faith) in accordance with applicable Department of Treasury
regulations within one hundred twenty (120) days of Closing. Chubb
Life, the Seller, the Plan and Buyer shall be bound by the allocation
determined in accordance with this section; Chubb Life, the Seller, the
Plan and Buyer covenant and agree to report this transaction for all
domestic Tax purposes in each and every respect in a fashion consistent
with the allocation made by Buyer. If the allocation is disputed by any
taxing authority, the party receiving notice of such dispute shall
promptly notify and consult with the other parties. Buyer shall resolve
any such dispute in its sole discretion (the "Resolution") and Chubb
Life, the Seller and the Plan agree to be bound by said Resolution.
Should the Resolution result in additional Tax to the Seller or any
other member of The Chubb Corporation's affiliated group (as that term
is defined under Internal Revenue Code section 1504, Seller and all
members of The Chubb Corporation's affiliated group collectively or
individually, as the case may be, the "Affiliated Group"), Buyer
covenants and agrees to reimburse the Affiliated Group for all Taxes
resulting from the Resolution and to pay Chubb Life any additional
amounts necessary to ensure
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<PAGE> 18
Distribution Proceeds to Chubb Life as defined in Section 1(e).
(f) Governmental and Other Consents, etc. No consent, approval, or
authorization of, or designation, declaration, or filing with, any
governmental authority or other persons or entities on the part of
Chubb Life, the Seller or the Plan, is required in connection with the
execution or delivery of this Agreement or the consummation of the
transactions contemplated hereby other than notification to and
consents from the persons specified in Schedule 8(f) hereto, which the
parties agree to use their best efforts to obtain as soon as
practicable.
(g) Recoverable Severance Payments. Chubb Life shall, within 10 days from
the date of this Agreement, provide to Buyer a list which sets forth:
(i) the name of each person employed by the Plan, and (ii) the amount
of severance which Plan would legally be obligated to pay to each such
person, if Plan were to terminate such employee on December 31, 1996,
any additional amount due for tenure past such date (on a monthly
basis) and the cost of all other rights of continued benefits after
termination (including, without limitation, life insurance, disability
insurance and COBRA rights (collectively the "Severance Amount"). The
Severance Amount shall not include out placement assistance.
At Closing, Buyer shall deliver to Chubb Life a list of Plan employees
who will be given notice on the Closing Date that their employment is
to be terminated within six (6) months after Closing. Buyer alone is
responsible for compilation of the list and Chubb Life shall have no
role or involvement in the selection of employees to be terminated or
the compilation of the list and further shall have no knowledge of
employees on the list prior to Closing. Upon termination of any
employee on such list within six (6) months after Closing, Plan shall:
(i) promptly notify Chubb Life of such termination, (ii) pay the
Severance Amount to such employee, and (iii) provide from time-to-time
to Chubb Life documentation as to the Severance Amount then actually
paid by Plan to or for the benefit of the terminated employee; Chubb
Life shall thereafter pay to Plan within fifteen (15) days of Plan's
statement therefor the cumulative Severance Amount.
The decision to terminate any Plan employee shall be the sole
responsibility of Buyer and/or Plan. Chubb Life shall have no role or
involvement in such decision and shall have no obligation, other than
to pay to Plan the cumulative Severance Amount described in this
Section 8. Buyer and Plan shall jointly and severally indemnify and
hold harmless
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<PAGE> 19
Chubb Life and its affiliates from any and all claims, causes of
action, charges, suits, regulatory actions, and other legal actions
which any terminated employee may assert in connection with the
termination of his/her employment excluding any claim grounded on
actions occurring prior to Closing and excluding any claim for
severance benefits in excess of the severance benefits included in the
Severance Amount on the list delivered at Closing.
If Plan rehires any such terminated employee within one (1) year or
his/her original termination, Plan shall immediately refund any amount
previously paid by Chubb Life to Plan in conjunction with Plan's
termination of such employee. Plan shall be permitted to make
employment offers to any employee of Chubb Life or its affiliates
previously working on Plan matters, provided that such offers will take
effect only at Closing.
(h) Use of Name. To the extent that Plan must disclose in advertising and
promotional materials, the name of Colonial as underwriter of the POS
products offered by the Plan, such advertising and promotional
materials shall receive the prior written approval by Colonial, such
approval which will not be unreasonably withheld. Colonial shall
respond (by fax to Plan) to all such advertising and other materials
within 2 business days of receipt. The Plan may use the Colonial name
in its contract forms and riders, but will not use the Colonial name
anywhere else except where required by law.
(i) Office Space. Chubb Life shall continue to provide Plan with the
existing Plan space in the Parsippany, New Jersey building for up to
one year from Closing at a rate of $20 per square foot for actual space
used (but any space occupied by personnel supporting Chubb Life
products shall be excluded from such charge).
(j) Exchange of Data. Except where Colonial is able to retrieve the
necessary data from its own MIS systems, Plan shall forthwith provide
to Colonial any and all data which Colonial requires to perform any
duties which it must perform under this Agreement. Likewise, Chubb Life
and Colonial shall provide all data to Buyer and Plan relative to Plan
or the POS Contracts which are useful to manage Plan's future
operations. Each party may audit the books and other records of the
other regarding any matter covered by this Agreement. Each party shall
provide adequate advance notice to the other and such audit shall be
performed only during
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<PAGE> 20
normal business hours on days when the audited party is generally open
for business.
(k) Withdrawal from Group Health, Ancillary Business and POS Coverages.
Buyer recognizes that Chubb Life and Colonial will continue their
actions relating to the withdrawal from the group indemnity health
insurance business and nothing in this Agreement is intended to keep
Chubb Life and affiliates from publicly discussing Colonial's strategic
exit from the group health insurance business. Chubb Life agrees to
continue to offer POS/SCA contracts in New York and New Jersey for as
long as contemplated under Section 7 (including new products developed
under Section 3(b)) and to offer Ancillary Business products (defined
as the offering of group life, group short and long term disability and
group dental insurance policies) in New York and New Jersey until
December 31, 1996 and agrees to consider the contemplated withdrawal
from the Ancillary Business in New York and New Jersey after December
31, 1996 confidential and especially therefore not to notify the
public, the brokerage community or its employees of such contemplated
withdrawal until at least ninety (90) days from signing of this
Agreement. Chubb Life agrees not to lower the broker commission
structure on any Ancillary Business products prior to September 30,
1996. Plan shall also be free after the date of this Agreement to
contract with other insurance companies writing group health and
Ancillary Business products for the sale of any such products in tandem
with Plan products through any brokers proposing to sell Plan products.
(l) ERISA. The parties recognize that all current Plan employees will be
ineligible to participate in current Chubb Life pension and other
benefit plans after Closing. Chubb Life shall have sole financial and
other responsibility for taking any and all actions required and/or
permitted by ERISA in connection with such discontinuance of benefits
at Closing. Neither Buyer nor Plan shall have any duties or financial
responsibilities in connection with such discontinuance of benefits.
(m) SEC Consents. Chubb Life has provided the audited annual financial
statements for Plan in Appendix I and shall provide similar audited
financials for Plan for each subsequent annual period ending prior to
Closing; in connection therewith, Chubb Life agrees to cause its
auditor, Ernst & Young, LLP, to consent without charge to (i) the
filing of any such financial statements (together with unaudited stub
periods) with the Securities Exchange Commission ("SEC") in connection
with any
20
<PAGE> 21
registration statement or Forms 8-K/ 10-Q/10-K filings by Healthsource,
Inc., when such statements are required, and (ii) to such firm being
named as accounting experts in any such SEC filing.
(n) Warrants. Buyer agrees that it will not exercise the Warrants for the
Purchase of Shares of Common Stock of Seller ("Warrants") dated April
23, 1993 before Closing so that, at Closing, there shall be a
redemption of Buyer's 15,000 shares of Common Stock of Seller which
shall constitute Buyer's entire stock holdings of Seller.
(o) Stop-Loss Insurance. Colonial and Plan shall as soon as possible after
execution of this Agreement place so-called stop-loss insurance on all
members covered by Plan products (including the POS products under
Section 7) which shall reimburse Plan or Colonial, as the case may be,
for all health costs on any case in excess of $100,000. This coverage
may be written on a combined policy. The cost to Colonial of such
stop-loss premiums will be an expense reimbursed to Colonial.
9. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF CHUBB LIFE AND SELLER
All obligations of Chubb Life and Seller under this Agreement are subject
to the fulfillment, at or prior to the Closing Date, of each of the
following conditions:
(a) Buyer's Covenants. The 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 the Closing Date.
(b) Consents and Regulatory Approvals. Chubb Life and Seller shall
have received evidence, satisfactory to them, that (i) all of
the consents disclosed in Schedule 8(f) have been duly
obtained, and (ii) that all regulatory approvals necessary to
permit Seller to sell and Buyer to acquire the Assets and to
exercise statutory control (within the meaning of the New York
HMO act) over Plan have been received.
(c) 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
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<PAGE> 22
been threatened against Chubb Life, Seller, the Plan or Buyer:
(i) which might restrict or affect the right of Seller to sell
the Assets (and indirectly the stock of the Plan) or to
exercise any rights in respect thereto, under this Agreement
or under any agreement contemplated to be delivered at
Closing; or (ii) which seeks to subject Chubb Life or Seller,
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.
(d) Transitional Services Agreement. The Buyer shall have entered
into the Transitional Services Agreement in the form of
Exhibit A.
10. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF BUYER
All obligations of the Buyer under this Agreement are subject to the
fulfillment, at or prior to the Closing Date, of each of the following
conditions:
(a) Covenants of Chubb Life and Seller. Chubb Life and Seller
shall have performed all of their obligations and agreements
and complied with all their covenants contained in this
Agreement to be performed and complied with by them prior to
the Closing Date and the representation contained in Section
5(k) shall be true at Closing.
(b) Consents and Regulatory Approvals. The Buyer shall have
received evidence, satisfactory to the Buyer, that (i) all of
the consents disclosed in Schedule 8(f) have been duly
obtained, (ii) and that all permits, licences, franchises,
governmental approvals, and other authorizations necessary to
the operations of the Plan as now conducted have been issued
to Buyer or the Plan and will remain in full force and effect
after Closing; (iii) that all regulatory approvals necessary
to permit Buyer to acquire the Assets and to exercise
statutory control (within the meaning of the New York HMO act)
over Plan have been received; (iv) confirmation has been
received from the New York and New Jersey Insurance and Health
Departments that the Plan is in good standing; and (v) all
regulatory, license, permits, forms, governmental approvals,
authorizations and any other requirements are in place for the
Plan to continue to market, without interruption or
impediment, its then existing POS products, whether such
products are written directly
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<PAGE> 23
by Buyer or affiliates of Buyer, Chubb or any affiliate of
Chubb or through a third-party.
(c) 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 Chubb Life, Seller, Plan 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, materially adversely affects the financial
condition, business, property, assets or prospects of the
Seller or the Plan; (ii) which might restrict or affect the
right of Buyer to acquire and own (directly or indirectly
through Seller) the stock of the Plan or to exercise any
rights in respect thereto, under this Agreement or under any
agreement contemplated to be delivered at Closing; or (iii)
which seeks to subject Buyers, 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.
(d) Financial Statements. The Seller shall have delivered to Buyer
consolidated audited financial statements of the Seller for
the year ending December 31, 1995 in the form of Appendix I,
together with an opinion of Ernst & Young, LLP which concludes
that the financial statements of the Seller present fairly the
financial position, results of operations and cash flows of
the Seller in conformity with generally accepted accounting
principles.
(e) Transitional Services Agreement. The Seller shall have entered
into the Transitional Services Agreement in the form of
Exhibit A.
11. LACK OF IMPLIED WARRANTIES.
Buyer, Chubb Life and Seller represent and acknowledge (i) that they are
institutional accredited investors within the meaning of the Securities Act
of 1933, (ii) that they each have had an opportunity to investigate the
condition, management and future prospects of both the Seller and the Plan
and to ask all
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<PAGE> 24
pertinent questions they might have, (iii) that each is relying only
upon the information and representations contained in this Agreement
and (iv) that neither party shall have any obligation to the other to
supplement the representations contained herein, nor any claim against
the other for any alleged failure to disclose matters not specifically
represented herein.
12. CHUBB LIFE'S, SELLER'S AND BUYER'S DELIVERIES; FURTHER ASSURANCES
(a) Seller's Deliveries. At the Closing Seller shall deliver to
the Buyer:
(i) original stock certificate in the Seller's name
evidencing all outstanding shares of common stock in
Plan duly endorsed for transfer to Buyer;
(ii) copies of all minute and stock record books of the
Seller and the original minute and stock record books
of the Plan;
(iii) copies of the Certificate of Incorporation of the
Seller and Plan certified by the Secretary of State
of the States of New Hampshire and New York,
respectively, and the By-Laws of the Seller and Plan,
certified by the Secretary of each corporation;
(iii) such other instrument or instruments of transfer, in
such form as shall be necessary or appropriate to
vest in the Buyer marketable title to the Assets;
(iv) certificates issued by appropriate governmental
authorities evidencing the good standing (including
tax good standing) of the Seller as a corporation in
the State of New Hampshire and the good standing
(including tax good standing) of the Plan as a
corporation in New York and certificates evidencing
the good standing of the Seller and the Plan (as the
case may be) in each state where the Seller or the
Plan is doing business, as of a date not more than
ten days prior to the Closing Date;
(v) a list of all bank accounts of Plan with signatures
changed to Buyer's designees;
(vi) certified or bank check in the amount to be
determined in accordance with Section 2 in redemption
of Buyer's stock interest in Seller;
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<PAGE> 25
(b) Chubb Life's Deliveries. At the Closing, Chubb Life shall
deliver to the Buyer:
(i) the Transitional Services Agreement duly executed on
its behalf in the form of Exhibit A;
(ii) resignations of Chubb America Service Corporation or
Chubb Corp. employees who act as directors and
officers of the Plan effective at the Closing Date;
and
(iii) Chubb Life's vote of its shares in Seller in favor of
redemption of Buyer's entire stock interest in Seller
as contemplated in Section 2(c).
(c) Buyer's Deliveries. At the Closing, the Buyer shall deliver:
(i) certified or bank checks in the aggregate amount of
the Purchase Price due in accordance with Section 2
hereof;
(ii) the Transitional Services Agreement duly executed on
behalf of Buyer and in the form of Exhibit A;
i (iii) Buyer's vote of its shares in Seller in favor
of redemption of Buyer's entire stock interest in
Seller as contemplated in Section 2(c); and
(iv) original stock certificates in Buyer's name
evidencing the 15% stock interest of Buyer in Seller
for redemption by Seller
(d) Further Assurances. Following the Closing, at the request of
the Buyer, Chubb Life and the Seller shall deliver to the
Buyer such further documents and take such reasonable action
as may be necessary or appropriate to vest in the Buyer all
the right, title, and interest to the Assets.
13. INDEMNIFICATION FOR UNDERWRITING LOSSES OR GAINS.
(a) To the extent not solved by other agreements or by reinsurance
proceeds for POS/SCA business from Buyer's affiliates under
Sections 7(a) and (b), Buyer agrees to indemnify and hold
harmless Colonial from any and all underwriting losses
incurred by Colonial on the POS/SCA plans which it
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continues to offer or reinsure for Plan after Closing, as
provided in Section 7 of this Agreement. Colonial agrees to
indemnify and hold harmless Buyer from any underwriting gain
accrued by Colonial on the POS/SCA Plans offered or reinsured
under Section 7 (excluding the amount of the fee under
Sections 7(a)(ii), (aa), (bb) or (cc). Colonial shall make a
determination each calendar quarter as to the presence or
absence of an underwriting loss or gain on such POS/SCA
business; such determination shall (i) use standard actuarial
practices consistently applied with those used by Chubb Life
or Colonial on December 31, 1995, (ii) include estimates of
incurred but not paid claims, and (iii) include cumulative
adjustments, based on updated claims experience, of
determinations made in prior calendar quarters.
Such determination shall continue to be made for one year
after all such POS/SCA business has ceased to be effective
with Colonial, at which time Colonial shall make a final
cumulative determination as to the presence of absence of an
underwriting loss or gain on such POS/SCA business taking into
account all payments or discounts or credits received by
Colonial with respect to health care expenses under such
POS/SCA business; provided, however, that if Colonial
determines there are outstanding unresolved claims or other
issues in amounts which may materially affect the
determination of the presence or absence of an underwriting
loss or gain and/or the amount thereof, Colonial may continue
to make quarterly determinations, until such time as such
claims or other issues no longer materially affect the
determination of the presence or absence of an underwriting
loss and/or the amount thereof.
(b) Any amounts due to Colonial or Buyer as a result of a
determination of an underwriting loss or gain under clause (a)
shall be paid by the respective party within fifteen (15)
calendar days after the determination.
(c) For purposes of determining the presence or absence of an
underwriting loss or gain under clause (a) Colonial shall,
consistent with the accounting principles used in preparing
Schedule 4:
(i) include not only all claims incurred during
the period post Closing, net of reinsurance,
together with an estimate for incurred but
not paid claims, but also all actual direct
and indirect costs in connection with
Colonial's offering of the POS/SCA plans (as
defined in Section 7(a)(ii)(dd), including,
all premiums payable by Colonial for
stop-loss coverage
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limiting Plan's or Colonial's exposure to
individual cases to a maximum of $100,000,
all fines, penalties and sanctions imposed
upon Chubb Colonial which result from
actions taken or insisted upon by Plan; in
determining expenses incurred, only
reasonable expenses assigned to the product
(consistent with the assumed level and types
of expenses) shall be included, and
(ii) exclude all expenses recovered from or paid
by other sources, including but not limited
to amounts borne by ChubbHealth and paid by
the stop-loss insurer or any other reinsurer
(Chubb Life agreeing not to make any change
from the above agreed level of stop-loss
coverage for such POS/SCA book of business).
(d) The obligations in this Section 13 shall survive after
Closing.
14. ARBITRATION. Except as provided in Section 3(b), any controversy or
claim arising out of or relating to this Agreement, shall be
exclusively settled by binding arbitration which shall be conducted in
accordance with the Commercial Arbitration Rules of the American
Arbitration Association in New York, New York, as such rules shall be
in effect on the date of delivery of the demand for arbitration. Any
such arbitration shall be heard and conducted in the State of New York.
Judgment on the award rendered by the arbitrator(s) may be entered in
any court having jurisdiction thereof, provided, however, the
arbitrator shall have no authority to award any punitive, treble or any
other like style of multiple damages that exceed the purchase price
under Section 2(b). The prevailing party (if any) shall be entitled to
recover its reasonable attorney's fees and costs. All conclusions of
law reached by the arbitrators shall be made in accordance with the
substantive law of the State of New York.
15. MISCELLANEOUS.
(a) Waivers. No action taken pursuant to this Agreement,
including, without limitation, proceeding with
Closing, shall be deemed to constitute a waiver by
any party taking such action of 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 or a breach of any other provision of this
Agreement.
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<PAGE> 28
(b) Amendments, Supplements, Termination, etc. Subject to applicable law,
this Agreement may be amended, modified, and supplemented, only by
written agreement of Chubb Life, the Seller, the Plan and Buyer.
(c) Notices. All notices 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 by hand or overnight courier or mailed certified first
class mail, postage prepaid. Notice shall be deemed effective on the
date actually received:
(i) If to Chubb Life:
Chubb Life Insurance Company of America
One Granite Place
Concord, NH 03301
Attn: Theresa M. Stone, President & CEO
with a copy to:
Chubb Life Insurance Company of America
One Granite Place
Concord, NH 03302
Attn: J. Michael Gannon, Esq.
(ii) If to the Seller:
ChubbHealth Holdings, Inc.
c/o Chubb Life Insurance Company of
America, Inc.
One Granite Place
Concord, NH 03302
Attn: J. Michael Gannon, Esq.
(iii) If to the Buyer:
Healthsource, Inc.
Two College Park Drive
Hooksett, NH 03106
Attn: Norman C. Payson, M.D.
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President & CEO
with a copy to:
Healthsource, Inc.
Two College Park Drive
Hooksett, NH 03106
Attn: Jon S. Richardson, Esq.
or to such other person or persons at such address or
addresses as may be designated by written notice to
the other party hereunder.
(d) Entire Agreement. This Agreement, together with the
other writings delivered in connection herewith,
embodies the entire agreement and understanding of
the parties hereto with respect to the subject
matters hereof and thereof and supersedes any prior
agreement and understanding between the parties.
(e) Governing Law and Binding Effect. This Agreement
shall be governed by the laws of the State of New
York without regard to principles of conflicts of law
and shall be binding upon and shall inure to the
benefit of the parties hereto and their respective
successors and assigns.
(f) 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.
16. TERMINATION OF PRIOR AGREEMENTS. Upon the Closing of the purchase of
the Assets under this Agreement, the terms and conditions of the
Investment Agreement, the Shareholders Agreement, the Administrative
Services Agreement and the Management Services Agreement are hereby
terminated with no further obligation of any party thereunder after the
Closing Date.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
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<PAGE> 30
date first written above.
WITNESS: HEALTHSOURCE METROPOLITAN NEW YORK HOLDING
COMPANY, INC.
/s/ By: /s/ Norman C. Payson, M.D.
- ---------------------------- --------------------------------------
Norman C. Payson, M.D.
President & CEO
CHUBB LIFE INSURANCE COMPANY OF AMERICA
/s/ By: /s/ Theresa M. Stone
- ---------------------------- --------------------------------------
Theresa M. Stone
President & CEO
CHUBBHEALTH HOLDINGS, INC.
/s/ By: /s/ Richard V. Werner
- ---------------------------- --------------------------------------
Duly Authorized
CHUBBHEALTH, INC.
/s/ By: /s/ Richard V. Werner
- ---------------------------- --------------------------------------
Duly Authorized
THE CHUBB CORPORATION
(only with respect to the obligations under
Section 8(e)
/s/ By: /s/
- ---------------------------- --------------------------------------
Duly Authorized
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GUARANTY
The undersigned corporation hereby guarantees the performance of all obligations
of Healthsource Metropolitan New York Holding Company, Inc. and affiliates under
this Agreement.
HEALTHSOURCE, INC.
By: /s/ Norman C. Payson, M.D.
-------------------------------
Norman C. Payson, M.D.
President & CEO
31
<PAGE> 1
DELOITTE &
TOUCHE LLP
- ------------ ----------------------------------------------------------
[Logo] 125 Summer Street Telephone: (617) 261-8000
Boston, Massachusetts 02110-1617 Facsimile: (617) 261-8111
August 14, 1996
EXHIBIT 15
----------
Healthsource, Inc.
Two College Park Drive
Hooksett
New Hampshire 03106
We have made a review, in accordance with standards established by the American
Institute of Certified Public Accountants, of the unaudited interim financial
information of Healthsource, Inc. and Subsidiaries for the periods ended June
30, 1996 and 1995, and March 31, 1996 and 1995, as indicated in our reports
dated August 9, 1996 and May 10,1996 respectively; because we did not perform
an audit, we expressed no opinion on that information.
We are aware that our reports referred to above, which were included in your
Quarterly Reports on forms 10-Q for the quarters ended June 30, 1996 and March
31, 1996 respectively, are being used in this Registration Statement.
We also are aware that the aforementioned reports, pursuant to Rule 436(c) under
the Securities Act of 1933, are not considered a part of the Registration
Statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of that Act.
/s/ Deloitte & Touche LLP
- ---------------
DELOITTE TOUCHE
TOHMATSU
INTERNATIONAL
- ---------------
<PAGE> 1
EXHIBIT 23.1
------------
INDEPENDENT AUDITORS' CONSENT
- -----------------------------
We consent to the incorporation by reference in this Amendment No. 1 to
Registration Statement No. 333-5223 of Healthsource, Inc. and Subsidiaries on
Form S-3 of our report dated February 16, 1996, appearing in the Annual Report
on Form 10-K of Healthsource, Inc. and Subsidiaries for the year ended
December 31, 1995.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
August 14, 1996
